Economics: Limits, Markets, Demand, Supply, and Equilibrium

Comprehensive review flashcards covering introductory microeconomics and macroeconomics concepts, including scarcity, opportunity costs, production possibilities, the circular flow model, supply and demand fundamentals, and market equilibrium controls.

How does microeconomics differ fundamentally from macroeconomics?

Microeconomics focuses on individual decision-making units such as households, businesses, and specific markets ("the trees"), whereas macroeconomics studies the economy as a whole using aggregate measures such as Gross Domestic Product (GDP), inflation, and unemployment ("the forest").

What are the four recognized factors of production (types of economic resources)?

Land, labor, capital, and entrepreneurial ability.

What is the primary role of an entrepreneur in an economy?

To bring the factors of production together and take the financial and operational risks of producing goods or services.

In economic terms, why is commercial software classified as a capital resource, while corporate bonds or money are not?

Capital refers to manufactured tools, machinery, and equipment used directly to produce other goods and services; money and bonds are financial instruments that do not directly produce output.

What economic principle is encapsulated by the phrase "there is no free lunch"?

Every activity and choice involves an opportunity cost because resources are scarce.

Adam considers attending college for one year with a tuition cost of $\$15{,}000$, giving up a job paying $\$25{,}000$. What is his total economic cost of attending college for that year?

$\$40{,}000$ (the explicit tuition cost of $\$15{,}000$ plus the implicit opportunity cost of $\$25{,}000$ in forgone wages).

Under the economic perspective of rational self-interest, when will an individual or firm choose to undertake an action?

When the marginal benefit is greater than or equal to the marginal cost ($MB \ge MC$).

What does the law of diminishing marginal benefit state?

As more units of a product are consumed, the marginal benefit (extra satisfaction or utility) derived from each additional unit decreases.

How is marginal cost defined, and how is it calculated when total cost rises from $\$28$ at $2$ units to $\$38$ at $3$ units?

Marginal cost is the change in total cost resulting from producing one additional unit of output; here, it is $\$38 - \$28 = \$10$.

Based on this marginal benefit ($MB$) and marginal cost ($MC$) graph, what is the optimal quantity for society to produce?

Quantity $2$, because it is the point where marginal benefit equals marginal cost ($MB = MC = \$10$).

Based on this production possibilities curve, what is the opportunity cost of producing the 4th unit of bread (moving from point D to point E)?

$4$ drill presses (production of drill presses falls from $4$ to $0$).

What factors can cause an economy's production possibilities frontier to shift outward from AB to CD?

Technological progress or an increase in the quantity or quality of economic resources.

What does operating at point X, located inside the production possibilities curve, indicate?

Unemployment or an inefficient allocation and use of society's available resources.

In the circular flow model of a market system, what functions do households perform in product and resource markets?

Households buy goods and services in the product market and sell resources (land, labor, capital, and entrepreneurial ability) in the resource market.

In the circular flow model, what monetary flows do businesses pay in the resource market and receive in the product market?

Businesses pay costs (rent, wages, interest, profits) in the resource market and receive revenues from consumption expenditures in the product market.

What is the core premise of Adam Smith's concept of the "invisible hand"?

When individuals act in their own rational self-interest within competitive markets, they unintentionally promote the broader economic interest and efficiency of society.

How is competition broadly defined in the context of the market system?

Independent buyers and sellers freely participating in markets.

How is a market defined in economics?

A location or mechanism that brings together buyers and sellers to negotiate prices and determine quantities traded.

What does the law of demand state regarding the relationship between price and quantity demanded?

Holding all else constant (ceteris paribus), there is an inverse relationship: as price increases, quantity demanded decreases, and as price decreases, quantity demanded increases.

What three economic concepts explain why the demand curve is downward-sloping?

The income effect, the substitution effect, and the law of diminishing marginal utility.

How does the income effect explain an increase in quantity demanded when the price of a good declines?

A decline in the good's price increases consumers' purchasing power, allowing them to purchase more of the good with the same money income.

In this demand diagram, what economic concept is demonstrated by the movement along the curve from point A to point B when the price falls?

An increase in the quantity demanded (not an increase in demand).

What does the law of supply state regarding the behavior of producers?

Holding all else constant, there is a direct relationship between price and quantity supplied: as price increases, producers are willing and able to offer more units for sale.

Why is the supply curve upward-sloping?

Due to increasing marginal costs of production; producers require higher prices to cover the higher costs of expanding output.

What does movement from point A to point B along the supply curve $S_1$ represent?

An increase in quantity supplied resulting from an increase in price.

If three sellers in a market supply quantities of $6$, $4$, and $3$ hamburgers respectively at a price of $\$4$, what is the weekly market quantity supplied at that price?

$13$ hamburgers ($6 + 4 + 3 = 13$).

What defines a market shortage (excess demand) versus a market surplus (excess supply)?

A shortage occurs when quantity demanded exceeds quantity supplied (price is below equilibrium); a surplus occurs when quantity supplied exceeds quantity demanded (price is above equilibrium).

How do competitive markets naturally eliminate surpluses or shortages without government intervention?

Price movements induce changes in the quantities demanded and supplied until equilibrium is restored.

What is the market consequence of imposing a binding price ceiling of $P_c = \$3.00$ when equilibrium is $P_0 = \$3.50$?

It creates a persistent shortage because the quantity demanded ($Q_d$) exceeds the quantity supplied ($Q_s$).

Given this market with an equilibrium price of $\$15$ and quantity of $150$, what is the outcome of a government-imposed price ceiling at $\$10$?

A shortage of $200$ units (quantity demanded is $250$ and quantity supplied is $50$, yielding $250 - 50 = 200$).

What is the market consequence of setting an effective price floor of $P_f = \$3.00$ above the equilibrium price of $P_0 = \$2.00$?

It causes a persistent surplus because the quantity supplied ($Q_s$) exceeds the quantity demanded ($Q_d$).

Where must a price ceiling and a price floor be set relative to the equilibrium price in order to be effective (binding)?

A price ceiling must be set below the equilibrium price, and a price floor must be set above the equilibrium price.