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Final Exam Micro Econ
fuck
169
Economics
Undergraduate 2
05/03/2017
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Term
Economics
 Definition
The study of the choices individuals make given the presence of scarcity.
Term
Scarcity
 Definition
Limited resources but unlimited wants.
Term
Commodities
 Definition
Economic goods and services.
Term
The Economy
 Definition
The institutional structure through which individuals in a society coordinate their diverse wants.
Term
3 Big Questions
 Definition
1. What and how much to produce?
2. How to produce it?
3. For whom to produce it?
Term
Economic Reasoning
 Definition
Making decisions on the basis of costs and benefits.
Term
Economizing
 Definition
Getting maximum benefit at the minimum cost.
Term
Marginal Analysis
 Definition
Economic thinking is marginal thinking.
Term
The Economic Decision Rule
 Definition
If marginal benefit of an action exceeds the marginal cost, do it.
Term
Opportunity Cost
 Definition
The highest valued benefit that must be sacrificed as the result of choosing an alternative.
Term
Forces Influencing Economic Outcome
 Definition
1. Scarcity creates economic forces that ration scarce resources in our economy.
2. If these economic forces are allowed to function without hindrance, they become market forces.
3. Market forces ration goods and services by changing the price level.
Term
Invisible Hand
 Definition
The price mechanism.
Term
Economic Theory
 Definition
Generalizations about the working of an abstract economy.
Term
Economic Models
 Definition
We use simple abstract models to study larger, more complex concepts.
Term
Positive Statements
 Definition
A statement that can be tested, proven, or disproven.
Term
Normative Statements
 Definition
A statement of opinion, cannot be proven or disproven.
Term
Centrally Planned Economy
 Definition
Role of government: Communism & regulation
Property rights and resource ownership: Full control
Coordination of economic activity: Communism
Term
Pure Market
 Definition
Role of government: Capitalism, free markets, no regulation.
Property rights and resource ownership: No intervention, laissez faire.
Coordination of economic activity: Determined by market, price mechanism.
Term
Types of Economies
 Definition
1. Centrally planned
2. Mixed
3. Pure market
Term
Centrally planned market economies answer the big 3 questions.
 Definition
1. What to produce? What government wants.
2. How to produce? Determined by government.
3. Who gets the output? Equally distribution.
Term
Pure market economies answer the big 3 questions.
 Definition
1. What to produce? What people are willing to buy.
2. How to produce? What is most efficient and profit maximizing.
3. Who gets the output? Based on effort and inheritance.
Term
Primary resource allocation for Centrally Planned Economy
 Definition
Primary resource allocation to governemnt.
Term
Primary resource allocation for Pure Market
 Definition
Primary resource allocation is through price markets.
Term
Motivation and work incentives for Centrally Planned
 Definition
Ideally communal goal.
Term
Motivation and work incentives for Pure Market
 Definition
Through self interest, profit, and wealth.
Term
PPF
 Definition
A graph that shows the combination of two commodities that can be produced given a fixed level of technology and resources being used efficiently at a fixed point in time.
Term
Constant slope
 Definition
Straight line.
Term
Changing slope
 Definition
Round line.
Term
Comparative Advantage
 Definition
If you have the lowest opportunity cost of producing something. Hugging the Y-axis.
Term
Absolute Advantage
 Definition
If you have a productive advantage at producing a good. Hugging the X-axis.
Term
Law of Comparative Advantage
 Definition
We can gain by producing goods for which we have the lowest opportunity cost and then trading.
Term
Things that shift the PPF
 Definition
1. Natural disaster- Shifts it to the left.
2. Discovery of new oil deposits- Shifts the curve to the right.
3. Technological Improvements- Shits curve to the right.
4. Capital Accumulation- Shifts to the left then to the right.
Term
Quantity Demanded
 Definition
Amount of a good that households want to consume given their income and prices in a given time period.
Term
Demand Curve
 Definition
Slope of demand.
Term
Demand Schedule
 Definition
Shows the relationship between the price level and the quantity demanded.
Term
Law of Demand
 Definition
As the price of a good increases, the quantity demanded falls, ceteris paribus.
Term
Ceteris Paribus
 Definition
All held constant.
Term
Law of diminishing marginal benefit
 Definition
As more units of a good are consumed, additional units provide less benefit.
Term
Quantity Supplied
 Definition
The amount of a commodity that a firm plans to sell in a given time period at a given price.
Term
Law of Supply
 Definition
As the price for which a good can be sold increases; The quantity of that good this is supplied will increase, ceteris paribus.
Term
Economics
 Definition
The study of the choices individuals make given the presence of scarcity.
Term
Scarcity
 Definition
Limited resources but unlimited wants.
Term
Commodities
 Definition
Economic goods and services.
Term
The Economy
 Definition
The institutional structure through which individuals in a society coordinate their diverse wants.
Term
3 Big Questions
 Definition
1. What and how much to produce?
2. How to produce it?
3. For whom to produce it?
Term
Economic Reasoning
 Definition
Making decisions on the basis of costs and benefits.
Term
Economizing
 Definition
Getting maximum benefit at the minimum cost.
Term
Marginal Analysis
 Definition
Economic thinking is marginal thinking.
Term
The Economic Decision Rule
 Definition
If marginal benefit of an action exceeds the marginal cost, do it.
Term
Opportunity Cost
 Definition
The highest valued benefit that must be sacrificed as the result of choosing an alternative.
Term
Forces Influencing Economic Outcome
 Definition
1. Scarcity creates economic forces that ration scarce resources in our economy.
2. If these economic forces are allowed to function without hindrance, they become market forces.
3. Market forces ration goods and services by changing the price level.
Term
Invisible Hand
 Definition
The price mechanism.
Term
Economic Theory
 Definition
Generalizations about the working of an abstract economy.
Term
Economic Models
 Definition
We use simple abstract models to study larger, more complex concepts.
Term
Positive Statements
 Definition
A statement that can be tested, proven, or disproven.
Term
Normative Statements
 Definition
A statement of opinion, cannot be proven or disproven.
Term
Centrally Planned Economy
 Definition
Role of government: Communism & regulation
Property rights and resource ownership: Full control
Coordination of economic activity: Communism
Term
Pure Market
 Definition
Role of government: Capitalism, free markets, no regulation.
Property rights and resource ownership: No intervention, laissez faire.
Coordination of economic activity: Determined by market, price mechanism.
Term
Types of Economies
 Definition
1. Centrally planned
2. Mixed
3. Pure market
Term
Centrally planned market economies answer the big 3 questions.
 Definition
1. What to produce? What government wants.
2. How to produce? Determined by government.
3. Who gets the output? Equally distribution.
Term
Pure market economies answer the big 3 questions.
 Definition
1. What to produce? What people are willing to buy.
2. How to produce? What is most efficient and profit maximizing.
3. Who gets the output? Based on effort and inheritance.
Term
Primary resource allocation for Centrally Planned Economy
 Definition
Primary resource allocation to governemnt.
Term
Primary resource allocation for Pure Market
 Definition
Primary resource allocation is through price markets.
Term
Motivation and work incentives for Centrally Planned
 Definition
Ideally communal goal.
Term
Motivation and work incentives for Pure Market
 Definition
Through self interest, profit, and wealth.
Term
PPF
 Definition
A graph that shows the combination of two commodities that can be produced given a fixed level of technology and resources being used efficiently at a fixed point in time.
Term
Constant slope
 Definition
Straight line.
Term
Changing slope
 Definition
Round line.
Term
Comparative Advantage
 Definition
If you have the lowest opportunity cost of producing something. Hugging the Y-axis.
Term
Absolute Advantage
 Definition
If you have a productive advantage at producing a good. Hugging the X-axis.
Term
Law of Comparative Advantage
 Definition
We can gain by producing goods for which we have the lowest opportunity cost and then trading.
Term
Things that shift the PPF
 Definition
1. Natural disaster- Shifts it to the left.
2. Discovery of new oil deposits- Shifts the curve to the right.
3. Technological Improvements- Shits curve to the right.
4. Capital Accumulation- Shifts to the left then to the right.
Term
Quantity Demanded
 Definition
Amount of a good that households want to consume given their income and prices in a given time period.
Term
Demand Curve
 Definition
Slope of demand.
Term
Demand Schedule
 Definition
Shows the relationship between the price level and the quantity demanded.
Term
Law of Demand
 Definition
As the price of a good increases, the quantity demanded falls, ceteris paribus.
Term
Ceteris Paribus
 Definition
All held constant.
Term
Law of diminishing marginal benefit
 Definition
As more units of a good are consumed, additional units provide less benefit.
Term
Quantity Supplied
 Definition
The amount of a commodity that a firm plans to sell in a given time period at a given price.
Term
Law of Supply
 Definition
As the price for which a good can be sold increases; The quantity of that good this is supplied will increase, ceteris paribus.
Term
Supply Schedule
 Definition
Shows the relationship between the price level and the quantity supplied.
Term
Supply Curve
 Definition
Slope of supply.
Term
Law of Increasing Costs
 Definition
To supply additional units of a good, producers have greater opportunity costs, so the price must rise to induce producers to supply greater quantities.
Term
Market Equilibrium
 Definition
Where the quantity and price equilibrium meet. Q supplied = Q demanded
Term
Disequilibrium in the market
 Definition
P star, Quantity supplied is greater than quantity demanded.
Term
Excess supply-what this does to price, QD, QS
 Definition
Excess supply puts downward pressure on price. QD at P star is a surplus. (above PE)
Term
Excess demand-what this does to price, QD, QS
 Definition
Excess demand puts upward pressure on the price. P star below PE causes a shortage.
Term
Scalping
 Definition
Tickets selling prices below the true equilibrium price, results in shortage.
Term
Changes in quantity demand (QD)
 Definition
If price falls QD rises. Point on the demand slope.
Term
Changes in Demand
 Definition
A shift of the demand curve.
Term
Determinants of Demand
 Definition
1. Prices of related goods (Shifts curve to the left)
2. Income rising (Shifts curve to the right)
3. Population (shifts to right depending on situation)
4. Preference (Depends on situation)
5. Price Expected to rise (shifts demand curve to right)
6. Compliments/ Market for hershey's as price of marshmallows fall. (shifts curve to the right)
Term
Changes in quantity supplies (QS)
 Definition
Movement along the supply curve due to price change.
Term
Changes in supply (S)
 Definition
Shifts to the right when increase and shift to the left when decrease.
Term
Determinants of supply
 Definition
1. Price of Factors of Production (situational)
2. Technological Advance (Shifts curve to the right)
3. Compliments of production (Situational)
4. Number of Firms/ New firms enter market (Shifts curve to the right)
5. Subsidies and Taxes (Taxes shifts curve to the left) (Subsidies shifts the curve to the right)
6.Expectations of Future Prices (shifts curve to the left)
7. Natural Disasters (Shift curve to the left)
Term
Allocative efficiency
 Definition
Resources get allocated to the highest value production.
Term
Consumer Sovereignty
 Definition
The production of goods and services according to individual demand.
Term
What causes market failure? Why?
 Definition
Inefficiency, lack of competition, price fixing or colluding, and predatory pricing.
Term
Lack of competition
 Definition
A form of inefficiency such a a monopoly in power and anti competitive practices.
Term
Price fixing/colluding
 Definition
Cooperating with competitors that causes inefficiency.
Term
Predatory pricing
 Definition
Putting prices low only to drive out competition.
Term
Externalities
 Definition
Third party affected by market transactions.
Term
Negative Externality
 Definition
Market over provides the good from societies pinto of view.
Term
Positive Externality
 Definition
Market under provides the good from societies point of view.
Term
How to deal with externalities
 Definition
1. Ensure private property rights/
2. Taxes
3. Subsidies
4. Do nothing.
Term
Public Good
 Definition
Nonrival and nonexcludeable
Term
Excludability
 Definition
Once you buy something you can exclude others from using it.
Term
Nonexcludability
 Definition
No one can be excluded from consumption.
Term
Free rider problem
 Definition
Market under provides public goods.
Term
Direct transfers
 Definition
Unemployment compensation, social security, TANF.
Term
In-kind transfer
 Definition
Food stamps medicare, housing assistance, indirect forms of income/compensation.
Term
Price Ceiling
 Definition
Upper limit set on a price. Causes a shortage and is below the price equilibrium.
Term
Price Floor
 Definition
Lower limit set on price. Is binding and above the price equilibrium. Causes a surplus.
Term
Binding
 Definition
Keeps pice from reaching the equilibrium level.
Term
Minimum Wage
 Definition
Binding minimum wage is inefficient. (PF) Binding minimum wage causes unemployment.
Term
Excise Tax
 Definition
A tax imposed on some specific good. Shifts supply curve to the left.
Term
Tariff
 Definition
A tax on some specific imported good. Shifts supply curve to the left.
Term
Quota
 Definition
Quantity limit on imports. Vertical straight line on left side of graph.
Term
Elasticity of demand
 Definition
A measure that indicates the degree of consumer response ti a price change.
Term
Elasticity of supply
 Definition
Measures producers response to a price change.
Term
Income elasticity
 Definition
How demand changes in response to a change in income.
Term
Perfectly Inelastic Demand
 Definition
Vertical slope.
Term
Perfectly Elastic Demand
 Definition
Horizontal straight slope.
Term
Total Revenue
 Definition
sales and profit.
Term
Normal Good
 Definition
Are either luxury or necessities. Yd>0
Term
Inferior good
 Definition
Goods you stop getting as your income rises. Yd<0
Term
Elastic Goods
 Definition
Have lots of substitutes usually luxuries or wants. ED>1 Has flatter slope/
Term
Inelastic Goods
 Definition
Are needs. ED<1 Has steep slope.
Term
Elastic Total Revenue
 Definition
As price increases TR decreases and as price decreases TR increases.
Term
Inelastic Total Revenue
 Definition
As price increases TR increases, as price decreases TR decreases.
Term
Determinants of Elasticity
 Definition
1. Availability of substitutes. (More subs more elastic item is)
2. The passage of time (Longer the period of time buyers have to adjust more elastic it becomes.)
3. More it is a necessity more inelastic it is.
4. Greater budget devoted to a good more elastic it is.
Term
Types of Taxes
 Definition
1. Income tax
2. Property tax
3. Sales tax
4. Tariffs
5. Excise tax
6.Social security tax
Term
Benefits of Taxing
 Definition
1. Provides stable set of institutions and rules.
2. Provides public goods.
3. Adjust undesired market results.
Term
Costs of Taxing
 Definition
1. Administrative costs.
2. Dead weight loss.
Term
Producer Surplus
 Definition
Market price minus the amount that must be paid to provide the good.
Term
Consumer Surplus
 Definition
Amount you are wiling to pay minus the amount that you actually must pay.
Term
Deadweight Loss
 Definition
When people drop out of the market.
Term
The Benefit Principle
 Definition
The individuals who receive the benefit of a good or service should pay the tax necessary to supply that good.
Term
The Ability to Pay Principle
 Definition
The individuals who are the most able to bear the burden of the tax should pay the tax.
Term
Legal incidence of a tax
 Definition
Who is turning the tax into the government.
Term
Economic incidence of a tax
 Definition
Who bears the burden of the tax.
Term
Utility
 Definition
Measure of satisfaction we get from doing something.
Term
Firm
 Definition
An institution that hires factors of production and organizes them to produce / sell goods and services.
Term
Goals of Firm
 Definition
Maximize profit.
Term
Principal-agent problem
 Definition
The agent undertakes an action that affects the principal.
Term
Shirking
 Definition
Not doing your job in the work place causing inefficiency.
Term
Ways to try to control shirking
 Definition
1. Payment schemes
2. Monitoring
3. Precautions
Term
Fixed Input
 Definition
Cannot be varied in the short run such as machinery, land, and buildings. (capital)
Term
Variable Inputs
 Definition
Can be varied in the short run such as labor and materials.
Term
Short Run
 Definition
A time period short enough where at least one of the inputs is fixed.
Term
Long Run
 Definition
A time period sufficient enough for all inputs used in the productive process to be variable.
Term
Total Product
 Definition
The maximum total output that can be produced at a given time.
Term
Marginal Product
 Definition
Is the change in the total output that occurs when an additional unit of that factor is employed.
Term
Diminishing Marginal Returns
 Definition
As labor increases by additional units, TP increases, but by smaller and smaller amounts.
Term
Increasing Marginal Returns
 Definition
As labor increases by additional units, TP increases by larger and larger amounts.
Term
Negative Marginal Returns
 Definition
As labor increases by additional units, TP decreases.
Term
Average Product
 Definition
Tells us the average amount of output that each unit of the input enables us to produce.
Term
Total Fixed Costs
 Definition
Costs which do not depend on the level of output, they must be paid whether you profit or not.
Term
Total Variable Costs
 Definition
Costs that depend on the level of output.
Term
Total Costs
 Definition
Fixed costs plus variable costs.
Term
Average Total Cost
 Definition
Total Cost divided by quantity.
Term
Average Variable Cost
 Definition
Variable cost divided by quantity.
Term
Average Fixed Cost
 Definition
Fixed cost divided by quantity.
Term
Economic Efficiency
 Definition
To produce at the lowest possible cost.
Term
Technological Efficiency
 Definition
To use as few inputs as possible.
Term
Economies of Scale
 Definition
When average costs fall as output/firm size rises. (Increasing returns)
Term
Diseconomies of Scale
 Definition
When average costs increase as output/firm size rises. (Decreasing returns)
Term
Constant Returns to Scale
 Definition
When ATC does not change as output rises.
Term
Economies of Scope
 Definition
Term
Marginal Revenue
 Definition
Revenue from selling one or more unit of the good.
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