Economics – Review Flashcards (Exam 1 Notes)

A comprehensive set of Q&A flashcards covering key concepts from the notes on economics, scarcity, PPC, demand and supply, market equilibrium, and basic economic forces.

What is economics?

The study of how individuals and societies coordinate wants and desires, balancing micro (individual) and macro (society) perspectives with scarce resources.

What is scarcity?

Limited resources relative to unlimited wants, forcing choices and trade-offs.

Why do people have to make choices in economics?

Because resources are scarce while wants are unlimited, so we cannot have everything.

What does it mean to be rational in making economic decisions?

To compare benefits and costs and choose the option that makes us as well off as possible given constraints.

What does marginal mean in economics?

Additional or extra; the extra benefit (MB) or cost (MC) from one more unit.

What is marginal benefit?

The benefit or satisfaction obtained from consuming one additional unit.

What is marginal cost?

The cost of producing or consuming one additional unit.

What is the rule for MB vs MC in decision making?

If MB > MC, do it; if MB < MC, do not; if MB = MC, you’re indifferent (may still proceed in some cases).

What is incremental analysis?

Evaluating the impact of each additional unit to decide whether to proceed.

How is marginal benefit typically measured?

By the utility or satisfaction gained from the extra unit.

What is the invisible hand?

The price mechanism in capitalism that guides production and consumption; signals guide behavior.

What are the three ‘invisible forces’ in the notes?

Invisible hand (price mechanism), invisible handshake (social/cultural norms), invisible foot (political/legal forces).

What is the invisible handshake?

Social and historical forces; cultural norms that influence economic decisions.

What is the invisible foot?

Political and legal forces; government actions and regulations that affect production and trade.

What is an economic institution?

A structure (physical or mental) that significantly influences economic decisions (e.g., firms, government, norms).

What is an economic policy?

Government actions or inactions that influence economic events (recessions, deficits, etc.).

What is positive economics?

The study of what is, without opinion or value judgments.

What is normative economics?

The study of what ought to be, incorporating judgments about what should happen.

What are sunk costs?

Costs already incurred that should not affect current decisions.

What is the Production Possibilities Curve (PPC)?

A graph showing the maximum output combinations possible with given resources and technology.

What are the PPC assumptions?

1) All inputs fixed; 2) Technology fixed; 3) Full employment.

What does a straight-line PPC imply about opportunity cost?

Constant opportunity cost for both goods along the line.

What does a curved PPC imply about opportunity cost?

Increasing opportunity cost as you shift resources because inputs are not equally well suited.

What are points on the PPC?

On the curve: efficient; inside: inefficient; outside: unattainable.

What causes the PPC to shift outward?

More resources or improved technology.

What is growth bias in the PPC?

Growth that is biased toward one good (guns or butter) due to technology or resource shifts.

What is demand in economics?

The overall relationship between price and quantity demanded; downward-sloping and subject to shifts.

What is quantity demanded?

A specific amount consumers are willing to buy at a particular price.

What causes the demand curve to shift to the right?

Non-price factors that increase demand (income, prices of related goods, expectations, tastes, number of buyers).

What are demand shifters?

Income (normal vs inferior), prices of substitutes/complements, expectations, tastes, number of buyers.

What is a normal good?

A good for which demand rises as income rises.

What is an inferior good?

A good for which demand falls as income rises (e.g., cabbage in the example).

What is a substitute?

A good that can replace another; a rise in the price of one increases demand for the other.

What is a complement?

A good typically consumed with another; a rise in the price of one decreases demand for the other.

What is the law of demand?

There is a negative (inverse) relationship between price and quantity demanded; the demand curve slopes downward.

What is the difference between demand and quantity demanded?

Demand is the entire curve (all prices); quantity demanded is a single point on that curve.

What causes demand to shift aside from price?

Income, substitutes/complements, expectations, tastes, number of buyers.

What is the law of supply?

Positive relationship between price and quantity supplied; upward-sloping curve.

What are supply shifters?

Input prices, technology, expectations, taxes/subsidies, number of sellers.

What is equilibrium in a market?

A point where quantity demanded equals quantity supplied; market clears with no inherent pressure to move.

What is a shortage?

When price is below equilibrium; quantity demanded exceeds quantity supplied (Qd > Qs).

What is a surplus?

When price is above equilibrium; quantity supplied exceeds quantity demanded (Qs > Qd).

What is a price ceiling?

A maximum legal price set below equilibrium; creates a shortage.

What is a price floor?

A minimum legal price set above equilibrium; creates a surplus (e.g., minimum wage).

What happens when demand increases while price is fixed?

A shortage occurs; price tends to rise to reach a new equilibrium.

What happens when supply increases while price is fixed?

A surplus occurs; price tends to fall to reach a new equilibrium.

What happens if both demand and supply shift?

Equilibrium price and quantity may both change; the outcome depends on which curve shifts more; sometimes quantity is indeterminate.