Untitled Flashcards Set

Economics is the study of how individuals and societies allocate their limited resources to satisfy their unlimited wants. This fundamental concept highlights the tension between scarce resources and the infinite desires of people, leading to the necessity of making choices.

Definition of Economics: Economics examines how people use limited resources to fulfill their needs and desires, focusing on decision-making processes and the implications of those decisions on a personal and societal level.

Difference Between Microeconomics and Macroeconomics:

• Microeconomics: This branch analyzes individual and firm-level decisions, such as consumer behavior, production choices, and market interactions.

• Macroeconomics: This field studies the economy as a whole, addressing large-scale issues like national productivity, inflation rates, and unemployment.

Rationality Assumption in Economics: Economics operates under the assumption that individuals act rationally, making decisions aimed at maximizing their utility or satisfaction based on the information available to them.

Positive vs. Normative Statements:

• Positive Statements: Objective assertions that can be tested and validated, describing "what is."

• Normative Statements: Subjective claims based on opinions or beliefs, prescribing "what ought to be."

Relationship Between Price and Quantity Demanded (Qd): There is an inverse relationship; as the price increases, the quantity demanded decreases, and vice versa.

Relationship Between Price and Quantity Supplied (Qs): There is a direct relationship; as the price increases, the quantity supplied increases, and vice versa.

Axes Directions:

• Vertical Axis (Y-axis): Movement is up and down.

• Horizontal Axis (X-axis): Movement is left and right.

Meaning of Ceteris Paribus: A Latin phrase meaning "all other things being equal," used to isolate the effect of one variable by holding others constant.

Free-Riding and Example: Free-riding occurs when individuals benefit from resources or services without paying for them. For example, someone who enjoys public fireworks without contributing to the funding is a free rider.

True or False: We All Face the Problem of Scarcity. True. Scarcity is a universal issue because resources are limited while human wants are unlimited.

Three Fundamental Economic Questions:

1. What to produce?

2. How to produce?

3. For whom to produce?

Federal Government Spending Includes All Except: Without specific options, it's challenging to identify the exception. Generally, federal spending covers defense, education, healthcare, and infrastructure.

Production Possibility Curve (PPC) Points:

• Attainable Points: Combinations of goods that can be produced with available resources.

• Unattainable Points: Combinations that cannot be achieved with current resources.

• Inefficient Points: Combinations where resources are not fully utilized.

Why is the PPC Concave? The PPC is concave due to the law of increasing opportunity costs, indicating that producing more of one good requires larger sacrifices of another good.

Factors Causing the PPC to Shift Outward: An outward shift can result from economic growth, technological advancements, or an increase in resources.

Factors That Shift Demand:

• Changes in consumer income

• Preferences and tastes

• Prices of related goods (substitutes and complements)

• Expectations about future prices

• Number of buyers

Factors That Shift Supply:

• Technological changes

• Input prices

• Taxes and subsidies

• Expectations about future prices

• Number of sellers

Inferior Goods vs. Normal Goods:

• Inferior Goods: Goods for which demand decreases as consumer income rises.

• Normal Goods: Goods for which demand increases as consumer income rises.

Definition of Relative Price: The price of one good in terms of another good.

Relative Price Calculation: If A = $100 and B = $120, the relative price of A in terms of B is 100/120 = 0.833, meaning A costs 83.3% of B's price.

Effect on Demand for Complements: If the price of good Y increases, the demand for its complement, good Z, decreases.

Effect on Demand for Substitutes: If the price of Pepsi increases, the demand for its substitute, Coca-Cola, increases.

Free Rider Problem: The free rider problem occurs when individuals consume a good without contributing to its cost, leading to under-provision of that good.

Theory of Public Choice: This theory applies economic principles to political processes, analyzing how public decisions are made and how they could lead to government failures.

Consequences of Price Ceilings: Price ceilings can lead to shortages, black markets, and reduced quality of goods.

Government Corrections for Negative Externalities: Governments can impose taxes, regulations, or fines to reduce activities that cause negative externalities.

Impact of Higher Crude Oil Prices on Egg Supply: Higher crude oil prices increase transportation and production costs, leading to a decrease in the supply of eggs.

Signs of Demand and Supply Equations:

• Demand Equation: Negative slope, indicating an inverse relationship between price and quantity demanded.

• Supply Equation: Positive slope, indicating a direct relationship between price and quantity supplied.As prices rise, consumers may seek substitutes, further impacting the overall demand in the market. This can lead to a shift in consumer preferences, resulting in a decrease in egg consumption and potentially affecting the market equilibrium.