Introduction to Economics

This set of flashcards covers essential concepts in economics, including definitions, analyses, and examples related to supply and demand, elasticity, and decision-making.

What is Economics?

Economics is the study of how people and societies make choices about using limited resources to satisfy unlimited wants.

What is cost-benefit analysis?

It is the process of comparing the benefits of an action with its costs to decide whether the action is worthwhile.

What are opportunity costs?

Opportunity cost is the value of the next best alternative that you give up when you make a choice.

What does marginal rationality mean?

It means making decisions by comparing the additional (marginal) benefits of an action to its additional (marginal) costs.

What is quantity demanded?

The amount of a good or service consumers are willing and able to buy at a given price.

What is the law of demand?

When the price of a good rises, quantity demanded falls; when the price falls, quantity demanded rises.

What are two factors that can shift the demand curve?

Change in consumer income and change in tastes/preferences.

Define substitute of a good or service.

A substitute is a good that can replace another good, so when the price of one rises, demand for the other increases.

Define complement of a good or service.

A complement is a good used together with another good, so when the price of one rises, demand for the other falls.

What is quantity supplied?

The amount of a good producers are willing and able to sell at a given price.

What is the law of supply?

When the price rises, sellers sell more; when the price falls, sellers sell less.

What are two factors that can shift the supply curve?

Cost of production and technology.

What is market equilibrium?

It is when demand equals supply, resulting in no shortage or surplus.

What is a surplus?

A surplus occurs when there is too much supply and not enough demand.

What is a shortage?

A shortage occurs when there is too much demand and not enough supply.

What is price elasticity of demand?

It measures how much the quantity demanded of a good changes when its price changes.

What is income elasticity of demand?

It measures how much the quantity demanded of a good changes when consumer income changes.

What is the income elasticity of demand for normal goods?

Positive income elasticity, meaning demand rises with income.

What is the income elasticity of demand for inferior goods?

Negative income elasticity, meaning demand falls with income.

What is the elasticity for necessity goods?

Elasticity between 0 and 1, indicating demand rises slowly with income.

What is the elasticity for luxury goods?

Elasticity greater than 1, meaning demand rises faster than income.

What is an inferior good?

A good for which demand decreases when income increases.

What is a normal good?

A good for which demand increases when income increases.

What is a luxury good?

A normal good with demand rising faster than income.

What is a necessity good?

A normal good with demand rising slower than income.

Provide two examples of normal goods.

Smartphones and clothing.

Provide two examples of inferior goods.

Instant noodles and bus rides.

Provide two examples of luxury goods.

Jewelry and high-end sports cars.

Provide two examples of necessity goods.

Bread and electricity.

Define cross-price elasticity of demand.

How demand for one good changes when the price of another good changes.

What is the cross-price elasticity for substitutes?

Positive; when the price of one good increases, demand for its substitute increases.

What is the cross-price elasticity for complements?

Negative; when the price of one good increases, demand for its complement decreases.

Define price elasticity of supply.

How much supply changes when price changes.

What is the main determinant of elasticity of supply?

More elastic in the long run, less elastic in the short run.

Define price inelastic and price elastic demand

Inelastic its less than 1 and if its elastic its greater than 1

Relationship between elasticity and revenue

Elastic is lower price and increase in revenue. Inelastic is high price and increase in revenue.

Two examples of inelastic demand

Gasoline and insulin

Two examples of elastic demand

Restaurant meals and designer clothes

Two determinants of elasticity

Nessecitity or luxuruy and substitutes

Income elasticity for normal vs inferior goods

Normal goods the demand increases when income increases wheras inferior goods demand decreases when the income increases

Income elasticity for necessity vs luxury goods

Neccessity is small rise when income increases and luxury is big rise when income increases