Econ exam 1What is economics? The study of choices made under scarcity and the incentives influencing them. What is scarcity? Our inability to satisfy all our wants because resources are limited. What is an incentive? A reward encouraging an action or a p

What is economics?

The study of choices made under scarcity and the incentives influencing them.

What is scarcity?

Our inability to satisfy all our wants because resources are limited.

What is an incentive?

A reward encouraging an action or a penalty discouraging an action.

What is microeconomics?

The study of choices by individuals and businesses and how they interact in markets.

What is macroeconomics?

The study of the performance of national and global economies.

What are the two big questions of economics?

What, how, and for whom goods are produced; and whether self-interest promotes social interest.

What are the four factors of production?

Land, labor, capital, and entrepreneurship.

What does land earn?

Rent.

What does labor earn?

Wages.

What does capital earn?

Interest.

What does entrepreneurship earn?

Profit.

What is opportunity cost?

The highest-valued alternative that must be given up to get something.

What is a rational choice?

A choice that compares costs and benefits to achieve the greatest benefit.

What is marginal benefit?

The benefit from an incremental increase in an activity.

What is a positive vs. normative statement?

Positive statements can be tested against facts; normative statements express opinions.

What is the production possibilities frontier (PPF)?

The boundary between combinations that can and cannot be produced.

What do points on the PPF represent?

Attainable and production-efficient combinations.

What do points inside the PPF represent?

Attainable but inefficient combinations.

What do points outside the PPF represent?

Unattainable combinations.

What is a tradeoff along the PPF?

Giving up some of one good to produce more of another.

What is opportunity cost?

The quantity of one good given up to produce another good.

Why does the PPF bow outward?

Resources are not equally productive in all activities.

What is marginal cost?

The opportunity cost of producing one more unit.

What is marginal benefit?

The benefit received from consuming one more unit.

What is the principle of decreasing marginal benefit?

The more of a good consumed, the smaller its marginal benefit.

What is production efficiency?

Producing more of one good requires producing less of another.

What is allocative efficiency?

Producing the combination of goods that people value most.

When does allocative efficiency occur?

When marginal benefit equals marginal cost.

What is economic growth?

An expansion of production possibilities.

What are two factors that influence economic growth?

Technological change and capital accumulation.

What is a market?

An arrangement that enables buyers and sellers to get information and do business with each other.

What is a competitive market?

A market with many buyers and sellers where no single buyer or seller can influence the price.

What is a relative price?

The ratio of the money price of a good to the money price of the next best alternative; it is the good's opportunity cost.

What does it mean to demand something?

You want it, can afford it, and have made a definite plan to buy it.

What is the quantity demanded?

The amount of a good or service that consumers plan to buy at a particular price during a given time period.

What is the law of demand?

Other things remaining the same, a higher price leads to a smaller quantity demanded, while a lower price leads to a larger quantity demanded.

What are the substitution and income effects?

The substitution effect means people seek substitutes when a good becomes relatively more expensive; the income effect means a higher price reduces what people can afford.

What is a change in demand?

A change caused by something other than the good's own price, resulting in the demand curve shifting.

What are six factors that change demand?

Prices of related goods, expected future prices, income, expected future income and credit, population, and preferences.

What is a normal good?

A good for which demand increases as income increases.

What is an inferior good?

A good for which demand decreases as income increases.

What does it mean to supply something?

A firm has the resources and technology to produce it, can profit from producing it, and has made a definite plan to produce and sell it.

What is the law of supply?

Other things remaining the same, a higher price leads to a greater quantity supplied, while a lower price leads to a smaller quantity supplied.

What are six factors that change supply?

Prices of factors of production, prices of related goods produced, expected future prices, number of suppliers, technology, and the state of nature.

What is market equilibrium?

A situation where the quantity demanded equals the quantity supplied; the equilibrium price balances buyers' and sellers' plans.

What is price elasticity of demand?

A units-free measure of quantity demanded's responsiveness to price changes.

How is price elasticity of demand calculated?

% change in quantity demanded ÷ % change in price.

Why use average price and quantity?

It gives the same elasticity whether price rises or falls.

What does elasticity greater than 1 mean?

Demand is elastic: quantity responds more than proportionally to price.

What does elasticity less than 1 mean?

Demand is inelastic: quantity responds less than proportionally to price.

What does elasticity equal to 1 mean?

Demand is unit elastic: percentage changes are equal.

What three factors influence demand elasticity?

Substitutes, income share, and time elapsed after a price change.

How do close substitutes affect demand elasticity?

More substitutes make demand more elastic.

What is the total revenue formula?

Total revenue = price × quantity sold.

What happens to total revenue with elastic demand after a price cut?

Total revenue increases.

What happens to total revenue with inelastic demand after a price cut?

Total revenue decreases.

What is income elasticity of demand?

Quantity demanded's responsiveness to a change in income.

What does negative income elasticity indicate?

The good is an inferior good.

What is cross elasticity of demand for a substitute?

It is positive.

What is elasticity of supply?

The responsiveness of quantity supplied to a change in price.