Micro Test 1

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  1. Microeconomics
    • Study economic behavior of individuals
    • [consumers, businesses]
  2. Economics
    Study of how a society allocates its scarce factors of production among different possible uses.
  3. Factors of production
    Inputs that are used in order to produce final products.
  4. List the factors of production.
    • Land-all natural resources
    • Labor-all human work effort (human capital)
    • Capital-all human made tools
    • Entrepreneurship-all humans who take risk and organize the factors of production to run a business
  5. Scarcity
    • Limited factors of production (limits number of final products) vs. unlimited human wants
    • [Choices, decisions, trade-offs]
  6. Market economy
    • Economic decisions based on market forces. (supply&demand)
    • [price+income+profits]
  7. Mixed economy
    Mostly market economy with some government involvement
  8. Production Possibilities Frontier on diagram
    • Study questions #5
    • Assume:
    • A-Economy
    • B-Limited factors of production
    • C-Each factor of production can produce either good
    • D-Full employment
    • Shift scarce factors of production from one good to another (given up)
  9. Opportunity Cost
    Whatever was given up when making a decision
  10. What is the opportunity cost if we moved from point w to point x ? what is the benefit of this move?
    • Opportunity cost 7000 fewer computer
    • Benefits +400 extra cars
  11. Is it currently feasible or possible to produce 800 cars and 29,000 computers (point D), why or why not?
    No not enought factors of porduction
  12. Can we reach point D in the future?
    • Yes. Technology or more factors of production could lead to economic growth.
    • [outside curve]
  13. What is true if society produces 400 cars and 10,000 computers (point B)?
    • Unemployment
    • Not using all factors of production
    • [inside curve]
  14. Marginal cost
    change (additional or extra) in cost from doing something (making a decision)
  15. Marginal benefit
    Change in benefit from doing something
  16. What is the marginal principle of decision-making?
    Weigh marginal benefit vs. marginal cost
  17. Demand
    Relationship that shows various quantities of a product that people are willing to buy at various prices, all else constant
  18. Quantity Demanded
    exact number of units demanded at an exact price
  19. Law of Demand
    • As prices increase, people will buy fewer units; as prices decrease, people will buy more units
    • [creates negative slope]
  20. Substitute goods
    Good A can be used in place of Good B
  21. Complementary goods
    • Two goods are used together.
    • Good A is needed with the purchase of Good B
  22. Income Effect
    When prices decrease buyer has "income left over" after buying your usual amount, you might buy more units. Income contant.
  23. Substitute Effect
    When price of good A increases, buyer switch and buy a substitute, good B.
  24. Demand curve for product with no substitues
    Graph would be a vertical line for demand.
  25. Supply
    Relationship that shows various quantities made available at various prices-all else constant
  26. Quantity supplied
    Exact number of units supplies at exact price
  27. Equilibrium price
    Price at which quantity demanded = quantity supplied
  28. Surplus (excess supply)
    Quantity supplied more than quantity demanded at a given price
  29. Shortage (excess demand)
    Quantity demanded more than quantity supplied at a given price
  30. What could cause a change in the quantity demanded of a product?
    • A change in the selling price of a product
    • [no shift in curve]
  31. What could cause a change in the demand of a product?
    • A change in anything held constant.
    • Decrease in demand:
    • decrease in income, preference, price of substitute good, buyer's expected price of future good
    • increase in price of complementary good

    • Increase in demand:
    • increase in income, preference, price of substitute good, buyer's expected price of future good
    • decrease in demand of complementary good
  32. Normal Good
    Income increase then demand increase; income decreases then demand decreases
  33. Inferior good
    • as income increases then demand decreases; income decreases then demand increases
    • [does not mean anything about quality]
  34. Effects on the demand for SUV
    a. consumers expect that the price will increse in future
    c. consumer preference increase
    • Increase in Demand
    • Demand curve shifts to the right
  35. Effects on the demand for SUV
    b. consumer income decrease
    d. an increase in the price of gasoline
    • Decrease in Demand
    • Demand curve shifts to the left
  36. Effects on the demand for SUV
    e. a decrease in the price of a SUV
    • Increase in demand
    • Price moves along demand curve
    • [does not shift]
  37. What could cause a change in quantity supplied?
    • A change in price
    • [no shift]
  38. What could cause a change in supply?
    • Change in anything held constant.
    • Increase in supply:
    • greater availability, decrease in cost of poduction and expected price of good in future

    • Decrease in supply:
    • Less availability, increase in cost of production and expected price of good in future
  39. What happens to equilibrium price and quantity exchanged when:
    demand increases
    demand decreases
    • Price up & Quantity up
    • Price down & Quantity down
  40. What happens to equilibrium price and quantity exchanged when:
    Supply increases
    Supply decreases
    • Price down & Quantity up
    • Price up & Quantity down
  41. What happens to equilibrium price and quantity exchanged when:
    Buyers & Sellers both expect price to increase
    • ?
    • Price increases
  42. Price Floor
    • Government sets a minimum allowable price for a product
    • Helps: Sellers
    • Trade-offs: creates surplus
  43. Price Ceiling
    • Government sets a maximum allowable price for a product
    • Helps: consumers
    • Trade-offs: shortage
  44. If the government fixes a price for a level below the market price, a shortage will occur. Illustrate this on graph
    Shortage price will be drawn below the equilibrium price
  45. Define and list two things that will occur in an Efficient Market.
    • A. Price of the product is at the equilibrium
    • B. 1-product is purchased by the peopl who place highest value on product (highest bidder)
    • 2-Product will be produced by the lowest cost to sellers
  46. Use supply and demand to explain the role of scalpers at concerts and sporing events.
    • Fixed Supply of tickets
    • Strong demand
  47. Consumer Surplus
    • Occurs when the value you place on a product exceeeds the price you pay.
    • Value to you > price you pay
  48. Producer Surplus
    Occurs when the price received by seller is more than the lowest price at which the seller would have supplied the product
  49. Total Revenue
    • total amount of income
    • TR= P X Q
  50. Price elasticity of demand
    • percentage change in quantity demanded
    • percentage change in price
  51. Elasticity coefficient
    • number that can be calculater
    • change in quantity/starting quantity
    • /
    • change in price/starting price
  52. Price elastic
    • E-coefficient greater than 1
    • quantity is highly responsive to a price change
  53. Price inelastic
    • I-coefficient less than 1
    • quantity is highly unresponive to a price change
  54. Unitary price elastic
    U-coefficient is equal to one
  55. What is the relationship between elasticity and total revenue?
    • E-price up tr down
    • price down tr up

    • I-price up tr up
    • price down tr down

    U-price up or down remains the same
  56. Draw a perfectly inelastice demand curve.
    Demand veritcal
  57. Draw a perfectly elastic demand curve.
    Horizonal demand curve
  58. Discuss affect of price elasticity for a product
    • Inelastic
    • A few, poor substitutes, strong preference, lots of compliments
    • Elastic
    • lots of great substitiutes, weak preference, lots of brand name few category
Card Set
Micro Test 1
SQ 1, SQ 2 #'s
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