Micro Fall 2015 – Flashcards
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the policies are consistent with economic incentives
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When the federal gov't crafts environmental policies that make it less expensive for firms to follow green initiatives...
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the situation in which unlimited wants exceed the limited resources available to fulfill those wants
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Scarcity
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the study of the choices people make to attain their goals, given their scare resources
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Economics
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a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
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A Market
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when economists assume that customers and firms use all available information as they act to achieve their goals
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Rationality
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Marginal cost=marginal benefit
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When does an optimal decision occur?
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An economy in which the government decides how economic resources will be allocated
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Centrally planned economy
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An economy in which the decisions of households and firms interacting in markets allocate economic resources
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Market economy
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An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources
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Mixed economy
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The situation in which a good or service in produced at the lowest possible cost
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Productive efficiency
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A state of the economy in which production is in accordance with consumer preference; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost it takes to produce it
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Allocative efficiency
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the fair distribution of economic benefits
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Equity
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the highest valued alternative that must be given up in order to engage in an activity
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Opportunity cost
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1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will receive the goods and services produced?
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Trade-offs force society to make choices, particularly when answering what three questions?
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Consumers, firms, and the gov't
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Who decides what goods and services will be produced?
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How income is distributed
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In the US, who receives the goods and services produced depends largely on what?
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1. usually about a casual relationship 2. a statement that may be either correct or incorrect about an economic variable 3. tested before it can be accepted (or rejected)
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A hypothesis in an economic model is what?
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something measurable that can have different values
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Economic variable
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Models have to be simplified to be useful and we cannot analyze an economic issue unless we reduce its complexity
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Why is any model based on making assumptions?
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uses scientific principles to arrive at testable conclusions; concerned with "what is"
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Positive analysis
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refers to the process of making recommendations about what action should be taken or taking a particular viewpoint on a topic; concerned with "what ought to be"
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Normative analysis
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1. It is based on studying the actions of individuals 2. It considers human behavior, particularly decision-making behavior 3. It applies to the scientific method to the study of the interactions among individuals
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Why is economics considered a social science?
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a variable that affects other variables, and its omission can lead to false conclusions about cause and effect
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Omitted variable
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occurs when we conclude that changes in X cause changes in Y, when, in fact, it's Y that is causing changes in X
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Reverse causality
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a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology
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A production possibilities frontier (PPF) is
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The ability of an individual, firm, or a country to produce more of a good or service than competitors using the same amount of resources
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Absolute advantage
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The ability of an individual, firm, or a country to produce more of a good or service at a lower opportunity cost than competitors
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Comparative advantage
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absolute advantage refers to the ability to produce more of a good or service using the same amount of resources while comparative advantage refers to the ability to produce more of a good or service at a lower opportunity cost
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The primary difference between absolute and comparative advantage is
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Circular-flow diagram
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What's the simple economic model to see how participants in markets are linked?
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When the government places few restrictions on how a good or service can be produced or sold or on how a factor of production can be employed
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When does a free market exist?
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prices would do a better job of coordinating the activities of buyers and sellers than guilds could
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The Scottish philosopher Adam Smith argued in 1776 that...
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Markets for goods and services
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Product markets
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Markets for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability
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Factor markets
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Labor, Capital, Natural Resources, Entrepreneurial Ability
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What are the factors of production?
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the ability to bring together the other factors of production to successfully produce and sell goods and services
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Entrepreneurial ability
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the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it
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Property rights
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All else equal
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"Ceteris Paribus" means (in general)...
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there is an inverse relationship between price and quantity demanded
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According to the law of demand...
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a good for which the demand increases as income rises and decreases as income falls
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Normal good
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a good for which the demand increases as income falls and decreases as income rises
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Inferior good
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when income increases, demand for a normal good increases while demand for an inferior good falls
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The distinction between and normal and inferior good is...
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1. Many buyers and sellers 2. All firms selling identical products 3. No barriers to new firms entering the market
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A perfectly competitive market is a market that meets these three conditions
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Goods and services that can be used for the same purposes
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Substitutes
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Goods and services that are used together
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Compliments
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When the price of a good increases, consumers purchasing power falls, and they cannot buy as much of the good as they did prior to the price change.
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According to the Law of Demand, there is an inverse relationship between price and quantity demanded. That is, the demand curve for goods and services slopes downward. Why?
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The rule that, holding everything else constant, when the price of a product falls, the quantity demanded will increase, and when the price of a product rises, the quantity demanded of the product decreases
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Law of Demand
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there is a positive relationship between price and quantity supplied, and as the price of a product increases, firms will supply more of it to the market
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According to the Law of Supply...
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both supply and demand
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Market price is determined by...
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False, decreases in price affect the quantity demanded, not demand.
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Consider the following statement, "An increase in supply decreases the equilibrium price. The decrease in price increases demand." This statement is true or false?
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legally determined maximum price that sellers may charge
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Price ceiling
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legally determined minimum price that sellers may receive
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Price floor
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the difference between the highest price a consumer is willing to pay and the price the consumer actually pays
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Consumer surplus
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the difference between the lowest price a firm would be willing to accept and the price it actually recieves
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Producer surplus
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a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum
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Economic efficiency
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a market in which buying and selling takes place at prices that violate government price regulations
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A black market
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some people win, some people lose, and there is a loss of economic efficiency
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When the government imposes price floors or ceilings...
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the actual division of the burden of a tax between buyers and sellers in a market
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Tax incidence
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A cost or benefit that affects someone who is not directly involved in the production or consumption or a good or service
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Externality
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the private benefit from consumption will be different from the social benefit from consumption
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How do externalities affect markets? If a positive externality in consumption is present in a market, then...
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provide insufficient college educations
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How do externalities in the production of college educations result in market failure? Because of externalities, the market for college educations will...
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a situation in which the market fails to produce the efficient level of output
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Market failure
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Externalities and market failure will result from incomplete property rights
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How do property rights affect externalities and market failure?
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The argument of economist Ronald Coase that if the transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities
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The Coase Theorem
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all parties to an agreement must be willing to accept a reasonable agreement
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For the Coase Theorem to hold...
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Not change the amount of pollution reduction because the marginal benefit and marginal cost of pollution reduction will not change.
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Suppose the production of electricity by a utility generates pollution that harms others. Suppose also that Coase bargaining can occur between the utility and the victims of pollution but that the utility has not been legally liable for the damages from its pollution. How would making the utility liable for the damages from its pollution affect pollution reduction?
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private solutions may reduce or correct market failure
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If an externality is present, resulting in market failure, then...
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The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods and services.
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Transaction Cost
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the cost associated with drawing up a binding contract to reduce a negative externality
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An example of a transaction cost is...
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Transaction costs may make private solutions to reduce negative externalities easier
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How might transaction costs affect private solutions to externality problems?
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An approach that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices
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Command-and-control approach
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A system of tradable emission allowances
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Cap-and-trade system
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A good that is both rival and excludable
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Private good
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A good that is both nonrivalrous and nonexcludable
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Public good
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A good that is excludable but not rival
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Quasi-public good
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A good that is rival but not excludable
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Common resource
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The situation that occurs when one person's consuming a unit of a good means no one else can consume it
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Rivalry
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The situation in which anyone who does not pay for a good cannot consume it
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Excludability
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Quasi-public good
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What type of good is electricity?
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The government could impose restrictions on access to wood in the forest
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Suppose a common resource--wood in a public forest--is being overused because residents consider the benefits of gaining firewood or wood for building but do not account for the cost of deforestation when chopping down trees. What could be done to prevent wood in the forest from being overused?
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Extra or additional
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Economists use the word "marginal" to mean what?
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marginal benefit equals marginal cost (MB=MC)
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Economists reason that the optimal decision is to continue any activity up to the point where...
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Analysis that involves comparing marginal benefits and marginal costs
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Marginal analysis
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The idea that, because of scarcity, producing more of one good or service means producing less of another good or service
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trade-off
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A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction
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Voluntary exchange
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A table that shows the relationship between the price of a product and the quantity of the product demanded
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Demand Schedule
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The amount of a good or service that a consumer is willing and able to purchase at any given price
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Quantity demanded
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The demand by all the consumers of a given good or service
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Market demand
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The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes
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Substitution Effect
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The change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power
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Income effect
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the quantity of goods a consumer can buy with a fixed income
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Purchasing power
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The amount of a good or service that a firm is willing and able to supply at any given price
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Quantity supplied
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a positive or negative change in the ability of a firm to produce a given level of output with a given quanitity of inputs
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Technological change
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The price of one good or service relative to the prices of other goods and services
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Relative prices
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1. Income 2. Prices of related goods 3. Tastes 4. Population and demographics 5. Expected future prices
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Variables that shift market demand
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1. Prices of inputs 2. Technological change 3. Prices of substitutes in production 4. Number of firms in the market 5. Expected future prices
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Variables that shift market supply
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the cost borne by the producer of a good or service
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Private cost
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the total cost of producing a good or service, including both the private cost and any external cost
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Social cost
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the benefit received by the consumer of a good or service
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Private benefit
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the total benefit from consuming a good or service, including both the private benefit and any external benefit
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Social benefit
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A measure of how much one economic variable responds to changes in another economic variable
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Elasticity
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The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price
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Price elasticity of demand
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Demand is elastic when the percentage change in the quantity demanded is greater than the percentage change in price, so the price elasticity is greater than 1 in absolute value
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Elastic demand
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Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1 in absolute value.
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Inelastic demand
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Demand is unit elastic when the percentage change in quantity is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value.
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Unit-elastic demand
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The case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero.
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Perfectly inelastic demand
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The case where the quantity demanded is indefinitely responsive to price and the price elasticity of demand equals infinity
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Perfectly elastic demand
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The total amount of funds a seller receives from selling a good or service, calculated by multiplying price per unit by the number of units sold
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Total revenue
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The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good
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Cross-price elasticity of demand
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A measure of the responsiveness of the quantity demanded to changes in income, measured by the percentage change in the quantity demanded divided by the percentage change in income
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Income elasticity of demand
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The responsiveness of the quantity supplied to a change a price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the products price
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Price elasticity of supply
