ECON201 midterm 1

question

positive and normative statements

answer

(+) - observed results/facts, what did people do?
(-) - opinions, what should people do?

question

rational behavior/decisions

answer

making choices to achieve goals in the most effective way possible. acting in self-interest = acting on your goal.

if benefits > costs, it is worth it!

question

scarcity

answer

the condition of wanting more than we can get with available resources

question

cost

answer

not only the amount you pay, but also the opportunity you must now give up for something that you may have otherwise enjoyed. what you HAVE to give up

question

opportunity cost

answer

value you could have gained by choosing your next best alternative; helps us think more clear about trade offs. the value you gave up.

question

efficiency

answer

use of resources to ensure that people get what they most want and need given the available resources - not necessarily fair/ethical.

When the economy is efficient, resources are used to create the greatest total economic value to society.

question

market failure

answer

people/firms fail to take advantage of opportunities because something prevents them from capturing the benefits of the opportunity or it imposes additional costs.

question

model

answer

simplified representation of the important parts of a real situation - simplifying the complex world gives us approximate answers.

question

what makes a good model?

answer

1. predicts cause and effects
2. states its assumptions clearly
3. describes the real world accurately

question

benefits

answer

what you are WILLING to give up

question

marginal benefit

answer

additional benefit from an additional unit. each unit adds some amount to total happiness!

question

diminishing marginal benefit

answer

additional benefit eventually gets less than the one before as more of it is consumed.

question

marginal cost

answer

additional cost required to get another unit.

question

increasing marginal cost

answer

additional cost eventually rises as more of it is consumed.

question

production possibilities frontier (PPF)

answer

represents the constraints and the trade offs on production. producing more of one thing means producing less of the other.

question

factors that drive PPF changes

answer

1. number of workers = shifts line outward
2. changes in technology = shifts line less steep
3. increase in opportunity cost = concave curve

question

absolute advantage

answer

who is MORE productive. the ability to produce more of a good than others can with given resources.

question

comparative advantage

answer

even if you're better at something, you can let someone else do it so you can do something MORE important. producing a good at a lower opportunity cost than others.

question

profit

answer

profit = total revenue - total costs

question

revenue

answer

revenue = price x quantity sold - total costs

question

explicit costs

answer

production costs related to resources, paid with MONEY.

question

implicit costs

answer

opportunity costs that are implied, forgone opportunities.

includes normal profit - profit one would normally expect (ex. lost wages if you leave a job to do something else).

question

long run vs short run

answer

LR: enough time to change levels of any factor - all costs are variable.

SR: some factors cannot be changed. fixed and variable costs

question

fixed costs vs variable costs

answer

cannot be changed in the short run (ex. rent)

can be changed in the short run (ex. wages)

question

total, average, marginal

answer

sum for all units

per unit

additional amount per additional units

question

economic profit

answer

includes all costs and all benefits.

EP = total revenue - all opportunity costs (explicit and implicit)

tells businesses if they would be making more money in a different venture

question

accounting profit

answer

AP = total revenue - explicit costs

tells businesses if it is making money with this venture

question

productivity (AP and MP)

answer

average product (AP) - output per unit of input. dividing the total production by the number of workers.
AP = Total product/labor = quantity/labor

marginal product (MP) - additional output from additional input
MP = change in quantity/change in labor

question

increased marginal returns

answer

when additional workers add more to the total output than the ones before.

specialization and teamwork - accomplish more as a group

there is a limit! diminishing marginal returns

question

diminishing marginal returns

answer

when there is too many people and productivity decreases

question

total costs

answer

fixed costs + variable costs

question

average fixed cost (AFC)
average variable cost (AVC)
average total cost (ATC)
marginal cost (MC)

answer

AFC = TFC/Q
AVC = TVC/Q
ATC = TC/Q = TFC+TVC/Q = AFC + AVC
MC = change in TC/change in Q = change in TVC/change in Q

question

marginal cost curve

answer

hits the 2 minimums of the AVC and ATC curve.

MC is below AVC when AVC is falling, and above when AVC is rising.

question

optimization

answer

maximize profit given the cost of resources/prices they can sell.

compare MB to MC

measure in terms of revenue (marginal revenue, MR)

increase output when MR > MC
decrease output when MR < MC
you're doing the best when MR = MC!

question

production function

answer

the relationship between quantity of inputs and quantity of outputs

question

economies of scale

answer

returns that occur when an increase in the quantity of output decrease ATC (ex. buying bulk, assembly lines)

left side of the U-shaped curve

cost per unit decreases as output increases

question

diseconomies of scale

answer

returns that occur when an increase in the quantity of output increase the ATC.

right side of the U-shaped curve

cost per unit increases as cost increases

question

constant returns to scale

answer

returns that occur when ATC does not depend on the quantity of output

middle of the U-shaped curve

costs stay the same as output increases

question

efficient scale

answer

quantity of output at which ATC is minimized and cannot be lower by increasing or decreasing its scale.

question

competitive markets

answer

-price takers
-standardized products
-no barriers to entry
-informed buyers/sellers
-no transaction costs

question

price takers

answer

too many buyers and sellers for them to directly affect the price

question

standardized products

answer

no difference between what firms in a particular market are selling

question

no barriers to products

answer

anyone can starts selling the good or service if they want to join the market

question

informed buyers and sellers

answer

everyone has access to information that would affect the price.

if we all act in self-interest; if you know more info as a seller, you can sell the product for more money to the buyer.

question

producers

answer

create supply!
goal = maximize profit
max profit when MR = MC

question

supply

answer

relationship between the price and the quantity producers are willing/able to sell

law of supply - as price goes up, quantity goes up, as long as nothing else changes (ceteris paribus)

increase in supply = curve moves R
decrease in supply = curve moves L

question

individual vs market supply

answer

the relationship between P and Qs for a firm making a rational decision

includes all of the potential sellers (horizontal sum)

question

utility maximization

answer

maximized when the happiness/dollar spent on each option is equal.

marginal utility (MU) = happiness associated with each unit of each good.
diminishing marginal utility = as you buy more, you will get less happiness out of each additional one.

question

demand

answer

the relationship between price of a good and the corresponding quantity buyers are willing/able to buy.

law of demand - when price goes up, the quantity demanded falls, as long as nothing else changes

'willingness to pay' - the benefit the buyer would expect from another unit.

increase in demand = curve moves R
decrease in demand = curve moves L

question

reservation price

answer

the price that people will begin buying the product (demand)

the price to sell the first unit - must be low enough (supply)

question

individual vs market demand

answer

relationship between P and Q for an individual making a rational decision based on their assessment of value

all potential buyers - shows the value someone places on each unit based on the line.

question

falling price vs rising price

answer

more people believe value > = price; will buy

more people believe value < = price; won't buy

question

change in quantity demanded (Qd)

answer

caused by a change in price

move from one point to another on the demand curve

question

change in quantity supplied (Qs)

answer

caused by a change in price

move from one point to another on the supply curve

question

non-price changes in demand

answer

1. consumer preferences
2. prices of related goods
substitutes - good consumed in place of another
complements - goods consumed together
3. expectations/future changes
4. income
normal goods - demand inc. when income inc.
inferior goods - demand dec. when income inc
5. number of buyers in the market

shifts the curve!

question

market equilibrium

answer

price that everyone in the market believes a product should be sold at.

question

surplus

answer

excess supply, not enough demand. price is too high and must lower

question

shortage

answer

not enough supply, and too much demand. price is too low and must be higher

question

non-price changes in supply

answer

1. prices of related goods/outputs
substitutes in production - compete for resources
complements in production - produced together
2. technology (productivity)
3. prices of inputs
4. expectations
5. number of sellers

question

positive incentive vs negative incentive

answer

makes people more likely to do something

makes people less likely to do something

1 of 60

question

positive and normative statements

answer

(+) - observed results/facts, what did people do?
(-) - opinions, what should people do?

question

rational behavior/decisions

answer

making choices to achieve goals in the most effective way possible. acting in self-interest = acting on your goal.

if benefits > costs, it is worth it!

question

scarcity

answer

the condition of wanting more than we can get with available resources

question

cost

answer

not only the amount you pay, but also the opportunity you must now give up for something that you may have otherwise enjoyed. what you HAVE to give up

question

opportunity cost

answer

value you could have gained by choosing your next best alternative; helps us think more clear about trade offs. the value you gave up.

question

efficiency

answer

question

market failure

answer

people/firms fail to take advantage of opportunities because something prevents them from capturing the benefits of the opportunity or it imposes additional costs.

question

model

answer

simplified representation of the important parts of a real situation - simplifying the complex world gives us approximate answers.

question

what makes a good model?

answer

1. predicts cause and effects
2. states its assumptions clearly
3. describes the real world accurately

question

benefits

answer

what you are WILLING to give up

question

marginal benefit

answer

additional benefit from an additional unit. each unit adds some amount to total happiness!

question

diminishing marginal benefit

answer

additional benefit eventually gets less than the one before as more of it is consumed.

question

marginal cost

answer

additional cost required to get another unit.

question

increasing marginal cost

answer

additional cost eventually rises as more of it is consumed.

question

production possibilities frontier (PPF)

answer

represents the constraints and the trade offs on production. producing more of one thing means producing less of the other.

question

factors that drive PPF changes

answer

1. number of workers = shifts line outward
2. changes in technology = shifts line less steep
3. increase in opportunity cost = concave curve

question

absolute advantage

answer

who is MORE productive. the ability to produce more of a good than others can with given resources.

question

comparative advantage

answer

even if you're better at something, you can let someone else do it so you can do something MORE important. producing a good at a lower opportunity cost than others.

question

profit

answer

profit = total revenue - total costs

question

revenue

answer

revenue = price x quantity sold - total costs

question

explicit costs

answer

production costs related to resources, paid with MONEY.

question

implicit costs

answer

opportunity costs that are implied, forgone opportunities.

includes normal profit - profit one would normally expect (ex. lost wages if you leave a job to do something else).

question

long run vs short run

answer

LR: enough time to change levels of any factor - all costs are variable.

SR: some factors cannot be changed. fixed and variable costs

question

fixed costs vs variable costs

answer

cannot be changed in the short run (ex. rent)

can be changed in the short run (ex. wages)

question

total, average, marginal

answer

sum for all units

per unit

additional amount per additional units

question

economic profit

answer

includes all costs and all benefits.

EP = total revenue - all opportunity costs (explicit and implicit)

tells businesses if they would be making more money in a different venture

question

accounting profit

answer

AP = total revenue - explicit costs

tells businesses if it is making money with this venture

question

productivity (AP and MP)

answer

question

increased marginal returns

answer

when additional workers add more to the total output than the ones before.

specialization and teamwork - accomplish more as a group

there is a limit! diminishing marginal returns

question

diminishing marginal returns

answer

when there is too many people and productivity decreases

question

total costs

answer

fixed costs + variable costs

question

average fixed cost (AFC)
average variable cost (AVC)
average total cost (ATC)
marginal cost (MC)

answer

AFC = TFC/Q
AVC = TVC/Q
ATC = TC/Q = TFC+TVC/Q = AFC + AVC
MC = change in TC/change in Q = change in TVC/change in Q

question

marginal cost curve

answer

hits the 2 minimums of the AVC and ATC curve.

MC is below AVC when AVC is falling, and above when AVC is rising.

question

optimization

answer

question

production function

answer

the relationship between quantity of inputs and quantity of outputs

question

economies of scale

answer

returns that occur when an increase in the quantity of output decrease ATC (ex. buying bulk, assembly lines)

left side of the U-shaped curve

cost per unit decreases as output increases

question

diseconomies of scale

answer

returns that occur when an increase in the quantity of output increase the ATC.

right side of the U-shaped curve

cost per unit increases as cost increases

question

constant returns to scale

answer

returns that occur when ATC does not depend on the quantity of output

middle of the U-shaped curve

costs stay the same as output increases

question

efficient scale

answer

quantity of output at which ATC is minimized and cannot be lower by increasing or decreasing its scale.

question

competitive markets

answer

-price takers
-standardized products
-no barriers to entry
-informed buyers/sellers
-no transaction costs

question

price takers

answer

too many buyers and sellers for them to directly affect the price

question

standardized products

answer

no difference between what firms in a particular market are selling

question

no barriers to products

answer

anyone can starts selling the good or service if they want to join the market

question

informed buyers and sellers

answer

everyone has access to information that would affect the price.

if we all act in self-interest; if you know more info as a seller, you can sell the product for more money to the buyer.

question

producers

answer

create supply!
goal = maximize profit
max profit when MR = MC

question

supply

answer

question

individual vs market supply

answer

the relationship between P and Qs for a firm making a rational decision

includes all of the potential sellers (horizontal sum)

question

utility maximization

answer

question

demand

answer

question

reservation price

answer

the price that people will begin buying the product (demand)

the price to sell the first unit - must be low enough (supply)

question

individual vs market demand

answer

relationship between P and Q for an individual making a rational decision based on their assessment of value

all potential buyers - shows the value someone places on each unit based on the line.

question

falling price vs rising price

answer

more people believe value > = price; will buy

more people believe value < = price; won't buy

question

change in quantity demanded (Qd)

answer

caused by a change in price

move from one point to another on the demand curve

question

change in quantity supplied (Qs)

answer

caused by a change in price

move from one point to another on the supply curve

question

non-price changes in demand

answer

question

market equilibrium

answer

price that everyone in the market believes a product should be sold at.

question

surplus

answer

excess supply, not enough demand. price is too high and must lower

question

shortage

answer

not enough supply, and too much demand. price is too low and must be higher

question

non-price changes in supply

answer

question

positive incentive vs negative incentive

answer

makes people more likely to do something

makes people less likely to do something

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ECON201 midterm 1

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