Foundations of Economics
The study of how people use scarce resources
What is Economics?
A graph showing trade-offs between two goods
What is a PPC?
When price rises, quantity demanded…
Measures responsiveness to price changes
What is elasticity?
One firm controls the market
What is a monopoly?
Studies individual markets vs. the whole economy
Difference between Micro & Macro-economics
A point inside the PPC represents this
What is inefficiency?
A change in price causes...
A movement along the curve
Goods with many substitutes tend to be…
elastic.
Many firms with differentiated products
What is monopolistic competition?
Choosing college over a full-time job means giving up income. This is…
Opportunity Cost
A point is located below the production possibilities curve. What is it called and how could it move to the curve?
Inefficiency (underutilized resources), and the economy could move to the curve by using resources more efficiently or reducing unemployment
A rise in income for a normal good causes…
demand to increase.
Why is gasoline typically inelastic?
There are few substitutes, it is a necessity.
Shortage; the price is too low - more demand than there is supply
Why should sunk costs be ignored in decision-making?
Because they cannot be recovered and should not affect future choices
If opportunity cost increases as production rises, what does the curve look like and why?
Bowed outward due to specialized resources
A tax on producers is introduced. What happens to supply, price, and quantity?
Supply decreases, price increases, quantity decreases
Price ↑ 10%, quantity ↓ 5%. Elastic or inelastic? Price elasticity of supply or of demand? Why?
Inelastic price elasticity of demand, because price goes up and quantity goes down
Why are firms in an oligopoly considered interdependent? How does this affect their pricing decisions?
Each firm’s decisions affect the others, so firms must consider how competitors will respond when setting prices. This can lead to price matching, price wars, or even collusion.
A country must decide whether to produce more healthcare or more military defense. Explain what economic concept this decision represents and why.
Trade-off (or opportunity cost), because choosing to produce more of one good requires giving up some of the other due to scarcity
Country A has lower opportunity cost in cars, Country B in wheat. What should each specialize in and why?
A produces cars, B produces wheat due to comparative advantage
The price of a good is above equilibrium. Explain what is happening in the market and describe how price and quantity will change to return to equilibrium.
Surplus, because quantity supplied is greater than quantity demanded. Prices will fall, which leads quantity demanded to increase and quantity supplied to decrease, moving the market back toward equilibrium.
Price of Good Z goes up. Demand of Good A then goes up. What is the cross price elasticity of demand? What does this mean and why?
Explain a nonbinding price control, give an example, and explain the effect on the market. (Need all three parts for points!)
A nonbinding price control would be like a price floor that is below the equilibrium price. This is nonbinding because the company would be able to continue selling at equilibrium price, since it is above the price floor. Because of this, it would have no effect on the market.