ECON-UA 2 Test 1 Study Guide

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New York University
Maharukh Bhiladwalla

Test 1 Economics is the study of choice under conditions of scarcity In the US, individuals are forced to make choices because both time and spending power are scarce Society’s resources include land, labor, and capital A physician’s knowledge and skills are referred to by economists as human capital A microeconomist might study why wages for females are lower than for males in a particular labor market This represents a macroeconomic issue: “Central bank raises interest rates” If you have two options of going to college or going to work, the opportunity cost of going to college is the income you could have made working plus the direct cost of attending the college When there is an improvement I technology, all else constant, the production possibilities frontier will shift outward The PPF can be used to illustrate the concepts of productive inefficiency, opportunity cost, scarcity, and the law of increasing opportunity costs, but not the law of demand. The law of increasing opportunity cost states that the opportunity cost of producing a good rises as production of that good rises. On the PPF graph, if a point moves from inside the graph to the line of the graph, it is caused by eliminating productive inefficiency. The principle of specialization and exchange implies that total production is highest when individuals specialize according to their comparative advantages. If one person has a comparative advantage in A and another person has a comparative advantage in B, then we cannot conclude anything about absolute advantage Under Market capitalism, resources are allocated primarily through prices A group of buyers and sellers with the potential to trade with each other is known as a market In analyzing the market for a particular good, the most appropriate size of the market to consider depends on the purpose of the analysis In a circular flow diagram of the economy, households and businesses interact in both product markets and resource markets The demand curve for a particular good indicates the various quantities demanded at various prices, other things equal A decrease in the price of a particular good, with all other variables constant, causes a movement along a given demand curve to a higher quantity demanded. An increase in the price of college football tickets would not cause the demand curve for college football tickets to shift If the price of orange juice rises, the demand for grapefruit juice will increase because the two goods are substitutes. Assuming that baseball and football cards are substitutes, a leftward shift in the demand curve for baseball cards can be caused by a decrease in the price of football cards “As income rises, the demand for most goods also rises.” This statement suggests that most goods are normal goods If two goods are often consumed together, they are complementary goods What do supply and demand curves have in common? The both show a relationship between quantity and price If the resource prices faced by a firm rise, the result is a decrease in supply Price ceilings are primarily targeted to help consumers, while price floors generally benefit producers When the minimum wage is set above the equilibrium market wage, the unemployment rate will rise To maintain a price floor, the government should buy the excess supply If an excise tax is imposed on a good or service, the supply curve will shift upward The incidence of an excise tax refers to who really pays it A stock variable measures a quantity in existence at a moment in time Another term that could be used to elasticity is sensitivity If the price elasticity of demand is 3.0, then a 12% drop in price leads to a 36% rise in the quantity demanded The slope of the demand curve and the price elasticity of demand are different because slope is based on absolute changes and elasticity is based on percentage change If the demand curve is a straight line and has the nominal negative slope, then as quantity demanded increase, demand becomes more inelastic. If the demand curve is a vertical line, then demand is perfectly inelastic If demand is perfectly elastic, then the demand curve is a horizontal line If demand is price elastic, a decrease in price results in an increase in total revenue to the seller An inferior good is any good whose demand curve shifts to the left as income rises If the cross-price elasticity of demand between two goods is -2.2, then the two goods are complements Test 2 According to the law of increasing opportunity cost, opportunity cost rises s society produces more of a good or service. If a store increases its price of a good, but sells the same amount of the good, the demand for that good is perfectly inelastic If the price of a good is above market equilibrium, the price will fall, causing the quantity supplied to fall. A good is said to be normal when decreases in income lead to a decrease in demand for the good Understand the distinction between positive and normative economic statements is important because it provides a framework for understand differences among economists If the economy is producing a combination of goods inside its PPF, some resources are being wasted Consider a good with a price elasticity equal to 1 at every point on its demand curve. Then total revenue does not change if the price changes An increase in the price of a substitute results in an increase in the demand of the good A $1 increase in the price of a meal results in a drop in q
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