Economics Principles Practice Flashcards

A complete set of practice questions and answers derived from the lecture notes covering basic microeconomics, including supply and demand, elasticity, market efficiency, taxation, and firm behavior.

What is the opportunity cost for a student deciding whether to spend an hour studying or relaxing?

The opportunity cost of studying is the foregone relaxation, and the opportunity cost of relaxing is the foregone studying.

If you have not purchased a concert ticket yet, and it costs $50 , what is the marginal explicit (monetary) cost?

The marginal monetary cost is $50 .

Suppose a ticket costs $50 and is non-refundable (sunk), and the foregone wages from working are $40 . What is the marginal implicit (opportunity) cost of attending?

The marginal implicit (opportunity) cost is $40 in foregone wages.

What value must you place on a concert for attending to be rational if the ticket costs $50 (not yet purchased) and you forgo $40 in wages?

You must value the concert at least $90 ( $50 for the ticket plus $40 in foregone wages).

What are sunk costs and how do they affect current marginal decisions?

Sunk costs are costs that have already been incurred and cannot be recovered; they should not affect current marginal decisions.

How do drivers react to an increase in city parking fines?

Drivers have a stronger incentive to park legally or avoid the behavior because illegal parking becomes more costly.

How can specialization lead to gains from trade?

If individuals specialize in the good for which they have the lower opportunity cost, total output rises, and they can trade at a price between their opportunity costs to make both better off.

What is the "invisible hand" in a market economy?

The idea that individuals pursuing their own self-interest can, through prices and voluntary exchange, promote an efficient allocation of resources without central direction.

Why might a market outcome with significant pollution be considered a market failure?

It is inefficient because producers ignore external costs of pollution, meaning private costs are below social costs and too much is produced relative to the efficient quantity.

Contrast positive and normative statements.

A positive statement is a factual claim that can be tested (e.g., "A higher minimum wage reduces employment"), while a normative statement is a value judgment (e.g., "The minimum wage should be increased").

Describe the roles of households and firms in the circular flow diagram.

Households supply factors of production (labor, land, capital) and buy goods/services; firms demand those factors, pay households for them, and produce the goods/services.

What does a point inside the Production Possibilities Frontier (PPF) represent?

A point inside represents a feasible but inefficient combination where some resources are underutilized.

What does a bowed-out Production Possibilities Frontier (PPF) indicate?

It indicates increasing opportunity cost.

Define comparative advantage.

Comparative advantage is the ability to produce a good at a lower opportunity cost than someone else.

If Ann can produce 8 shirts or 4 hats, what is her opportunity cost of one shirt?

The opportunity cost of one shirt is $rac{1}{2}$ hat.

State the Law of Demand.

Holding other things constant, when price rises, quantity demanded falls, and when price falls, quantity demanded rises.

What are three common factors that can shift the demand curve?

Income, prices of related goods (substitutes/complements), and tastes or preferences.

State the Law of Supply.

Holding other things constant, when price rises, quantity supplied rises, and when price falls, quantity supplied falls.

What determines the equilibrium price and quantity in a market?

The price and quantity at which quantity demanded equals quantity supplied ($Q_d = Q_s$).

What is the outcome of a market where demand increases (shifts right) and supply decreases (shifts left)?

The price definitely rises, but the effect on quantity is ambiguous.

Define normal goods and inferior goods.

A normal good is one for which demand rises as income rises; an inferior good is one for which demand falls as income rises.

Define price elasticity of demand.

The percentage change in quantity demanded divided by the percentage change in price ( rac{ ext{%} riangle Q_d}{ ext{%} riangle P} ).

Why is demand for insulin usually inelastic?

It is a necessity with few close substitutes for patients, so quantity demanded responds weakly to price changes.

What happens to total revenue when price rises for a good with inelastic demand?

Total revenue rises because the percentage increase in price is larger than the percentage decrease in quantity demanded.

Why is supply typically more elastic in the long run than in the short run?

Firms have more time to adjust inputs, expand capacity, or enter and exit the market.

When is a price ceiling considered binding?

A price ceiling is binding if it is set below the equilibrium price.

What is a tax wedge?

The gap between the price buyers pay and the price sellers receive, equal to the tax per unit.

Which side of the market bears more of the tax burden?

The side that is less elastic bears more of the burden because it changes behavior less in response to the tax.

How is Consumer Surplus (CS) measured graphically?

The area below the demand curve and above the market price, up to the quantity sold.

Define Total Surplus.

The sum of consumer surplus and producer surplus ($ext{Consumer Surplus} + ext{Producer Surplus}$).

What is the difference between accounting profit and economic profit?

Accounting profit subtracts only explicit costs from total revenue, while economic profit subtracts both explicit and implicit (opportunity) costs.

According to the Cost Table, if TFC is $100 and TVC is $240 for 5 bears, what is the Average Total Cost (ATC)?

ext{Total Cost} = 100 + 240 = $340 . ext{ATC} = rac{340}{5} = $68 .

What is diminishing marginal product?

A property whereby the marginal product of an input falls as the quantity of the input increases (holding other factors constant).

Why are firms in perfectly competitive markets called price takers?

Individual firms are so small relative to the market that their output cannot affect the market price; they take the price as given.

Under what condition does a firm shut down in the short run?

A firm shuts down if price is below average variable cost ( P < AVC ).

What constitutes a long-run equilibrium in a competitive market regarding profit?

Firms earn zero economic profit because entry or exit drives price until it equals the minimum of average total cost ($P = ext{min } ATC$).

Why is marginal revenue less than price for a monopolist ( MR < P )?

To sell one more unit, the monopolist must lower the price on that extra unit and all previously sold units.

Where does a monopolist choose to produce to maximize profit?

Where marginal revenue equals marginal cost ($MR = MC$).

What is the deadweight loss of a monopoly?

The welfare loss resulting from the monopolist restricting output below the efficient quantity where $P = MC$.

According to the Laffer Curve concept, what can happen to tax revenue beyond a certain tax rate?

A higher tax rate can shrink the tax base so significantly that total tax revenue falls.