Econ Chapter 1-5 Flashcards
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Questions and Answers

What is economics best defined as?

the study of how people, businesses, governments, and societies make choices to cope with scarcity

The largest part of what the US produces today is ___________ such as ___________________

services; trade and health care

What do factors of production include?

land, labor, capital, and entrepreneurship

What is the opportunity cost of any action?

<p>the highest-value alternative forgone</p> Signup and view all the answers

What does the production possibilities frontier (PPF) depict?

<p>the boundary between those combinations of goods and services that can be produced and those that cannot given the resources and current state of technology</p> Signup and view all the answers

When is production efficiency achieved?

<p>producing one or more units of a good cannot occur without producing less of some other good</p> Signup and view all the answers

What is marginal cost when moving along a PPF?

<p>equal to the opportunity cost of producing one more unit of a good or service</p> Signup and view all the answers

What is necessary for societies to reap gains from trade?

<p>define and enforce property rights</p> Signup and view all the answers

What does the 'law of demand' refer to?

<p>when the price of a good rises, there is movement up along the demand curve to a smaller quantity demanded</p> Signup and view all the answers

When the price of a normal good falls, the substitution effect leads to ______________ in the quantity purchased and the income effect leads to ___________ in the quantity purchased.

<p>increase; increase</p> Signup and view all the answers

What does the 'law of supply' refer to?

<p>when the price of a good rises, there is a movement up along the supply curve to a larger quantity supplied</p> Signup and view all the answers

What happens when there is an increase in the number of fast food restaurants?

<p>increases the supply of fast food meals</p> Signup and view all the answers

What does a shortage cause?

<p>price to rise</p> Signup and view all the answers

When demand decreases and supply does not change, the equilibrium price _________ and the equilibrium quantity ___________.

<p>falls; decreases</p> Signup and view all the answers

What does elasticity generally measure?

<p>the responsiveness of a variable to a change in another variable</p> Signup and view all the answers

If the demand for a good is elastic, what happens when the price increases?

<p>the quantity demanded will decrease by a greater percentage than the price increased</p> Signup and view all the answers

When will producers' total revenue increase?

<p>the price rises and the demand is inelastic</p> Signup and view all the answers

What is the marginal benefit?

<p>the maximum amount a person is willing to pay for one more unit of a good</p> Signup and view all the answers

If someone pays $50 for a pair of shoes, and the actual price of the shoes is $30, what is their marginal benefit?

<p>$50</p> Signup and view all the answers

Consumer surplus is the ______________ summed over the quantity bought.

<p>difference between the value of a good or service and the price paid for the good or service</p> Signup and view all the answers

What is the producer surplus on a unit of a good?

<p>the difference between the price of the good and the marginal cost of producing the good</p> Signup and view all the answers

What is a price ceiling?

<p>a price above which a seller cannot legally sell</p> Signup and view all the answers

What is production efficiency?

<p>to produce goods and services at the lowest possible cost</p> Signup and view all the answers

Resources are ____________ when they are idle but could be working.

<p>unused</p> Signup and view all the answers

Resources are _____________ when they are assigned to tasks for which they are not the best match.

<p>misallocated</p> Signup and view all the answers

What does allocative efficiency refer to?

<p>goods and services produced at the lowest possible cost in quantities that provide greatest benefits</p> Signup and view all the answers

What is technological change?

<p>development of new goods and of better ways of producing goods and services</p> Signup and view all the answers

What is capital accumulation?

<p>growth of capital resources</p> Signup and view all the answers

What is comparative advantage?

<p>activity a person can perform at a lower opportunity cost than anyone else</p> Signup and view all the answers

What is a market?

<p>any arrangement that enables buyers and sellers to get info and do business with each other</p> Signup and view all the answers

What is relative price?

<p>the ratio of one price to another</p> Signup and view all the answers

What is a complement?

<p>a good that is used in conjunction with another good</p> Signup and view all the answers

What does it mean when demand decreases and income increases?

<p>inferior good</p> Signup and view all the answers

What does it mean when demand increases as income increases?

<p>normal good</p> Signup and view all the answers

What is total revenue?

<p>the price of the good x the quantity sold</p> Signup and view all the answers

What does the total revenue test refer to?

<p>method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price</p> Signup and view all the answers

What is cross elasticity of demand?

<p>%age change in quantity demanded/%age change in price of a substitute or complement</p> Signup and view all the answers

What is income elasticity of demand?

<p>%age change in quan demanded/%age change in income</p> Signup and view all the answers

What is individual demand?

<p>relationship between the price of a good and the quantity demanded by a person</p> Signup and view all the answers

What is market demand?

<p>relationship between the price of a good and quantity demanded by all buyers</p> Signup and view all the answers

What is consumer surplus?

<p>excess of the benefit received from a good over the amount paid for it</p> Signup and view all the answers

What is deadweight loss?

<p>decrease in total surplus that results from an inefficient level of production</p> Signup and view all the answers

What is the big tradeoff?

<p>tradeoff between efficiency and fairness</p> Signup and view all the answers

What does land earn?

<p>rent</p> Signup and view all the answers

What does labor earn?

<p>wages</p> Signup and view all the answers

What does capital earn?

<p>interest</p> Signup and view all the answers

What does entrepreneurship earn?

<p>profit</p> Signup and view all the answers

Study Notes

Economics Overview

  • Economics studies choices made by individuals, businesses, governments, and societies to manage scarcity.

Production in the U.S.

  • Majority of U.S. production comprises services, particularly in trade and health care.

Factors of Production

  • Key components include land, labor, capital, and entrepreneurship.

Opportunity Cost

  • Defined as the highest-value alternative that is forgone when making a decision.

Production Possibilities Frontier (PPF)

  • Graphical representation showing the maximum combinations of goods and services produced given available resources and technology.

Production Efficiency

  • Achieved when producing additional units of one good requires a reduction in the production of another good.

Marginal Cost and Opportunity Cost

  • Moving along a PPF, marginal cost equates to the opportunity cost of producing one more unit of a good or service.

Gains from Trade

  • Societies must establish and enforce property rights to benefit from trade.

Law of Demand

  • As prices rise, quantity demanded decreases, leading to movement up along the demand curve.

Normal Goods

  • When prices of normal goods fall, both substitution and income effects lead to an increase in quantity purchased.

Law of Supply

  • Price increases result in a greater quantity supplied, shown by movement up along the supply curve.

Supply Dynamics

  • An increase in the number of fast food outlets raises the supply of fast food meals.

Market Shortages

  • Result in rising prices.

Equilibrium Adjustments

  • A decrease in demand with unchanged supply leads to lower equilibrium prices and quantities.

Elasticity

  • Measures how responsive one variable is to changes in another.

Elastic Demand

  • For elastic goods, an increase in price causes a larger percentage decrease in quantity demanded.

Total Revenue and Price Elasticity

  • Total revenue increases if prices rise and demand is inelastic.

Marginal Benefit

  • Maximum amount a person is willing to pay for an additional unit of a good.

Consumer Surplus

  • Defined as the difference between the value of a good or service and its purchase price.

Producer Surplus

  • The difference between a good's selling price and the marginal cost of production.

Price Ceiling

  • A legal maximum price established for selling a good.

Allocative Efficiency

  • Achieved when goods and services are produced at the lowest cost and provide the greatest benefit.

Technological Change

  • Refers to the development of new goods and improved production methods.

Capital Accumulation

  • Growth in capital resources.

Comparative Advantage

  • Occurs when a person can perform activities at a lower opportunity cost than anyone else.

Markets

  • Arrangements that facilitate information and transaction between buyers and sellers.

Relative Price

  • The price ratio of one good to another.

Complements

  • Goods that are used together.

Inferior Goods

  • Demand decreases as income increases.

Normal Goods

  • Demand increases as income rises.

Total Revenue

  • Calculated as price multiplied by quantity sold.

Total Revenue Test

  • Estimates price elasticity of demand based on the relationship between price changes and total revenue changes.

Cross Elasticity of Demand

  • Measures the percentage change in quantity demanded in response to a percentage change in the price of related goods.

Income Elasticity of Demand

  • Percentage change in quantity demanded divided by the percentage change in income.

Individual Demand vs. Market Demand

  • Individual demand pertains to one person, while market demand aggregates demands from all consumers for a good.

Deadweight Loss

  • Represents the decrease in total surplus resulting from production inefficiencies.

Efficiency and Fairness

  • Refers to the tradeoff known as the "big tradeoff."

Earnings from Economic Resources

  • Land earns rent, labor earns wages, capital earns interest, and entrepreneurship earns profit.

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Test your knowledge of key concepts from Economics Chapters 1 to 5 with these flashcards. Each card defines essential terms and ideas that form the foundation of economic principles. Perfect for students looking to reinforce their understanding of economics.

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