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Econ 2101 exam
Ch. 1, 2, 4, 5, 6 and 7
Terms in this set (66)
income elasticity of demand
% change in quantity demand/ %change in income
cross price elasticity of demand
substitutes +/- ?
% change in quantity demanded of good 1/ %change in price of good 2
the resources we use to produce goods and services are limited
the study of choices when there is scarcity
factors of production
the resources used to produce goods and services; also known as production inputs or resources
10 principles of economics
1.people face tradeoffs
2.cost of something is what you give up to get it
3.rational people think at the margin,
4.people respond to incentives,
5.trade can make everyone better off,
6.markets are usually a good way to organize economic activity,
7.gov can sometimes improve market outcomes,
8.a country's standard of living depends on its ability to produce goods and services,
10.trade off inflation and unemployment
efficiency and equality
society gets maximum benefits from its scarce resourcees while those benefits are also distributed among society's members
the cost of what you give up in return for getting another item
describe a small adjustment to an existing plan of action
a good for which an increase in income decreases demand
a good for which an increase in income increases demand
two goods for which a decrease in the price of one good increases the demand for the other good
Is inelastic demand <1, =1, or >1?
Inelastic is less than 1
perfectly elastic is 1
elastic is greater than 1
Formula for total revenue
TR= P x Q
Graph of perfect inelastic, and what happens to total revenue if price changes
up and down graph, price and total revenue move in the same direction
unit elasticity and what happens to total revenue if price changes
its equal to the graph, total revenue remains constant when price changes
perfectly elastic graph and what happens to total revenue if price changes
its equal to infinity totally flat, price and total revenue move in opposite directions
How does duration affect supply elasticity?
supply becomes more elastic in the long run
price elasticity of supply formula
%change in quantity supplied/ %change in price
What can binding price ceiling leads to?
Binding price ceiling leads to shortages, and people need to ration
Rent control affects in the short run and long run
A binding price floor causes
A surplus Quantity supplied is greater than quantity demanded
A bind price ceiling causes
If john and Paul are in a bidding war and john is willing to pay 80 and paul is willing to pay 70 whats John's consumer surplus?
consumer surplus formula
value to buyers - amount paid by buyers
amount recieved by sellers- cost to sellers
Total surplus formula
value to buyers- cost to sellers
maximizing total surplus of all parties
fairness of the distribution
Tax causes deadweight loss because...
it prevents buyers and sellers from realizing some of the gains from the trade
Tax Distortions if inelastic is the deadweight loss larger/ smaller than an elastic supply?
deadweight loss if smaller than if its elastic
Tax Distortions if inelastic is the deadweight loss larger/ smaller than an elastic demand?
When demand is inelastic deadweight loss is smaller than elastic demand
WIth larger taxes do deadweight losses get bigger or smaller?
deadweight losses get bigger
social cost equation
social cost= private costs of producers+ cost to bystanders
how to internalize positive externalities
-Government intervention patents
if private parties can bargain without cost over allocation of resources, they can solve the externalities problem on their own
public policy towards certain behaviors
Command and control policies
market based policies
tax enacted to correct the effects of a negative externality
Pigovarian taxes are preferred by economists over regulation
markets fail to allocate resources efficiently when property rights are not well established
What is a firms objecive?
TO MAXIMIZE PROFITS
what types of costs do accountants focus on compared to economists?
Accountants focus on explicit costs only while an economist focuses on both explicit and implicit
marginal product of labor formula
change in output/ change in labor
Average fixed cost formula
Average variable cost formula
variable cost/ quantity
Average total cost formula (both formulas)
total cost/ quantity, ATC= AFC +AVC
Marginal cost formula
change in total cost/ change in quantity
Shape of a typical ATC graph
What happens to AVC when output expands?
What happens to AFC when output expands?
AFC declines pulling ATC down also
what is the efficient scale?
bottom of the ATC graph that minimizes the average total cost
relationship between MC and ATC
if MC is less than ATC then ATC is falling, When MC is > then ATC is rising
marginal cost curve crosses the ATC at minimum ATC or efficient scale
Draw the table for excludable and rival goods
Where does profit maximization occur?
When Marginal revenue = Marginal cost
What should a firm do if MR<MC?
It should decrease quantity produced
What should a firm do if MR>MC?
It should increase quantity produced
When does a firm shutdown?
what is the key difference between a competitive firm ad a monopoly firm?
Monopoly is able to control the price
descriptive and make a statement about how the world is
prescriptive and make a claim about how the world ought to be
What makes a perfectly competitive market?
1. goods are identical
2. Lots of sellers each has no influence over market
What are households and businesses in market for the factors of production?
households are sellers and firms are buyers
- households provide the inputs that firms use to produce goods and services
- firms provide wages, rent, and profit and households receive income
What are households and businesses in market for goods and services?
Households are the buyer, businesses are the seller
An economy produces hot dogs and hamburgers. If a discovery of the remarkable health benefits of hot dogs were to change consumers' preferences, it would:
a.expand the production possibilities frontier.
b.contract the production possibilities frontier.
c.move the economy along the production possibilities frontier.
d. move the economy inside the production possibilities frontier
c. move the economy along the production possibilities frontier
(updated cost/base cost) *100
Recommended textbook explanations
Principles of Microeconomics
N. Gregory Mankiw
Principles of Microeconomics
N. Gregory Mankiw
Hal R. Varian
Paul Krugman, Robin Wells
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