question
an increase in the price of substitutes in production will cause supply to do what?
answer
supply will lower
question
what is economics?
answer
the study of scarcity
question
what are rational choices?
answer
systematically and purposefully making choices
question
what is an incentive?
answer
its a reason for doing something
question
what are trade-offs?
answer
a sacrifice that must be made in order to obtain a product
question
what is a marginal choice?
answer
small incremental changes. the more you consume, the less you enjoy it
question
what is an example of a marginal choice?
answer
liking snow in october vs. liking snow in april
question
what is an opportunity cost?
answer
whatever must be given up in order to obtain some item
question
what causes opportunity costs?
answer
trade offs
question
what is the difference between a centrally planned economy and a market economy?
answer
centrally planned- government decides how resources are allocated
market- decisions of houses and firms interacting in a market that allocates resources
market- decisions of houses and firms interacting in a market that allocates resources
question
what is a PPF curve?
answer
a curve showing maximum attainable combinations of two goods that can be produced with available resources and current technology
question
in a PPF curve, what points are
a) not efficient
b) efficient
c) not attainable
a) not efficient
b) efficient
c) not attainable
answer
a) inside the curve
b) on the curve
c) outside the curve
b) on the curve
c) outside the curve
question
how can an economy reach a point that is outside the curve?
answer
trade
question
Adam can produce 10 coconuts and 10 fish. Bob can produce 4 coconuts and 8 fish. calculate opportunity cost of coconuts and fish.
answer
coconuts:
Adam= 10f/10c --> 1 fish per coconut (X)
Bob= 8f/4c --> 2 fish per coconut
fish:
Adam= 10c/10f --> 1 fish per coconut
Bob= 4c/8f --> .5 fish per coconut (X)
Adam= 10f/10c --> 1 fish per coconut (X)
Bob= 8f/4c --> 2 fish per coconut
fish:
Adam= 10c/10f --> 1 fish per coconut
Bob= 4c/8f --> .5 fish per coconut (X)
question
when calculating opportunity cost, how do you know who has the specialization in each product?
answer
when you calculate opportunity cost, whoever has the LOWEST amount has the comparative advantage (look at Adam and Bob example)
question
what is the law of demand?
answer
given ceteris peribus, quantity demanded falls when prices rise (and vice versa)
question
does price change demand?
answer
no! it changes QUANTITY DEMANDED
question
what are the shifters of demand?
answer
1. change in income
2. change in price of a related good
3. change in customer's taste
4. change in # of buyers
5. change in future expectations of price
2. change in price of a related good
3. change in customer's taste
4. change in # of buyers
5. change in future expectations of price
question
what are the shifters of supply?
answer
1. change in input prices
2. change in technology
3. change in price of a related good in production
4. # of firms in the market
5. change in future expectation in price
6. changes in taxes and subsidies
7. changes in weather
2. change in technology
3. change in price of a related good in production
4. # of firms in the market
5. change in future expectation in price
6. changes in taxes and subsidies
7. changes in weather
question
what is the law of supply?
answer
an increase in price causes an increase in quantity supplied (vice versa)
question
if the price of taco bueno went up, what would happen to the demand of taco bell?
answer
increase
question
if your income increased, what would happen to the demand of ramen? or great value items?
answer
decrease
question
if the technology of bike production went up, what would happen to supply?
answer
increase
question
if a price landed below equilibrium, what would happen?
answer
there would be a shortage
question
if a price landed above equilibrium, what would happen?
answer
there would be a surplus
question
if bad weather killed orange production, what would happen to supply?
answer
decrease
question
if the supply of pumpkins decreased due to bad weather AND the demand for pumpkins increased since it's october, what would happen to price and quantity?
answer
price would increase, quantity would be ambiguous
question
if the taste of vinyl records increased AND the technology for pressing vinyls increased, what would happen to price and quantity?
answer
quantity would increase, price would be ambiguous
question
what is consumer surplus and how do you calculate it?
answer
it's the difference between highest price a consumer is willing to pay for a good and the actual price
CS= highest price willing to pay - actual price
CS= highest price willing to pay - actual price
question
how do you find the maximum willingness to pay for consumers?
answer
when the demand curve hits the price axis
question
what is producer surplus and how do you calculate it?
answer
the difference between the lowest price a firm will be willing to accept for a good and the price it actually receives
PS= actual price - lowest price willing to accept
PS= actual price - lowest price willing to accept
question
how to find the minimum willingness to pay for producers?
answer
when the supply curve hits the price axis
question
how do you calculate total surplus?
answer
consumer surplus + producer surplus
question
what is a price floor?
answer
legal minimum on the price at which a good can be sold
question
what is an example of a price floor?
answer
minimum wage
question
when is a price floor binding?
answer
when it is ABOVE equilibrium
question
what is a price ceiling?
answer
a legal maximum on the price at which a good can be sold
question
what is an example of a price ceiling?
answer
rent control
question
when is a price ceiling binding?
answer
when it is BELOW equilibrium
question
what is a tax incidence?
answer
it is the actual division of the burden of a tax between buyers and sellers in a market
question
an example of tax incidence
answer
in the market for gas, equilibrium price is at $2.50.
The government puts a 10 cent tax on gas. The buyers pay $2.58 and the sellers receive $2.48.
the tax causes a decrease in supply
The government puts a 10 cent tax on gas. The buyers pay $2.58 and the sellers receive $2.48.
the tax causes a decrease in supply
question
what happens because of a tax incidence?
answer
deadweight loss
question
what is deadweight loss?
answer
reduction in economic surplus resulting from a market not being in a competitive equilibrium
question
what is the formula for DWL?
answer
.5 x (P2-P1) x (Q2-Q1)
question
where does the tax burden fall more on? the elastic or the inelastic sector?
answer
the inelastic sector
question
what is price elasticity of demand and what is the formula?
answer
responsiveness of quantity demanded to change in price
% change in QD/% change in Price
% change in QD/% change in Price
question
what are determinants of Ed (price elasticity of demand)?
answer
1. availability of close substitutes
2. necessity vs. luxury
3. passage of time
4. definition of the market
5. share of goods in consumer's budget
2. necessity vs. luxury
3. passage of time
4. definition of the market
5. share of goods in consumer's budget
question
there is a 15% increase in price of wheat, as well as a 45% decrease in the quantity demanded of wheat. find price elasticity of demand
answer
-.45/.15 = -3, |-3| = 3, elastic
question
there is a 5% increase in the quantity demanded of bagels, as well as a 10% decrease in the price of bagels. find Ed (price elasticity of demand)
answer
-.05/.10 = -.5, |-.5| = .5, inelastic
question
what is the midpoint method formula?
answer
(QD2-QD1)/[(QD2+QD1)/2]
-----------------------------
(P2-P1)/[(P2+P1)/2]
-----------------------------
(P2-P1)/[(P2+P1)/2]
question
how do you calculate the income elasticity of demand?
answer
% change in Qd/% change in income
EI > 0, normal good
EI < 0, inferior good
EI > 0, normal good
EI < 0, inferior good
question
suppose you have a 25% increase in your income, and your quantity demanded for kraft mac n cheese goes down 45%. calculate EI (income elasticity of demand)
answer
-.45/.25 = -1.8, inferior good
question
what is the cross price elasticity of demand?
answer
% change in Qd of good 1/ % change in P of good 2
Ec > 0, substitute
Ec < 0, compliments
Ec > 0, substitute
Ec < 0, compliments
question
if the price of tortilla chips went up by 20%, and the quantity demanded for salsa goes down by 30%, calculate the cross price elasticity of demand.
answer
-.30/.20 = -1.5, compliments
question
what is the price elasticity of supply?
answer
% change in Qs/ % change in P
question
there is an increase in the price of corn by 15%, as well as an increase of quantity supplied for corn by 27%. calculate Es (price elasticity of supply)
answer
.27/.15 = 1.8, elastic
question
how do you know whether answers in Ed, midpoint method, and Es are elastic, inelastic, or unit elastic?
answer
x > 1 = inelastic
x < 1 = elastic
x = 1 = unit elastic
(only for price elasticity of supply will you see x = 0 (perfectly inelastic) and x = ∞ (perfectly elastic)
x < 1 = elastic
x = 1 = unit elastic
(only for price elasticity of supply will you see x = 0 (perfectly inelastic) and x = ∞ (perfectly elastic)
question
how to remember formulas if you forget
answer
quantity demanded will always be on top, price will always be on bottom
question
will you do good on this test?
answer
yes!!!
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