Economics Review Flashcards

Flashcards for economics exam review.

What is the fundamental problem of economics?

Scarcity

Define opportunity cost.

The loss of potential gain from other alternatives when one alternative is chosen.

What was Adam Smith's theory of capitalism?

Free markets allocate resources efficiently.

Define market power. What type of firm has market power?

The ability to influence market prices. Monopoly.

What is the primary determinant of a country's standard of living?

Productivity

How does inflation affect the value of money?

Inflation reduces the purchasing power of money.

What causes inflation?

Growth in the quantity of money.

How is comparative advantage determined?

By the lowest opportunity cost of production.

Why does trade make everyone better off?

Trade allows specialization based on comparative advantage.

How do economists get their data?

Through observation, surveys, and statistical analysis.

In the circular-flow diagram, in which direction do income payments and sales revenue flow?

Income payments flow from firms to households, sales revenue from households to firms.

What are the factors of production?

Land, labor, capital, and entrepreneurship

How does the price of peanut butter affect the demand for peanut butter?

It causes a movement along the demand curve.

What type of pressure is placed on price when there is a shortage in the market?

Upward pressure

If Kroger opens a new store in Fishers, what will happen to the supply of groceries in Fishers?

Supply will increase.

What is the determinant of supply?

Technology, Input Prices, Expectations, Number of Sellers

What would happen to the demand for Kroger water if the price of Dasani water increases? What is the determinant of demand?

Demand for Kroger water would increase. Prices of Related Goods

Define externalities.

The impact of one person's actions on the well-being of a bystander.

What is the best measure of an economy's well-being?

Gross Domestic Product (GDP)

What are the components of GDP?

Consumption, Investment, Government Purchases, and Net Exports

What does the GDP deflator measure?

The price level of all new, domestically produced, final goods and services in an economy.

What is the purpose of the Consumer Price Index?

To measure the overall cost of goods and services bought by a typical consumer.

If the CPI increases, what does a family have to do to maintain the same standard of living?

Increase their income proportionally.

Define inflation.

An increase in the overall level of prices in the economy.

What goods are included in the CPI?

A basket of goods and services purchased by a typical consumer.

How is the CPI used to calculate inflation?

Inflation rate = (CPI this year - CPI last year) / CPI last year x 100

Suppose the CPI was 20 in 1950 and is 200 in 2012. A dollar in 1950 would purchase the same amount of goods as _ would purchase today.

$10

Who is responsible for regulating the money supply in the United States?

The Federal Reserve (The Fed)

When a bank loans money, what happens to the money supply?

The money supply increases.

What three Fed actions increase the money supply?

Lowering the reserve requirement, lowering the discount rate, buying government bonds.

What three Fed actions decrease the money supply?

Raising the reserve requirement, raising the discount rate, selling government bonds.

What percentage of economies experience scarcity?

100%

What products are considered scarce?

Almost all products

What is a marginal change?

A small incremental adjustment to a plan of action.

What two things should you compare before taking an action?

Marginal cost and marginal benefit

What represents the behavior of buyers?

Demand

What are the determinants of demand?

Income, prices of related goods, tastes, expectations, number of buyers

How does an increase in income affect the demand for a normal good?

Demand increases.

Define complementary goods.

Two goods for which an increase in the price of one leads to a decrease in the demand for the other.

Define substitute goods.

Two goods for which an increase in the price of one leads to an increase in the demand for the other.

What is the law of demand?

As price increases, quantity demanded decreases.

What is a movement along an existing demand curve called? What causes this movement?

Change in quantity demanded. Caused by a change in price.

Suppose scientists discover that drinking a glass of wine a day decreases your risk of heart disease. What would we expect to happen to demand for wine?

Demand for wine would increase.

What is the law of supply?

As price increases, quantity supplied increases.

A decrease in the sellers in a market would have what effect on supply?

Supply would decrease.

What is a movement along an existing supply curve called? What causes this movement?

Change in quantity supplied. Caused by a change in price.

Define market equilibrium.

The point where the quantity supplied equals the quantity demanded.

What is caused by a price that is less than the equilibrium price?

A shortage

What is caused by price that is greater than the equilibrium price?

A surplus

What forces make a market economy work?

Supply and demand

In a free market, who determines how much of a good will be sold and the price at which it will be sold?

Supply and demand.

How is a change in demand shown on a graph?

By a shift of the demand curve.

Define absolute advantage.

The ability to produce a good using fewer inputs than another producer.

Define market.

A group of buyers and sellers of a particular good or service.

Define substitute goods.

Two goods for which an increase in the price of one good leads to an increase in the demand for the other good.

Define inferior good.

A good for which, other things being equal, an increase in income leads to a decrease in demand.

Define normal good.

A good for which, other things being equal, an increase in income leads to an increase in demand

Define entrepreneurship.

The human resource that organizes labor, land, and capital.