Economics 101 - Midterm #1

Microeconomics

The study of how individuals, households, and firms make decisions and how they interact in markets — individual decisions

Macroeconomics

The study of economy-wide phenomena, including inflation, unemployment, and economic growth — collective decision

Why study economics

• to make skillful decisions

• To be an astute citizen

• To understand how an economy works

Economist do two things

• try to explain the economic world — explain reasons for the recent economic downturn

• try to change [or advocate for] an economic world — they recommend polices, but do not implement them

How is economic analysis done?

Scientific method

• use historical/real world data to analyze a situation

• use a model

Model

A simplified representation of reality containing principal variables and omitting many details

• diagrams and equations

Production Possibilities Frontier

A graph showing the combinations of output that the economy can produce given the available factors of production ad the available production technology

Production Possibilities Frontier model contains:

• Plenty of assumption

• Feasibility

• Efficiency

• Trade-off

• Economic growth

Economics was founded upon/is the study of …

Scarcity

When does scarcity exist?

There is less of a good or resource available than people wish to have

What is economics the study of?

How society manages it scarce resources

How are resources allocated?

By the combined actions of millions of households and firms

Efficiency

Minimum waste

Efficiency means …

Society is getting the most it can from its scarce resources

How does a market economy reward people?

According to their ability to produce things that other people are willing to pay for

How to people make decisions at the margin?

By comparing costs and benefits

What do economists consider normative statements to be?

Prescriptive, making a claim about how the world ought to be

Opportunity cost

The next best alternative

Absolute advantage

Produce more of a good/service with the same resource as another

Comparative advantage

Producing good/service at a lower opportunity cost than another

Why do sellers have limited control over the price of a product in a competitive market?

Other sellers are offering similar products

The relationship between price and quantity supplied is …

Positive or direct

How is market supply determined?

By horizontally summing individual supply curves

If the number of sellers in a market increases …

The supply in that market will increase

A movement along the supply curve might be cause by what?

A change in the price of the good or service

An advance in production technology will …

Shift the supply curve to the right

Minimum wage increase will cause the supply of the product to …

Shift to the left

An increase in the price of a good would …

Give producers an incentive to produce more

At the equilibrium price …

Everyone in the market has been satisfied

The midpoint method

Used to compute elasticity because it gives the same answer regardless of the direction of the change

If sellers respond substantially to changes in price …

Sellers are considered to be relatively price-sensitive

If the elasticity of supply is zero …

The quantity supplied is the same regardless of price

A decrease in supply will cause the smallest increase in price when …

Both supply and demand are elastic

Market

Interaction of buyers and sellers of good or service to buy and sell

Characteristics of competitive market

• Number of buyers and sellers

• Homogenous goods

• Perfect information

Demand

Inverse relationship between a set of quantity demanded as response to a set of prices

Law of demand

Other things equal, the quantity demanded of a good fall when the price of the goods rises and vice versa