U1 Outsmart Your Brain Flashcards

21 flashcards covering key concepts from Unit 1: Basic Economic Concepts.

What is the difference between Microeconomics and Macroeconomics?

Microeconomics studies individual markets, firms, and households; Macroeconomics studies the economy as a whole (GDP, inflation, unemployment).

What are the positives and negatives of a Market Economy?

Positives: efficient resource allocation via price signals, consumer choice, innovation. Negatives: inequality, market failures, externalities, economic cycles.

What are the positives and negatives of a Command Economy?

Positives: potential for equality and coordinated goals; Negatives: inefficiency, weak incentives, less innovation, shortages or surpluses.

What are the positives and negatives of a Traditional Economy?

Positives: stability and reliance on customs; Negatives: slow to adapt, limited output and choice, lower growth.

Which type of economic system are most economies today?

Most economies are mixed economies with both market and government intervention.

What is meant by Adam Smith’s invisible hand?

The idea that individuals pursuing self-interest in a free market coordinate resources through prices and competition, benefiting society overall.

What does marginal mean?

Marginal refers to the additional or incremental change from one more unit (e.g., marginal cost or marginal benefit).

Why is where MC = MB allocative efficiency?

Because the value of the last unit produced equals its cost, resources are allocated to maximize net benefit.

Give an example of a normative statement and a positive statement.

Positive: 'The unemployment rate is 5%' (testable). Normative: 'The government should reduce unemployment.'

Name the 4 factors of production and give an example of each.

Land (natural resources, e.g., farmland), Labor (human effort, e.g., workers), Capital (physical capital, e.g., machines), Entrepreneurship (risk-taking/innovation, e.g., business owner).

Give an example of an opportunity cost when deciding to study microeconomics at home.

Time that could be spent working (foregone wage) or on leisure; e.g., 2 hours of potential earnings forgone.

What does the Production Possibilities Curve (PPC) represent?

The maximum feasible combinations of two goods that can be produced with available resources and technology, illustrating trade-offs and efficiency.

What does it mean when a PPC has increasing opportunity costs? Explain with numbers and a graph.

Producing more of one good requires giving up progressively more of the other good; the curve bows outward. Example: 0 X costs 10 Y, 1 X costs 3 Y, 2 X costs 6 Y, showing the slope steepens as X increases.

What does it mean when a PPC has constant opportunity costs? Explain with numbers and a graph.

Each additional unit of one good costs a constant amount of the other good; the PPC is a straight line. Example: 1 X costs 1 Y; 2 X costs 2 Y.

Identify absolute advantages, comparative advantages, and terms of trade from a two-country two-good example.

Absolute advantage: one country can produce more of a good with the same resources. Comparative advantage: the lower opportunity cost in producing a good. Terms of trade lie between the two countries’ opportunity costs (e.g., between 0.5 and 0.667 units of Y per X).

Define the law of demand and explain using numbers. What are the 3 reasons why the demand curve is downward sloping?

Law of demand: when price falls, quantity demanded rises. Example: P=$6 → Qd=30; P=$4 → Qd=40. Reasons: (1) Income effect, (2) Substitution effect, (3) Diminishing marginal utility.

Define the law of supply and explain using numbers.

Law of supply: higher price leads to higher quantity supplied. Example: P=$4 → QS=20; P=$6 → QS=30.

Draw a market graph and label equilibrium price and quantity.

A graph with downward-sloping demand and upward-sloping supply intersecting at the equilibrium point; label the intersection P* (equilibrium price) and Q* (equilibrium quantity).

What are the 5 determinants of demand? What does an increase in demand look like on a graph?

Determinants: income, prices of related goods, tastes, expectations, number of buyers. An increase shifts the demand curve rightward (D1 to D2).

What are the 6 determinants of supply? What does a decrease in supply look like on a graph?

Determinants: input prices, technology, expectations, number of sellers, taxes/subsidies, prices of other goods. A decrease shifts the supply curve leftward (S1 to S2).

What is consumer surplus? What is producer surplus? Locate it on a graph. What is the formula for consumer and producer surplus?

Consumer surplus is the area under the demand curve and above price; Producer surplus is the area above the supply curve and below price. CS = 0.5 × Q × (WTPmax − P); PS = 0.5 × Q × (P − WTPmin).