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Econ Test 1
Slides, modules 1-4
37
Economics
Undergraduate 3
09/24/2013

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Term
What is Economics?
Definition
Economics is the study of how people, institutions, and societies make choices under conditions of scarcity
Term
Why is econ important?
Definition
It is important because both individuals and societies cannot possibly fulfill all of their wants and needs. Economics helps people make decisions in order to best fulfill their wants and needs.
Term
What is Opportunity Cost?
Definition
Opportunity Cost is the value of a good or service that a person gives up to obtain something else in return.
Term
How does opportunity cost factor in decision making?
Definition
b. It factors into decision making because we cannot possibly fulfill all of our wants and needs. Economics assumes people are rational and self-interested so it allows us to assess what each item we want or need might cost us.
Term
What is the difference between Microeconomics and Macroeconomics?
Definition
Micro: involves businesses or individuals, etc.
Macro: involves starts, national governments, global decisions, etc.
Term
How does economics help us to make decisions as individuals?
Definition
We as individuals have unlimited wants and needs, but limited time and resources. Economics helps us to decide what we can obtain with the time and resources that we do have to use.
Term
How does econ help us to make decisions as a society?
Definition
As a society our resources are scarce (Land, Labor, Capital, & Entrepreneurial Ability). Economics assumes that people are rational and self-interested, and it allows us to best utilize our scare resources.
Term
What are the major economic systems? (2)
Definition
1. Command
2. Market
Term
Command System
Definition
"communist" or socialism.
decisions made my central planning board
Term
Market System
Definition
Capitalism, private ownership of resources,
Term
Name the Four Fundamental Questions that each economy must answer.
Definition
a. What goods/services will be produced?
b. How will these goods/services be produced?
c. Who will get these goods/services?
d. How will the system promote progress?
Term
What is the circular flow diagram?
Definition
The circular flow diagram shows how the economy works in the most simplistic of terms
Term
How does the circular flow diagram depict the economy
Definition
It depicts the economy as a system where people and businesses are constantly buying and selling
Term
What is the law of demand?
Definition
The law of demand states that, other things equal, as price falls quantity demanded rises and as the price raises quantity demanded falls. (Indirect Relationship
Term
What does the law of demand tell us about consumers behavior?
Definition
It tells us that consumers are willing to buy more if it costs less because:
i. Common Sense
ii. Law of Diminishing Marginal Utility
iii. Income Effect
iv. Substitution Effect
Term
What is elasticity of demand ?
Definition
Elasticity of demand is a measure of responsiveness of the quantity of a product demanded by consumers when product price changes
Term
What is the law of supply?
Definition
The law of supply states that, other things equal, as price falls the quantity supplied falls and as price raises the quantity supplied rises. (Direct Relationship)
Term
What does the law of supply tell us about consumers behavior?
Definition
This tells us that producers are willing to make more the higher the price they can charge
i. Price acts as an incentive to producers
ii. At some level of production, cost will rise
Term
What is the elasticity of supply?
Definition
Measure’s sellers’ responsiveness to price changes
Term
How does supply and demand interact
Definition
They interact inversely with the demand curve sloping downward and the supply curve sloping upward. There are shortages, equilibriums, and surpluses depending on the specific interaction.
Term
What is the point of interaction called?
Definition
The point of interaction is called market equilibrium.
Term
Equilibrium price:
Definition
the price where demand & supply curve intersect
Term
Equilibrium Quantity:
Definition
the quantity where the demand & supply curve intersect
Term
How does a shift in demand affect the market?
Definition
It affects the market in that if demand increases the curve moves right and if demand decreases the curve moves left
Term
How does a shift in supply affect the market?
Definition
It affects the market in that if the supply increases the curve will move right and if the supply decreases the curve will move left.
Term
1How does elasticity play a role in the magnitude of change?
Definition
Elasticity plays a role in the magnitude of change because the more elastic the good, the more vastly the curve will move if any of the factors are changed. If it is more inelastic (something like insulin) it doesn’t affect it as greatly because people HAVE to have the insulin.
Term
Price Ceiling
Definition
a legal maximum on the price of a good or service
i. Binding if it is set below equilibrium price
ii. Example: rent control
Term
Price Floor
Definition
is a legal minimum on the price of a good or service
i. Binding if set above the equilibrium price
ii. Example: Minimum Wage
Term
How do price ceilings and price floors affect market outcomes?
Definition
The cause surpluses and shortages which the government then has to go in and intervene.
Term
How do taxes affect market outcomes?
Definition
Taxes drive a wedge between the supply and demand curves so then the buyer and seller are left to share the burden.
Term
Incidence of tax?
Definition
the difference between the equilibrium price and the new price, as well as how the burden is shared between the buyers and sellers.
Term
What determines incidence?
Definition
The incidence is determined by who in the situation is more elastic.
Term
If the supply is more elastic then the demand then the _____ will pay more
Definition
Buyers
Term
If the demand is more elastic than the supply, then the ______ will pay more
Definition
Sellers
Term
When do markets fall? Why?
Definition
a. Markets fail when scarce resources are underallocated or overallocated, or in other words when things are non-rival and non-excludable. This is due to free riders as well as the fact that public goods have inefficient market outcomes.
Term
What are the 4 classifications of goods?
Definition
Private, Common, Low-Congestion, Public
Term
What are externalities?
Definition
Externalities are side effects borne by people who are not directly involved in market exchanges→ externalities are unintended side effects while public goods are under allocation of goods shared by all
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