Microeconomics chapter 2, Microeconomics Exam 1

question

...

answer

...

question

production possibilities frontier (PPF)

answer

is the boundary between those combinations of goods and services that can be produced and those that cannot

question

model

answer

a ______ economy demonstrates the how the quantities of only two goods change, when all else is heal constant

question

attainable, but inefficient because resources are wasted or misallocated

answer

within the curve the combos are

question

unattainable

answer

outside the curve the combos are

question

production efficiency

answer

We achieve ________ if we produce goods and services at the lowest possible cost. This outcome occurs at all points on the PPF.

question

production efficiency (alternative definition)

answer

When we cannot produce more of any one good without giving up some other good, we have achieved ________.

question

opp cost = what we give up/what we get

e.g. 1 million cola/1 million pizza = 1 = the opportunity cost of PIZZA (what we get - always in the denominator!!)

answer

what is the opportunity cost equation?

question

Down to the right = looking at app cost of the x-axis (b/c that's what we're gaining)

Up to the left = looking at app cost of the y-axis (b/c that's what we're gaining)

answer

what's a heuristic for opportunity cost?

question

because resources are not all equally productive.

The more we produce of either good the less productive are the additional resources we use and the larger is the opportunity cost of a unit of that good

answer

why is the PPF bowed outward?

question

allocative efficiency

answer

when goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit.

question

it takes into account BENEFIT, which is the gain or pleasure that it brings as determined by consumer preferences

answer

how is allocative efficiency different that production efficiency?

question

It increases (due to resources becoming less and less productive)

answer

what happens to the marginal cost as we produce more and more of one good? (in a two good model)

question

marginal cost

answer

The _______ of a good or service is the opportunity cost of producing one more unit of it.

question

Marginal cost curve

answer

the ________ curve can be figured out from data from the PPF (the slope of the PPF)

question

marginal benefit

answer

the benefit received from consuming one more unit of something, depended on preferences

question

preferences

answer

people's likes and dislikes and the intensity of those feelings

question

We measure marginal benefit by the amount that a person is willing to pay for an additional unit of a good or service.

answer

How do we measure marginal benefit?

question

No, we can only derive the marginal cost from the PPF

answer

Can we derive marginal benefit from the PPF?

question

principle of decreasing
marginal benefit

answer

the more we have of something, the less we are willing to pay for it (e.g. I'll pay 5$ for one slice of pizza when I'm hungry, but only 1$ when I'm not hungry)

question

marginal benefit curve

answer

The _______ shows the relationship between the marginal benefit of a good and the quantity of that good consumed.

question

allocative efficiency (notice that as you make more pizzas the benefit goes down BUT the benefit of colas goes up (proportional to the marginal cost of pizza)! thus at some point if you make too much pizzas, people will start to value colas more!)

it's a two step process - at some point when making more and more pizza, (1) people will start to value cola MORE and (2) the marginal cost of making the pizza will start to outweigh the marginal benefit

answer

When we cannot produce more of any one good without giving up some other good that we value more highly, we have achieved ________.

question

allocative efficiency

answer

When we are producing at the point on the PPF that we prefer above all other points, we have reached _____

question

if we produce more that the point of allocative efficiency, then the consumer is not willing to pay the cost which we propose, it's not worth it to them

answer

translate this "If we produce more than 2.5 million pizzas, marginal cost exceeds marginal benefit.

question

at the point of allocative efficiency, the cost the we propose is exactly the cost that the consumer is willing to pay - We cannot get more value from our resources

answer

translate this "If we produce exactly 2.5 million pizzas, marginal cost equals marginal benefit."

question

a straight line

answer

If resources were equally efficient what would the PPF look like?

question

economic growth

answer

The expansion of production possibilities—an increase in the standard of living—is called________

question

Technological change & Capital accumulation

answer

Two key factors influence economic growth

question

Technological change

answer

is the development of new goods and of better ways of producing goods and services.

question

Capital accumulation

answer

is the growth of capital resources, which includes human capital.

question

To use resources in research and development and to produce new capital, we must decrease our production of goods and services during that time. There's a trade -off here.

answer

Explain the The Cost of Economic Growth

question

less current consumption.

answer

The opportunity cost of economic growth is ________

question

By using some resources to produce pizza ovens today, the PPF shifts outward in the future.

answer

Explain what's happening here

question

comparative advantage

answer

A person has a _______ in an activity if that person can perform the activity at a lower opportunity cost than anyone else.

question

absolute advantage

answer

A person has an _________ if that person is more productive than others.

question

productivities; opportunity costs

answer

Absolute advantage involves comparing _______ while comparative advantage involves comparing _______.

question

Joe

answer

If Joe's opportunity cost of a salad is 1/5 smoothie, and Liz's opportunity cost of a salad is 1 smoothie; who has the comparative advantage in producing salads?

question

Liz

answer

who has an absolute advantage?

question

we should all produce only the good in which we have the comparative advantage. Then we should trade it for the other thing we don't have a comparative advantage for. We should trade it for a value that is more than our opportunity cost. E.g. if it costs me 5 salads to make 1 smoothie, I should trade 1 of my salads for more than 1/5 a smoothie. If our trading partner is doing the same, then we should both benefit!

answer

How can we achieve the Gains from trade?

question

coordinated

answer

To reap the gains from trade, the choices of individuals must be ______.

question

Firm

answer

is an economic unit that hires factors of production and organizes those factors to produce and sell goods and services.

question

Market

answer

is any arrangement that enables buyers and sellers to get information and do business with each other.

question

economic growth and trade

answer

what are two ways in which we can push the PPF out?

question

factor markets and goods markets

answer

households and firms interact in 2 markets;

question

factor market

answer

A _______ facilitates the purchase and sale of services of factors of production, which are inputs like labor, capital, land and raw materials that are used by a firm to make a finished product.

question

goods markets

answer

market for finished products or services.

question

red is the flow of goods and services, green is the flow of money. Notice how the Factor market coordinates the firms buying factors of production and the households selling them. Notice how the goods market coordinates the buying and selling of goods and services.

answer

what do the green and red arrows represent?

question

Through price adjustments, e.g. lowing the price if there's more quantity supply than quantity demand, or upping the price if there's lots of buyers for a few goods, in order to maximize profit.

answer

How does the market coordinate consumer decisions?

question

Elasticity

answer

A measure indicating the consumer response in response to change in price.

question

Demand is Elastic

answer

if E of demand > 1

question

Demand is Inelastic

answer

if E of demand < 1

question

Demand is Unit Elastic

answer

if E of demand = 1

question

Horizontal

answer

What does the line look like on a perfectly elastic market

question

Vertical

answer

What does the line look like on a perfectly inelastic market

question

Determinants of Elasticity

answer

1. Availability of substitutes increase elasticity
2. The more specific the good, the more elastic
3. items that take up big portions of the budget are more elastic
4. Necessity is more inelastic while luxury goods are more elastic
5. the longer the time buyers get to adjust increases elasticity

question

Price Elasticity of Supply

answer

measure indicating the degree of seller response to a change in price

question

Normal good

answer

if E of Income > 0

question

Inferior good

answer

if E of Income < 0

question

Necessity

answer

if E of Income is between 0 and 1

question

Luxury good

answer

if E of Income > 1

question

Substitutes

answer

if X of demand > 0

question

Complements

answer

if X of demand < 0

question

Unrelated in consumption

answer

if X of demand = 0

question

Microeconomics

answer

the study of how
households and firms
make decisions and how
they interact in markets

question

Scarcity

answer

the limited nature of society's
resources

question

Opportunity Cost

answer

whatever must be
given up to obtain some item

question

Consumer Surplus

answer

the amount a buyer is
willing to pay for a good
minus the amount the
buyer actually pays for it

question

Producer Surplus

answer

the amount a seller is
paid for a good minus the
seller's cost of providing it

question

Price Ceiling

answer

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

question

Price Floor

answer

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

question

Law of Supply

answer

the claim that, other
things equal, the quantity supplied of a
good rises when the price of the good
rises

question

Law of Demand

answer

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

question

Equilibrium

answer

a situation in which
the market price has
reached the level at which
quantity supplied equals
quantity demanded

question

Cross Price Elasticity of Demand

answer

question

Capital

answer

the equipment and
structures used to produce
goods and services

question

Goods

answer

A material that satisfies human wants, and provides utility.

question

Supply Curves

answer

a graph of the relationship
between the price of a good and
the quantity supplied

question

Demand Curves

answer

a graph of the relationship
between the price of a good and
the quantity demanded

question

Shortages

answer

a situation in which quantity
demanded is greater than quantity
supplied

question

Surpluses

answer

a situation in which quantity
supplied is greater than quantity
demanded

question

Changes in Demand

answer

Shifts or pivots in the demand curve

question

Changes in Supply

answer

shifts or pivots in the supply curve

question

Market Equilibrium

answer

Supply and demand are equal.

question

Determinants of Demand

answer

1. Income - Money earned over a period of time
2. Wealth - Net Worth
3. Tastes - Changes in Taste
4. Price of Substitutes - Wine
5. Price of Complements - Pizza
6. Future Prices - Memorial Day

question

Determinants of Supply

answer

1. Input Prices - Resources and Raw Materials
2. Technology - More Efficient Use of Resources
3. Number of Sellers
4. Future Prices - Price Expectations
5. Government Policies A. Subsidies B. Taxes C. Restrictions
6. Weather (Agriculture)

question

Cross Price Elasticity of Demand (Between two Products)

answer

a measure of how much
the quantity demanded
of one good responds to
a change in the price of
another good, computed as
the percentage change in
quantity demanded of the
first good divided by the
percentage change in the
price of the second good
Formula: Change in Price A/Average of Price A and B Divided by Change in Price C/Average of Price C and D
B-A
------
A+B/2

question

Income Elasticity of Demand

answer

a measure of how much
the quantity demanded
of a good responds to
a change in consumers'
income, computed as
the percentage change
in quantity demanded
divided by the percentage
change in income

question

Tax Incidence

answer

the manner in which the
burden of a tax is shared
among participants in a
market

question

Resources

answer

Labor, Capital, Land, Natural Resources, and Entrepreneurship

question

Labor Resources

answer

The time people spend producing goods and services

question

Land Resources (Natural Resources)

answer

Gifts of Nature such as physical space and prime materials (timber, arable land, crude oil, iron ore, coal, etc.)

Renewable and Exhaustible Resources

question

Entrepreneurship

answer

The willingness by creative people to take risks to create new and innovative products.

question

Capital Good

answer

Can be used to make other capital goods or consumer goods

question

Inferior Good

answer

a good for which, other
things equal, an increase
in income leads to a
decrease in demand

question

Normal Good

answer

a good for which, other
things equal, an increase
in income leads to an
increase in demand

question

Neutral Good

answer

goods that have a demand that is not dependent to the income.

question

Price Elasticity of Demand

answer

a measure
of how much the quantity demanded of
a good responds to a change in the price
of that good, computed as the percentage
change in quantity demanded divided by
the percentage change in price

question

Wealth of Nations: Why is it Important?

answer

Laissez-faire philosophies, such as minimizing the role of government intervention and taxation in the free markets

question

Invisible Hand

answer

a metaphor for how, in a free market economy, self-interested individuals operate through a system of mutual interdependence to promote the general benefit of society at large.

question

Tragedy of The Commons

answer

The tragedy of the commons is an economic problem in which every individual tries to reap the greatest benefit from a given resource. As the demand for the resource overwhelms the supply, every individual who consumes an additional unit directly harms others who can no longer enjoy the benefits.

question

Price Change vs. Quantity Demanded

answer

A change in quantity demanded represents a movement along the current demand curve, while a change in demand represents a shift in the entire demand curve. By understanding this difference, a producer can better respond to market changes.

question

Deadweight Loss Formula

answer

1/2b*h

question

Spillover Costs

answer

also known as "negative externality," is a term used to describe some loss or damage that a market transaction causes a third party. The third party ends up paying for the transaction in some way, even though it was neither the buyer nor the seller and had no part in the original decision.

question

Producer Surplus+Consumer Surplus=_____

answer

Total Surplus

question

Price *Quanity___

answer

Cost of Tax

1 of 105

question

...

answer

...

question

production possibilities frontier (PPF)

answer

is the boundary between those combinations of goods and services that can be produced and those that cannot

question

model

answer

a ______ economy demonstrates the how the quantities of only two goods change, when all else is heal constant

question

attainable, but inefficient because resources are wasted or misallocated

answer

within the curve the combos are

question

unattainable

answer

outside the curve the combos are

question

production efficiency

answer

We achieve ________ if we produce goods and services at the lowest possible cost. This outcome occurs at all points on the PPF.

question

production efficiency (alternative definition)

answer

When we cannot produce more of any one good without giving up some other good, we have achieved ________.

question

opp cost = what we give up/what we get

e.g. 1 million cola/1 million pizza = 1 = the opportunity cost of PIZZA (what we get - always in the denominator!!)

answer

what is the opportunity cost equation?

question

Down to the right = looking at app cost of the x-axis (b/c that's what we're gaining)

Up to the left = looking at app cost of the y-axis (b/c that's what we're gaining)

answer

what's a heuristic for opportunity cost?

question

answer

why is the PPF bowed outward?

question

allocative efficiency

answer

when goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit.

question

it takes into account BENEFIT, which is the gain or pleasure that it brings as determined by consumer preferences

answer

how is allocative efficiency different that production efficiency?

question

It increases (due to resources becoming less and less productive)

answer

what happens to the marginal cost as we produce more and more of one good? (in a two good model)

question

marginal cost

answer

The _______ of a good or service is the opportunity cost of producing one more unit of it.

question

Marginal cost curve

answer

the ________ curve can be figured out from data from the PPF (the slope of the PPF)

question

marginal benefit

answer

the benefit received from consuming one more unit of something, depended on preferences

question

preferences

answer

people's likes and dislikes and the intensity of those feelings

question

We measure marginal benefit by the amount that a person is willing to pay for an additional unit of a good or service.

answer

How do we measure marginal benefit?

question

No, we can only derive the marginal cost from the PPF

answer

Can we derive marginal benefit from the PPF?

question

principle of decreasing
marginal benefit

answer

the more we have of something, the less we are willing to pay for it (e.g. I'll pay 5$ for one slice of pizza when I'm hungry, but only 1$ when I'm not hungry)

question

marginal benefit curve

answer

The _______ shows the relationship between the marginal benefit of a good and the quantity of that good consumed.

question

answer

When we cannot produce more of any one good without giving up some other good that we value more highly, we have achieved ________.

question

allocative efficiency

answer

When we are producing at the point on the PPF that we prefer above all other points, we have reached _____

question

if we produce more that the point of allocative efficiency, then the consumer is not willing to pay the cost which we propose, it's not worth it to them

answer

translate this "If we produce more than 2.5 million pizzas, marginal cost exceeds marginal benefit.

question

at the point of allocative efficiency, the cost the we propose is exactly the cost that the consumer is willing to pay - We cannot get more value from our resources

answer

translate this "If we produce exactly 2.5 million pizzas, marginal cost equals marginal benefit."

question

a straight line

answer

If resources were equally efficient what would the PPF look like?

question

economic growth

answer

The expansion of production possibilities—an increase in the standard of living—is called________

question

Technological change & Capital accumulation

answer

Two key factors influence economic growth

question

Technological change

answer

is the development of new goods and of better ways of producing goods and services.

question

Capital accumulation

answer

is the growth of capital resources, which includes human capital.

question

To use resources in research and development and to produce new capital, we must decrease our production of goods and services during that time. There's a trade -off here.

answer

Explain the The Cost of Economic Growth

question

less current consumption.

answer

The opportunity cost of economic growth is ________

question

By using some resources to produce pizza ovens today, the PPF shifts outward in the future.

answer

Explain what's happening here

question

comparative advantage

answer

A person has a _______ in an activity if that person can perform the activity at a lower opportunity cost than anyone else.

question

absolute advantage

answer

A person has an _________ if that person is more productive than others.

question

productivities; opportunity costs

answer

Absolute advantage involves comparing _______ while comparative advantage involves comparing _______.

question

Joe

answer

If Joe's opportunity cost of a salad is 1/5 smoothie, and Liz's opportunity cost of a salad is 1 smoothie; who has the comparative advantage in producing salads?

question

Liz

answer

who has an absolute advantage?

question

answer

How can we achieve the Gains from trade?

question

coordinated

answer

To reap the gains from trade, the choices of individuals must be ______.

question

Firm

answer

is an economic unit that hires factors of production and organizes those factors to produce and sell goods and services.

question

Market

answer

is any arrangement that enables buyers and sellers to get information and do business with each other.

question

economic growth and trade

answer

what are two ways in which we can push the PPF out?

question

factor markets and goods markets

answer

households and firms interact in 2 markets;

question

factor market

answer

A _______ facilitates the purchase and sale of services of factors of production, which are inputs like labor, capital, land and raw materials that are used by a firm to make a finished product.

question

goods markets

answer

market for finished products or services.

question

answer

what do the green and red arrows represent?

question

Through price adjustments, e.g. lowing the price if there's more quantity supply than quantity demand, or upping the price if there's lots of buyers for a few goods, in order to maximize profit.

answer

How does the market coordinate consumer decisions?

question

Elasticity

answer

A measure indicating the consumer response in response to change in price.

question

Demand is Elastic

answer

if E of demand > 1

question

Demand is Inelastic

answer

if E of demand < 1

question

Demand is Unit Elastic

answer

if E of demand = 1

question

Horizontal

answer

What does the line look like on a perfectly elastic market

question

Vertical

answer

What does the line look like on a perfectly inelastic market

question

Determinants of Elasticity

answer

question

Price Elasticity of Supply

answer

measure indicating the degree of seller response to a change in price

question

Normal good

answer

if E of Income > 0

question

Inferior good

answer

if E of Income < 0

question

Necessity

answer

if E of Income is between 0 and 1

question

Luxury good

answer

if E of Income > 1

question

Substitutes

answer

if X of demand > 0

question

Complements

answer

if X of demand < 0

question

Unrelated in consumption

answer

if X of demand = 0

question

Microeconomics

answer

the study of how
households and firms
make decisions and how
they interact in markets

question

Scarcity

answer

the limited nature of society's
resources

question

Opportunity Cost

answer

whatever must be
given up to obtain some item

question

Consumer Surplus

answer

the amount a buyer is
willing to pay for a good
minus the amount the
buyer actually pays for it

question

Producer Surplus

answer

the amount a seller is
paid for a good minus the
seller's cost of providing it

question

Price Ceiling

answer

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

question

Price Floor

answer

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

question

Law of Supply

answer

the claim that, other
things equal, the quantity supplied of a
good rises when the price of the good
rises

question

Law of Demand

answer

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

question

Equilibrium

answer

a situation in which
the market price has
reached the level at which
quantity supplied equals
quantity demanded

question

Cross Price Elasticity of Demand

answer

question

Capital

answer

the equipment and
structures used to produce
goods and services

question

Goods

answer

A material that satisfies human wants, and provides utility.

question

Supply Curves

answer

a graph of the relationship
between the price of a good and
the quantity supplied

question

Demand Curves

answer

a graph of the relationship
between the price of a good and
the quantity demanded

question

Shortages

answer

a situation in which quantity
demanded is greater than quantity
supplied

question

Surpluses

answer

a situation in which quantity
supplied is greater than quantity
demanded

question

Changes in Demand

answer

Shifts or pivots in the demand curve

question

Changes in Supply

answer

shifts or pivots in the supply curve

question

Market Equilibrium

answer

Supply and demand are equal.

question

Determinants of Demand

answer

1. Income - Money earned over a period of time
2. Wealth - Net Worth
3. Tastes - Changes in Taste
4. Price of Substitutes - Wine
5. Price of Complements - Pizza
6. Future Prices - Memorial Day

question

Determinants of Supply

answer

question

Cross Price Elasticity of Demand (Between two Products)

answer

question

Income Elasticity of Demand

answer

a measure of how much
the quantity demanded
of a good responds to
a change in consumers'
income, computed as
the percentage change
in quantity demanded
divided by the percentage
change in income

question

Tax Incidence

answer

the manner in which the
burden of a tax is shared
among participants in a
market

question

Resources

answer

Labor, Capital, Land, Natural Resources, and Entrepreneurship

question

Labor Resources

answer

The time people spend producing goods and services

question

Land Resources (Natural Resources)

answer

Gifts of Nature such as physical space and prime materials (timber, arable land, crude oil, iron ore, coal, etc.)

Renewable and Exhaustible Resources

question

Entrepreneurship

answer

The willingness by creative people to take risks to create new and innovative products.

question

Capital Good

answer

Can be used to make other capital goods or consumer goods

question

Inferior Good

answer

a good for which, other
things equal, an increase
in income leads to a
decrease in demand

question

Normal Good

answer

a good for which, other
things equal, an increase
in income leads to an
increase in demand

question

Neutral Good

answer

goods that have a demand that is not dependent to the income.

question

Price Elasticity of Demand

answer

a measure
of how much the quantity demanded of
a good responds to a change in the price
of that good, computed as the percentage
change in quantity demanded divided by
the percentage change in price

question

Wealth of Nations: Why is it Important?

answer

Laissez-faire philosophies, such as minimizing the role of government intervention and taxation in the free markets

question

Invisible Hand

answer

a metaphor for how, in a free market economy, self-interested individuals operate through a system of mutual interdependence to promote the general benefit of society at large.

question

Tragedy of The Commons

answer

question

Price Change vs. Quantity Demanded

answer

question

Deadweight Loss Formula

answer

1/2b*h

question

Spillover Costs

answer

question

Producer Surplus+Consumer Surplus=_____

answer

Total Surplus

question

Price *Quanity___

answer

Cost of Tax

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