Economics Review Test Questions – Flashcards
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What does Ceteris Paribus mean?
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all other things unchanged or constant
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What is Economics the study of? Why?
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Economics is the study of choices that leads to the best possible use of scarce resources. This is used in order to best satisfy unlimited human wants and needs.
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What is the crucial problem of economics?
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That society has unlimited wants and needs but resources are limited.
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What are the key Economic questions?
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1. For whom to produce 2. What to produce 3. How to produce
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What is the function of an economic system?
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To produce and distribute goods and services
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In order to be considered scarce, what must an economic resource be?
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It must be limited in supply
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What does the circular flow model explain?
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It explains how money flows through the economy.
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What does scarcity mean?
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That the supply is inefficient for the demand.
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How does scaricty relate toa ll goods and services?
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Because there is a limit on these items
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Explain the PPC.
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PPC represents all combinations of the maximum amounts of two goods that can be produced by an economy
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Where do all countries lie on the PPC?
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On the inside of the PPC.
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How can countries improve their production possibilities?
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New resources and technology
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What are resources made by huns that re used to create other goods are called?
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capital goods.
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What is opportunity cost?
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the value of giving up an alternative choice by making an economic decision.
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What is the product market?
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the marketplace in which a final good or service is bought and sold.
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Explain the two different types of economic systems.
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Microeconomics- the study of the decisions made by individuals and businesses Macroeconomics- the study of national economy and the global economy
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What are the factors of production?
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Land- natural resources Labor- human side of production capital- man made machines/factories entrepreneurship- person that organizes land, labor, capital
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Explain the concept of price as a rationing system
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price regulates rationing. people have to make a choice of what to produce
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Explain the law of demand
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there is a negative causal relationship between the price of a good and its quantity demanded over a particular time period, ceteris paribus.
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Explain the law of supply
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as price increases the quantity supplied will also increase (positive causal relationship) firms create more
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equilibrium
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when quantity demanded is equal to quantity supplied
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If price is lower than equilibrium what is the result?
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A shortage occurs
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If price is higher than equilibrium what is the result?
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A surplus occurs
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If there is an increase in demand, which way will the demand curve shift? Is the same true for supply?
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increase in demand - shift right; same with supply
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If there is a decrease in supply, which way will the supply curve shift? Is the same true for demand?
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decrease in supply - shift left; same with demand.
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List and explain each of the determinants of supply.
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Number of firms, resource prices and costs of production, technology, prices of other goods the firm can produce, expectations, taxes, subsidies, supply shocks
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What kind of table lists the quantity of a good that a person will buy at different prices?
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demand schedule
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What happens to market equilibrium when there is an increase in supply?
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price decreases and quantity demanded increases
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What happens to market equilibrium when there is an increase in demand?
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price increases and quantity demanded increases
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What happens to market equilibrium when there is a decrease in supply?
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price increases and quantity demanded decreases
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What happens to market equilibrium when there is a decrease in demand?
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price decreases and quantity demanded decreases
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Explain the concept of elasticity.
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measures a variable's sensitivity to change in another variable.
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What is PED?
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a measure of how much quantity responds to change in price
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What is the formula for PED?
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percentage change in quantity demanded / percentage change in price
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What are the ranges for PED?
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0;PED;1 = price inelastic 1;PED;infinity = elastic PED = 1 = unit elastic PED = 0 = perfectly inelastic PED = infinity = perfectly elastic
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What are the determinants of PED? Give examples of each.
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availability of substitute goods, definition of the good or service, necessities vs. luxuries, proportion of income spent, addiction
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What is CED?
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measures the change in demand for a good based on a change in price in a substitute or complementary good
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What is the formula for CED?
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percentage change in quantity demanded of good x / percentage change in price of good y
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What are the ranges for CED?
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CED is positive = goods are substitute CED is negative = goods are complementary CED is zero = goods are unrelated
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Why is CED important to producers?
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It informs them how much they need to produce of a product
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What is YED?
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measures the responsiveness of demand to changes in income
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What is the formula for YED?
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percentage change in demand for good x / percentage change in income
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What are the ranges for YED?
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YED;1 = income elastic YED;1 = income inelastic YED is positive = normal YED is negative = inferior
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What is PES?
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measures the amount of a good supplied in relation to a change in its price.
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What is the formula for PES?
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percentage change in quantity supplied / percentage change in price
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What are the ranges for PES?
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PES1 = price elastic PES = 1 = unit elastic PES = 0 = perfectly inelastic
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What are the determinants for PES?
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length of time
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What are price ceilings and price floors? Give examples of each and the impact on all stakeholders.
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price ceiling- a legal maximum price set below the equilibrium price price floor- legally set minimum price above the equilibrium price.
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Why might the government impose a tax or a subsidy? What do the diagrams look like and explain the impacts on all stakeholders.
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subsidy- money granted by the government to assist an industry
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Explain the concept of market failures.
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exists any time the free market results in an over or under allocation of resources towards a particular good or service
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What are negative externalities?
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negative effects creased by producers and consumers
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What are positive externalities?
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positive effects created by producers and consumers
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Give examples of negative production externalities.
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pollution and deforestation
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Give examples of negative consumption externalities.
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cigarettes and alcohol
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Give examples of positive production externalities.
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eco-friendly systems / sage production
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Give examples of positive consumption externalities.
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healthy foods
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Explain whether the market under-allocates or over-allocates resources when there is a positive or negative externalities associated.
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the government under-allocates goods and services with positive externalities
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Explain why the free market needs government intervention at times.
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people can get greedy and create monopolies
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Explain the government policies used to correct negative production externalities.
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governments can use market-bases policies: taxes or tradeable permits
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Explain the government policies used to correct negative consumption externalities.
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advertising and regulation can be used to alert consumer of dangers of consumption shifting D=MPB leftward back to Qe
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Explain the government policies used to correct positive production externalities.
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Direct government provision or subsidies
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Explain the government policies used to correct positive consumption externalities.
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legislation and advertisement shift D=MPB to MSB to promote greater consumption
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Explain how the circular flow model relates to macroeconomics.
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It shows the big picture of economics including leakages and injections in the households and the firms
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What are leakages in the circular flow model?
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savings, taxes, and imports
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What are injections in the circular flow model?
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investments, government intervention, or exports
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Explain the concept of GDP.
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gross domestic product: the value of all goods and services produced
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Explain the concept of GNP.
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gross national product: the income of a country's residents, which is equal to the value of all final goods and servies
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What are the three methods to calculate GDP?
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1. expenditure approach 2. income approach 3. outcome approach
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What is included in the calculation of GDP?
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-consumption -investments -government spending -net exports
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What is the difference between nominal GDP and real GDP?
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Real GDP uses a base year, while nominal GDP is measured at the time of measurement
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Explain the phases of the business cycle.
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expansion- positive real GDP; increase in output and employment peak- cycle max level of real GDP contraction- decrease in output and increase in unemployment trough- minimum GDP and highest rate of unemployment before and expansion
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When real GDP is above potential GDP which type of gap occurs?
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Inflationary
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When real GDP is below potential GDP which type of gap occurs?
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Recessionary
