Final
What is the wealth effect?
As the market value of houses and stocks increased, American households felt more wealthy and thus saved less.
Graphically, where does the marginal cost curve cross the average total cost curve?
At the minimum of the average total cost curve
After a successful marketing campaign there has been an increase in the demand for Vans shoes. What happened?
At the same price buyers of Vans shoes are willing to buy more.
What happens to the demand of a normal good when buyer's income increases?
Demand increases
Own price elasticity
E = Change in Q/change in P; if less than 1, then very inelastic. if greater than one, very elastic
If supply increases by much more than demand falls, what will happen to equilibrium price and quantity?
Equilibrium price will fall and equilibrium quantity will increase.
Law of diminishing marginal returns
Eventually, the marginal product for an input decreases as its use increases, holding all other inputs fixed.•As you add more and more of one input to fixed amount of all other inputs, the additional output you get becomes smaller and smaller.
Tom does not understand economics well. How would you best explain a demand function to Tom?
Explain it is a relationship between price and quantity from a buyer's perspective.
example of a substitution effect
For most goods consumers will purchase more of a cheaper good all else constant.
When does demand decrease?
If for the same amount of buyers are only willing to pay a lower price, or if at the same price, buyers are willing to buy less OR a combination of the two, demand has decreased
When does demand increase?
If for the same amount of buyers are willing to pay a higher price, if at the same price, buyers are willing to buy more, or a combination of the above, there is an increase in demand.
examples of perfect complements
Left shoe, right shoe; Ring angle indifference curves
You read a story in the FT on the topic of an increase in earnings for Apple last quarter. Is this a story on microeconomics or macroeconomics, and why?
Microeconomics since it deals with the performance of one firm.
If the market price of computer chips falls, this will cause what change in terms of the demand function?
Movement down the demand curve.
Dave is confused about the concept of supply as it is used in economics. Dave states, "Well, in the Army supply was the amount of goods we provided to the troops." How would you help Dave to understand how the term "supply" is used in economics?
Point out in economics "supply" refers to various price and quantity combinations sellers are willing to offer for sale.
Southwest Airlines benefits greatly from reduced jet fuel prices. In terms of a supply function, a reduction in the cost of jet fuel would do what?
Shift Southwest's supply curve outward or to the right
At the request of the European Union the government of Portugal raises taxes on firms doing business in Portugal. In terms of the supply function this will
Shift the supply curve of Portuguese firms backward or to the left
Tom is very confused. He does not understand what the term "marginal product" means. What do you tell Tom?
That it refers to the additional output from hiring an additional input or factor of production
On a graph of an indifference curve, the origin is zero and on the vertical axis what is measured?
The amount of one of the two goods the consumer is consuming
In a graph of a budget constraint how is an increase in the price of the good on the vertical axis represented?
The budget or income constraint becomes more flat.
Land Rover is a British producer of vehicles. If the UK leaves the European Union the management at Land Rover fears the number of potential buyers of Land Rover vehicles will decline significantly. How would this impact the demand function for Land Rover vehicles?
The demand curve would shift back or towards the origin.
What changes as we move along an isocost curve?
The input mix or combination of the factors of production
What changes as we move along an isoquant?
The input mix that produces the same level of output
It is estimated that your firm's goods have an own price elasticity of 0.02 in absolute value terms. If your firm decides to cut price in order to gain more market share, what will be the most likely outcome?
Total revenue will decline.
Buyer expectations affect demand as well. Ex: if buyers think that there are price changes increasing in the future, they try to buy before the prices increases right now which will lead in increase in demand. (T/F)
True
If price of pepsi decreases, demand for coke will decrease(T/F)
True
If price of pepsi increases, demand for coke will increase (T/F)
True
If prices are expected to decline in the future they will hold back and demand will decrease (shift towards the origin) (T/F)
True
If the price of hot dogs increases, the demand for hot dog buns will decrease (T/F)
True
Supply curve is always upward sloping (T/F)
True
deman curve is always downward sloping (T/F)
True
expectation of income decreases in the future, causes demand decrease(T/F)
True
expectation of income increases causes demand increases (T/F)
True
government taxes - decrease in demand for goods (T/F)
True
regulations will result in decrease in demand for the good/service(T/F)
True
In economics the concept of utility is most often associated with which of the following?
Usefulness or satisfaction from consuming a good or service
At what point of output are profits maximized or losses minimized?
Where marginal revenue equals marginal cost
Which of the following best describes Stiglitz's view of capitalism?
While great at producing wealth and allocating resources, capitalism also has a deplorable side to it.
changes in the budget line - price
a decrease in the price of a good rotates the budget line counter-clockwise. an increase rotates the budget line clockwise
demand
a price/quantity relationship from a buyer's perspective
Supply
a price/quantity relationship from a seller's perspective
moral hazard
after the transaction takes place; unequal information about the actions one party will undertake after the financial contract is in place.
if price is below equilibrium price...?
amount demanded will be greater than amount supplied (excess demand)
If price is above the equilibrium price...?
amount supplied will be greater than amount demanded, (excess supply)
Piketty's theory
argued k>g or the return to capital is greater than the growth rate of the economy
adverse selection
before a transaction takes place; one side of the transaction has more information than the other. As a result, only the poor quality goods/services are traded
change in demand
change in something other than the price of the good or service; movement/shift of the demand curve in or out ex: buyer expectations, Number of buyers in the market, buyer's income
Change in quantity demanded
change in the price of the good or service, movement along the demand curve, when only the price changes.
changes in the budget line - income
changes in income affect the budget line when looking at it graphically.
Examples of substitutes
coca cola & Pepsi
Isocost
combination of inputs that result in the same total costs
What happens to the demand of an inferior good when buyer's income increases?
demand decreases
what happens to demand when there is a decrease in the number of buyers in the market?
demand decreases
what happens to demand when there is an increase in the number of buyers in the market?
demand increases
indifference curves
do not cross anything. higher indifference curves represent higher levels of utility
Economists and accountants disagree on what is considered a cost. What do economists include in costs that accountants do not?
economists include opportunity costs (implicit). Accountants only count explicit costs.
George Akerlof's Lemon's Problem
high quality good vs low quality good with an uncertain buyer but knowledgeable seller
budget constraints
how much of each good can you buy with the amount of budget you can afford
Increases in Supply
if, for the same amount, sellers are willing to accept a lower price, or If, at the same price, sellers are willing to offer more for sale, or a combination of the two, then there has been an increase in supply.
Decrease in supply
if, for the same amount, sellers require a higher price, or If, at the same price, sellers are offering less for sale, or a combination of the two, then there has been a decrease in supply.
Kuznets theory
income inequality will first increase and then decrease as the economy developed (industrialized)
Stiglitz theory
inequality is driven by globalization: wage setters vs wage earners. Many of the trade agreements are structured to benefit the wage setters at the cost of the wage earners thus increasing inequality
what happens to the demand curve when demand decreases?
it shifts to the left
what happens to the demand curve when demand increases?
it shifts to the right
maximizing profits principle
marginal cost = marginal benefit(revenue)
explicit costs
money exchanging hands
Causes of changes in demand?
number of buyers in the market, buyer's tastes, buyers income.
implicit costs
opportunity costs + money costs, etc.
Isoquant
shows the trade-off between inputs that yields the same output when all inputs are variable.
Durlauf's Membership Theory of Inequality
social structures encourage segregation exacerbate inequality, inter-generational immobility drives inequality, your peers matter.
Causes for changes in supply
technology and productivity, cost of inputs, government taxes/regulation, Number of sellers in the market, seller expectation
marginal benefit
the additional benefit from undertaking an additional unit.
marginal cost
the additional cost from undertaking an additional unit
marginal rate of subsitution
the rate at which a consumer is willing to substitute one good for another and maintain the same satisfaction level
Marginal Rate of Technical Substitution (MRTS)
the rate at which inputs can be substituted and maintain same level of output; the slope of the isoquant
examples of Complements
toothpaste/toothbrushes, hot dogs and hot dog buns
examples of perfect subsitute
waffles/pancakes; down sloping indifference curves
perfectly elastic
when buyers are extremely price sensitive. increase in price leads to a decrease in total revenue. Also like: a decrease in price leads to an increase in total revenue
Perfectly inelastic
when buyers don't care about price. ex: will pay thousands of dollars for an iphone. an increase in price leads to an increase in total revenue, a decrease in price leads to a decrease in total revenue.
Equilibrium
where quantity demanded equals quantity supplied
ceteris paribus assumption
with other conditions remaining the same