Economics 1021A/B · Flashcards

Economics 1021 Exam Review: Consumer Choice, Costs, Competition, Monopoly and Factor Markets

27 termsUniversity of Western Ontarioby @studyboardUpdated October 2026

Study FlashcardsAdd to Studyboard

A study set written by the Studyboard team for the topics in this course's published outline. It isn't official course material from University of Western Ontario and doesn't contain real exam questions.

Terms in this set (27)

  1. What is the fundamental economic problem?Scarcity: wants exceed the limited resources available, so people and societies must make choices and face trade-offs.
  2. Positive vs normative statementsPositive statements describe what is and can be tested (a minimum wage rise reduces teen employment). Normative statements are value judgments about what ought to be.
  3. What does a point inside the production possibilities frontier represent?An inefficient use of resources (unemployment or misallocation); more of one good could be produced without giving up any of the other.
  4. What does the law of demand state, and why does it hold?Other things equal, a higher price lowers quantity demanded. It holds because of the substitution effect and the income effect.
  5. What shifts the supply curve?Changes in input prices, technology, prices of related goods in production, expected future prices, number of sellers, and natural events. The good's own price does not shift supply.
  6. Mini-problem: Qd = 100 - 2P and Qs = 20 + 2P. Find equilibrium.Set 100 - 2P = 20 + 2P, so 4P = 80 and P = 20. Q = 100 - 40 = 60.
  7. Income elasticity of demand: what do the signs mean?Positive means a normal good (above 1 is a luxury, between 0 and 1 a necessity). Negative means an inferior good.
  8. Price elasticity of supply and its main determinantEs = % change in Qs / % change in P. Supply is more elastic with more time to adjust and when inputs can easily be shifted into production.
  9. Write the budget constraint and give its slope.Px·X + Py·Y = Income. With X on the horizontal axis the slope is -Px/Py, the market rate at which Y trades for X.
  10. What does an indifference curve show, and why does it slope downward?All bundles giving the consumer the same utility. It slopes down because to stay equally well off, getting more of one good requires giving up some of the other.
  11. Marginal rate of substitution (MRS)The rate at which a consumer is willing to give up Y for one more X while keeping utility constant; it equals the absolute slope of the indifference curve and usually diminishes.
  12. Condition for the consumer's best affordable bundleThe indifference curve is tangent to the budget line: MRS = Px/Py, or equivalently MUx/Px = MUy/Py (equal marginal utility per dollar).
  13. Substitution effect vs income effect of a price fallSubstitution effect: the good is relatively cheaper, so buy more of it. Income effect: real income rises, so buy more if the good is normal, less if it is inferior.
  14. What is the law of diminishing marginal returns?In the short run, adding more of a variable input (labour) to a fixed input (capital) eventually causes the marginal product of each extra unit to fall.
  15. How are AFC, AVC, ATC and MC defined?AFC = TFC/Q, AVC = TVC/Q, ATC = TC/Q = AFC + AVC, MC = change in TC / change in Q.
  16. Why does the MC curve cross ATC and AVC at their minimum points?When marginal cost is below an average, it pulls the average down; when above, it pulls it up. So MC intersects each average curve at its lowest point.
  17. Economies of scale vs diseconomies of scaleEconomies of scale: long-run average cost falls as output rises (specialization). Diseconomies of scale: LRAC rises at large output (management and coordination problems).
  18. Short run vs long run in productionIn the short run at least one input (usually plant size) is fixed. In the long run all inputs are variable, including the number of firms.
  19. Four characteristics of perfect competitionMany firms and buyers, identical products, no barriers to entry or exit, and full information; each firm is a price taker with horizontal demand at the market price.
  20. Which part of the cost curve is a competitive firm's short-run supply curve?The portion of the marginal cost curve above the minimum of average variable cost.
  21. Mini-problem: a competitive firm sells at P = $10 where MC = $10, ATC = $8, and Q = 50. Find profit.Profit = (P - ATC) x Q = (10 - 8) x 50 = $100 in economic profit, which will attract entry in the long run.
  22. Sources of monopoly power (barriers to entry)Natural barriers (economies of scale making a natural monopoly, control of a key resource), legal barriers (patents, copyrights, licences, public franchises).
  23. What is price discrimination, and what conditions are needed?Charging different customers different prices for the same good, not based on cost differences. The firm needs market power, the ability to identify groups with different willingness to pay, and to prevent resale.
  24. Monopolistic competition in the long runFree entry drives economic profit to zero, but because demand slopes down, firms produce where P = ATC above minimum ATC, so there is excess capacity and a markup over MC.
  25. How does a competitive firm decide how much labour to hire?Hire until the value of the marginal product of labour (P x MPL) equals the wage rate.
  26. Why might income be unequally distributed in a market economy?Differences in skills and human capital, wealth and inherited assets, compensating wage differentials, discrimination and market power.
  27. What does the Lorenz curve show?The cumulative share of income received by cumulative shares of households. The further it bows from the 45-degree line of perfect equality, the greater the inequality (the Gini coefficient measures this gap).

More Economics 1021A/B flashcards

See all Economics 1021A/B flashcards

Something wrong with this flashcard set? Open it in Studyboard and choose Report.