Microeconomics Midterm 1

Shape of PPF

Concaves to the origin and bows outward.

True

Demand and Supply analysis will be used to establish equilibrium prices and quantities within a market.

Suppose that in the clothing market, production costs have fallen, but the equilibrium price and quantity purchased have both increased. Based on this information we can conclude that

Demand for clothing has grown faster than the supply of clothing.

In which of the following instances is the effect on equilibrium price dependent on the magnitude of the shifts in supply and demand

Demand rises and supply rises.

Reasons the law of demand holds

Diminishing marginal utility, income effect, and substitution effect.

Choices

Forced with scarcity we have to make choices.

Assumptions for production possibility model

Full employment and productive efficiency Fixed Resources Fixed Technology 2 Goods

With a down-sloping demand curve and an up-sloping supply curve for a product, placing an excise tax on this product will

Increase equilibrium price and decrease eqilibrium quantitity

At the current price there is a shortage of a product. We would expect price to:

Increase, quantity demanded to decrease, and quantity supplied to increase.

Economics

Is the social science that studies the choices we make as we cope with scarcity.

Microeconomics

Is the study of choices that individuals and businesses make, the way these choices interact, and these institutions that have evolved to reconcile these choices.

Cross elasticity is negative

It is a complement

Income Elasticity is positive

It is a normal good.

Cross Elasticity is positive

It is a substitute

Income elasticity is negative

It is an Inferior Good.

Reason why PPF is shaped the way it is

It is because of the increasing opportunity cost. The production of one good increases than what is given up. Increases at a faster increment and resources don't transfer easily from one sector to the other.

Cross Elasticity is 0

It is unrelated

Resource Categories

Land, Labor, Capital/Investment, and Entrepreneur/Enterprise

Resource Payment

Land= rent, labor=wages, capital=interest, and entrepreneur=profits.

Production Possibility Table

Lists the different combinations of two products that can be produced with a specific set of resources.

Percent Change

New-Old/Old

Labor

Physical and mental talent used in the production process.

Total Revenue

Price X Quantity

PPF

Production possibility frontier.

Demand

Shows the various amounts of a product that consumers are willing and able to purchase at a particular price. During a particular time.

Supply

Shows various amounts of a product that a seller is willing and able to sell at a particular price during a particular time.

If price is above the equilibrium level, competition among sellers to reduce the resulting:

Surplus will increase quantity demanded and decrease quantity supplied.

Nonprice Factors

Taste or preference Number of buyers *more buyers= shifts to the right *less buyers= shifts to the left Price expectations *If prices goes up in the future it goes to the right now but if price drops down it shifts to the left now. Price of related Good *Example- substitute goods Income

Opportunity Cost

The costs of the next best alternative.

Proportion of income spent

The greater the proportion of income spent on a good- the more elastic demand is.

Entrepreneur/Enterprise

The human element that organizes land, labor, and capital to come up with new ideas.

#of substitutes

The less substitues available for a good- the more inelastic demand is.

Time

The longer a consumer gets to make a purchase decision- the more elastic demand is.

Inelastic

The percentage change in QXD< the percentage change in price. Ed<1

Elastic

The percentage change in QXD> the percentage changes in price. Ed>1

In moving along a demand curve, which of the following is not held constant

The price of the product for which the demand curve is relevant

Price Elasticity of Demand

The responsiveness or sensitivity of consumers to price changes.

Effect of the supply of television sets in a competitive market on new inexpensive satellite dishes which make televisions more popular among consumers

The supply curve would shift no where and its a demand issue. there is no shift.

Effect of the supply of television sets in a competitive market on an increase in the price of electronic equipment used in producing television sets

The supply would shift left, and supply would decrease because the cost of production went up and these are the things that are used to make these Tv sets

Effect of the supply of television sets in a competitive market on a decline in the number of firms producing television sets

The supply would shift to the left because the number of sellers would decrease going to the left

Capital/Investment

The tools, instruments, machines, buildings, and other constructions used in the production process.

Effect on the demand for gasoline in a competitive market on an increase in the price of car insurance, taxes, maintenance

There will be a decrease in demand for gasoline beacue people will be using less of the cars. Demand will shift to the left and its a complementary good.

Effect on the demand for gasoline in a competitive market and the economy moves into a recession

There will be a decrease of demand for gasoline because people wouldn't be able to afford gas because they loose money or income. Demand will shift to the left and is a normal good.

Effect on the demand for gasoline in a competitive market on an increase in the number of cars

There will be an increase of demand for gasoline because gasoline and cars are complements of each other and demand will shift to the right.

Normative Statement

They are subjective, they are based on opinions, and they are not easily tested.

Negative/Inverse Relationships

This is when the variables move in the opposite direction.

Positive Relationships

This is when variables move in the same direction.

Assume the demand curve for product X shifts to the right. This might be caused by:

a decline in income if X is an inferior good.

Determinants of Elasticity

#of substitutes, proportion of income spent, luxury vs a necessity, and time.

Assuming conventional supply and demand curves, changes in the determinants of both supply and demand will generally:

alter both equilibrium price and quantity.

Law of Demand

an increase in a product's price will reduce the quantity of it demanded, but a decrease in a product's price will increase the quantity of it demanded.

Which will cause a decrease in market equilibrium price and an increase in equilibrium quantity

an increase in supply

Land

All the natural resources- gifts of nature. Examples: mineral deposits such as oil, copper, silver, streams, ocean, sunlight, and air.

Assuming competitive markets with typical supply and demand curves, which of the following statements is correct:

An increase in demand with no change in supply will result in an increase in sales

A recent study found that an increase in the federal tax on beer( and thus an increase in the price of beer) would reduce the demand for marijuana. We can conclude that:

Beer and marijuana are complementary goods.

When an economist says that the demand for product has increased, this means that:

consumers are now willing to purchase more of this product at each possible price.

Inelastic for total revenue

decrease price then quantity demanded increases a little and total revenue decreases. Increase price then quantity demanded decreases a little and total revenue increases.

Elastic for total revenue

decrease price then the quantity demanded increases a lot and total revenue increases. Increase price then quantity demanded decreases a lot and total revenue decreases.

Suppose an excise tax is imposed on product X. We expect this tax to:

decrease the demand for complementary good Y and increase the demand for substitute product Z.

A decrease in the demand for recreational fishing boats might be caused by an increase in the :

decrease the supply of B and increase the demand for C.

If products A and B are complements and the price of B decreases, the:

demand for A will increase and the quantity of B demanded will increase.

Suppose that in each of four successive years producers sell more of their product and at lower prices. This could be explained:

in terms of a stable demand curve and incresing supply.

Assume product A is an input in the production of product B. In turn, product B is a complement to product C. We can expect a decrease in the price of A to:

increase the supply of B and increase the demand for C.

Assume in a competitive market that price is initially below the equilibrium level. We can predict that price will:

increase, quantity demanded will decrease, and quantity supplied will increase.

Removing the Assumptions of production possibilities model

inside the PPF- Unemployment/inefficiency. *higher PPF if you have more resources. Fixed Resources, Fixed technology.

Cross Elasticity=

percent change in demand for x/percent change in price of y

An increase in the quantity demanded means that:

price has declined and consumers therefore want to purchase more of the product

Camille's Creations and Julia's Jewels both sell beads in a competitive market. If at the market price of $5 both are running out of beads to sell( they can't keep up with the quantity demanded at that price), then we would expect both Camille's and Julia's to:

raise their price and increase their quantity supplied.

Assume a drought in the Great plains reduces the supply of wheat. Noting that wheat is a basic ingredient in the production of bread and potatoes are a consumer substitute for bread, we would expect the price of wheat to:

rise, the supply of bread to decrease, and the demand for potatoes to decrease

In 2007, the price of oil increased, which in turn caused the price of natural gas to rise. This can best be explained by saying that oil and natural gas are:

substitute goods and the higher price for oil increased the demand for natural gas.

Unit Elasticity or Ed1

the percentage change in QD, the percentage change in price. Ed is always negative but we will leave the negative sign.

Effect of the supply of television sets in a competitive market on a large new tariff on imported tv sets

the supply would shift to the left because you're getting taxed

Equation of a line

y= a+bx, y=name of the dependent variable, a= intercept, b=slope, and x=name of the independent variable

Graph

A visual representation of a relationship between two variables.

Scarcity

All economic questions arise because we want more than we can get.

The Economic Problem

All resources are scarce, however individuals have to make choices. The cost of the next best alternative is called opportunity cost.

Income Effect

As the price of good changes it affects our purchasing power. Lower the price it increases purchasing power and you buy more stuff. If you increase the price it decreases the purchasing power and you buy less stuff.

Diminishing Marginal Utility

As you consume more and more of a particular product you want less of it. So price has to decrease at higher quantities to motivate us to buy more.

Positive Statement

Based on facts, they are objective, they are either right or wrong, and can be easily tested.

Economic Methodology

Economics is a social science.

Common Mistakes

Economics is just about money, economics is a synonym with finance, and economics is just math, graphs, and has no application in the real world.

True

Economists try to discover how the world works by examining two types of statements.

Measuring elasticity

Ed= % change in Q.D/ % Change in price

Midpoint Formula

Ed= (Q2-Q1/Avg(Q1,Q2))/ (P2-P1/Avg(P1,P2))

Ei=

Ei= % change in demand for x/ % change in income.

Cross Elasticity

How changes in the demand for one good are affected by the price of a completely different good.

Income Elasticity

How responsive are consumers when there is a change in income.

Interpretation of Ed

If Ed is Elastic- the top is always bigger than the bottom

Luxury vs a necessity

If a good is considered a luxury rather than a necessity- the more elastic demand is.

Which of the following statements is correct:

If supply increases and demand decreases, equilibrium price will fall

Supply curve and Law of Supply

If you increase price it increases quantity supply but if you decrease price quantity supply goes down.

Macro

Total employment and global scale.

"There is no such thing as a free lunch"

True

Changes in non-price factor(demand)

We say demand changed.

Changes in price (Demand)

We say quantity demanded changed.

Changes in Price(Supply)

We say quantity supplied change.

Price Quantity/Cost Quantity Relationship

We switch where the variable goes.

Rule of Thumb

When consumers are very responsive to price changes we say demand is elastic. But when consumers are not very responsive to price changes we say demand is inelastic.

Rational Behavior

When individuals pursue actions that satisfy their own self interest.

Effect on the demand for gasoline in a competitive market on consumer expectations of substantial price increases in gasoline

You would want to purchase gasoline more and now because you expect the prices to go up in the future you're going to want to purchase it now because it would be cheaper. Demand shifts to the right today.