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Economics Definitions (up to elasticity)
Lec 1-3 Slides
46
Economics
Undergraduate 1
10/18/2010

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Term
Economics

(1)
Definition
Science that studies HOW resources are used in order to satisfy human wants or needs.
Term
Resources

(1)
Definition
Limited, scarce
Human wants are Unlimited
Term
Commodities

(1)
Definition
Goods and Services
Term
Factors of Production

(1)
Definition
Resources used in capitalist production
Term
Effective Demand

(1)
Definition
People not only have a want but also purchasing power.
Eg. Starvation in Africa is demand but they do not have purchasing power
Term
Production consists of firms

(1)
Definition
Employs factors of production in order to produce commodities that it sells to other firms to households, or to government.
Term
Consumers consists of households

(1)
Definition
Consists of all people living under one roof, make joint financial decisions
Term
Circular flow of expenditures and income

(1)
Definition
Commodities and factors of production are bought and sold in MARKET
Firms supply commodities which are demanded by households who supply factors of production to firms
Term
Factor Market

(1)
Definition
Household sells labour/land/capital in factor markets which are demanded by firms
Term
Goods Markets

(1)
Definition
Goods and services brought here to be sold to households who demand for them.
Term
Microeconomics

(1)
Definition
Focuses on household and firms
eg. determination of price of apples in market for apples, ONLY focuses on apples
Term
Macroeconomics

(1)
Definition
Studies economy as a whole.
eg. determination of price level for economy as whole.
Term
Assumptions

(1)
Definition
allow for simplification of the real world
Term
Implications

(1)
Definition
on model depends on assumptions, outcomes of a model
Term
PPC

(1)
Definition
Production Possibility Curve
It can shift and change according to how of certain goods are being produced
Term
Index Numbers

(1)
Definition
Value of variable relative to its value in base period.
(Absolute value in given period)/ (Absolute value in base period)*100
could be prices increasing over the years or differences in prices between different locations
Term
Demand Curve

(2)
Definition
Relationship between quantity demanded of commodity and its own price
Term
Law of Demand

(2)
Definition
Other things being equal, the higher the price of commodity, the lower it is demanded
This is not an absolute law, it is only most likely outcome
It is the negative slope
Term
Substitute/Compliment

(2)
Definition
Substitute can replaces another commodity (Pepsi vs. Coke)
Complement can be consumed in conjunction with another commodity (Drinks and bottles)
Term
Types of goods (3 types)

(2)
Definition
Normal Good - the demand for normal good increases when income increases

Inferior goods - Demand for inferior good decreases when income increases

Income-Independent Good - changes in income won't effect demand
Term
Causes for demand to shift

(2)
Definition
If price is same but demand changed then demand shifts.
This can happen when population increases, tastes/preferences change, expectations about future will cause increase in demand for most commodities
Term
Movements along curve

(2)
Definition
Price of good changes, that is only movement along curve, it does not shift.
Term
Quantity Supplied

(2)
Definition
The amount that producers plan to sell in a given period of time at particular price
Depends on prices of input used to produce, State of technology (how much it costs), number of firms in the industry
Term
Supply curve

(2)
Definition
Relationship between quantity supplied and its price, holding all other variables constant
Term
Law Of Supply

(2)
Definition
States that other things being equal, the higher the price of commodity, the larger the quantity supplied
Term
How Supply Curve Shifts

(2)
Definition
Shifts when change in price of input (factor of production), change in technology, change in number of firms
Term
Movement along Supply Curve

(2)
Definition
Price of good changes while value of other variables are unchanged
Term
4 Laws of Demand and Supply

(2)
Definition
Rise in demand causes rise in equilibrium price and quantity
Fall in demand causes fall in both equilibrium price and quantity
Rise in Supply causes fall in equilibrium price and increase in equilibrium quantity
Fall in supply causes increase in equilibrium price and decrease in equilibrium quantity
Term
Consumer Surplus

(2)
Definition
Value a consumer places on good is equal to maximum price that she is willing to pay for it, difference between the value the consumer assigns to good and its market price
Term
Producer Surplus

(2)
Definition
Additional cost of producing each unit of good is the minimum price that producer is willing to accept for each additional unit
Term
Price Floor

(2)
Definition
Government sets minimum price that can be charged for commodity
Price floor must be above market price
Term
Price Ceiling

(2)
Definition
Government sets maximum price that can be charged for commodity
Price ceiling must be below market price
Term
Indirect Tax
Direct Tax

(2)
Definition
Indirect - on production or consumption
Direct - on income
Term
Unit-Subsidy

(2)
Definition
reduces unit-cost of production allowing firms to demand lower price for unit, shifts supply curve down-right, price will fall and quantity transacted of commodity will increase
Can be given to producers OR consumers, results are same
Term
Unit-Tax

(2)
Definition
Increases cost per unit of production, causing firm to demand higher minimum price, shifts supply curve up to left
Can be put on consumers or producers, results are the same
Term
Price Elasticity

(3)
Definition
Responsiveness of quantity demanded to change price of a commodity We need to know price elasticity of demand to determine size of required shift in supply curve.
Term
Arc Elasticity of Demand

(3)
Definition
Arc elasticity of demand measures average responsiveness of quantity demanded to change in price over interval of demand curve
Term
Point Elasticity

(3)
Definition
Measure of elasticity at only one point of demand curve.
Term
Values of Elasticity (What does zero and infinity mean?)

(3)
Definition
Only absolute values. zero - infinity
elasticity zero means curve is vertical demand and Q is unchanged curve is infinity
elasticity infinity means horizontal demand curve and slope is 0
Term
What happens to elasticity when price goes up? what do the values of elasticity mean?

(3)
Definition
Price goes up (let n=elasticity, C=change)
if 1=n then equilibrium
n>1 p/q is larger ratio, %CQ>%CP
n<1 p/q is smaller ratio, %CP>%CQ
Term
Total revenue, what happens to price when TR changed?

(3)
Definition
TR=P x Q
n>1 p/q is smaller ratio, %CP<%CQ therefore decrease in price increases TR
n<1 p/q is smaller ratio, %CP>%CQ
therefore decreases in price decreases TR
Term
What determines elasticity of demand?

(3)
Definition
3 main factors:
-How easily good can be replaced (coke vs pepsi vs sprite)
-Proportion of income spend on good
- amount of time elapsed since price change, more time means substitute can be found easier
Term
Income Elasticity of Demand

(3)
Definition
Measures responsiveness of quantity demanded to change in income.
Results:
ny>0 in case of normal good
ny<0 in case of inferior good
ny=0 in case of income-independent good
Term
Cross-Elasticity of Demand

(3)
Definition
Nxy - measures responsiveness of quantity demanded of good to change in price of ANOTHER good
Term
Elasticity of Supply

(3)
Definition
Ns - measures the responsiveness of quantity supplied to change in price of commodity
Short-run supply curve is relatively steep, hard to increase output by increasing price
Long-run supply curve is relatively flat, production capacity can be increased easily
Term
Incidence of Sales Tax

(3)
Definition
Burden of sales tax is distributed between consumers and producers in manner that depends upon elasticities of supply and demand
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