Economics 201 Practice Exam Review

This set of vocabulary flashcards covers key economic concepts including the Production Possibilities Frontier, elasticity, market equilibrium, surpluses, international trade, taxes, and price controls based on the Economics 201 practice exam.

Production Possibilities Frontier (PPF)

A graph representing the possible combinations of two outputs a country can produce given its available resources and technology.

Opportunity Cost

The cost of increasing production of one good measured in terms of the amount of another good that must be given up.

Absolute Advantage

The ability of a country to produce more of a specific good than another country using the same amount of resources.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer; it is the basis for gains from trade.

Efficient Output Combination

A production point located exactly on the PPF curve where all resources are fully utilized.

Infeasible Output Combination

A production point located outside the PPF curve that cannot be achieved with current resources.

Inward Shift of the PPF

Occurs when a country's production capacity decreases, such as when a catastrophic typhoon destroys production plants.

Price Elasticity of Supply (Midpoint Method)

A measure of the responsiveness of quantity supplied to a change in price, calculated as $\frac{(Q_2-Q_1) / ((Q_2+Q_1)/2)}{(P_2-P_1) / ((P_2+P_1)/2)}$.

Elastic Supply

A condition where the price elasticity of supply is greater than 1, indicating that producers are highly responsive to price changes.

Equilibrium Price and Quantity

The price and quantity at which the inverse supply function ($P = 2 + \frac{Q_s}{50}$) equals the inverse demand function ($P = 50 - \frac{Q_d}{10}$); in this specific beef market, $P^* = 10$ and $Q^* = 400$.

Consumer Surplus (CS)

The consumer's gains from trade when their willingness to pay exceeds the market price; calculated as the area below the demand curve and above the price.

Producer Surplus (PS)

The producer's gains from trade when the market price exceeds their willingness to sell; calculated as the area above the supply curve and below the price.

World Price

The price of a good on the global market; if it is higher than the domestic price, the country has a comparative advantage and will export the good.

Tariff

A tax imposed on imported goods that increases the price for domestic consumers and typically reduces the volume of imports from the targeted country.

Tax Wedge

The difference created by a tax between the price paid by consumers ($P_{Buyer}$) and the price received by sellers ($P_{Seller}$).

Deadweight Welfare Loss (DWL)

The reduction in total surplus resulting from a tax or price control that prevents mutually beneficial trades for which willingness to pay exceeds the cost of production.

Price Ceiling

A government-imposed maximum price, such as a cap on credit card interest rates, which can lead to a market shortage if set below the equilibrium price.

Shortage

A situation where the quantity demanded exceeds the quantity supplied, often caused by a price ceiling set below the equilibrium level.