econ exam 1

  1. economics
    study of how scarce resources are allocated amount unlimited wants
  2. scarcity
    condition of having to choose amoung alternatives
  3. scarce good
    good for which the choice of one alternative requires that another be given up
  4. fallacy of false cause
    incorrect assumption that one event causes another because the 2 events tend to occur together
  5. macroeconomics
    studies the economy at the aggregate level, of the economy as a whole, total consumer behavior, total employment, total production, total sales, etc.
  6. microeconomics
    studies the economy at the level of individual consumers, workers, firms, goods and markets
  7. normative - definition
    statement that makes a value judgement can't be proven
  8. economics - 3 basic questions
    • What should be produced?
    • How should goods & services be produced?
    • For whom should goods and services be produced?
  9. comparative advantage - application
    • ability to produce a good or service at lower opportunity cost than someone else
    • If opportunity cost is 2 for one firm but 1 for another then the firm that produce 1 per 1 is better than the one that produces 2 for 1.
  10. economic growth - definitional
    Process through which an economy achieves an outward shift in its PPC (increase of quanity or quality of factors of production)
  11. opportunity cost - application
    • value of highest value alternative that must be given up when choice is made (trade off)
    • ex. go see u2 at $75 would pay $100 but free tickets to madonna opporunity cost is $25
  12. efficiency - definitional
    When an economy or firm is producing on its PPC
  13. PPC - application
    • production possibilities curve - how much given up to produce something else
    • Q of item produced/Q of item given up
    • skis to snowboard
    • 100 skies or 50 snowboards
    • means 2 skis per snowboard produced; .5 snowboard per ski produced
  14. factors of changing demand - knowledge of factors
    number of buyers, price of related goods, expectations, demographics, tastes & preferences, consumer income
  15. law of demand - application
    a higher price leads to a reduction in quntity demanded and lower price leads to increase in quantity demanded, negative slope on graph
  16. factors changing supply - knowledge of factors
    resource prices, technology & productivity, expectations of buyers, number of producers, supply shocks
  17. demand vs quantity demand - application
    • change in demand is a shift in the demand curve
    • change in quantity demanded is a movement along the demand curve due to change in price
  18. normal vs inferior goods - application
    • normal good is a good that will go up in demand when income increases and down in demand when income decreases
    • inferior good is a good that will go down in demand when income increases and up in demand when income increases
  19. complement vs substitutes - application
    • complements is a good that goes with another good and demand goes up when price of complement goes down but down when price of complement goes up
    • substitute is a good that replaces another good and demand goes up when price of substitute goes up and demand goes down when price of substitute goes down
  20. shifts in demand & supply curve - application
    • When there is a decrease in supply & demand equilibruim quantity goes down but equilibrium price is unknown
    • When there is an increase is supply & demand equilibrium quantity goes up but equilibrium price is unknown
    • When there is a decrease in demand & increase in supply equilibrium price goes down quantity unknown
    • When there is a decrease in supply & increase in demand equilibrium price goes up quantity unknown
  21. supply vs quantity supplied - application
    change in quantity supplied is a movement along the supply curve caused by change in price, an increase or decrease in supply causes a shift in the supply curve (the more or less there is to be supplied)
  22. shortages - application
    • occurs when demand is greater than supply
    • surplus occurs when supply is greater than demand
  23. price floor - examples
    • price is not allowed to decrease below a certain level; minimum wage, agricultural price supports
    • price is above the equilibrium price causing surplus because there is less of a demand then what the supply curve at same price gives
  24. price ceiling - application
    • price ceiling is when price is not allowed to increase above a certain level; rent control
    • causes shortage as equilibrium price is above the amount allowed to be charge, this is due to supply available is less than demand at the same price
  25. elasticity
    • ratio of the % of change in a dependent variable to a % of change in an indpendent variable
    • to get % of change difference in 2 points divided by average of the 2 points
  26. price elasticity of demand
    % of change in quanity demanded of product divided by % of change in price of product
  27. arc elasticity/ price elasticity of demand
    • measure of elasticity based on % of changes relative to the average value of each variable between 2 points
    • Ed = (changeQ/average Q)/(change P/average P)
  28. inelastic
    price elasticity is between zero and -1
  29. elastic
    price elasticity is between neg 1 and neg infinity
  30. unit elastic
    price elasticity is -1
  31. perfectly inelastic - demand
    situtation in which the price elasticity of demand is zero - vertical (no matter the cost demand will never change)
  32. perfectly elastic - demand
    price will always be the same no matter the quantity demanded - horizontal
  33. price/revenue test - application
    • Price is elastic (higher price less demand) increase in price reduces revenue & reduction in price increases revenue - total revenue moves in direction of quanity change
    • price is inelastic (lower price more demand) increse in price increases revenue & reduction in price reduces revenue - total revnue moves in direction of price change
    • unit price elastic does not change total revenue
  34. income elasticity - application
    % change in quantity demanded / % change in income
  35. cross price elasticity demand
    • % change in quantity demanded good A / % change in price of good B
    • substitute vs complement
  36. price elasticity of supply
    • % of change in quantity supplied / % of change in price
    • if 0 then perfectly inelastic - vertical
    • if infinite then perfectly elastic - horizontal
Card Set
econ exam 1
econ exam 1