Micro Chapters 1-5
CHAPTER 1: First Principles
Flashcards
Front | Back |
|---|---|
Resource | Anything that can be used to produce something else |
Scarce | Not enough to satisfy all the ways society wants to use it |
Opportunity cost | What you give up to get something |
Marginal decision | Whether to do a bit more or less of an activity |
Incentive | Anything offering rewards for changing behavior |
Source of gains from trade | Specialization |
Equilibrium | No one is better off doing something different |
Efficient economy | No way to help someone without hurting someone else |
Equity | Everyone gets a "fair share" |
Market failure | Self-interest leaves society worse off |
Recession cause | Spending falls short of what keeps workers employed |
Inflation cause | Spending exceeds what the economy can supply |
What boosts economy's potential? | New technology and more resources |
CHAPTER 2: Economic Models: Trade-offs and Trade
Flashcards
Front | Back |
|---|---|
Model | Simplified representation of a real situation |
Other things equal | All other relevant factors unchanged |
PPF | Combinations of two goods producible at full employment |
Point on the PPF | Efficient in production |
Point inside PPF | Inefficient (missed opportunities) |
Point outside PPF | Unattainable |
Outward PPF shift causes | More factors of production, better technology |
Factors of production | Land, labor, physical capital, human capital |
Bowed-out PPF means | Increasing opportunity cost |
Comparative advantage | Lower opportunity cost |
Absolute advantage | Produces more with the same resources |
Gains from trade come from | Specializing by comparative advantage, then trading |
Circular flow: factor markets | Firms buy resources from households |
Positive economics | Describes what is (description) |
Normative economics | Prescribes what should be (prescription) |
Forecast | A simple prediction of the future |
CHAPTER 3: Supply and Demand
Flashcards
Front | Back |
|---|---|
Competitive market | Many buyers and sellers, none can influence price |
Law of demand | Higher price, lower quantity demanded (ceteris paribus) |
Movement along curve caused by | Change in the good's own price |
Shift of curve caused by | Any other factor |
5 demand shifters | Related goods' prices, income, tastes, expectations, number of consumers |
5 supply shifters | Input prices, related goods' prices, technology, expectations, number of producers |
Substitutes | Price fall of one lowers demand for the other |
Complements | Price fall of one raises demand for the other |
Normal good | Demand rises with income |
Inferior good | Demand falls with income |
Market demand | Horizontal sum of individual demand curves |
Equilibrium | Qs = Qd |
Surplus | Qs > Qd, price above equilibrium, price falls |
Shortage | Qd > Qs, price below equilibrium, price rises |
Demand up, supply unchanged | P up, Q up |
Supply down, demand unchanged | P up, Q down |
Input price rises | Supply decreases (shifts left) |
Expect higher future price (sellers) | Supply falls now |
Expect lower future price (buyers) | Demand falls now |
CHAPTER 4: Consumer and Producer Surplus
Flashcards
Front | Back |
|---|---|
Willingness to pay | Max price a buyer would pay |
Individual consumer surplus | WTP minus price paid |
Consumer surplus (graph) | Area below demand, above price |
Individual producer surplus | Price received minus cost |
Producer surplus (graph) | Area above supply, below price |
Total surplus | Consumer surplus + producer surplus |
Price falls | Consumer surplus rises, producer surplus falls |
Price rises | Producer surplus rises, consumer surplus falls |
Why equilibrium is efficient | It maximizes total surplus |
3 ways that fail to raise total surplus | Reallocate consumption, reallocate sales, change quantity |
Property rights | Owners' rights to dispose of items as they choose |
Economic signal | Info that helps people make better decisions (prices) |
3 causes of market failure | Market power, externalities, unsuitable goods (public goods, common resources, private info) |
Efficient vs. fair | Efficient does not mean equitable |
CHAPTER 5: Price Controls and Quotas
Flashcards
Front | Back |
|---|---|
Price ceiling | Legal maximum price; binding below equilibrium |
Price floor | Legal minimum price; binding above equilibrium |
Ceiling creates a... | Persistent shortage |
Floor creates a... | Persistent surplus |
5 ceiling side effects | Low quantity, inefficient allocation, wasted resources, low quality, black markets |
5 floor side effects | Deadweight loss, inefficient allocation among sellers, wasted resources, high quality, illegal activity |
Shadow market | Illegal buying and selling |
Quota | Government limit on quantity bought or sold |
License | Government right to supply a good |
Demand price | Price at which consumers demand a given quantity |
Supply price | Price at which producers supply a given quantity |
Quota rent (wedge) | Demand price minus supply price at quota; equals license price |
Deadweight loss | Surplus lost from missed mutually beneficial trades |
Who wins from rent control | Lucky renters |
Who loses | Landlords and unlucky renters |
Why controls persist | Beneficiaries are organized and vocal; officials misunderstand S&D |