Econ W1&2

25 flashcards · Other · by Daniel F.

1. Positive economics

   Independent of the ethical value system of the economist

2. Normative economics

   Reflects the ethical value system of the economist (implicitly, explicitly or by omission)

3. Macro-economics

   The study of the performance of national economies and the policies that governments use to try to improve that performance

4. Micro-economics

   The study of individual choice under conditions of scarcity, and its implications for society Standard economic theory assumes decision makers are rational

5. Scarcity

   Resources available to satisfy boundless needs and wants are limited Having more of one good thing usually means having less of another

6. Economic Surplus

   value > momentary cost + opportunity cost

7. The Cost-Benefit Principle

   Rationality demands that an individual (or firm or other decision maker) takes an action if, and only if, the extra benefits (=marginal benefits) from taking that action are at least as great as the extra costs (=marginal costs)

8. Decision Pitfalls

   Measuring costs and benefits as proportions rather than absolute money amounts Ignoring opportunity (i.e. implicit) costs Failure to ignore sunk costs Failure to understand the distinction between average and marginal

9. Production Possibilities Curve

   a graph that shows the quantity of a good that can be produced for every possible level of production of another good points Attainable point Unattainable poi Efficient point Inefficient point

10. Production Possibility Frontier

    The PPC for a multi-person and million person economy

11. Why do buyers purchase a greater quantity at lower prices and vice-versa

    Substitution effect: The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes Income effect: The change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumers’ purchasing power Buyer’s reservation price: The benefit will exceed the cost for fewer buyers at higher prices than at lower prices

12. Shifts in Demand

    Due to Complements Due to Substitutes Due to Income Changes normal good inferior good

13. Shifts in Supply

    The supply curve is based on costs of production

14. Surplus

    buyers/sellers: difference between reservation price and price paid/sold at

15. Inefficient Market Equilibrium

    When some costs of production fall on people other than those who sell the good or service the market equilibrium is inefficient e.g.: pollution vaccines

16. Price Elasticity of Demand

    The percentage change in the quantity demanded that results from a 1 percent change in its price | ϵ\epsilonϵ |>1: Elastic | ϵ\epsilonϵ |<1: Inelastic

17. Determinants of Demand Price Elasticity

    Substitution Possibilities Budget Share Time

18. Eq of price elasticity for small changes

19. Elasticity ______ as we move down a straight line demand curve

    decreases

20. Eq of price elasticity for large changes

21. Elasticity and Total Expenditure

22. Cross-Price Elasticity of Demand

    The percentage change in quantity demanded of one good in response to a 1 percent change in the price of another good Substitute Goods Cross-Price Elasticity of demand is positive Example: Red vs green apples Complement Goods Cross-Price Elasticity of demand is negative Example: Pizza dough and pizza sauce

23. Income Elasticity

    is the percentage change in quantity demanded in response to a 1 percent change in income Normal Goods Income elasticity of demand is positive Inferior Goods Income elasticity of demand is negative

24. Determinants of Supply Elasticity

    Flexibility of inputs Mobility of inputs Input substitutes Time

25. Opportunity cost

    Net value of the next best thing