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82 Cards in this Set
- Front
- Back
Define: Economics
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The study of how to allocate resources among competing ends (decision making)
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Define: microeconomics
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Branch of economics that examines decision making by individuals, firms, gov.
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Define: macroeconomics
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Study of the economy as a whole (unemployment, national production/income, price level)
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Define: market economy
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-US uses
-Capitalist |
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Define: command economy
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Communism, opposite of a market economy
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What do systems decide? (3 points)
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1.What goods and services will be produced
2.What inputs will we use in the production process 3.Who is going to receive the goods |
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Define: scarcity
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We have limited resources but unlimited wants
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What are 5 resources?
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1.Natural resources
2.Physical capital (factories/materials) 3.Labor 4.Human capital (knowledge/skills) 5.Entrepreneurship |
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Explain trade-offs
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-Because of scarcity
-To get one thing we usually have to give up something -Trade-offs--conflicts (over resources)--competition--choices--costs |
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Define: opportunity cost
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What you give up to get something
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What are two approaches to opportunity cost?
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1.All or nothing= 0 or 72 hours on Econ
2."On the margin"= do I spend another hour on econ |
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Define: margin
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Incremental adjustment, one unit more
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Define: rational
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People don't intentionally make themselves worse off, make decisions to increase general happiness
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Define: theory
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Simplified representation of the world
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What are the characteristics of a useful theory?
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1.Simple
2.General 3.Predictive power |
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What are the assumptions about market consumer?
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1.Self-interested
2.Rational 3.Consistent (preferences continue) |
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Define: Production Possibilites Frontier (PPF)
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Curve representing all possible combos of maximum outputs that can be produces assuming fixed resources
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What are the assumptions of the PPF?
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1.Production takes place over a specific time period
2.Resources and technology are fixed 3.All resources are fully employed |
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How is the PPF related to opportunity cost?
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It illustrates the cost of one good in terms of another
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What communicates the opportunity cost of the X axis good in a PPF?
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The slope
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What communicates the opportunity cost of the Y axis good?
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Inverse slope
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Define: absolute advantage
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Ability to produce a good using fewer inputs than another producer
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Define: comparative advantage
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Ability to produce a good at a lower opportunity cost than another producer
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What shape of a PPF is the most realistic?
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Curved
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Define: property rights
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Government gives so individuals can own and control scarce resources
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Define: market failure
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When the market fails on its own to efficiently allocate resources
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Define: externality
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Impact of one person's actions on a bystander
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Define: market power
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Ability of a single person to influence market
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Define: inflation
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Increase in overall prices in economy
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Define: business cycle
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Unpredictable fluctuations in economy
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What could change the shape of the PPF?
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Shift to the right=increase in resources
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Define: "balanced growth" in a PPF
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Proportional increase
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What should a producer specialize in?
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The good they have the comparative advantage in
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What will the range of trading prices be?
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Min: opp. cost of the seller
Max: opp. cost of the buyer |
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What does voluntary trade impact?
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-Wealth is created
-Improves efficiency |
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What are the steps to graph a joint PPF?
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1.Find endpoints for all resources (max out)
2.Find who should produce the first of the x-axis good (whoever has the comparative advantage/lower y-axis cost to produce x-axis) |
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Define: market
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A group of buyers and sellers of a good
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Define: competitive market
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Large # of sellers and buyers for a similar good, no individual buyer/seller can impact outcome (price)
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Define: quantity demanded
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Amount of good/service that buyers are willing to purchase
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Define: Law of Demand
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As price goes up, quantity demanded decreases (and vice versa)
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Define: demand curve
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Displays relationship between price and quantity demanded
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Why does the demand curve slope downward?
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1.Subsititution effect= as good becomes more expensive ppl will find other similar goods
2.Income effect= as price increases, ppl experience decrease in purchasing power 3.Buyers' reservation prices= consumers differ in willingness to pay |
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What are the determinates of demand?
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1.Number of buyers
2.Taste/preferences 3.Income 4.Price of related good 5.Expectations about future |
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Define: quantity supplied
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Amount of good a producer is willing/able to supply at a given price
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Define: Law of Supply
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Quantity supplied increases as price increases (vice versa)
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Define: market supply
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Sum of all supply curves
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What could cause shifts in the supply curve?
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1.Change in input prices
2.Technology 3.Expectations (ex. if suppliers expect price to go up later decrease what they supply today) 4.Number of sellers (more sellers, more market supply) |
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What is true at market equilibrium?
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Quantity demanded=quantity supplied=Q*
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What is true when quantity demanded is greater than quantity supplied?
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A shortage occurs, causing price increase (eventually goes back to equilibrium
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What is true when quantity supplied is greater than quantity demanded?
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A surplus occurs, prices fall (eventually equilibrium
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Define: consumer surplus
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Amount buyer is willing to pay -- amount buyer actually pays
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Define: producer surplus
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Amount producer is paid for a good - amount it cost to make the good
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Define: total surplus
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Consumer and producer surplus together
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Define: welfare economics
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Study of how the allocation of resources effects economic well-being
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Define: market efficiency
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Resource allocation that maximizes well-being or surplus
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Define: free markets
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Allocate supply of goods yo buyers who value them the most highly (most willing to pay)
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What is the 1st Fundamental Theorem of Economics?
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1.Perfect competition
2.Market existence Under these assumptions, a competitive economy allocates resources efficiently w/o central planning |
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Define: elasticity
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Response to change
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Define: elasticity of demand
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How responsive is quantity demanded to change in price?
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Define: elasticity of supply
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How responsive is quantity supplied to change in price?
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Define: income elasticity of demand
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How responsive is quantity demanded to change in income?
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Define: cross-price elasticity of demand
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How responsive is quantity demanded of one good to the price of another? (substitutes and complements)
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When does the elasticity of demand tend to be "high" (large, elastic)
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1.High number of close substitutes
2.Market is narrowly defined 3.Good is a luxury good 4.Time to adjust is large |
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Define: expenditure
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How much money spent on a good
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How is expenditure calculated?
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Price x quantity demanded
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How is the elasticity of demand calculated?
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Percent change in quantity demanded/percent change in price
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How is percent change in quantity demanded calculated?
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(Qnew -- Qold)/average Q
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How is percent change in price calculated?
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(Pnew -- Pold/average P)
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What sign is elasticity of demand always?
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Negative
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When is a good considered elastic?
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-When percent change in Q is greater than percent change in P
-E>1 -Less steep curve |
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When is a good considered inelastic?
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-When percent change in Q is less than percent change in P
-E<1 -"Steeper" curve |
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When is a good considered unit elastic?
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When percent change in Q is equal to percent change in P, or when E=1
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What does the demand curve look like when a good is perfectly inelastic and elastic?
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-Inelastic=vertical line
-Elastic=horizontal line |
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How does elasticity determine how revenue changes when price changes?
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-Inelastic (relatively)=price and revenue change in same direction
-Elastic (relatively)=price change and revenue in opposite directions |
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How is elasticity of supply calculated?
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"Eta"=change in quantity supplied/change in price
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What sign is elasticity of supply always?
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Positive
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Under what circumstances is elasticity of supply elastic, inelastic, and unit elastic?
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-Elastic= eta>1, not steep
-Inestlastic=eta<1, steeper -Unit elastic=eta=1 |
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When does elasticity of supply tend to be "large" (or elastic)?
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Time to adjust is large
-Single firm can adjust production levels -New firm enters market |
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What is the formula for cross-price elasticity?
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Percent change in quantity demanded of x/percent change in price of y
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What are the two options for cross-price elasticity and what are their signs?
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-Substitutes=positive, Q and P move in same direction
-Complements=negative, Q and P move in opposite directions |
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What is the formula for income elasticity of demand?
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Percent change in quantity demanded/percent change in income
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What are the two options for income elasticity and what are their signs?
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-Normal=positive, Q and I move in same direction
-Inferior=negative, Q and I move in opposite directions |