Microeconomics Quiz/Test 1

Macroeconomics

studies an economy as a whole, dealing with such issues as economic growth, unemployment, and inflation

Excess Supply

suppliers are offering a larger quantity of a good than is being bought

Marginal Benefit

the additional benefit received from an increase in activity

Marginal Cost

the additional cost resulting from an increase in an activity

Total Surplus

the amount of total gains from trade received by the market participants

Willingness to Pay

the benefit (or value) recurved by a person from enjoying a good or service is the highest price the person is willing to pay for it

Producer Surplus

the difference between the price sellers receive for each unit of a good sold and the opportunity cost of those units

Consumer Surplus

the difference between the value consumers receive when purchasing a good or a service and the price they pay for it

Deadweight Loss

the loss of the potential total surplus for both consumers and producers

Willingness to Sell

the lowest price a seller is willing to offer a good at

"Demand"

the market demand curve for a good shows how much of the good offered in the market consumers are willing to buy over a certain period of time at each given price, holding that all other factors that influence their choice (relationship)

"Supply"

the market supply curve for a good shows how much of the good sellers are willing to offer over a certain period of time at each given price, holding constant all other factors that influence their decisions (relationship)

Relative (Real) Price

the ratio of one nominal price to another

The Economic Problem

the situation in which the limited resources we have cannot satisfy all our endless wants

Opportunity Cost

the value of what we give up to get something else

Resources

things such as land, structures, machines, energy, and workers with certain skills used to produce goods or services

Inefficiency

total surplus is below its potentially achievable level

Efficiency

total surplus is maximized with no deadweight loss

Excess Demand

when buyers want a greater quantity of a good than is available in the market

Law of Demand

when the price of a good rises, the quantity of the good demanded decreases, holding constant all other factors that influence consumers' choices

Law of Supply

when the price of a good rises, the quantity of the good supplied increases, holding constant all other factors that influence sellers' decisions

Scarcity

when the resources available to individuals and society are not enough to produce the amounts of goods and services that would satisfy the desires for them

Assume that we see the price of auto gas increase 10% during the next three months. During the same time period, we see the quantity demanded of auto gas fall by 5%. Calculate the price elasticity of demand coefficient.

|% change in quantity demanded/% change in price| = |-5%/10%| = 0.50

What is a person's "willingness to pay" and how can it be measured?

"Willingness to pay" refers to the highest price a person is willing to pay to enjoy a good or service; this also seen as the "benefit" or value of consuming the good.

Consider a hypothetical market for peaches. The current price of peaches is $5.00 per bushel, and the quantity demanded of peaches bought each month is 10,000. Now, assume the price of peaches falls to $4.50. As a result, the quantity demanded of peaches increases to 12,000 bushels per month. Give a reason why you think the demand for peaches would have a price elasticity of demand coefficient like the one calculated in part (a).

-many substitutes -not a necessity

Income Elasticity of Demand

-measures the responsiveness of the quantity demanded for a good or service to a change in income -% change in quantity demanded/ % change in income

Cross-Price Elasticity of Demand

-measures the responsiveness of the quantity demanded for a good to a change in the price of another good -% change in quantity of x/% change in price of y

Elasticity of Supply

-measures the responsiveness of the quantity supplied of a good or service to a change in its price -% change in quantity supplied/ % change in price

Price Elasticity of Demand

-the measure of the change in quantity demanded or purchased in relation to its price change -% change in quantity demanded/ % change in price

List and discuss the "Determinants" that impact the price elasticity of demand.

1. Availability and closeness of substitutes (more substitutes means more elastic demand) 2. Necessity(inelastic) or luxury(elastic)? 3. Proportion of income spent (larger - elastic, smaller - inelastic) 4. Time span (shorter - inelastic, longer - elastic)

Discuss the "Factors that Shift Demand Curve." List them and describe how changes in them impact the demand curve.

1. Consumers' tastes and preferences: increase, increase, shift right 2. Income and wealth: "normal" good - increase, increase, shift right; "inferior" good - increase, decrease, shift left 3. Prices of related goods: substitute - increase, increase, shift right; complement - increase, decrease, shift left 4. Consumers' expectations: increase, increase, shift right 5. Population: increase, increase, shift right

What are the "five foundations" of economics?

1. Opportunity Cost 2. Cost-benefit Analysis 3. Marginal Thinking 4. Gains from Trade 5. Efficiency

Discuss the "Factors that Shift Supply Curve." List them and describe how changes in them impact the supply curve.

1. Technology: increase, increase, shift right 2. Input price: increase, decrease, shift left 3. Price in Alt. Market: increase, decrease, shift left 4. Sellers' Expectations: increase, decrease, shift left 5. Number of firms: increase, increase, shift right 6. Natural events: Depends

Consider a hypothetical market for peaches. The current price of peaches is $5.00 per bushel, and the quantity demanded of peaches bought each month is 10,000. Now, assume the price of peaches falls to $4.50. As a result, the quantity demanded of peaches increases to 12,000 bushels per month. Using the "midpoint" formula, calculate the price elasticity of demand coefficient for peaches.

1.64

You are considering buying one of two goods: peaches of plums. The current monetary price of the peaches is $1.75 per pound and the current monetary price of plums is $2.85 per pound. What is the relative price between peaches and plums?

2.85/1.75=1.63 pound peaches

The price of a film camera is $150 and the price of a similar digital camera is $300. What is the relative price of the film camera?

A) 1/2 of a digital camera

The above figure shows the market for pizza. Which figure shows the effect of an increase in the price of sandwiches, which for consumers are substitutes for pizza?

A. Figure A (Demand curve shifts rightward)

Which of the following shifts the demand curve for a hot dog leftward?

A. an increase in the price of a hot dog bun

The demand curve for a normal good shifts leftward if income _____ or the expected future price _______.

A. decreases; falls

If the price is above the equilibrium price, then there is a

A. surplus, and market forces will operate at a lower price

Last year the price of corn was $3 per bushel and the quantity of corn demanded was 8 million bushels. This year the price of corn is $4 per bushel and the quantity of corn demanded is 7 million bushels. Assuming that the demand curve has not shifted, what is the price elasticity of demand for corn? (Use the midpoint formula)

B. 0.47

A 20 percent increase in the quantity of pizza demanded results from a 10 percent decline in its price. The price elasticity of the demand for pizza is

B. 2.0

The above figure shows the market for pizza. Which figure shows the effect of a decrease in the price of a hamburger, which for consumers is a substitute for pizza?

B. Figure B (Demand curve shifts leftward)

The above figure shows the market for pizza. Which figure shows the effect of an increase in the price of a complement such as soda?

B. Figure B (Demand curve shifts leftward)

What will happen to the equilibrium price and quantity of coffee if it is discovered to help prevent colds and, at the same time, Brazil and Vietnam emerge in the global market as massive producers of coffee?

B. The quantity will increase and the effect on the price is uncertain.

If both demand and supply increase, what will be the effect on the equilibrium price and quantity?

B. The quantity will increase but the price could either rise, fall, or remain the same.

Coffee and sugar are complements. If a poor sugar harvest leads to an increase in the price of sugar, there will also be

B. a decrease in the price of coffee.

Which of the following is NOT one of the factors that influences the supply of a product?

B. income

The "law of demand" most directly means that consumers buy

B. less of a good the higher its price.

The above table shows the demand schedule and supply schedule for chocolate chip cookies. If the price is $4.00 per pound, there is a

B. shortage of 3 pounds of chocolate chip cookies

In the above figure, if the price is $8 then there is a

B. surplus of 200.

The above figure shows the market for pizza. Which figure shows the effect of an increase in the price of the tomato sauce used to produce pizza?

C. Figure C (Supply curve shifts leftward)

The "law of supply" refers to the fact that, all other things remaining the same, when the price of a good rises

C. there is a movement up along the supply curve to a larger quantity supplied.

Taco Bell's economists determine that the price elasticity of demand for their tacos is 2.0. So, if Taco Bell raises their price of its tacos by 6.0 percent, the quantity demanded will decrease by _______ percent.

D. 12.0

The above table shows the demand schedule and supply schedule for chocolate chip cookies. What is the equilibrium quantity and equilibrium price for chocolate chip cookies?

D. 4 pounds, $5.00 per pound (Quantity supplied and quantity demanded are equal)

Demands differ from wants because

D. demands reflect a decision about which wants to satisfy and a plan to buy the good, while wants are unlimited and involve no specific plan to acquire the good.

Dan sells newspapers. Dan says that a 4 percent increase in the price of a newspaper will decrease the quantity of newspapers demanded by 8 percent. According to Dan, the demand for newspapers is _______.

D. elastic

The demand for a good is more price inelastic if

D. it has no close substitutes.

The price elasticity of demand equals magnitude of the

D. percent change in the quantity demanded divided by the percent change in the price

You observe that an increase in the price of salsa decreases the demand for tortilla chips and increases the demand for potato chips. You can conclude that

D. salsa and tortilla chips are complements

Consider a hypothetical market for milk. The market is perfectly competitive. Assume the equilibrium price in the market is $4.00 per gallon and the equilibrium quantity is 100 gallons per week. Predict what will happen in the following events, all else equal: The price of almond milk, a substitute good, decreases

Demand curve will shift to the left

Consider a hypothetical market for milk. The market is perfectly competitive. Assume the equilibrium price in the market is $4.00 per gallon and the equilibrium quantity is 100 gallons per week. Predict what will happen in the following events, all else equal: Demanders' income rises and milk is considered an "inferior good," while at the same time a drought effects the availability of grass that dairy cattle can graze on

Demand curve will shift to the left, supply curve will shift to the left

Consider a hypothetical market for milk. The market is perfectly competitive. Assume the equilibrium price in the market is $4.00 per gallon and the equilibrium quantity is 100 gallons per week. Predict what will happen in the following events, all else equal: Demanders' income rises and milk is considered a "normal good"

Demand curve will shift to the right

Consider a hypothetical market for peaches. The current price of peaches is $5.00 per bushel, and the quantity demanded of peaches bought each month is 10,000. Now, assume the price of peaches falls to $4.50. As a result, the quantity demanded of peaches increases to 12,000 bushels per month. Is this hypothetical demand for peaches elastic of inelastic? Explain.

Elastic because the elasticity is greater than 1. Responsive to change in price

Assume that we see the price of auto gas increase 10% during the next three months. During the same time period, we see the quantity demanded of auto gas fall by 5%. Based on your calculation, does auto gas have an elastic or inelastic demand? Briefly explain.

Inelastic because the elasticity is under one, it is relatively unresponsive

Consider a hypothetical market for milk. The market is perfectly competitive. Assume the equilibrium price in the market is $4.00 per gallon and the equilibrium quantity is 100 gallons per week. Predict what will happen in the following events, all else equal: The rent on land used to raise dairy cattle suddenly rises

Supply curve will shift to the left

Consider a hypothetical market for milk. The market is perfectly competitive. Assume the equilibrium price in the market is $4.00 per gallon and the equilibrium quantity is 100 gallons per week. Predict what will happen in the following events, all else equal: A law is passed that requires dairy farmers to pay worker's compensation and full health benefits to all employees, including part-time workers, while at the same time the population of the milk demanding area declines.

Supply curve will shift to the left, demand curve will shift to the left

Consider a hypothetical market for milk. The market is perfectly competitive. Assume the equilibrium price in the market is $4.00 per gallon and the equilibrium quantity is 100 gallons per week. Predict what will happen in the following events, all else equal: Dairy farmers forecast that they can make higher profits by shifting their resources to growing corn, while at the same time, demanders expect the price of milk to be considerably higher next week

Supply curve will shift to the left, demand curve will shift to the right

Consider a hypothetical market for milk. The market is perfectly competitive. Assume the equilibrium price in the market is $4.00 per gallon and the equilibrium quantity is 100 gallons per week. Predict what will happen in the following events, all else equal: The cost of hiring labor to work dairy cattle farms rises, while at the same time, consumers preference for milk increases

Supply curve will shift to the left; demand curve will shift to the right

Consider a hypothetical market for milk. The market is perfectly competitive. Assume the equilibrium price in the market is $4.00 per gallon and the equilibrium quantity is 100 gallons per week. Predict what will happen in the following events, all else equal: Technology improves in the processing of milk

Supply curve will shift to the right

Assume that we see the price of auto gas increase 10% during the next three months. During the same time period, we see the quantity demanded of auto gas fall by 5%. Given your calculation, if the sellers of auto gas were to raise the price of gas further, what would you expect to happen to their revenues?

Their revenue would increase

How does trade create value?

Voluntary transactions generate gains from trade for buyers and sellers; a voluntary exchange involves "inequalities" on both sides - the seller is trading away a good or service that she values less for something she values more, and vice versa. Both parties gain in a mutual beneficial trade.

Externality

a cost of benefit resulting from production or consumption of a good that is imposed on someone other than its buyers or sellers

Sunk Cost

a cost that has already been paid- or must be paid due to an unavoidable commitment- and that cannot be recovered or refunded

"Quantity Demanded"

a particular quantity that consumers are willing to buy

"Quantity Supplied"

a particular quantity that sellers are willing to offer

Public Good

a product that an individual can consume without reducing its availability to others and of which no one is deprived

Equilibrium

a steady state in which buyers want to buy the same amount that sellers want to sell

Economic Efficiency

achieved when all transactions that can potentially generate value for their participants are fully consummated

Market

any rearrangement that enables buyers and sellers to interact with each other

Consider a hypothetical market for peaches. The current price of peaches is $5.00 per bushel, and the quantity demanded of peaches bought each month is 10,000. Now, assume the price of peaches falls to $4.50. As a result, the quantity demanded of peaches increases to 12,000 bushels per month. In order to increase the peach sellers' revenue, what advice would you give them about raising/lowering peach prices?

because demand is elastic, they should lower the price to increase revenue

Microeconomics

focuses on individual units that make up the economy-households, firms, industries, markets

Competitive Market

model in which no individual buyer or seller can significantly influence the market price, so the price is determined by all buyers and sellers in the market with each of them acting independently

Models

must present a sinplified reflection of the real world that makes the problem we are addressing easier to analyze

Price Taker

people who must accept the market price as a given