Principles of Economics Practice Flashcards

This flashcard set covers the essential definitions and concepts from the 'Ten Principles of Economics' lecture transcript, including microeconomic foundations, market mechanics, firm behavior, and macroeconomic indicators.

How is scarcity defined in economics?

Scarcity is the limited nature of society’s resources.

What is the definition of economics?

Economics is the study of how society manages its scarce resources.

Distinguish between efficiency and equality in a societal context.

Efficiency means society gets the maximum benefits from its scarce resources, whereas equality means those benefits are distributed uniformly among society’s members.

What is the opportunity cost of an item?

The opportunity cost is what you give up to get that item.

How do rational people achieve their objectives?

Rational people systematically and purposefully do the best they can to achieve their objectives.

What is a marginal change?

A marginal change is a small incremental adjustment to an existing plan of action.

Define an incentive.

An incentive is something that induces a person to act, such as the prospect of a punishment or reward.

What characterizes a market economy?

A market economy allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

What is productivity?

Productivity is the quantity of goods and services produced from each unit of labor input.

Define inflation.

Inflation is an increase in the overall level of prices in the economy.

What does the business cycle consist of?

The business cycle consists of fluctuations in economic activity, such as employment and production.

Contrast microeconomics and macroeconomics.

Microeconomics studies how households and firms make decisions and interact in markets, while macroeconomics studies economy-wide phenomena like inflation, unemployment, and economic growth.

Difference between positive and normative statements.

Positive statements are descriptive and claim how the world is; normative statements are prescriptive and claim how the world ought to be.

What is a circular-flow diagram?

It is a visual model of the economy showing how dollars flow through markets among households and firms.

What does the production possibilities frontier show?

It is a graph showing combinations of output that an economy can possibly produce given available factors of production and production technology.

Define absolute advantage.

Absolute advantage is the ability to produce a good using fewer inputs than another producer.

What is comparative advantage?

Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer.

Why can trade benefit everyone in society?

Trade allows people to specialize in activities in which they have a comparative advantage.

Distinguish between imports and exports.

Imports are goods produced abroad and sold domestically; exports are goods produced domestically and sold abroad.

What is a competitive market?

A market with many buyers and many sellers such that each has a negligible impact on the market price.

What is the law of demand?

The claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises.

Define substitutes and complements.

Substitutes are two goods where a price increase in one leads to a demand increase in the other; complements are two goods where a price increase in one leads to a demand decrease in the other.

What is the law of supply?

The claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises.

How is market equilibrium defined?

A situation where market price has reached the level where quantity supplied equals quantity demanded.

What is elasticity?

Elasticity is a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants.

How is total revenue computed?

$$ext{Total Revenue} = ext{Price} imes ext{Quantity Sold}$$

What are price ceilings and price floors?

A price ceiling is a legal maximum on the price at which a good can be sold; a price floor is a legal minimum price.

What is welfare economics?

Welfare economics is the study of how the allocation of resources affects economic well-being.

Define consumer surplus.

Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.

Define producer surplus.

Producer surplus is the amount a seller is paid for a good minus the seller’s cost of providing it.

What is efficiency in the context of resource allocation?

Efficiency is an allocation of resources that maximizes total surplus.

What is a deadweight loss?

The fall in total surplus that results when a tax or policy distorts a market outcome.

What does the Laffer curve illustrate?

The Laffer curve shows that tax revenue first rises and then falls as the size of the tax grows.

What is an externality?

An externality is the uncompensated impact of one person’s actions on the well-being of a bystander.

What does the Coase theorem propose?

If private parties can bargain without cost over resource allocation, they can solve externalities problems on their own.

Distinguish between excludability and rivalry in consumption.

Excludability is the property where a person can be prevented from using a good; rivalry is the property where one person's use diminishes another's use.

Compare private goods, public goods, and common resources.

Private goods are excludable and rival; public goods are neither excludable nor rival; common resources are rival but not excludable.

What is the Tragedy of the Commons?

A parable illustrating why common resources are used more than is desirable from the standpoint of society as a whole.

Distinguish between the average tax rate and marginal tax rate.

Average tax rate is total taxes paid divided by total income; marginal tax rate is the tax increase from an additional dollar of income.

What are the two main principles of tax levying?

The benefits principle (paying based on benefits received) and the ability-to-pay principle (paying based on the ability to shoulder the burden).

How is economic profit calculated compared to accounting profit?

Economic profit is total revenue minus both explicit and implicit costs; accounting profit subtracts only explicit costs.

What is marginal cost?

Marginal cost is the increase in total cost that arises from an extra unit of production.

Where is the profit-maximizing level of output for a firm?

At the point where marginal revenue equals marginal cost ($MR = MC$).

What is a natural monopoly?

A monopoly that arises because a single firm can supply a good or service to an entire market at a lower cost than two or more firms could.

Define Nash equilibrium.

A situation where economic actors each choose their best strategy given the strategies all others have chosen.

What is human capital?

The accumulation of investments in people, such as education and on-the-job training.

What are efficiency wages?

Above-equilibrium wages paid by firms to increase worker productivity.

How is the poverty rate defined?

The percentage of the population whose family income falls below the poverty line.

What is a Giffen good?

A good for which an increase in the price raises the quantity demanded.

Define moral hazard.

The tendency of an imperfectly monitored person to engage in dishonest or undesirable behavior.

Define adverse selection.

The tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party.

What are the four components of GDP?

Consumption ($C$), investment ($I$), government purchases ($G$), and net exports ($NX$).

Distinguish between Nominal GDP and Real GDP.

Nominal GDP is valued at current prices; Real GDP is valued at constant prices.

What is the catch-up effect?

The property whereby countries that start off poor tend to grow more rapidly than countries that start off rich.

What is crowding out?

A decrease in investment that results from government borrowing.

Define the labor force.

The sum of the employed and the unemployed.

What are the three functions of money?

Medium of exchange, unit of account, and store of value.

Identify the central bank of the United States.

The Federal Reserve (Fed).

What is the quantity theory of money?

The theory asserting that the quantity of money available determines the price level and its growth rate determines the inflation rate.

Describe the Fisher effect.

The one-for-one adjustment of the nominal interest rate to the inflation rate.

Define the real exchange rate.

The rate at which a person can trade the goods and services of one country for those of another.

What is stagflation?

A period of falling output and rising prices.

What is the multiplier effect?

Additional shifts in aggregate demand resulting when expansionary fiscal policy increases income and consumer spending.

What does the Phillips curve illustrate?

A negative association between the inflation rate and the unemployment rate.