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Economics
Amanda Ross
| Question | Answer |
|---|---|
| Economists assume that people are rational in the sense that | They use all available information as they take actions intended to achieve their goals |
| What is the definition of scarcity | When unlimited wants exceed the limited resources available |
| Scarcity is the central to the study of economics because it implies that | Every choice involves an opportunity cost |
| Productive efficiency means that | A good or service is produced at its lowest possible cost |
| Allocative efficiency means that | Every good or service is produced up to the point where the MB=MC (ABC: Allocative, Benefit,Cost) |
| Positive Analysis is a | Fact (What is) |
| Normative Analysis is | Opinion (What ought to be) |
| Microeconomics is | The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. |
| Macroeconomics is | The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth. |
| We can show economic efficiency with | Points ON the production possibilities frontier |
| We can show economic inefficiency with | Points INSIDE the production possibilities frontier |
| The Production possibilities frontier will shift outward if | Technological advances occur |
| What does increasing marginal opportunity cost mean | That increasing the production of a good requires larger and larger decreases in the production of another good |
| What are the implications of this idea for the shape of the production possibilities frontier | The production possibilities frontier will be bowed outward. |
| What is absolute advantage | The ability to produce more of a good using the same amount |
| What is comparative advantage | The ability to produce more of a good at a lower opportunity cost than other producers |
| What is the basis for trade | Comparative advantage |
| How can a country gain from specialization and trade | A country can specialize in producing that for which it has a comparative advantage and then trade for other needed goods and services |
| Whether carried out by an individual or a country, PRODUCTION beyond the production possibilities frontier | is not physically possible |
| With respect to CONSUMPTION, individuals and countries | can, through trade, consume beyond their production possibilities frontiers. |
| The law of demand is the assertion that | the quantity demanded of a product is inversely related to its price |
| An increase in the price of a product causes a decrease in quantity demanded because of the income and substitution effects. More specifically, | the substitution effect is the decrease in quantity demanded because the product is more expensive relative to other goods and the income effect is the decrease in quantity demanded owing to the decline in consumers' purchasing power |
| The difference between a change in supply and a change in the quantity supplied is that the latter is | Is produced in the change by the product's own price while the former is caused by a variety of variables besides the product's price |
| What do economists mean by market equilibrium | A market outcome where quantity supplied is equal to quantity demanded |
| The formula for the price elasticity of demand is | The percentage change in quantity demanded divided by the percentage change in price |
| Why isn't elasticity just measured by the slope of the demand curve | The measurement of slope is sensitive to the units chosen for quantity and price |
| (Comparing the price of gasoline to pencils) The demand for pencils is likely | More inelastic because pencils tend to represent a smaller fraction of a consumer's budget |
| Demand will be most elastic for | BP supreme-grade gasoline, then for all BP grades of gasoline, and then for all gasoline. |
| The cross-price elasticity of demand is | The percentage change in quantity demanded of one good divided by the percentage change in the price of another good |
| If the cross-price elasticity of demand is negative, then the products are | Complements, but if it is positive, then the products are substitutes (NC, PS) |
| Income elasticity of demand is | The percentage change in quantity demanded divided by the percentage change in income. Your answer is correct. |
| For a normal good, the income elasticity of demand will be | Positive, but for an inferior good, the income elasticity of demand will be negative (NORMAL< POSITIVE) (INFERIOR<NEGATIVE) |
| Is it possible to tell from the income elasticity of demand whether a product is a luxury good or a necessity | Yes. If the income elasticity of demand is greater than 1, then the good is a luxury. If the income elasticity of demand is positive but less than 1, then the good is a necessity |
| Producer surplus is | The difference between the lowest price a firm would be willing to accept and the price it actually receives |
| As the price of a good rises, producer surplus ----, and as the price of a good falls, producer surplus ----- | Increases, Decreases |
| Deadweight loss is | The reduction in economic surplus resulting from a market not being in competitive equilibrium |
| Economic surplus is maximized when | The marginal benefit of consumption is EQUAL to the marginal costs of production |
| What is an externality | A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service |
| Which of the following is an example of a good or service having the effects of a positive externality | Medication and Education |
| Which of the following is an example of a good or service having the effects of a negative externality | Cigarette smoking |
| Your neighbor John has a barking dog.--- Which of the following statements is true (positive externality, negative externality, or both) | It can create negative externalities by disrupting your sleep and can also create positive externalities by discouraging intruders |
| The Coase Theorem states that | If transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities |
| The parties involved in an externality have an incentive to reach an efficient solution because | Both parties become better off when an efficient solution is reached |
| A Pigovian tax is | A tax to bring about an efficient level of output in the presence of externalities |
| At what level must a Pigovian tax be set to achieve efficiency? A Pigovian tax must be set equal to | The cost of the externality |
| Rivalry is the situation that occurs when | One person's consuming a unit of a good means no one else can consume it |
| Excludability is the situation that occurs when | Anyone who does not pay for a good cannot consume it |
| A private good is | Rival and excludable |
| a public good is | nonrivalrous and nonexcludable |
| a quasi-public good is | nonrivalrous and excludable |
| a common resource is | rival and nonexcludable |
| Tax incidence indicates | The actual division of the burden of a tax |
| Do the people who are legally required to pay a tax always bear the burden of the tax? Briefly explain. | No. Whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government |
| Utility is | The enjoyment or satisfaction people receive from consuming goods and services. |
| What is the definition of marginal utility | The change in utility from consuming an additional unit of a good or service |
| The law of diminishing marginal utility suggests that | Consumers experience diminishing additional satisfaction as they consume more of a good or service |
| Marginal utility is more useful than total utility in consumer decision making because | Optimal decisions are made at the margin |
| A market demand curve is derived by | Adding horizontally the individual demand curves |
| What is the difference between the short run and the long run | In the short run, at least one of a firm's inputs is fixed, while in the long run, a firm is able to vary all its inputs and adopt new technology |
| Any cost that remains unchanged as output changes represents a firm's | Fixed cost |
| Any cost that changes as output changes represents a firm's | Variable cost |
| Which of the following is most likely to be a fixed cost for a farmer | Insurance premiums on property |
| Which of the following is most likely to a variable cost for a business firm | Cost of shipping products |
| An implicit cost is | a nonmonetary opportunity cost |
| How are implicit costs different from explicit costs | An explicit cost is a cost that involves spending money, while an implicit cost is a nonmonetary cost |
| The production function is the relationship between | The inputs employed by a firm and the maximum output it can produce with those inputs |
| The law of diminishing returns states that | Adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline. |
| What is the difference between the average cost of production (ATC) and marginal cost of production (MC) | ATC equals= TC/Q MC = ΔTC/ΔQ |
| The marginal cost curve intersects the average total cost curve at the level of output where average total cost is at a minimum because | When the marginal cost of the last unit produced is below the average, it pulls the average down, and when the marginal cost is above the avearge, it pulls the average up |
| As the level of output increases, the difference between the value of average total cost and average variable cost | Decreases because average fixed cost decreases as output increases |
| For a market to be perfectly competitive, there must be | Many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market |
| A price taker is | A firm that is unable to affect the market price |
| A firm is likely to be a price taker when | It sells a product that is exactly the same as every other firm |
| Why do single firms in perfectly competitive markets face horizontal demand curves | With many firms selling an identical product, single firms have no effect on market price |
| When maximizing profits, MR = MC is equivalent to P = MC because | The marginal revenue curve for a perfectly competitive firm is the same as its demand curve. |
| In the short run, a firm's shutdown point is the minimum point on the | Average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average total cost curve. |
| Why are firms willing to accept losses in the short run but not in the long run | There are fixed costs in the short run but not in the long run |
| What is the relationship between a perfectly competitive firm's marginal cost curve and its supply curve | A firm's marginal cost curve is equal to its supply curve for prices above average variable cost |
| When are firms likely to enter an industry? When are they likely to exit? | Economic profits attract firms to enter an industry, and economic losses cause firms to exit an industry |
| Unlike in perfectly competitive markets, in monopolistically competitive markets, | Firms face downward-sloping demand curves, and the products competitors sell are differentiated |
| Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets. | Apples and oranges are sold in perfectly competitive markets and Starbucks coffee and Gap clothing are sold in monopolistically competitive markets. |
| The entry of new firms cause the demand curve of an existing firm in a monopolistically competitive market to shift to the left because ______ and become more elastic since ______ | Each will have a smaller share of the existing market; consumers will have additional choices |
| A monopolistically competitive firm is not productively efficient because it produces a level of output where | Average total cost is not at a minimum |
| What is a monopoly | A firm that is the only seller of a good or service that does not have any close subsistutes |
| What is the formula for Total Revenue | Price x Quantity |
| What is market power | The ability of a firm to charge a price greater than marginal costs --- there will be a loss in efficiency for all markets where prices are not equal to the marginal costs |
| What are Antitrust laws | Laws aimed at eliminating collusion and promoting competition among firms |
| To successfully practice price discrimination | some consumers must have greater willingness to pay for the product than others and a firm must know consumer willingness to pay for the product |
| What is perfect price discrimination | Charging every consumer a different price equal to their willingness to pay |
| Perfect price discrimination is | Unlikely to occur because firms typically do not know how much each consumer is willing to pay |
| Perfect price discrimination is | Efficient because it converts into producer surplus what had been consumer surplus and deadweight loss |
| The public choice model | Applies economic analysis to government decision making |
| According to the ability - to - pay principle, governments favor taxes that | Place a greater share of tax burden on those who have the greater ability to pay |
| What is the difference between the marginal product of labor and the marginal revenue product of labor for a firm in a perfectly competitive market | The marginal revenue product of labor is equal to the marginal product of labor multiplied by the product price |
| The opportunity cost of leisure is | The wage rate |
| The substitution effect of a wage increase | Causes a worker to supply a LARGER quantity of LABOR, and the income effect causes a worker to supply a SMALLER quantity of LABOR |
| Why is the supply curve of labor usually upward sloping | As the wage decreases, the opportunity cost of leisure decreases, causing individuals to devote less time to working |
| A compensating differential is | When higher wages are paid to compensate a worker for unpleasant aspects of a job, such as when workers are paid higher wages for dirty work |
| Define economic discrimination | Economic discrimination is paying a person a lower wage or excluding a person from an occupation on the basis of an irrelevant characteristic such as race |
| Is the fact that one group in the population has higher earnings than other groups evidence of economic discrimination | No. Differences in earnings between groups could be due to worker productivity & Differences in earnings between groups could be due to worker preferences |
| Principal-agent problem | Results from agents pursuing their own interests rather than the interests of the principals who hired them |
| Adverse selection | Is the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction |
| Asymmetric information | Occurs when one party to an economic transaction has less information than the other party |
| Moral hazard | Refers to actions people take after they have entered into a transaction that make the other party to the transaction worse off |
| good luck :-) |
Created by:
KatelynWells016
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