micro flashcards midterm 1
🏛 CHAPTER 1 – FOUNDATIONS OF ECONOMICS
Q: What are the 2 things needed to make an optimal decision?
A: (1) Have all relevant information, (2) Have the incentive to act on it.
Q: What are the 4 factors of production?
A: Land, labor, capital, and entrepreneurship.
Q: What is opportunity cost?
A: What you give up to get something else (explicit + implicit costs).
Q: What’s an incentive?
A: Anything that offers rewards to people who change their behavior.
Q: What is specialization?
A: When each person focuses on the task they’re best at to increase efficiency.
Q: What is equilibrium?
A: A situation where no one can be better off doing something different.
Q: What makes an economy efficient?
A: If it takes all opportunities to make some people better off without hurting others.
Q: What are the 5 parts of market structure?
A: Private property, competition, market discipline, profit, and loss test.
Q: What does “invisible hand” mean?
A: Pursuit of self-interest benefits society as a whole.
Q: What are the 5 pitfalls to sound reasoning?
A: Biases, loaded terminology, post hoc fallacy, fallacy of composition, correlation ≠ causation.
Q: What is positive economics?
A: Objective, fact-based economics (no emotions or opinions).
📈 CHAPTER 3 – SUPPLY AND DEMAND
Q: What are the 5 key elements of the supply & demand model?
A: Demand curve, supply curve, shifters of demand, shifters of supply, and market equilibrium.
Q: What’s the law of demand?
A: Price ↑ → Quantity demanded ↓.
Q: What’s the law of supply?
A: Price ↑ → Quantity supplied ↑.
Q: What’s the difference between movement and shift?
A: Movement = price change; Shift = determinant change.
Q: What causes demand to increase (shift right)?
A: Higher income (normal goods), higher price of substitutes, lower price of complements, more buyers, higher future prices, higher preferences.
Q: What causes demand to decrease (shift left)?
A: Lower income, lower price of substitutes, higher price of complements, fewer buyers, lower future prices, decreased popularity.
Q: What causes supply to increase (shift right)?
A: Lower input prices, better technology, more sellers, lower future prices.
Q: What causes supply to decrease (shift left)?
A: Higher input prices, worse technology, fewer sellers, higher future prices.
Q: What happens when input prices rise?
A: Supply decreases (shifts left).
Q: What’s the equilibrium condition?
A: Quantity demanded = Quantity supplied.
💰 CHAPTER 4 – SURPLUS AND EFFICIENCY
Q: What is consumer surplus?
A: Max price willing to pay – actual price paid.
Q: What is producer surplus?
A: Market price – minimum price willing to accept.
Q: What is total surplus?
A: Consumer surplus + Producer surplus.
Q: When is a market efficient?
A: When total surplus is maximized.
Q: What are the 3 caveats to market efficiency?
A: 1) Not always fair, 2) Markets can fail, 3) Efficient doesn’t mean best for everyone.
Q: What are property rights?
A: The right to control, use, and trade resources as you choose.
Q: What are economic signals?
A: Prices that convey information about costs and willingness to pay.
🏷 CHAPTER 5 – PRICE CONTROLS & QUOTAS
Q: What is a price ceiling?
A: Legal max price (below equilibrium) → shortage.
Q: What is a price floor?
A: Legal min price (above equilibrium) → surplus.
Q: What’s a non-binding price control?
A: One that doesn’t affect equilibrium because it’s set above (ceiling) or below (floor) equilibrium.
Q: What are the side effects of a price ceiling?
A: Shortages, inefficient allocation, wasted resources, low quality, black markets.
Q: What do both ceilings and floors cause?
A: Wasted resources and deadweight loss.
Q: What is deadweight loss?
A: The total surplus lost due to reduced quantity transacted.
Q: What is a quota?
A: Government limit on how much can be sold (quantity control).
Q: What’s a license?
A: The right to legally supply a good under a quota.
📊 CHAPTER 6 – ELASTICITY
Q: What’s the formula for price elasticity of demand?
A: Ed=ΔQ/avg QΔP/avg PE_d = \frac{\Delta Q / \text{avg Q}}{\Delta P / \text{avg P}}Ed=ΔP/avg PΔQ/avg Q
Q: What does |Ed| < 1 mean?
A: Inelastic demand.
Q: What does |Ed| > 1 mean?
A: Elastic demand.
Q: What’s the total revenue test?
A: Inelastic: Price ↑ → TR ↑.
Elastic: Price ↑ → TR ↓.
Q: What does positive cross-price elasticity mean?
A: Goods are substitutes.
Q: What does negative cross-price elasticity mean?
A: Goods are complements.
Q: What does positive income elasticity mean?
A: Normal good.
Q: What does negative income elasticity mean?
A: Inferior good.
Q: What’s Es > 1?
A: Elastic supply.
Q: 0 < Es < 1?
A: Inelastic supply.
Q: Es = 1?
A: Unit elastic supply.
Q: What happens when α is positive in a demand function?
A: Substitute.
Q: When αy is negative?
A: Complement.
Q: When αm is negative?
A: Inferior good.
🧾 CHAPTER 7 – TAXES
Q: What is an excise tax?
A: A per-unit tax on producers or goods (like hotel rooms or cigarettes).
Q: Who bears more tax burden?
A: The side that’s more inelastic.
Q: What happens to deadweight loss when curves are inelastic?
A: Smaller DWL.
Q: When curves are elastic?
A: Larger DWL.
Q: What are the three tax types by structure?
A: Progressive (income ↑ → rate ↑), Regressive (income ↑ → rate ↓), Proportional (flat rate).
Q: Examples of each?
A:
+Personal income tax = Progressive+
+Sales tax = Regressive+
+Corporate tax = Proportional+
+Payroll tax = Regressive+
Q: What are the two tax principles?
A: Benefits principle (pay if you benefit) and ability-to-pay principle.
Q: What’s the average tax rate formula?
A: Tax liability ÷ income.
Q: Marginal tax rate formula?
A: Change in tax ÷ change in income.
Q: What does a progressive tax look like numerically?
A: The tax rate increases with income.
Q: What’s the key to calculating total tax liability?
A: Add up the tax owed in each income bracket separately.