Economics Principles: Microeconomics, Macroeconomics, and Market Efficiency

Flashcards covering core concepts of microeconomics and macroeconomics including opportunity cost, positive vs. normative statements, demand and supply, consumer and producer surplus, price controls, and comparative advantage based on homework and quiz review materials.

How do positive economic statements differ from normative economic statements?

Positive statements are objective descriptions or predictions about reality that can be tested with data, whereas normative statements prescribe what ought to be done and reflect values or opinions that cannot be confirmed with data.

Why is the statement "The vending machine outside the classroom needs a better selection of food" classified as a normative statement?

Because it describes what ought to be done based on personal preference or opinion, making it impossible to confirm or disprove with data.

What is the primary difference between microeconomics and macroeconomics?

Microeconomics is the study of how individuals, households, firms, and governments make choices, whereas macroeconomics is the study of the economy as a whole.

Are the prices of individual goods studied under microeconomics or macroeconomics?

microeconomics, whereas macroeconomics focuses on aggregate issues such as the inflation rate and the total money supply.

What does the term "empiricism" refer to in economics?

Empiricism refers to the process of testing ideas and theories using data to determine whether they match reality.

What is the opportunity cost of an activity?

a measure of what is given up, specifically the value of the next-best alternative option, when that activity is chosen.

If working part-time pays $20 per hour, what is the student's opportunity cost of surfing the web for 5 hours?

The opportunity cost is $100, calculated as 5 hours multiplied by $20 per hour.

Why does the number of people who want to go to college typically increase during an economic recession?

Because full-time jobs are difficult to find during a recession, which lowers the opportunity cost of attending college since the forgone income from employment is smaller.

What is required when conducting a cost-benefit analysis?

All relevant options and their associated costs and benefits must be considered.

What is free riding in economics?

Free riding occurs when individuals do not contribute to the provision of a good or service but still benefit from others' actions or contributions.

Why is a tax evader enjoying national security an example of a free rider?

Because the tax evader benefits from the protection provided by national security without contributing to the taxes that fund it.

How can free riding be reduced in a group setting?

Free riding can be reduced through social pressure or targeted incentives.

What defines an economic equilibrium?

Economic equilibrium is the sweet spot where the amount of a product people want to buy (demand) matches the amount businesses want to sell (supply)

What does an economic agent's budget constraint represent?

A budget constraint represents the combinations of goods and services an economic agent can choose given her limited income.

What is a price taker, and in what market setting do price takers exist?

a buyer or seller who must accept the current market price because they lack the power to influence it.

What does the Law of Demand state regarding price and quantity demanded?

an increase in a product's price causes a decrease in the quantity demanded, and a decrease in price causes an increase

What causes a movement along a demand curve versus a shift of the demand curve?

A change in the price of the good itself causes a movement along a given demand curve, whereas a change in non-price determinants (such as income, tastes, or number of buyers) causes a shift of the demand curve.

How is an aggregated market demand curve constructed from individual demand curves?

An aggregated market demand curve is created by horizontally summing the quantity demanded by each individual consumer at each specific price.

What does the Law of Supply state, and what is the typical slope of a supply curve?

states that as the price of a good or service rises, the quantity supplied by producers increases, assuming all else remains equa

What is the relationship between willingness to pay and willingness to accept for a voluntary trade to occur?

For a trade to take place, the buyer's willingness to pay (the highest price the buyer is willing to pay) must be higher than or equal to the seller's willingness to accept (the lowest price the seller is willing to receive).

If at a price of $15, quantity demanded is 700 units and quantity supplied is 400 units, what is the resulting market condition?

There is an economic shortage of 300 units, calculated as 700 minus 400.

What is an economic model, and what key property do all economic models share?

An economic model is a simplified description or representation of reality, and all economic models begin with assumptions.

What is the difference between causation and correlation?

Causation occurs when a change in one variable directly causes a change in another variable, whereas correlation means two variables move together (positively or negatively) without implying a direct cause-and-effect relationship.

What is an omitted variable in an empirical study?

An omitted variable is an unconsidered variable that has been left out of a study and, if included, would explain why the variables being analyzed are correlated.

What is a natural experiment?

A natural experiment is an empirical study in which a naturally occurring process outside the experimenter's control assigns subjects to control and treatment groups in a random or nearly random way.

How is consumer surplus defined?

Consumer surplus is the difference between the highest price a consumer is willing to pay for a good and the price the consumer actually pays.

If Juanita is willing to pay $120 for a circular saw but buys it on sale for $85, what is her consumer surplus?

Her consumer surplus is $35, calculated as $120 minus $85.

If Brett buys a cell phone for $100 and receives a consumer surplus of $80, how much does he value the cell phone?

Brett values the cell phone at $180, calculated as the actual price paid ($100) plus consumer surplus ($80).

What is producer surplus?

the difference between the price a seller receives for a good and the lowest price the seller is willing to accept to produce it.

What is deadweight loss?

Deadweight loss refers to the reduction in total economic surplus resulting from a market not operating at competitive equilibrium.

What type of price control is rent control, and what is its effect on market equilibrium?

Rent control is an example of a price ceiling (a maximum legal price set below equilibrium), which leads to an economic shortage as quantity demanded exceeds quantity supplied.

What does a minimum wage law dictate in the labor market?

a price floor, which is the lowest wage that firms may legally pay for labor.

How does absolute advantage differ from comparative advantage?

Absolute advantage is the ability to produce more of a good or service than competitors using a given amount of resources, while comparative advantage is the ability to produce a good or service at a lower opportunity cost than competitors.

What principle forms the economic foundation for trade within or between countries?

the principle of comparative advantage.

What does it mean when an economy is producing directly on its Production Possibilities Curve (PPC)?

It means that the economy is making full, efficient use of all its available resources.

If Madison can make 30 empanadas or 50 tacos per hour, and Austin can make 24 empanadas or 32 tacos per hour, who has the comparative advantage in making tacos?

Madison has the comparative advantage in making tacos because her opportunity cost of making 1 taco is 0.6 empanadas (30/50), whereas Austin's opportunity cost of making 1 taco is 0.75 empanadas (24/32).