PRINCIPLES OF MICROECONOMICS
FINAL EXAM
scarcity - Answer-unlimited wants exceed the limited resources available to fulfill those wants
rational - Answer-systematically and purposefully do the best they can to achieve an objective
incentive - Answer-induces someone to act
marginal - Answer-small, incremental changes
Law of Diminishing Marginal Utility - Answer-law of decreasing small changes in pleasure
trade-offs - Answer-produce more of one good or service, means we need to produce less of another
opportunity cost - Answer-highest valued alternative that must be given up to engage in activity;
whatever must be given up to obtain some item; marginal benefit>marginal cost
centrally planned economy - Answer-government decides how economic resources will be allocated--
communism
market economy - Answer-decisions of the household and firms interacting in markets that allocate
resources--resources are allocated among households and firms with little to no government
interference
,mixed economy - Answer-when most economic decisions result from the interaction of buyers and
sellers but the government plays a significant role in the allocation of resources
productive efficiency - Answer-good or service is produced at the lowest possible cost
allocative efficiency - Answer-production is in in accordance with consumer preferences
production possibilities frontier - Answer-curve showing the maximum attainable combinations of two
goods that can be produced with available resources and current technology, positive tool -- "what is" --
shows trade-off curve between two quantities
ceteris paribus - Answer-to hold all else constant
Law of increasing marginal opportunity cost - Answer-opportunity cost of production in a good rises as
society produces more of it
absolute advantage - Answer-ability of one producers to make more than another producer with the
same quantity of resources
comparative advantage - Answer-ability of an individual, a firm, or country to produce a good or service
at a lower opp cost than competitors
competitive market - Answer-many buyers and sellers
quantity demanded - Answer-amount of a good or service that a consumer is willing and able to
purchase at a given price
, law of demand - Answer-given ceteris paribus quantity demanded falls when prices rise and QD rises
when prices fall
substitution effect - Answer-change in QD of good that results from a change in price, making the good
more or less expensive relative to other goods that are substitutes
income effect - Answer-change in QD of good that results from the effect of a change in the goods price
on consumer's purchasing power
shifters of demand - Answer-1. changes in income
2. changes in prices of related goods
3. changes in taste
4. change in # of buyers
5. changes in expectations about the future
normal goods - Answer-anything you consume more of the more money you makes ^ income-^demand
inferior goods - Answer-anything you buy less of the more money you make ^income-down demand
substitues - Answer-goods and services that can be used for the same purpose -- ^price pepsi- ^demand
coke
complements - Answer-^price of coffee - down demand for coffee creamer
quantity supplied - Answer-amount of good or service that a firm is willing and able to supply at a given
price
FINAL EXAM
scarcity - Answer-unlimited wants exceed the limited resources available to fulfill those wants
rational - Answer-systematically and purposefully do the best they can to achieve an objective
incentive - Answer-induces someone to act
marginal - Answer-small, incremental changes
Law of Diminishing Marginal Utility - Answer-law of decreasing small changes in pleasure
trade-offs - Answer-produce more of one good or service, means we need to produce less of another
opportunity cost - Answer-highest valued alternative that must be given up to engage in activity;
whatever must be given up to obtain some item; marginal benefit>marginal cost
centrally planned economy - Answer-government decides how economic resources will be allocated--
communism
market economy - Answer-decisions of the household and firms interacting in markets that allocate
resources--resources are allocated among households and firms with little to no government
interference
,mixed economy - Answer-when most economic decisions result from the interaction of buyers and
sellers but the government plays a significant role in the allocation of resources
productive efficiency - Answer-good or service is produced at the lowest possible cost
allocative efficiency - Answer-production is in in accordance with consumer preferences
production possibilities frontier - Answer-curve showing the maximum attainable combinations of two
goods that can be produced with available resources and current technology, positive tool -- "what is" --
shows trade-off curve between two quantities
ceteris paribus - Answer-to hold all else constant
Law of increasing marginal opportunity cost - Answer-opportunity cost of production in a good rises as
society produces more of it
absolute advantage - Answer-ability of one producers to make more than another producer with the
same quantity of resources
comparative advantage - Answer-ability of an individual, a firm, or country to produce a good or service
at a lower opp cost than competitors
competitive market - Answer-many buyers and sellers
quantity demanded - Answer-amount of a good or service that a consumer is willing and able to
purchase at a given price
, law of demand - Answer-given ceteris paribus quantity demanded falls when prices rise and QD rises
when prices fall
substitution effect - Answer-change in QD of good that results from a change in price, making the good
more or less expensive relative to other goods that are substitutes
income effect - Answer-change in QD of good that results from the effect of a change in the goods price
on consumer's purchasing power
shifters of demand - Answer-1. changes in income
2. changes in prices of related goods
3. changes in taste
4. change in # of buyers
5. changes in expectations about the future
normal goods - Answer-anything you consume more of the more money you makes ^ income-^demand
inferior goods - Answer-anything you buy less of the more money you make ^income-down demand
substitues - Answer-goods and services that can be used for the same purpose -- ^price pepsi- ^demand
coke
complements - Answer-^price of coffee - down demand for coffee creamer
quantity supplied - Answer-amount of good or service that a firm is willing and able to supply at a given
price
