Term
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Definition
| "Decision making": we make decisions since we can't have everything (scarcity) |
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Term
| What is oppurtunity cost? |
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Definition
| The next best alternative. the amount you give up to get something. |
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Term
| Any society answers three questions because of scarcity: |
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Definition
1) What = what goods and services can we produce
2) How = what method do we use
3) For whom = who's going to get the goods and services |
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Term
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Definition
| Its a social construct that allows buyers and sellers to meet. |
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Term
| What's the key signal that comes out of the market? |
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Definition
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Term
Name and describe the three factors of production.
What's the fourth special factor of production |
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Definition
1) Labor: human effort
2) Capital: tools (plant or space and equipment: what goes into the space)
3) Land: gifts of nature
All three are connected to technology or knowledge.
The fourth is entrepreneuership: risk taking |
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Term
| On a linear production possibilities curve, what does any point on the line mean? |
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Definition
| The maximum we can produce; we've reacehd productive efficiency |
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Term
| What is the significance of being at a point below the PPC? Above? |
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Definition
Below: productively inefficient, but movement in the NE direction is getting more efficient
Above: impossible or currently unattainable. |
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Term
| Why is a straight line PPC unrealistic? |
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Definition
| Because of the heterogeneity in the labor force. In a real situation, where oppurtunity cost is the slope, the oppurtunity cost increases, which means the trade off becomes worse. |
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Term
| What is allocative efficiency? |
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Definition
| One point which maximizes our nation's satisfaction, or utility. |
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Term
| What is trade and what is it a function of? |
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Definition
| Trade is specialization and its a function of oppurtunity cost. |
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Term
| How do we decide what nation should specialize in what good? |
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Definition
| Nation with the lowest oppurtunity cost should specialize in that good. |
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Term
| What's the difference between comparative advantage and absolute advantage? |
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Definition
Comparative: lower oppurtunity cost
Absolute: who can produce more |
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Term
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Definition
| A nation that produces and consumes only what they produce. |
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Term
| Name six things that we can tell from a PPC. |
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Definition
1) Scarcity: limited number of resources
2) Inefficiency/ unemployment: inside our curve
3) Opporutnity cost: want something, give up something
4) Economic growth: curve can shift outward
5) Specialization
6) Gains from trade |
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Term
| What's the difference between a capitalist and socialist economy? |
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Definition
| Socialist: factors of production are government regulated but in captialism its not regulated. |
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Term
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Definition
| Satisfaction, or what you get out of consuming goods and services. |
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Term
| What kind of price does a market look for? |
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Definition
| An equilibrium price: matched up plans of buyers and sellers needs. |
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Term
| What curve is the buyer's side represented by. Describe the basics of this. |
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Definition
| By demand curve. At higher prices, quantity demanded is less. |
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Term
| On a demand curve, when you decrease the price does the demand decrease? |
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Definition
| NO, but the quantity demanded decreases. |
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Term
| What is the Latin phrase of all other things held constant? |
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Definition
| Cetris Paribus: to draw demand curves, these other factors like income, taste etc. all affect demand but will be constant. |
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Term
| What kind of curve is represented by the seller's side? |
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Definition
| A supply curve; as the price increases, the quantity supplied increases. |
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Term
| Define a surplus using the supply and demand curves. |
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Definition
| When the quantity supplied is greater than the quantity demanded at a particular price. |
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Term
| What is shortage in terms of supply and demand curves? |
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Definition
| At a certain price, the quantity demanded is greater than the quantity supplied. |
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Term
| What is the goal of the market? |
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Definition
| To clear, which means there is no surplus nor shortage. The equilibrium price is where the quantity demanded is equal to the quantity supplied. |
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Term
Give an example of a demand equation.
What's the slope? |
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Definition
| Qd = 1000 - 3P. Graph P versus Q, so slope is -1/3 |
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Term
| Give an example of a supply equation. What's the slope? |
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Definition
| Qs = 2P + 500. Slope is 1/2 |
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Term
| Given a supply and demand equations, how would I find the equilibrium price? |
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Definition
| Set both equations equal to one another and solve for P. 2) Plug two prices in and solve for Qd and Qs. |
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Term
| Name and describe two types of goverment intervention. |
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Definition
1) Price floor: A legal minimum price, below which the goverment cannot go.
2) Price ceiling: Legal maximum price, above which the goverment cannot go. |
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Term
| What do we call a situtatin in whcih the price floor is below the equilibrium price? |
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Definition
| Non binding: doesn't impact the equilibrium |
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Term
| What do we call a situation in which the price floor is above the equilibrium? |
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Definition
| Binding/ the market creates a surplus, and we cannot go below this quantity. |
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Term
| Describe the principle of price support. |
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Definition
Goverment tells what price to sell at, that's above the equilibrium price; this helps the sellers, not the buyers.
As a result 1) Consumers pay higher prices 2) Surplus doesn't make it to the market |
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Term
| Name four demand shift factors. |
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Definition
1) Income: a. normal g/s b. inferior g/s
2) Prices of related goods: a. substitutes b. complements
3) Expectations of the future; if we think price will go up or not
4) Tastes/preferences: ad campaign increases demand |
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Term
| With regard to income, how do normal g/s shift the demand curve? how do inferior goods shift it? |
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Definition
Normal: Increase Y, Increase D (shifts right)
Inferior: Increase Y, decrease D (shifts left) |
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Term
| With regard to prices of related goods, how do substitutes shift the demand curve? how about complements? |
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Definition
Substitutes: If Px increases, Qx decreases, and Dy increases, so Dy shifts right
Complements: If Px increases, Qx decreases, and Dy decreases, so curve shifts left |
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Term
| Name three factors of supply shifts. |
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Definition
1) Costs of inputs (resources, factors of production)
2) Technology: knowledge to combine resources
3) Prices of related goods |
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Term
| What happens to a supply shift curve is there's a decline in resources? |
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Definition
| Since it costs more to produce the same amount of a g/s, the supply curve shifts to the left |
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Term
| How does technology affect a supply curve? |
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Definition
| Technology only advances, so the curve shifts to the right. |
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Term
| Describe what happens to the supply and demand curves for the following scenario: Oranges decrease by a factor of 1/3 due to rain shortage. How is the apple and orange juice market affected? |
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Definition
| Because there's a decrease in oranges, it costs more to produce one orange, so price increases for less quantity supplied: supply curve shifts left. Because oranges cost more, people are demanding more apples; the Qd increases, as does the price, the demand curve shifts right. Because it costs more to get an orange, the price to make one bottle of juice increases, and there's less supplied; the supply curve shifts left. |
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Term
| What is elasticity and what info can we get out of it? |
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Definition
| Its responsiveness; we see a change, and we want to know to what extent the second variable changes. |
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Term
| What is Ed and how do we calculate it? |
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Definition
Price elasticity of demand
Ed = %(change in Qd)/ %(change in P)
Ed<1 inelastic, Ed>1, elastic and Ed=1 unit elastic |
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Term
| If we want to know the Ed for two points on a demand curve, what method do we use and how do we calculate it? |
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Definition
Use Arc method or midpoint method
(change in Qd/ (Q1+Q2/2) divided by change in P/(P1+P2/2) equals Ed |
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Term
| Why do we use the midpoint method for calcuation of Ed for two points? |
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Definition
| Since the percent change from pt. A to B is different than from B to A, we use an average or the midpoint of the two. |
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Term
| What's the exact definition of a firm? |
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Definition
| A collection of factors of production, brough together by an entrepreneur to produce goods and services. |
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Term
| What is the goal of a firm? |
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Definition
To maximize profit, which is the excess of money leftover after paying for all of our costs.
Pi = TR - TC, where TR is total revenue, and TC is total cost |
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Term
| How do we calcuated the total revenue? |
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Definition
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Term
| With the price elasticity of demand, what do we know more about? |
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Definition
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Term
| What happens to TR when our price increases in the elastic portion? |
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Definition
| Since Ed>1, we know that %(change in Qd) > %(change in P). If P increases, then Qd decreases. But the decrease in the % change in Qd is greater than the increase in the % change in price. If TR = PQ, then TR decreases. |
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Term
| What happens to TR when the price decreses in the elastic portion of a demand curve? |
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Definition
| Ed>1, so when P decreases, the Qd increases. We know that increases of the % change in Qd is greater than the decrease in % change in P, The TR increases. |
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Term
| What happens to the TR when the price increases on the inelastic portion. |
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Definition
| Ed<1, so when P increases, the Qd decreases. But the decrease in % change in Qd is less than the increase in % change in P, Therefore, TR increases. |
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Term
| What happens to TR when the price decreases in the inelastic portion of the demand curve. |
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Definition
| When P decreases, Qd increases, but the increase in the % change of Qd < the decrease in the % change of P. So the TR decreases. |
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Term
| What is the point of maximum TR occur? how is this represented in the graph of TR versus Q. |
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Definition
| Max TR is when Ed =1 (Unit elastic). Shown by upside down U. |
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Term
| What deteremines the Ed for a particular good? |
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Definition
1) Degree of substitutability: If there are a large number of close substitutes, then demand for good is very elastic.
2) Time: longer time of elapse, the greater the response from consumers; the more time, the more elastic the response. |
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Term
| What are three business types? |
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Definition
I. Sole Proprietor: one owner only.
II. Partnership: 2+ owners
IIIa. Privately held corporation
IIIb. Publicly held corporation |
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Term
| What are the advantages and disadvantages to the sole proprietor? |
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Definition
+ All decisions + All profits +Easy to establish +Simple taxation
- unlimited liability
- limited financing |
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Term
In what scenario would I use the point method as opposed to the arc method to cacluate ED? What's the equation?
Solve for it using Qd = 1200 - 30P, where P=25 |
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Definition
To find Ed for a particular point.
(dQ/dP)*P/Q
(dQ/dP) = 30 (sign doesn't matter), Ed = 1.67 elastic |
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Term
| What is Ey? What's the equation? |
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Definition
| Income elasticity of demand. Ey = %(change in Qd)/ %(change in Income) |
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Term
| How is Ey affected if income increases for normal vs. inferior good? |
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Definition
Normal: Income increases, then Qd Increases, both %changes are +
Inferior: Income increases, then Qd of inferior product decreases, inferior < 0. |
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Term
| What is Ex and why do we need it? |
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Definition
Cross price elasticity which tells us if the price of one good changes, how the Qd of another good changes
Ex = %(change in Qd)/ %(change in Py) |
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Term
| How is Ex affected for a complement and subsitute? |
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Definition
Complements: if Py increases, then Qdx decrease, its less than 0.
Substitutes: if Py increases, then Qdx increases, so greater than 0. |
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Term
| what are the main components of the circular flow model? |
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Definition
1. Households: own factors of production/ supply factor, buy g/s
2. Firms: demand factors, supply g/s
Two markets: 1. Factor 2. G/S |
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Term
| What are three assumptions made in the circular flow model. |
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Definition
1) Closed economy: no trade
2) No public sector/no government
3) No financial markets |
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Term
| What are four things you will find on a bond? |
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Definition
Name of issuer
a. Principal: amt of $ borrowed
b. Interest rate: semiannually
c. Term: how long this lasts |
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Term
| What dates make up a fiscal year? |
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Definition
| Oct. 1st to Sep 30th, take in money in taxes and spend it. |
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Term
| What do we mean when we say the fed gov has a budget deficit? |
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Definition
| Over a fiscal year, they spent more than they took in, in taxes. |
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Term
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Definition
| The combined total of all the years. so the deficit adds to the debt each year. |
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Term
| What's the difference between MU and TU. |
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Definition
TU/Total utility: the total satisfaction from some amt of G/S.
MU/Marginal utility: the additional or change in TU of consuming an additional G/S. |
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Term
| Draw a TU versus Q curve above a MU versus Q curve and expalin. |
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Definition
| TU curve increases at a decreasing rate. MU is always decreasing, occurs between 0 and 1 quantity, 1 and 2 quantity etc. |
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Term
| How do I plot an indifference curve? what does it tell me? |
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Definition
| Have 2 goods,Y vs. X, and starts high and decreases in x direction. TU is constant throughout(same satisfaction from each good). At pt. 1, MU of Y is low, since you have lots of it, but at point 2, MU increases since you get more X. |
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Term
What is the slope of an indifference curve called?
Derive the slope from the following equation:
Delta TU = MUx*deltax + MUy*deltay |
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Definition
| The mariginal rate of substituion (MRS) = MUx/MUy = -deltay/deltax |
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Term
| Given two goods, derive an income equation for a maximum utility |
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Definition
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Term
| Draw a budget constraint curve and find out the y and x intercept and the slope. |
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Definition
| Y intercept = I/Py, slope = Px/Py, and I/Px is the x-intercept |
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Term
| If we superimpose an indifference curve tangent to the budget constraint, where do we maximize utility? |
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Definition
| At the point of tangency; the slopes are teh same so Px/Py = MUx/MUy |
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Term
| With regard to utility, what do we want to be equal for every good and service. |
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Definition
| We want the marginal utitlity per dollar spent of x to be equal to the MUy per dollar spent of Y. |
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Term
| If MUx/Px is greater than MUy/Py, how can we alter the condiitons so that they are equal to one another. |
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Definition
| If increase X, and decrease Y, then MUx will decrease, and MUy will increase. |
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Term
| With regard to exchange, what is indifference vs. budget constraint? |
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Definition
Indifference: our willingness to exchange
Budget constraint: our ability to exchange. |
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