question

economics

answer

the study of how individuals and nations use scarce resources to satisfy their wants and needs

question

two disciplines of economics

answer

micro - individuals macro - nations

question

resources

answer

anything that can be used to obtain a want or a need

question

the basic problem of economics

answer

scarcity

question

seven elements of economic perspective

answer

1. real cost 2. trade off 3. opportunity cost 4. Law of Diminishing Marginal Utility 5. rational behaviour 6. cost benefit analysis 7. scarcity

question

real cost

answer

trade off + opportunity cost

question

trade off

answer

resources given up to obtain a want or a need

question

opportunity cost

answer

next best alternative for the use of a given up reasource

question

rational behaviour

answer

doing what is in your best interest

question

five types of fallacies/mistakes in economic reasoning/research

answer

1. bias 2. loaded terminology 3. fallacies of composition 4. post hoc ergo proper hoc 5. correlation vs causation

question

fallacies of composition

answer

saying something that applies to one person can apply to everyone

question

post hoc ergo proper hoc

answer

"after this therefore because of this" just because one event (A) preceded another event (B), event A caused event B

question

correlation vs causation

answer

thinking one thing cause another just because there is a correlation between them

question

three steps in economic policy

answer

1. state the goal 2. determine the policy options 3. implement and evaluate the policy that was selected

question

eight economic goals

answer

1. economic growth 2. full employment 3. economic efficiency 4. price-level stability 5. economic freedom 6. equitable distribution of income 7. economic security 8. balance of trade *see page 9*

question

ceteris paribus

answer

"all other things equal" assumption used to rule out the possibility of other factors changing the outcome

question

positive statement

answer

fact

question

normative statement

answer

opinion

question

three levels of economics

answer

1. fact 2. policy 3. theoretical

question

At which level do economists usually disagree?

answer

policy

question

inductive reasoning

answer

start with facts, come up with a theory

question

deductive reasoning

answer

starts with a theory, come up with facts

question

complimentary goals and example

answer

when you work toward one goal, another is achieved ex: economic growth and economic efficiency

question

conflicting goals and example

answer

when you work toward one goal and it hurts another ex: economic freedom and economic security

question

production possibility

answer

maximum possibility to produce

question

four assumptions of production possibility problems

answer

1. dealing with 2 products 2. technology is fixed 3. resources are fix 4. productively efficient and fully employed

question

two ways to display production possibility

answer

schedule (table) and curve (graph)

question

corresponding product of 15 units of B A - 0, 1, 2, 3, 4, 5 B - 15, 14, 12, 9, 5, 0

answer

0 units of A

question

opportunity cost of 12 units of B A - 0, 1, 2, 3, 4, 5 B - 15, 14, 12, 9, 5, 0

answer

3 units of A

question

economic efficiency

answer

productively efficient and allocatively efficient

question

productively efficient

answer

cost efficient (producing on the lowest point on the curve)

question

allocatively efficient

answer

producing what society wants in the quantities they want

question

four types of opportunity cost curves

answer

1. increasing 2. constant 3. decreasing 4. zero

question

increasing opportunity cost curve

answer

- real world - move least productive resource - (appearance) concaved bowed out from origin

question

constant opportunity cost curve

answer

- real world - same interval on both sides of the schedule - (appearance) straight negative diagonal line - usually time

question

decreasing opportunity cost curve

answer

- not in real world - not making good economic decisions - (appearance) convex curving in toward origin

question

zero opportunity cost curve

answer

- not in real world - free product - (appearance) straight line (can be vertical or diagonal - the free product is the product at which is parallel to the curve

question

shifting curves

answer

curve shifts in when resources are taken away curve shifts out when resources are added

question

unused resources

answer

are dormant points on the opportunity cost curve

question

economizing problem

answer

unlimited wants, limited resources

question

four general economic systems

answer

1. pure market 2. pure command 3. mixed economy 4. traditional

question

pure market

answer

capitalism- factors of production are owned by people and businesses (extreme & not in real world)

question

pure command

answer

communism - factors of production are owned by government (extreme & not in real world)

question

mixed economy

answer

factors of production are owned by people businesses, and government (everyone is mixed but on different levels)

question

traditional economy

answer

base economic decisions on history (ex: a guy is a doctor because his dad was a doctor)

question

two specific types of economic systems

answer

1. authoritarian capitalism 2. market socialism

question

authoritarian capitalism (definition)

answer

the people could own the resources but the government has high authority over people's resources

question

authoritarian capitalism (example)

answer

Nazi Germany

question

market socialism (definition)

answer

government owns the resources but the people had a high degree of influence on how they were used (lead to black market)

question

market socialism (example)

answer

Yugoslavia

question

four types of resources

answer

1. land 2. labor 3. capital 4. enterprenuership

question

resource payment for land

answer

rent

question

resource payment for labor

answer

wages

question

resource payment for capital

answer

interest

question

resource payment for enteprenuership

answer

profit

question

market (definition)

answer

where buyers and sellers come together to make a voluntary exchange

question

three key points of the circular flow model

answer

1. whoever starts it doesn't have to end it 2. nonstop 3. money and resources/products flow in opposite directions

question

what is the household on the input side of the circular flow model?

answer

supply

question

what is the household on the output side of the circular flow model?

answer

demand

question

what is the business on the input side of the circular flow model?

answer

demand

question

what is the business on the output side of the circular flow model?

answer

supply

question

six characteristics of money

answer

1. scarce 2. stable in value 3. be accepted by the people 4. durable 5. divisible 6. portable

question

money (definition)

answer

anything that can be used as a medium of exchange, can store value, and can measure value

question

three types of money

answer

1. commodity 2. representative 3. fiat

question

commodity money (definition)

answer

(also known as mercantile exchange) has value by itself and can be traded for something else

question

commodity money (example)

answer

tobacco leaves in Virginia Colony

question

representative money (definition)

answer

has no value by itself but can be traded for something of value

question

representative money (example)

answer

the Gold Standard (beginning - FDR)

question

fiat money (definition)

answer

has no value by itself and cant be exchanged for anything of value (go to the bank and they'll only give you money back) based on governmental promise

question

fiat money (example)

answer

U.S. Dollar Today (FDR - present)

question

Father of Economics

answer

Adam Smith

question

laisse faire

answer

hands off government has little influence on economy everyone does what's in their best interest

question

invisible hand

answer

if laisse faire is enacted, the economy will grow as if driven by an invisible hand

question

four basic economic questions

answer

1. what and how much should be produced? 2. who should produce what? 3. how should goods and services be produced? 4. for whom should goods and services be produced?

question

How does a pure market answer the four basic economic questions?

answer

1. supply and demand 2. people's choice 3. most cost efficient method 4. whoever wants to and can buy them

question

How does a pure command answer the four basic economic questions?

answer

the government decides all four

question

How does a tradition economy answer the four basic economic questions?

answer

keep doing what they did in the past

question

How does a mixed economy answer the four basic economic questions?

answer

mix of pure command and pure market

question

two things needed for compitition

answer

1. large number of buyers and sellers 2. people must have to have the freedom to leave or enter the market

question

dollar votes

answer

money people spend on the things they want/need the most votes make the demand go up

question

geographic specialization

answer

certain resources are more easily accessible in some areas than others it is sensible for the more accessible areas to produce a surplus and trade/sell for resources less accessible to them

question

six characteristics of a market economy

answer

1. private property 2. freedom of enterprise and choice 3. self interest 4. competition 5. markets and prices 6. little/no government control *see chapter 4*

question

demand

answer

the amount that consumers are willing and able to purchase at all possible prices

question

possible prices

answer

range determined by the area where buyers and sellers will interact

question

Which axis is price always on?

answer

the vertical axis independent

question

law of demand

answer

price and quantity demanded have an inverse relationship

question

three reasons for the law of demand

answer

1. substitution effec 2. income effect 3. law of diminishing marginal utility

question

substitution effect

answer

substitute the more expensive product for the cheaper (more likely to buy)

question

income effect

answer

what you can buy with a set amount of money

question

change in quantity demanded (definition)

answer

a change in the EXACT amount demanded in a given market

question

change in quantity demanded (cause)

answer

price change

question

change in quantity demanded (shown)

answer

by moving a point on the curve

question

change in demand (definition)

answer

change in the amount demanded at ALL possible prices in a given market

question

change in demand (cause)

answer

something other than price *see factors that cause a change in demand*

question

change in demand (shown)

answer

shifting the curve

question

increase in supply/demand shifts _____

answer

right

question

decrease in supply/demand shifts ____

answer

left

question

six factors that can cause a change in demand

answer

1. taste in preference 2. income 3. expectations 4. complimentary goods 5. substitute goods 6. number of buyers

question

general relationship between income and demand

answer

direct (increase in income results in an increase in demand) if the good is inferior however, relationship is inverse (increase income, decreased demand [etc.])

question

expectations (demand)

answer

what you expect price to do in the future (higher prices (negative effect) in future, causes demand to go up now) (lower prices = positive effect)

question

supply

answer

the amount that producers are willing and able to provide at all possible prices

question

When are products considered supply?

answer

when they are on the shelves of the store

question

law of supply

answer

price and quantity supplied have a direct relationship

question

change in quantity supplied (definition)

answer

change in the exact amount that is supplied in a given market

question

change in quantity supplied (cause)

answer

price

question

change in quantity supplied (shown)

answer

moving a point on a curve

question

change in supply (definition)

answer

change in the amount supplied in a given market at all possible prices

question

change in supply (cause)

answer

something other than price *see factors that influence change in supply*

question

change in supply (shown)

answer

shifting the curve

question

eight factors that influence a change in supply

answer

1. government regulations 2. taxes and subsidies 3. number of sellers 4. technology 5. productivity 6. cost of inputs (resource cost) 7. price of other goods 8. expectations

question

government regulations

answer

more regulations motivates them to decrease supply & vice versa (inverse relationship)

question

taxes

answer

increase in taxes = increase cost = decrease profit = decrease supply & vice versa (inverse relationship)

question

subsidies

answer

increase in subsidies = decrease in cost = increase profit = increase supply & vice versa (direct relationship)

question

number of sellers relationship to supply

answer

direct

question

technology relationship to supply

answer

direct

question

cost of inputs (resource cost)

answer

cost of materials need to make a finished product (inverse relationship)

question

price of other goods relationship to supply

answer

inverse

question

expectations (supply)

answer

negative = lower prices in the future positive = higher prices in the future

question

price floor

answer

cannot charge under this minimum price (top line on graph) helps producers creates a surplus

question

price ceiling

answer

cannot charge above this maximum price (bottom line on graph) helps consumers creates a shortage

question

price floor (example)

answer

milk government buy excess and gives to poor

question

price ceiling (example)

answer

public housing government makes up for it to help poor

question

normal income

answer

money you actually have

question

real income

answer

purchasing power

question

explicit cost/normal cost

answer

money to pay to someone else for the resources they own

question

implicit cost/economic cost

answer

what you pay to yourself

question

elasticity of demand

answer

measuring how sensitive consumers are to a price change

question

elastic demand

answer

consumers are sensitive to price change

question

How is a perfectly elastic curve represented?

answer

as a straight horizontal line (does not exist in either supply or demand in real world)

question

inelastic demand

answer

consumers are not sensitive to a price change

question

How is a perfectly inelastic curve represented?

answer

as a straight vertical line (does not exist in demand in real world) (DOES exist in supply in real world)

question

unit elastic demand

answer

dividing line between elastic (top) and inelastic (bottom) not placing a valued judgement on the sensitivity

question

more elastic curve

answer

rotates counter clockwise

question

more inelastic curve

answer

rotates clockwise

question

four basic factors that affect elasticity of demand

answer

1. necessity vs luxury 2. percent of income 3. substitutibility 4. time

question

necessity is inelastic or elastic?

answer

inelastic

question

luxury is inelastic or elastic?

answer

elastic

question

larger percent of income is inelastic or elastic?

answer

elastic

question

smaller percent of income is inelastic or elastic?

answer

inelastic

question

longer time to consider is inelastic or elastic?

answer

elastic

question

shorter time to consider is inelastic or elastic?

answer

inelastic

question

elasticity of supply

answer

how sensitive producers are to a price change

question

elastic supply

answer

producers are sensitive to a price change

question

inelastic supply

answer

producers are not sensitive to a price change

question

unit elastic supply

answer

dividing line between elastic (top) and inelastic (bottom) not placing a valued judgement on the sensitivity

question

factor that affects elasticity of supply

answer

time (if a producer can react quickly, they are more elastic. if it takes a longer time for a producer to react, they are inelastic)

question

market period

answer

time when inputs cannot be changed nothing is a variable

question

Qd

answer

quantity demanded

question

revenue test equation

answer

$ x Qd = Revenue

question

% change in $ > % change in Qd

answer

inelastic

question

% change in $ < % change in Qd

answer

elastic

question

% change in $ = % change in Qd

answer

unit elastic

question

if price and revenue are inversely related, it is ____

answer

elastic

question

if price and revenue are directly realte, it is ____

answer

inelastic

question

if revenue does not change, it is ____

answer

unit elastic

question

when do you not use revenue test?

answer

on supply

question

coefficient test equation

answer

Ed(or Es) = |((Q1-Q2)/(Q1+Q2)/2)/((P1-P2)/(P1+P2)/2)|

question

four types of business organizations

answer

1. sole proprietership 2. partnership 3. corporation 4. franchise

question

sole proprietorship (definition)

answer

business organization owned and controlled by one person

question

sole proprietorship (example)

answer

Ricatonis

question

sole proprietorship (advantages)

answer

owner gets profit owner gets full control

question

sole proprietorship (disadvantages)

answer

owner responsible for all the costs unlimited liability

question

partnership (definition)

answer

business organization owned and controlled by two people

question

partnership (example)

answer

Fisher-Smith Animal Hospital

question

partnership (advantages)

answer

split costs split work

question

partnership (disadvantages)

answer

split profit unlimited liability

question

unlimited liability

answer

responsible for business beyond value (if you get sued you could lose your business and then your house and car too to make up the cost)

question

corporation (definition)

answer

legal entity with some of the same rights and responsibilities of an individual, owned by shareholders but controlled by a board of directors

question

corporation (example)

answer

Google

question

corporation (advantages)

answer

limited liability easy to transfer ownership owner doesn't have to worry about how it's run

question

corporation (disadvantages)

answer

double taxation owner has limited input on how it's run

question

franchise (definition)

answer

business organization where the owner buys the right and sells its products

question

franchise (example)

answer

Krispy Kreme

question

franchise (advantages)

answer

name recognition free advertising

question

franchise (disadvantages)

answer

large startup fee must sell the products

question

merger

answer

two or more business organizations to form one company

question

two ways to form a merger

answer

1. friendly 2. hostile

question

friendly merger

answer

all parties know about and agree with the merger (can happen with all of the business organizations)

question

hostile merger

answer

at least 1 party doesn't know about or doesn't agree with the merger (can only happen with a corporation)

question

3 types of mergers

answer

1. horizontal 2. vertical 3. conglomerate

question

horizontal merger (definition and example)

answer

2 or more business organizations producing the same product at the same level of production join together ex: Nike and Adidas

question

vertical merger (definition and example)

answer

2 or more business organizations producing the same product at different levels of production join together ex: Sears and Craftsmen

question

conglomerate merger (definition and example)

answer

2 unrelated business organizations join together ex: Yamaha

question

absolute advantage

answer

which country can make the most of any one product

question

comparative advantage

answer

who has the cheapest opportunity cost

question

law of variable proportions

answer

states in the short run if 1 input is changed and all others are held constant, then outputs will change

question

production function

answer

how or illustrate law of variable proportion (the large table with multiple rows and columns)

question

fixed cost

answer

cost that doesn't change with production (rent, taxes)

question

variable cost

answer

a cost that changes with production (wages, utilities)

question

total cost

answer

sum of all costs

question

average ____ cost equals

answer

____ cost divided by total product (fixed, variable, total)

question

4 types of market structures

answer

(Be sure to look at models) 1. perfect competition 2. monopoly 3. monopolistic competition 4. oligopoly

question

six characteristics of perfect competition

answer

1. large number of sellers (not any one seller can effect the market as a whole) 2. price takers (no control over price) 3. all products are identical 4. no value in advertisement 5. almost no barriers to entry 6. do not have non-price competition (ex: farming)

question

six characteristics of a monopoly

answer

(be sure to look at models) 1. 1 seller 2. unique product 3. almost complete control 4. no advertising 5. substantial barriers to enter 6. non-price competition doesn't exist (ex: public utilities)

question

four types of barriers to entry

answer

1. ownership of essential resources 2. license 3. patents and copyrights 4. economics to scale

question

six characteristics of monopolistic competition

answer

(be sure to look at models) 1. differentiated products (but unique like _monopoly_) 2. many sellers (but not as much as _perfect competition_) 3. have control over price (like _monopoly_) 4. low barriers to entry (like _perfect competition_) 5. advertise 6. non price competition (ex: fast food, women's clothing)

question

excess capacity

answer

difference in your output from profit maximizing point to product efficiency point (minimum marginal cost = average total cost) what you could produce to become more efficient (but producers care more about profit than efficiency)

question

under allocative

answer

price > marginal cost

question

allocative efficient

answer

price = marginal cost

question

two ways to alter excess capacity

answer

number of sellers ( +:elastic [-ex.cap], -:inelastic [+ex.cap.]) product differentiation ( +:inelastic [+ex.cap], -:elastic[-ex.cap])

question

2 sides on the debate over advertising

answer

1. traditional view 2. new perspective

question

three arguments of the traditional view

answer

1. advertising is persuasive 2. creates concentration (causes demand curve to move to the right and becomes more inelastic like one firm) 3. wasteful (creates a higher point on ATC curve)

question

three arguments of the new perspective

answer

1. ads are informative 2. creates competition (causes demand curve to shift to the left and become elastic like a market) 3. efficient (lower point on the ATC curve)

question

six characteristics of an oligopoly

answer

(be sure to look at models) 1. multiple but few firms 2. standardized (homogeneous) or differentiated products 3. control over price is limited by mutual interdependence 4. significant obstacles to entry 5. advertising 6. non-price competition

question

collusions

answer

cooperation with rivals (illegal for profit)

question

price leadership

answer

when one firm (the leader) announces a price change and the other firms (the followers) soon announce similar changes

question

gentlemen's agreement

answer

an agreement without writing anything down

question

mutual interdependence

answer

as a producer, I have to take into account my competitors reaction to my price change

question

two assumption of mutual interdependence in an oligopoly

answer

1. if you raise price, your competition will ignore you (increases elasticity) 2. if you lower price, your competition will also lower (decreases elasticity)

question

kinked demand curve

answer

the equilibrium equivalent of the oligopoly

question

price rigidity

answer

oligopoly doesn't change price because they lose economically

question

why does the gap exist in the kinked demand curve?

answer

because of the two assumptions of mutual interdependence (rivals will ignore a price increase but react to a price cut)

question

two shortcomings of the kinked demand curve

answer

1.doesn't explain how we got price and output 2. doesn't take into account changes in the economy

question

three types of collusions

answer

1. gentlemen's agreement 2. price leadership 3. cartels

question

cartels

answer

a group of producers that typically creates a formal written agreement specifying how much each member will produce and charge

question

why do oligopolies engage in collusions?

answer

profit

question

why are collusions hard to maintain?

answer

cheaters cheat

question

what are the available variables in the short run?

answer

anything except the production facility

question

what are the available variables in the market period?

answer

there are none nothing can be changed in the market period

question

what are the available variables in the long run?

answer

everything anything can be changed in the king run (specially the production facility)

question

price takers have a ____ product

answer

standardized

question

price makers have a ____ product

answer

differentiated

question

extranality

answer

economic side effect to an uninvolved third party (can be positive or negative)

question

derived demand

answer

demand for inputs depends on the demand for outputs that they're used to create

question

public policy toward monopolies

answer

monopolies have been a good thing during the majority of history past 100 years, don't like monopolies

question

why did the public policy toward monopolies change?

answer

Teddy Roosevelt the Trust Buster

question

four government laws dealing with economy

answer

1. Sherman Act 2. Clayton Act 3. FTC Act 4. Robertson Patman Act (these are in order)

question

Sherman Act

answer

outlawed contracts that restricted trade

question

Clayton Act

answer

outlawed price discrimination

question

FTC Act

answer

created the Federal Trade Commission which has the power to regulate interstate commerce

question

Robertson Patman Act

answer

forbid rebates or discounts

question

three characteristics of price takers

answer

1. standardized product 2. no barriers to entry 3. elastic demand curve

question

three characteristics of price makers

answer

1. differentiated product 2. barriers to entry 3. downsloping demand curve

question

why does the supply curve become more elastic from the market period to the short run to the long run?

answer

because the producers have more time

question

*profit maximizing point*

answer

mc=mr

question

productively efficient point

answer

mc = minimum atc

question

how do you know a graph is representing profit maximizing?

answer

price > atc

question

how do you know a graph is representing equilibrium?

answer

price = atc

question

how do you know a graph is representing loss minimizing?

answer

atc > p > avc

question

how do you know a graph is representing shut down?

answer

p < avc

question

price > atc

answer

profit maximizing graph

question

price = atc

answer

equilibrium graph

question

atc > p > avc

answer

loss minimizing graph

question

price < avc

answer

shut down graph

question

profit maximizing is in the _____ run in an oligopoly

answer

short and long

question

profit maximizing is in the _____ run in a monopoly

answer

short and long

question

profit maximizing is in the _____ run in a monopolistic competition

answer

short

question

profit maximizing is in the _____ run in a perfect competition

answer

short

question

which type of curve (graph) is only short run for all types of markets?

answer

loss minimzing

question

which type of curve (graph) is the only one that is short run and long run for all types of markets?

answer

shut down

question

what is the oligopoly equivalent to the equilibrium curve?

answer

kinked demand

question

what is the monopoly equivalent to the equilibrium curve?

answer

regulated monopoly (be sure to look at this one!)

question

seven (possible) areas for a market model (graph)

answer

1. total cost 2. total revenue 3. variable cost 4. fixed cost 5. profit or loss? 6. price per unit 7. cost per unity

question

______ of scale is more efficient

answer

economies

question

______ of scale is less efficient

answer

diseconomies

question

constant returns

answer

output changes by the same percent as inputs

question

percent comparison in economies to scale

answer

if inputs increase by 10% outputs will increase by more than !0% if inputs decrease by 10% outputs will decrease by less than 10%

question

percent comparison in diseconomies to scale

answer

if inputs increase by 10% outputs will increase by less than 10% if inputs decrease by 10% outputs will decrease by more than 10%

question

when is the only time companies will produce in diseconomies to scale?

answer

if the government makes them

question

dilemma of the regulated monopoly

answer

the monopoly will suffer losses if it produces at the socially optimal price

question

fair-return price

answer

p=ATC (also known as break even)

question

socially optimal price

answer

p=mc (also known as the allocative efficiency point)

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