The economic problem
Unlimited wants in the face of limited resources means we have to make choices
Can the problem of scarcity be solved?
No, only alleviated
Opportunity cost is represented in micro theory by:
The PPF and supply/demand curves
Capitalism distinguishes from communism and socialism because of:
Private ownership of the means of production
Who decides the allocation of resources in a communalist economy?
The community
Adam Smith says we engage in economic activity due to:
an inborn human tendency to barter and exchange
Production at a point past the PPF would involve:
international trade
A productively efficient country operates where on the PPF?
On it
What would happen to the PPF of a country that experiences a severe loss of life?
It would shift inwards
Comparative advantage in a good's production also means:
lower opportunity cost in the production of that good
Why is the demand curve downward sloping?
Effect of a change in price on real income
Specialization and the division of labor are...
People training for a particular task and then accomplishing it in a larger production process
If the government puts a maximum price on an item, it is a _______, and results in a _______.
Price ceiling; shortage
How could the market correct a shortage?
Price will increase, causing an increase in the quantity demanded
According to Smith, shortages in markets occur due to:
A movement in the market price below the natural price
The minimum wage is a price ceiling or price floor?
Price floor
What does the minimum wage do to unemployment?
Can either cause more or less unemployment depending on the true equilibrium wage
Price of a good goes up, how is this shown on a graph?
Movement up on the demand curve from one point to another
Price of a good goes up, what will happen in the market?
The demand curve will shift backward to the left
The supply curve is upward sloping because:
marginal productivity diminishes over time as marginal costs continue to rise and thus suppliers need higher prices to produce more
Why would a supply curve shift outwards to the right?
An increase in the number of sellers
Price of a good falls, how is this shows on a supply graph?
The quantity supplied will decrease
For important goods with few substitutes, the price elasticity of demand will be elastic/inelastic?
Inelastic because customers are less sensitive to changes in price
Interest and capital are two components of what?
Total input costs for a firm
The less there is of a good, the more elastic/inelastic the supply curve will be?
Inelastic
Price elasticity of demand equation
%change in Qd/ %change in P. %change= (new-old)/old
Elasticity
>1
Find equilibrium price and quantity
Set Qd and Qs equal to each other, solve for p, plug p back in to original equations