Principles of Economics Review

A comprehensive set of flashcards covering key concepts from the Principles of Economics lecture. Designed to aid students in understanding and reviewing material for exams.

What is an economy?

A group of people interacting that determines consumer purchasing and productivity, supplier production and employment, and the division of resources.

What does it mean to face tradeoffs?

It means that choosing one option requires giving up another; there is a cost to everything.

What is opportunity cost?

The cost of something is what you give up to get it.

How do rational people make decisions?

They think at the margin, evaluating costs and benefits to reach objectives.

What do people respond to?

Incentives, which can be rewards or punishments.

How can trade benefit everyone?

Trade can make everyone better off by allowing specialization and cheaper production from other countries.

What is a market?

A group of buyers and sellers of a particular product.

What is a market economy?

An economy that allocates resources through decentralized decisions.

What is the 'invisible hand'?

The concept that households and firms act in ways that promote general economic well-being.

When can governments improve market outcomes?

When they enforce property rights or address market failures.

What is market failure?

When the market fails to allocate resources efficiently due to externalities or market power.

What is demand?

The amount of a good buyers are willing and able to purchase at a particular price.

What is the law of demand?

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

What do demand curves always show?

A negative slope.

How do the number of buyers affect demand?

An increase in buyers shifts the demand curve to the right, a decrease shifts it to the left.

What happens to demand when income increases for a normal good?

Demand increases, shifting the demand curve to the right.

What happens to demand when income increases for an inferior good?

Demand decreases, shifting the demand curve to the left.

What are substitutes in terms of related goods?

Goods that, when the price of one increases, the demand for the other increases.

What are complements in terms of related goods?

Goods that, when the price of one increases, the demand for the other decreases.

What is a supply schedule?

A table showing the market price of a good and the quantity supplied.

What does the law of supply state?

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

What can cause a shift in the supply curve?

Input prices change, technology, number of sellers, and expectations.

What is equilibrium in a market?

The price and quantity where the quantity supplied equals quantity demanded.

What happens when there is a surplus?

The quantity supplied is greater than the quantity demanded, causing sellers to cut prices.

What happens during a shortage?

The quantity demanded is greater than the quantity supplied, leading sellers to raise prices.

What is consumer surplus?

The amount a buyer is willing to pay minus what they actually pay.

How is producer surplus defined?

The amount a seller is paid for a good minus the seller’s cost.

What is total surplus?

The total gains from trade in the market, calculated as consumer surplus plus producer surplus.

What is a price ceiling?

A legal maximum on the price of a good or service.

What is a price floor?

A legal minimum on the price of a good or service.

What is elasticity?

It measures how much one variable responds to a change in another variable.

What does price elasticity of demand measure?

How the quantity demanded changes in response to a change in price.

When is demand considered elastic?

When the elasticity of demand is greater than 1.

When is demand considered inelastic?

When the elasticity of demand is less than 1.

What is the midpoint method?

A method for calculating percent changes that avoids issues of starting points.

What determines price elasticity?

Availability of substitutes, definition of the good, luxury versus necessity, and time frame.

What is price elasticity of supply?

It measures how much the quantity supplied responds to a change in price.

What is tax incidence?

How the burden of a tax is divided between buyers and sellers.

What happens with a tax on buyers?

It shifts the demand curve down by the amount of the tax.

What happens with a tax on sellers?

It shifts the supply curve up by the amount of the tax.

What does the government aim to do with taxation?

To collect revenue while attempting to minimize deadweight loss.

What is a deadweight loss?

The loss of total surplus due to market distortions, such as taxes.

What are Giffen goods?

Inferior goods for which an increase in price causes an increase in quantity demanded due to a stronger income effect.

What is the production function?

It shows the relationship between the quantity of inputs used to produce a good and the quantity of output produced.

What is marginal product?

The increase in output from an additional unit of an input.

What is total cost?

The market value of all inputs used in production.

What are fixed costs?

Costs that do not vary with the quantity of output produced.

What are variable costs?

Costs that vary with the quantity of output produced.

What does average total cost measure?

Total cost divided by the quantity of output.

What does the term 'efficient scale' refer to?

The quantity that minimizes average total cost.

What does short-run equilibrium refer to?

A situation where a firm can maximize profit or minimize loss with the given fixed costs.

What happens in the long-run equilibrium?

Firms earn zero economic profit with price equal to average total cost.

What is a monopoly?

A firm that is the sole seller of a product without close substitutes.

What is market power?

The ability of a single firm to influence market prices.

What are barriers to entry?

Obstacles that make it difficult for new firms to enter a market.

What is price discrimination?

Charging different prices to different consumers for the same good.

How can monopolies lead to deadweight loss?

By setting prices above marginal cost, reducing total surplus.

What is an oligopoly?

A market structure in which a few sellers offer similar products.

What is game theory?

The study of strategic interactions among players.

What is a Nash Equilibrium?

A situation where no player can benefit by changing their strategy while others keep theirs unchanged.

What are externalities?

Effects of a transaction that impact third parties not involved in the transaction.

What are public goods?

Goods that are non-excludable and non-rival in consumption.

What is the free-rider problem?

When people benefit from a good without paying for it, leading to under-provision of that good.

What is corrective tax?

A tax designed to induce private decision-makers to correct the social cost of negative externalities.

What is a subsidy for positive externalities?

A payment to encourage more consumption of goods that have positive spillover effects.

What is the Coase theorem?

The proposition that if private parties can bargain without cost, they can solve the externalities problem.

What role do property rights play in externalities?

They can facilitate negotiations to resolve externalities efficiently.

What are transaction costs?

Costs incurred in the process of agreeing to and following through on a bargain.

What are common resources?

Resources that are rival in consumption but not excludable.

What are club goods?

Goods that are excludable but not rival in consumption.

What is the significance of individual pricing decisions in oligopoly?

A firm's pricing can directly affect competitors and market outcomes.

What happens to market prices in competitive vs. monopolistic markets?

Competitive markets have prices equal to marginal cost, while monopolistic prices exceed marginal cost.

How do externalities affect market outcomes?

They lead to allocations that are not socially optimal, necessitating policy interventions.

What incentive do corrective taxes provide?

To align private costs with social costs, improving overall market efficiency.

What is the outcome when the government provides public goods?

It can ensure that socially beneficial goods are produced, often funded by taxes.

What happens in market failures?

The market does not allocate resources efficiently, leading to lost welfare.

What does a downward-sloping demand curve illustrate?

That as the price decreases, the quantity demanded tends to increase.

What occurs when firms enter or exit a market?

The supply curve shifts, affecting market equilibrium and prices.

What is the long-run adjustment in perfectly competitive markets?

To zero economic profit, with price stabilizing at average total cost.

How does the invisible hand guide markets?

Through individual pursuits of self-interest that unintentionally benefit society.