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?
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What does the production possibilities frontier (PPF) depict?
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When is production efficiency achieved?
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What is marginal cost when moving along a PPF?
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What is necessary for societies to reap gains from trade?
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What does the 'law of demand' refer to?
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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.
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What does the 'law of supply' refer to?
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What happens when there is an increase in the number of fast food restaurants?
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What does a shortage cause?
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When demand decreases and supply does not change, the equilibrium price _________ and the equilibrium quantity ___________.
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What does elasticity generally measure?
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If the demand for a good is elastic, what happens when the price increases?
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When will producers' total revenue increase?
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What is the marginal benefit?
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If someone pays $50 for a pair of shoes, and the actual price of the shoes is $30, what is their marginal benefit?
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Consumer surplus is the ______________ summed over the quantity bought.
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What is the producer surplus on a unit of a good?
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What is a price ceiling?
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What is production efficiency?
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Resources are ____________ when they are idle but could be working.
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Resources are _____________ when they are assigned to tasks for which they are not the best match.
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What does allocative efficiency refer to?
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What is technological change?
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What is capital accumulation?
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What is comparative advantage?
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What is a market?
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What is relative price?
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What is a complement?
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What does it mean when demand decreases and income increases?
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What does it mean when demand increases as income increases?
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What is total revenue?
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What does the total revenue test refer to?
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What is cross elasticity of demand?
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What is income elasticity of demand?
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What is individual demand?
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What is market demand?
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What is consumer surplus?
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What is deadweight loss?
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What is the big tradeoff?
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What does land earn?
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What does labor earn?
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What does capital earn?
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What does entrepreneurship earn?
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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.