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Microecon- ch 1-4
| Question | Answer |
|---|---|
| choices are necessary because resources are ________ | scarce |
| resource | anything that can be used to produce something else |
| scare | not enough of a resource to satisfy demand from society |
| the true cost of something is in its ______ | opportunity cost |
| opportunity cost | what you must give up in order to get something else |
| what does the principle, "'How much' is a decision at the margin mean | people make trade offs and decide whether to do a little more or a little less of an activity |
| trade-off | comparison of the costs/benefits of doing something |
| marginal decision | decision made at the margins of an activity about whether to do a little more or a little less of that activity. |
| marginal analysis | study of marginal decisions |
| ppl respond to ___________, exploiting opportunities to make themselves better off | incentives |
| incentive | anything that offers rewards to people who change their behavior |
| there are gains from ___________ | trade |
| what is a good thing about trade? | it allows us to consume more than we otherwise could |
| what do the gains from trade arise from? | specialization |
| markets move towards ____________ | equilibrium |
| why do markets move towards equilibrium? | because people respond to incentives |
| equilibrium | a situation in which no individual would be better off doing something else |
| resources should be used ___________ to achieve society's goals | effectively |
| what makes an economy efficient? | they take all opportunities to make some people better off without making other people worse off |
| equity | condition in which everyone gets their "fair share" |
| efficiency and equity are often at ________ | odds |
| markets usually lead to efficiency, but when they don't, ___________ intervention can improve society's welfare | government |
| people usually take ___________ to make themselves better off | opportunities |
| efficiency | all of the opportunities to make people better off have been exploited |
| what is the impact on society during market failure when people pursue their own interests? | it makes society worse off |
| one person's spending is another person's _________ | income |
| what does a drop in spending lead to during recession? | less income and less spending |
| what do large drops in business spending lead to? | layoffs and rising unemployment |
| overall spending sometimes gets out of line with the economy's productive ___________. When this happens, government policy can change spending | capacity |
| overall spending sometimes doesn't match what the economy is capable of _______________ | producing |
| how does a recession happen? | when overall spending falls short of what is needed to keep workers employed |
| what causes inflation? | when overall spending outstrips supply |
| what is something that can lead to economic growth over time? | an increase in economic potential |
| what is economic growth? | an increase in living standards over time |
| what is economic potential? | the total amount of goods and services an economy can produce |
| what are some things that can increase economic potential? | new technology; increase in resources available for production |
| increases in living standards are usually unevenly distributed, creating ___________ and _____________ | winners and losers |
| what is a model in economics? | simplified representation of reality that us used to better understand life situations |
| how many changes do models allow us to see the effects of? | only 1 change |
| what is the other things equal assumption? | all other relavent factors when making a model remain unchanged |
| computer programs need _______ data in order to make good models | good data (garbage in, garbage out) |
| what are the most effective economic models? | ones that are simplified, hypothetical versions of reality |
| what are the 3 simple economic models? | production possibility frontier, comparative advantage, and circular flow diagram |
| what is the purpose of the production possibility frontier? | helps economists think about trade offs every economy faces |
| what is the purpose of a comparative advantage model? | to clarify the principle of gains from trade |
| what is the purpose of the circular flow diagram? | help to understand flow of money, goods, and services and how they are channeled in an economy |
| what does a production possibility frontier do? | considers a simplified economy that only produces 2 goods |
| anything outside the line on the production possibility frontier is _____________________ | not possible |
| what can a production possibility frontier help us understand? | efficiency, opportunity cost, an economic growth |
| how does a ppf help us understand efficiency? | shows there is no way to produce more of one good without producing less of other goods |
| what is something to note with ppf's and efficiency models? | the economy must allocate its resources so that consumers are as well off as possible (something that command economies often lack) |
| how do ppf's help us understand opportunity cost? | shows the cost of producing more of a particular item |
| how do ppf's help us understand economic growth? | shows factors of production and how they affect growth |
| factor of production | resource not used in production (or reused, like a worker) |
| comparative advantage | opportunity cost of production is lower than other countries |
| does everyone have a comparative advantage or disadvantage in something? | yes |
| absolute advantage | one country is capable of producing more output than another |
| what type of advantage should trade be based off of? | comparative advantage |
| barter | one party directly trades a good or service for another (not involving money) |
| circular flow diagram | represents transactions that take place in an economy by 2 kinds of flows, physical items and the $ that pay for them |
| household | individual/group of people that share income |
| firm | produces goods/services for sale |
| factor markets | firms buy resources they need to produce goods/services |
| what are some things that the circular flow diagram ignores? | the distinction between household/firm isn't always clear (ex- family owned business), firms can sell to other firms, and government/taxes |
| positive economics | has a definite right/wrong answer-description |
| normative economics | says how the world should work-prescription |
| t or f. economic analyisis can prove that some policies are better than others regardless of opinion | true |
| what are some reasons that economists disagree? | the news can exaggerate differences of opinion; they may be looking at different models |
| what is a comparative market? | market in which there are many buyers/sellers of the same good/service, none of whom can influence the price |
| supply/demand model | model of how a comparative market behaves |
| what are the 5 key elements of the supply and demand model? | 1. demand curve 2. supply curve 3. factors that shift the supply/demand curve 4. the market equilibrium 5. changes in market equilibrium |
| supply | the ability+willingness to produce/sell a specific quantity of a good/service at alternative prices |
| what is a good rule about supply if you are a producing firm? | only produces 85% of your capacity in case of a large order |
| supply represents the behavior of _____________ | sellers |
| supply schedule | shows how much of a good/service would be supplied at different prices |
| supply curve | shows the quantity supplied at various prices (price goes up before quantity) |
| quantity supplied | quantity that producers are willing and able to sell at a particular price |
| law of supply | firms are greedy, but it isn't a bad thing. firms are greedy in the pursuit of normal profits. if they they didn't believe they could make money selling a good, they wouldnt make it |
| what are some things that can cause shifts in the supply curve? | changes in the input process, prices of related goods/services, technology, expectations, and the # of producers |
| how do changes in input prices impact the supply curve? | increases in prices makes production more costly, which makes supply decrease. decreases in prices make production less costly, which increases supply |
| how do prices of related goods/services impact the supply curve? | sellers choose to use inputs that generate the highest profit; sellers will produce less of a good if profitability falls |
| compliment | like a by-product (ex- beef tallow) |
| substitute | something that is replaced by something else |
| how do changes in tech impact the supply curve? | technology is always increasing, allowing firms to spend less on inputs, yet still have the same output. this causes supply to increase. |
| how do changes in expectations impact the supply curve? | -the expectation of a higher price for a good in the future decreases the current supply of the good (as long as sellers can store it) -sellers adjust their prices in anticipation of changes in expectations |
| how do changes in the number of producers impact the supply curve? | -entry-more sellers=inc in supply -exit-less sellers=Dec in supply |
| what is shown on the market supply curve? | the horizontal sum of the individual supply curves of all producers- only quantity changes, price doesn't change |
| demand | ability+willingness to purchase at alternative prices a specific quantity of a good/service |
| demand schedule | table showing how much of a good/service customers will want to buy at different prices |
| demand curve | shows quantity demanded at different prices |
| quantity demanded | quantity that buyers are willing+able to purchase at a particular price |
| law of demand | a higher price of a good leads people to want less of it; other things equal |
| what does a right shift on the demand curve mean? | increase in demand |
| what does a left shift on the demand curve mean? | decrease in demand |
| what is movement on the demand curve? | the price alone changes |
| what is a demand shift? | people buy more/less at every price |
| what are the factors that can cause the demand curve to shift? | changes in prices of related goods/services, income, taste, expectations, and # of consumers |
| how do changes in prices of related goods/services impact the demand curve? | substitutes (decrease in price for one increases demand for another), and complements (decrease in price lead to increase in demand for the other) |
| complements are generally consumed ______________. (ex- apps on a phone) | together |
| how do changes in income impact the demand curve? | -normal goods(luxory items): demand increases when income increases -inferior good(cheap items like ramen or 2nd hand clothes): demand decreases when income increases |
| how do changes in tastes/preferences impact the demand curve? | seasonal fads/changes in style can increase/decrease the demand for something |
| how do changes in expectations impact the demand curve? | -consumers will buy according to expectations if they have options -buyers will adjust spending in anticipation of the direction of the price to get the lowest price possible |
| what is the market demand curve? | a horizontal sum of the individual demand curves of consumers |
| how do you know where the market is in equilibrium? | when supply=demand at a certain price |
| how do you find the equilibrium price/quantity? | put the supply/demand curves on the same graph, find place where the lines intersect |
| what is another way to describe equilibrium price? | market clearing price |
| why do all sales/purchases in a market take place at the same price? | -in places where consumers don't have time to compare prices (like in a tourist trap) -in well established markets, there is a uniform price |
| what is another word for market price? | uniform price |
| what causes the market price to fall if it is above the equilibrium price? | there is a surplus, and sellers reduce the price to get rid of it |
| why does the market price fall if it is below the equilibrium price? | there is a shortage and sellers realize they can charge more |
| rationing function of prices | ability of competitive forces to establish a price at which selling/buying are consistent |
| what is consumer surplus? | consumer's willingness to pay for a good minus the price they paid |
| how do you get the total consumer surplus? | add all of the consumer surpluses |
| the term consumer surplus can refer to both | individual and total consumer surpluses |
| where is the total consumer surplus on the consumer surplus curve? | in the shaded area |
| what happens to the consumer surplus curve when there is a fall in price? | -dark blue rectangle shows gain to those who would have bought the item at the original price -light blue rectangle show people who are now willing to buy the item |
| producer surplus | difference between market price and and the price at which firms are willing to supply the product |
| total surplus | sum of producer+consumer surplus |
| are markets usually efficient? | yes |
| what are 3 ways that you might unsuccessfully try to raise the total surplus? | 1) reallocate consumption among consumers 2) reallocate sales among sellers 3) change quantity traded |
| what are the 4 ways that make competitive markets efficient? | 1) they allocate consumption of the good to potential buyers who most value it. 2) allocate sales to potential sellers who most value selling the good 3) all transactions are mutually beneficial 4) no mutually beneficial transactions are missed |
| what are the 3 caveats to efficiency? | 1) just because a market is efficient doesn't mean it's fair 2)markets sometimes fail to deliver efficiency 3) market equilibrium maximizing total surplus doesn't always result in the best outcome for everyone |
| why do markets typically work so well? | property rights and economic signals |
| why property rights make markets work well | it creates/protects their incentive to trade with others |
| what is the most important economic signals? | they convey info about other people's costs/willingness to pay |
| what happens when markets are innefficient? | there are missed opportunities |
| is market inefficiency necessarily a failure? | no |
| what are some reasons markets can fail? | 1) market power- firm has the ability to raise the market price 2) externalities- actions have side effects on welfare of others 3) nature of good makes it unsuitable for efficient allocation by a market |
Created by:
gschultz2028