Micro Economics first exam

market economies

Each individual makes their own production and consumption decisions, buying and selling in markets.

market

any setting that brings together potential buyers (demanders) and sellers (suppliers)

variable costs

are those costs that vary with the quantity of output, such as labor and raw materials

law of demand

as the prices of a good rises, the quantity demanded of the good falls, and as the price of a good falls, the quantity demanded of the good rises.

economics is described as an approach to

decision making but use in monetary terms

marginal principle

decisions about quantities are best made incrementally

individual supply curve

individual supply curve is a graph plotting the quantity of an item that a business plans to sell at each price

If I am asking a friend to help me move, am I the supplier or demander in the transaction?

my friend is a supplier and I am a demander of labor.

is a sunk cost an opportunity cost

no

marginal cost

the cost from one extra unit (the price or value of the inconvienence)

congestion effect

the effect that occurs when a good becomes less valuable because other people use it

network effect

the effect that occurs when a good becomes more useful because other people use it

diminishing marginal product

the marginal product of an input declines as you use more of that input

opportunity costs principle

the true cost of something is the next best alternative you must give up to get it

factors that shift only the market demand curve

the type and number of buyers

the following shifts only the market supply curve

the type and number of sellers

planned economies

Centralized decisions are made about what is produced, how, by whom, and who gets what

steps to determining new equilibrium

Step one: Is the supply or demand curve shifting (or both)? Step two: Is that shift an increase, shifting the curve to the right? Or is it a decrease, shifting the curve to the left? Step three: How will prices and quantities change in the new equilibrium?

opportunity costs

The _____ principle states that people should assess the consequences of their choice relative to the best of the alternatives

individual demand curve

an _______ is a graph plotting the quantity of an item that someone plans to buy at each price

With face value of $259 and secondary market price of $457, The face value is _________ the equilibrium price because the rate in the secondary market _________ the face value.

below; exceeds

what are the four categories of interdependencies?

between each of your individual choices, between people or businesses in the same market, between markets, and through time

rational rule for buyers

buy more of an item if its marginal benefit is greater than or equal to the price

who benefits from voluntary exchange

buyers and sellers

framing effects

can lead you astray and can make identical choices seem different

markets play a ________ role in society

central

theories of supply and demand are very __________

closely related

sunk costs

cost that has been incurred and cannot be reversed

An increase in demand leads to an increase in the price and quantity because the increase in price acts as an _______ for suppliers to increase the quantity supplied.

incentive

cost-benefit principle

incentives that shape decisions

shifts of individual and market demand curves

income, preferences, price of related goods, complementary goods, substitute goods, and congestions and network effects

Your supply of a good will ______________ if the price of a complement-in-production rises, shifting the supply curve to the _______.

increase; right

the following shift individual and market supply curves

input prices, productivity and technology changes, prices of related outputs, expectations

we don't count ________ when considering the law of demand because we are keeping all factors constant

interdependencies

rational rule

is something is worth doing, keep doing it until your marginal benefits equals your marginal cost. o Whether the extra benefit from buying one more of something exceeds the extra cost of buying only one item

Equilibrium

is the point at which there is no tendency for change (opposing forces are in balance) · Quantity supplied equals quantity demanded.

when do you reach the maximum profit

profit is maximized when the marginal benefit = marginal cost

x axis

quantity

marginal benefit

the extra benefit from one unit (of goods purchased, hours studied, etc) or the price you are willing to pay per unit

an increase in the price of an item will not cause a decreased in demand, but rather a decrease in __________________

the quantity demanded

demand

the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific period

Managers in perfectly competitive markets don't spend a lot of time strategizing about price because _______________________

their best price is the market price.

economic surplus formula

total benefits- total costs (from a decision)

marginal costs add up to

total costs

because of scarcity, there is always a

trade-off

what does the PPF illustrate

trade-offs you experience when deciding how to allocate scare resources

true or false: A change in the price will not cause a shift in demand!

true

·true or false: In equilibrium, neither suppliers nor demanders have an incentive to change.

true. there are so many buyers and sellers that just one or a few won't have an effect

scarcity

unlimited needs (wants but limited resources)

After a shortage, the price would go ____ because people are demanding it and there are not enough supplied, so demand would ________ and price would ________.

up; increase; increase

supply curve is _______ sloping because the higher the price, the higher the quantity supplied

upwards

marginal benefit formula

(TB2-TB1)/2-1

prices are determined by...

both suppliers and demanders

framing

how different alternatives are described or framed

when you are on your PPR, you can't produce more of one output unless you produce ___ of another

less

When your suppliers decrease the prices of your inputs, they decrease your __________________ and this will shift your supply curve to the _____.

marginal costs; right

When the cost of inputs decrease, the cost of production decreases, so you would sell ________ for the same price.

more

ceteris paribus

o keeping everything else constant, only the price changes

"costs" really means

opportunity costs

market supply

the sum of the quantities of an item that producers are willing and able to sell at every price

marginal benefits add up to

total benefits

when do you buy one more using the marginal principle?

If the marginal benefit is greater than or equal to the marginal cost, you buy one more in terms of satisfaction

4 steps to estimating market demand

1) Survey your customers, asking each person the quantity they will buy at each price. 2) Add up the total quantity demanded by your customers for each price 3) Scale up the quantities demanded by the survey to represent a larger population. 4) Plot the results.

Three-Step Recipe to Predict Market Outcomes

1. Is the supply curve or demand curve (or both) shifting?2. Is it an increase, shifting the curve to the right? Or is it a decrease, shifting the curve to the left?3. How will prices and quantities change in the new equilibrium?

in what order do you use the marginal principle and cost-benefit principle

Apply the marginal principal first, then the cost-benefit principle

law of supply and demand

As the price of a good rises, the quantity supplied of the good rises, and as the price of a good falls, the quantity supplied of the good falls, ceteris paribus

A clothing manufacturer finds a cheaper supplier of wool for their winter coats. During this time, an unexpected cold front moves across the country. What effect will this have on price and quantity?

The effect on price is unknown; quantity rises.

Market demand curve

The market demand curve is a graph plotting the total quantity of an item demanded, by the entire market, at each price. It is the sum of the quantity demanded by each person.

how do market set the price per unit

The number of buyers and sellers in such a market is so large that each of them buys or sells a negligible fraction of the total quantity bought and sold in the market. As a consequence, none of them has any individual influence on the process of price determination. (google this if confused)

inferior good

a good for which higher income causes a decrease in demand

normal good

a good for which higher income causes an increase in demand

what is a reason a higher price would lead to a lower quantity supplied to the market?

a low price will render some existing suppliers unprofitable, and they might choose to shut down and exit the market

A dust storm destroys the majority of a farmer's peanut crop, causing him to raise the price of his peanut butter. What kind of shift does this create in the market for jelly, a complement to peanut butter?

decrease in demand

demand vs supply curves

demand- diminishing marginal benefit per unit, POV of buyers, and the curve is the same as marginal benefit supply- increasing marginal costs, POV of sellers, and the curve is marginal cost

Malik is a local politician running for governor in his state. What role does Malik play in the market for votes?

demander

politicians running for office are _______ and voters are ______ in the market for voting

demanders; suppliers

fixed costs

do not vary when the quantity of output changes, they are incurred regardless of level of output

demand curve is ________ sloping

downwards

shift

factors besides price changes

markets organize economic activity by determining......

o what gets produced. o how much gets produced. o who produces it. o who receives it. o at what price.

y axis

price

scarce resources include

time, money, raw inputs, and production capacity

interdependencies

to identify how changes in other factors might lead you to make a different decision

Dr. Larson is a professor at a state university. He is known for being tough but fair in his grading, and rarely gives out A's on his assignments. Considering that Dr. Larson is on the supply side and his students are on the demand side, why is it so difficult to attain an A?

Demand is high, so price is high

Marco owns a shoe store. He recently got an exclusive pair of shoes that he decides to sell for $300 when all other vendors are selling them for $250. Marco is surprised when nobody comes to buy the shoes from him. What situation has Marco created?

He is selling for above the equilibrium price so it's a surplus because he has a quantity of something he cannot sell

Krishan goes to a local bank to make a deposit in his savings account. While there, he considers the principles of economics that he has been learning at the university. He concludes that in this situation he is a supplier of credit. How is this so?

He is supplying the bank with his savings, which the bank will in turn lend out to other borrowers.

Suppose there is a major winter storm forecasted. People expect the storm to be so bad that they won't be able to leave their houses for about a week. What do you expect to happen to the price of essential groceries and why?

The price of essential groceries is likely to rise as demand for those groceries increases as people stock up to weather the storm

If I applying to become a student at UNH, am I the supplier or the demander in this transaction?

The school is the supplier of educational services and I am the demander of it

supply

The willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific period.

bundling of extras

When you bought dinner just so you could get the valet to park your car, you were effectively buying extras (that dinner) so you could get the thing you wanted (the parking spot), and this effectively raises the price you're paying to park.

a secondary market

When you parked in someone else's driveway, you've found a way around the "official" market for parking spots.

queuing

When you're driving around looking for a spot, you're effectively queuing—waiting in line—for the next available spot. The extra time you spend in the queue raises the effective price you're paying because it'll cost you both time and money to get a spot.

substitutes-in-productoin

alternative uses of your production capacity

diminishing marginal benefit

each additional item yields a smaller marginal benefit than the previous item. o When you buy the first item, it has a lot of value, and you get a lot of benefit from it. By the second or third item, you have less of a desire to buy it.

When price is below equilibrium price, the Quantity demanded __________ the quantity supplied, and a __________ results.

exceeds; shortage

When price is above equilibrium price, the Quantity supplied ___________ the quantity demanded, and a ____________ results.

exceeds; surplus

effect on equilibrium quantity and price when... there is a decrease in demand

falls; falls

effect on equilibrium quantity and price when...decrease in supply

falls; rises

true or false: the rational rule for sellers tells sellers how to set the price against the competitors.

false

true or false: the price and quantity change then a shift occurs when equilibrium changes

false, the shift happens, resulting in a price and quantity change

true or false: markets by definition involve the exchange of money for goods and services

false: markets don't always involve money for exchanges

complements-in-production

goods that are made together

complementary goods

goods that go together/ are bought together

substitute

goods that replace each other

productivity growth

growth that occurs when businesses figure out how to produce more output with fewer inputs

what makes a perfectly competitive market

having many buyers and sellers and selling an identical good

perfectly competitive market

in a perfectly competitive market (all firms sell an identical good), determine what quantity to produce at each price by using the core principles. All firms in the industry sell an identical good and there are many buyers and many sellers

the rational rule does what for sellers?

o Guides managers in making the decisions that will earn their businesses the largest possible profit, o provides useful advice for businesses, and o helps managers keep a laser-like focus on their marginal costs when making supply decisions.

pros of market economies

o Instead of central plans, there are prices, and these prices provide incentives. o There's no central planner telling each of us what to do, or what we each get. Instead, we rely on markets to organize what is produced, how it's produced, and how it's allocated o People get to decide what goods they get based on how much they value it

The characteristics of perfectly competitive markets have important implications for a firm's price-setting strategy

o Perfectly competitive firms are price-takers o A price-taker is an actor who charges the market price. o A price-takers action do not affect the market price

reasons a high price leads to a larger quantity supplied:

o when the price of the good your business sells is higher, you'll respond by supplying a larger quantity, o the market curve inherits many of the characteristics of those individual supply curves, including their upward slope, o a higher price leads there to be more suppliers, and this also leads to a larger quantity supplied.

can you produce outside your PPF

only if you change something. you have to find a new way to produce more with the same inputs

your decisions should reflect the _______, rather than just the out-of-pocket financial costs

opportunity costs

Mrs. Johnson decides that she is going to create her own country. She determines that she will be in charge of all production matters because she knows how to do things more efficiently than anybody else. What kind of economy has Mrs. Johnson effectively created?

planned

keep buying until _____ = marginal benefit

price

movement along

price changes

disequilibrium symptoms

queuing, bundling or extras, and a secondary market

If you are a supplier and you sell out fast, what should you do?

raise the price

effect on equilibrium quantity and price when...increase in supply

rises; falls

effect on equilibrium quantity and price when... there in an increase in demand

rises; rises

1. If prices and quantities move in the ________ direction, then the demand curve has definitely shifted. (It's possible that supply may have also shifted.) 2. If prices and quantities move in __________ directions, then the supply curve has definitely shifted. (It's possible that demand may have also shifted.)

same; opposite

The rational rule for sellers in competitive markets:

sell one more item if the price is greater than or equal to the marginal cost

workers are considered ______ in their time in the labor market in return for a wage

sellers

when the price of an input changes, the price of the output _______, and the quantity produced __________

stays the same; changes, causing a shift

microeconomics

study of individual decision making and the implications for specific markets

If you are planning a party for someone, are you a supplier or demander?

supplier (of your planning services)

Cost VS price

supplier POV: Cost is how much we pay to produce a product, while Price is what the market pays us to get one of our products

People looking for a job act as the _________ and the open positions employers are looking to fill is the ________.

suppliers; demand

the right price is determined in a market based on

supply and demand

to determine who is the supplier or demander, first think.......... and then who is ..........

what is the service or product in the scenario; demanding or supplying it

Production possibilities frontier

what we use to visualize opportunity costs

benefit

what you get from not choosing alternative and overflow from what you were willing to pay

cost

what you pay or lose from not choosing alternative

individual demand

what you want/ demand at each price

trade-off of resources

when we use resources for one thing, we are unable to use them for another

maximize economic surplus

when you follow cost-benefit principle, every decision you make will yield larger benefits than costs

can you produce inside your PPF

yes, but its an inefficient use of resources

flaws in planned economies

· o Ignores differences in demand for specific goods because central planner decides what they get and where it goes o Does not consider magnitude of desirability, in market economy, people will bid and spend as much as they value it

diamond and water paradox

· Although water is essential for survival, there is plenty of water. · But the supply of diamonds is scarce, and they are expensive to mine. cost of production for water is low

Why is your supply curve also your marginal cost curve?

· If you are maximizing profit, you will always keep selling until price equals marginal cost. · The supply curve, therefore, shows the quantity sold at every price, which is also the marginal cost!