Microeconomics Study Set

Which points represent an infeasible output combination?

A F

What is a Demand Curve?

A graphical object showing the relationship between the price of a good and the amount of the good that buyers are willing and able to purchase at various prices

What is a luxury good's elasticity? How does it differ from a necessity?

A luxury good is often viewed as a normal good that has an income elasticity greater than 1. Necessities (such as food) tend to have lower, positive income elasticities, as consumers must purchase them regardless of their incomes

What is the definition of a normative statement?

A normative statement is one that offers an opinion as to the way the world should be.

What is the definition of a positive statement?

A positive statement is one that seeks to describe the world as it is

What is a Demand Schedule?

A table showing the relationship between the price of a good and the amount that buyers are willing and able to purchase at various prices

Shifts in the production possibilities curve are caused by changes in what 4 things:

Advances in technology Changes in resources More education or training (that's what we call human capital) Changes in the labor force

Which points represent an efficient output combination?

B C

Which points represent a feasible output combination?

B C D E

How do you find whether a marginal change is beneficial or not?

Compare the cost to the marginal cost, not the cost as a whole Let's say you lose $20.00 of gas traveling to work. If you have an extra seat in your car and someone going to the same place as you is willing to pay $10.00 to ride with you, then it is beneficial. Even though the average cost of driving to work is $20.00, the marginal cost is non-existent.

Which points represent an inefficient output combination?

D E

What is required for efficiency and equality in an economy?

Efficiency means that society is getting the maximum benefits from its scarce resources. Equality means that those benefits are distributed uniformly among society's members.

True or False: When both the demand and supply curve shift, you can always determine the effect on price and quantity without knowing the magnitude of the shifts.

False

What are the two factors in a circular flow model?

Firms and Households

In the absence of a price ceiling, a surplus exerts what type of pressure?

In the absence of a price ceiling, a surplus exerts downward pressure on prices until there is neither a surplus nor a shortage.

In the absence of a price ceiling, a shortage exerts what type of pressure?

In the absence of a price ceiling, a shortage exerts upward pressure on prices until there is neither a surplus nor a shortage

What is the difference between microeconomics and macroeconomics?

Microeconomics is the study of how prices and quantities are determined through interactions between buyers and sellers (individuals and firms) in individual markets. Therefore, microeconomists are more likely to create models to analyze the decisions of firms (such as pricing) and those of consumers (such as shopping choices), as well as how government policies affect those decisions. Macroeconomics is the study of factors that affect the entire economy. Therefore, macroeconomists tend to create models to analyze how aggregate phenomena such as growth, inflation, and unemployment respond to policy decisions of governments and central banks, changes in aggregate spending or savings, and supply or demand shocks.

How do you calculate the price elasticity of demand? Provided: Original Quantity New Quantity Original Price New Price

New Quantity - Old Quantity = Change in Quantity New Price - Old Price = Change in Price (Change in Quantity)/(Average Quantity) = Percentage Change in Quantity (Change in Price)/(Average Price) = Percentage Change in Price abs((Percentage Change in Quantity)/(Percentage Change in Price)) = Elasticity of Demand If Elasticity of Demand > 1, then it is elastic If Elasticity of Demand < 1, then it is inelastic If Elasticity of Demand = 1, then it is unit elastic

What are trade-offs? Why do trade-offs happen?

Nothing in life is free. In order to get something, you usually have to give up something else. Therefore, making decisions requires trading off one goal against another, in terms of both the benefits and the costs.

What is the definition of a rational person?

People who systematically and purposefully do the best they can to achieve their objectives, given the available opportunities.

How do you find: Per-Unit Tax Burden on Producers Burden on Consumers

Per-Unit Tax: Price Consumers Pay - Price Producers Receive Burden on Producers: How much more consumers pay after the tax Burden on Consumers: How much more consumers pay after the tax

If there is a decrease in demand and If there is no change in supply How will the equilibrium for production and consumption change?

Price decreases Quantity decreases

If there is no change in demand and If there is an increase in supply How will the equilibrium for production and consumption change?

Price decreases Quantity increases

If there is a decrease in demand and If there is an increase in supply How will the equilibrium for production and consumption change?

Price decreases Quantity is undeterminable

If there is no change in demand and If there is a decrease in supply How will the equilibrium for production and consumption change?

Price increases Quantity decreases

If there is an increase in demand and If there is no change in supply How will the equilibrium for production and consumption change?

Price increases Quantity increases

If there is an increase in demand and If there is a decrease in supply How will the equilibrium for production and consumption change?

Price increases Quantity is undeterminable

If there is no change in demand and If there is no change in supply How will the equilibrium for production and consumption change?

Price is unchanged Quantity is unchanged

If there is a decrease in demand and If there is a decrease in supply How will the equilibrium for production and consumption change?

Price is undeterminable Quantity decreases

If there is an increase in demand and If there is an increase in supply How will the equilibrium for production and consumption change?

Price is undeterminable Quantity increases

What factors determine demand?

Price of a related good (complement or substitute) Income of consumers Tastes of consumers Number of consumers Expectations of consumers

What factors determine supply?

Price of inputs Production technology Number of producers Expectations of producers

What are the 10 principles of economics?

Principle 1: People Face Trade-offs Principle 2: The Cost of Something Is What You Give Up to Get It Principle 3: Rational People Think at the Margin Principle 4: People Respond to Incentives Principle 5: Trade Can Make Everyone Better Off Principle 6: Markets Are Usually a Good Way to Organize Economic Activity Principle 7: Governments Can Sometimes Improve Market Outcomes Principle 8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services Principle 9: Prices Rise When the Government Prints Too Much Money Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment

What will cause a shift in a supply curve, and what will cause movement?

Shift: Determinants of Supply Movement: Price of the product supplied changing

What will cause a shift in a demand curve, and what will cause movement?

Shift: Determinants of demand Movement: Price of the product demanded changing

What is the definition of terms of trade?

Suppose that two imaginary Maldonia and Desonia agree to trade. Each country focuses its resources on producing only the good in which it has a comparative advantage. The countries decide to exchange 4 million pounds of potatoes for 4 million pounds of sugar. This ratio of goods is known as the terms of trade between Maldonia and Desonia.

What is the Quantity Demanded?

The amount of a good that buyers are willing and able to purchase at a given price

What is the most likely reason for a country having high and persistent inflation?

The central bank creating excessive amounts of money.

What is the Law of Demand?

The claim that, with other things being equal, the quantity demanded of a good falls when the price of that good rises

What is the cross-price elasticity of demand?

The cross-price elasticity of demand measures the sensitivity of the quantity demanded of one good to changes in the price of another good.

What determines the effect on price in a case where supply and demand both shift?

The curve with the larger magnitude

What is opportunity cost?

The difference in return between a chosen investment and one that is necessarily passed up What you invest are your assets. These are the resources; whether that be natural, human, or capital What your return includes can be more resources or an experience. If something related to the chosen investment is inevitable, than it is not included in the opportunity cost, because no matter what it will already count and therefore be a non-factor. eg.: The opportunity cost of going to the movies can be less enjoyment than a different movie, more expensive than a different movie, and a loss of time that could have been spent studying.

The price elasticity of demand measures ____________

The price elasticity of demand measures the responsiveness of consumers to changes in price

What is a production possibilities frontier (PPF)?

The production possibilities frontier (PPF) is an economic model used to illustrate how people and nations should decide what goods to produce, how much to produce, and for whom they should produce it. It's a model and a concept that looks at only two goods at a time.

What is the quantity supplied?

The quantity supplied of a good is the amount of the good that sellers are willing and able to supply at a given price.

What is the formula for total revenue?

Total revenue is equal to price times quantity

True or False? Supply is typically more elastic in the long run than in the short run.

True

When are two goods said to be complements?

Two goods are said to be complements when an increase in the price of one good decreases the quantity demanded for the other or when a decrease in the price of one good increases the quantity demanded for the other

When are two goods said to be substitutes?

Two goods are said to be substitutes when an increase in the price of one good increases the quantity demanded for the other or when a decrease in the price of one good decreases the quantity demanded for the other.

Without engaging in international trade, any quantity outside a country's original PPF is considered ___________.

Without engaging in international trade, any quantity outside a country's original PPF is considered infeasible. In other words, given an individual country's resources, the bundles on the PPF are the greatest quantities of the goods that a country can produce (and, therefore, consume) without trade. By exploiting each country's comparative advantage to realize gains from trade, Maldonia and Desonia can actually consume outside their individual PPFs through specialization.

What is a price ceiling?

a legal maximum on the price at which a good can be sold.

What is a binding price ceiling?

a price ceiling that is set below the equilibrium price

What is a price floor?

a price floor is a legal minimum on the price at which a good can be sold.

What is a binding price floor?

a price floor that is set above the equilibrium price

Economics is best defined as the study of_________________. A. how society manages its scarce resources. B. How to run a business most profitably C. how to predict inflation, unemployment, and stock prices. D. how the government can stop the harm from unchecked self-interest.

how society manages its scarce resources.

It's possible for the undetermined object not to change at all. If the magnitudes of the two shifts are equal, then what will happen to the price and quantity?

the undetermined object will remain constant.