micro flashcards midterm 1

What are the 2 things needed to make an optimal decision?

(1) Have all relevant information, (2) Have the incentive to act on it.

What are the 4 factors of production?

Land, labor, capital, and entrepreneurship.

What is opportunity cost?

What you give up to get something else (explicit + implicit costs).

What’s an incentive?

Anything that offers rewards to people who change their behavior.

What is specialization?

When each person focuses on the task they’re best at to increase efficiency.

What is equilibrium?

A situation where no one can be better off doing something different.

What makes an economy efficient?

If it takes all opportunities to make some people better off without hurting others.

What are the 5 parts of market structure?

Private property, competition, market discipline, profit, and loss test.

What does 'invisible hand' mean?

Pursuit of self-interest benefits society as a whole.

What are the 5 pitfalls to sound reasoning?

Biases, loaded terminology, post hoc fallacy, fallacy of composition, correlation ≠ causation.

What is positive economics?

Objective, fact-based economics (no emotions or opinions).

What are the 5 key elements of the supply & demand model?

Demand curve, supply curve, shifters of demand, shifters of supply, and market equilibrium.

What’s the law of demand?

Price ↑ → Quantity demanded ↓.

What’s the law of supply?

Price ↑ → Quantity supplied ↑.

What’s the difference between movement and shift?

Movement = price change; Shift = determinant change.

What causes demand to increase (shift right)?

Higher income (normal goods), higher price of substitutes, lower price of complements, more buyers, higher future prices, higher preferences.

What causes demand to decrease (shift left)?

Lower income, lower price of substitutes, higher price of complements, fewer buyers, lower future prices, decreased popularity.

What causes supply to increase (shift right)?

Lower input prices, better technology, more sellers, lower future prices.

What causes supply to decrease (shift left)?

Higher input prices, worse technology, fewer sellers, higher future prices.

What happens when input prices rise?

Supply decreases (shifts left).

What’s the equilibrium condition?

Quantity demanded = Quantity supplied.

What is consumer surplus?

Max price willing to pay – actual price paid.

What is producer surplus?

Market price – minimum price willing to accept.

What is total surplus?

Consumer surplus + Producer surplus.

When is a market efficient?

When total surplus is maximized.

What are the 3 caveats to market efficiency?

1) Not always fair, 2) Markets can fail, 3) Efficient doesn’t mean best for everyone.

What are property rights?

The right to control, use, and trade resources as you choose.

What are economic signals?

Prices that convey information about costs and willingness to pay.

What is a price ceiling?

Legal max price (below equilibrium) → shortage.

What is a price floor?

Legal min price (above equilibrium) → surplus.

What’s a non-binding price control?

One that doesn’t affect equilibrium because it’s set above (ceiling) or below (floor) equilibrium.

What are the side effects of a price ceiling?

Shortages, inefficient allocation, wasted resources, low quality, black markets.

What do both ceilings and floors cause?

Wasted resources and deadweight loss.

What is deadweight loss?

The total surplus lost due to reduced quantity transacted.

What is a quota?

Government limit on how much can be sold (quantity control).

What’s a license?

The right to legally supply a good under a quota.

What’s the formula for price elasticity of demand?

Ed=ΔQ/avg QΔP/avg P.

What does |Ed| < 1 mean?

Inelastic demand.

What does |Ed| > 1 mean?

Elastic demand.

What’s the total revenue test?

Inelastic: Price ↑ → TR ↑; Elastic: Price ↑ → TR ↓.

What does positive cross-price elasticity mean?

Goods are substitutes.

What does negative cross-price elasticity mean?

Goods are complements.

What does positive income elasticity mean?

Normal good.

What does negative income elasticity mean?

Inferior good.

What’s Es > 1?

Elastic supply.

0 < Es < 1?

Inelastic supply.

Es = 1?

Unit elastic supply.

What is an excise tax?

A per-unit tax on producers or goods.

Who bears more tax burden?

The side that’s more inelastic.

What happens to deadweight loss when curves are inelastic?

Smaller DWL.

What happens when curves are elastic?

Larger DWL.

What are the three tax types by structure?

Progressive, Regressive, Proportional.

What is a progressive tax?

Income ↑ → rate ↑.

What is a regressive tax?

Income ↑ → rate ↓.

What is a proportional tax?

Flat rate.

What are the two tax principles?

Benefits principle and ability-to-pay principle.

What’s the average tax rate formula?

Tax liability ÷ income.

What’s the marginal tax rate formula?

Change in tax ÷ change in income.

What does a progressive tax look like numerically?

The tax rate increases with income.

What’s the key to calculating total tax liability?

Add up the tax owed in each income bracket separately.