ECON 224 EXAM 2 (chap 4, 5, 6)

Economic costs vs. accounting costs

-Economics count explicit AND implicit cots -Accountants typically count only explicit costs *accounting cost=explicit cost

productivity

-Output per unit of input -The productivity of a factor of production depends on the other resources available to it

perfect competition

-a market structure in which a large number of firms all produce the same product -can see all of its output at the prevailing price -no seller has market power because no sale will be large enough to affect the market price -many small firms all produce the same good *In a competitive market the type of product is standardized. *Since a perfectly competitive firm faces a horizontal demand curve it can sell all of its output at the market price.

Long run

irms are able to adjust all costs, whereas, in the short run, firms are only able to influence prices through adjustments made to production levels. *a supply/production decision

marginal utility

is the change in total utility obtained by consuming one additional (marginal) unit of a good or service change in total ________________________ change in quality *The marginal utility of a good declines as more of it is consumed in a given time period.

short run

it expresses the idea that an economy behaves differently depending on the length of time it has to react to certain stimuli. *a supply/production decision

An industry in which many firms produce similar products but each firm has significant brand loyalty is known as:

monopolistic competition *starbucks coffee would be an example of a firm in a monopolistic competition market

The _____ substitutes there are available for a particular good or service, the _____ the price elasticity of demand will be for that good or service.

more ; greater

If quantity demanded rises significantly following a moderate price cut, then demand is:

most likely elastic *In most cases it would be elastic however it is possible to have a significant change in quantity demanded and still be inelastic (Ex. Q1 = 120, Q2 = 140, P1 = 0.9, P2 = 0.8, the elasticity coefficient would equal .76).

In a competitive market, in the long run, economic profits will cause...

new firms to enter the market *if economic profits are above normal profits then firms will enter the industry and this will cause economic profits to fail and eventually equal normal profits

The market demand curve is calculated by...

summing the quantities demanded from individual demand curves

what is NOT a determinant of demand?

the costs of factors of production *While income, tastes, and expectation about future prices are determinants of demand the cost of factors of production is a determinate of supply

What causes the market demand curve for a good to shift?

the number of buyers in the market *A change in the number of buyers in a market would shift the demand curve, while the other determinants would affect the supply curve.

Law of Demand

the quantity of a good demanded in a given time period increases as its price falls, ceteris paribus

If the price elasticity of demand is 1.8 then a 30 percent decrease in the price of the good will lead to a _______ percent increase in the quantity demanded.

54.00 *Since elasticity is measured in terms of percentages, a coefficient of 1.80 would cause the quantity demanded to increase by 54% given the decrease in price (180% X 30% = 54%).

Which of the following causes demand to be more elastic with respect to price?

A higher ratio of price to income *A higher unit price makes consumers more sensitive to price changes because it represents a larger share of a budget.

Monopoly

A market in which there are many buyers but only one seller.

Oligopoly

A market structure in which a few large firms dominate a market

explicit cost

A payment made for the use of a resource - money is exchanged

Which of the following characterizes a perfectly competitive market?

A selling price at the market-established equilibrium price *Since in a perfectly competitive market all of the firms are price takers, the market establishes the price.

inelastic demand

A situation in which an increase or a decrease in price will NOT significantly affect demand for the product *fewer substitutes

elastic demand

A situation in which consumer demand is sensitive to changes in price *more substitutes

production schedule

A technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs

diminishing marginal utility

Decreasing satisfaction or usefulness as additional units of a product are acquired. It is a common experience. It is a sufficient basis for economic predictions of consumer behavior.

When the additional satisfaction from a good declines as more of it is consumed, this illustrates the law of:

Diminishing marginal utility *At some point the consumption of additional units of a good or service yields less and less additional utility.

If more of an input factor is used, while holding other inputs constant, a firm will eventually experience:

Diminishing returns *The fixed factors of production must be used with more and more units of the variable factor and beyond some point additional amounts of input will yield less and less output.

In the perfectly competitive catfish market, the market demand curve is:

Downward sloping *Even though the individual firm in the catfish market faces a horizontal demand curve the market demand curve is still downward sloping.

Utility Theory

Economists define Utility as the pleasure or satisfaction obtained from a good or service. Economists assume that the more pleasure a product gives, the higher price buyers are willing to pay. An absolute measure of utility is not possible because the perception of satisfaction differs among individuals.

The difference between total utility and marginal utility is that:

Total utility is the complete satisfaction from consuming a good while marginal utility is the satisfaction from consuming one additional unit of a good. *Marginal utility determines the price of a good where as total utility tell us the total amount of satisfaction.

What refers to the satisfaction a consumer receives from the consumption of a good?

Utility *Utility is measure of the satisfaction received from the consumption of a good or service

production decision

How much should be produced with the existing factors of production

The main difference to an economist between "short-run" and "long-run" is that:

In the long-run all resources are variable where as in the short-run at least one resource is fixed. * In the long-run capital investment decisions are considered while in the short run the emphasis is on making production decisions.

marginal cost

change in total cost / change in total output

what is a determinant of demand for a good?

consumer income *Consumer income is a determinant of demand where as available workers, the prices of factor inputs, and technology are determinants of supply.

If Pepsi and Coke are the only two soft drink producers, they could be considered:

duopoly *Although there are some small producers in the cola industry, it is dominated by the two largest producers.

In a perfectly competitive industry, firms are likely to...

enter when there are economic profits *if economic profits are above normal profits then firms will enter the industry and this will cause economic profits to fall and eventually equal normal profits.

A profit-maximizing competitive firm wants to _____ the rate of output when price _____ marginal cost.

expand; exceeds *If price is greater than marginal cost an increase in output will add more additional revenue than additional cost.

necessities

goods critical for everyday life *demand is inelastic

complimentary goods

goods that are a completion of one another; ex peanut butter and jelly, body wash and a loofah ***The demand for a good decreases when the price of a complement to the good goes up.

what is true about demand?

in order to demand a good, a person must be willing and able to buy the good *Demand reflects both the desire and the ability to buy a good

Duopoly

an oligopoly consisting of only two firms (oligopoly: A market structure in which a few large firms dominate a market)

If a firm can change market prices by altering its output then it:

Has market power *market power is the ability to set a price that is above marginal cost

Luxuries

*demand for luxury goods is elastic

If the price elasticity of demand is 2.5, then a 40 percent decrease in the price of the good will lead to a _______ percent increase in the quantity demanded.

100.00 Since elasticity is measured in terms of percentages, a coefficient of 2.50 would cause the quantity demanded to increase by 100% given the decrease in price (250% X 40% = 100%).

Which of the following causes the price elasticity of demand for a good to be more inelastic? A. A shorter period of time to adjust to a change in price. B. A higher ratio of price to income. C. The availability of many substitutes. D. The good is a luxury.

A. A shorter period of time to adjust to a change in price. *The shorter the time period the less time that a consumer can adjust to the price of a product.

economic profit vs. accounting profit

Account profit does not include implicit costs, meaning that it does not take into account things like opportunity cost.

Explicit Costs:

Are the sum of actual monetary payments made for resources used to produce a good. *Explicit costs are the monetary payments that a firm must make to outsiders.

The equilibrium price for a perfectly competitive firm always occurs:

At the intersection of market supply and market demand. *Since in a perfectly competitive market all of the firms are price takers, the market establishes the price through the interaction of supply and demand.

What does NOT characterize a competitive market? A. Many firms B. Advertising by individual firms C. Low barriers to entry D. Zero economic profit in the long run

B. Advertising by individual firms *a major characteristic of a competitive market is a standardized product and so there is little need to advertise

Which of the following statements is true? A. As consumption increases, total utility must increase. B. Total utility increases initially and then decreases as marginal utility approaches zero. C. If marginal utility is greater than zero, total utility is increasing. D. If marginal utility is zero, total utility is at a minimum.

C. If marginal utility is greater than zero, total utility is increasing. *Marginal utility is the additional utility per unit added to total utility

Which of the following does not influence the price elasticity of demand? A. The availability of substitutes. B. The price of the item relative to your budget. C. The costs of production. D. Successful advertising.

C. The costs of production *The cost of production is a factor of supply and would not affect demand.

fixed costs

Costs that do not vary with the quantity of output produced

In defining costs, economists recognize:

Explicit and implicit costs while accountants recognize only explicit costs. *Economic cost includes those costs which must be made with a monetary payment and those that the firm pays by using its own resources.

If the price elasticity of demand is 1.5, and a firm raises its price by 20 percent, the quantity sold by the firm will, ceteris paribus:

Fall by 30.0 percent. *Since elasticity is measured in terms of percentages, a coefficient of 1.50 would cause the quantity demanded to decrease by 150% of the decrease in price (150% X 20% = 30%).

Assume a price elasticity of demand of 0.50. If the tobacco lobby is successful in reducing a tax on the price of cigarettes by 10 percent, the quantity demanded will:

Increase by 5 percent.

If quantity demanded rises only slightly following a moderate price cut, then demand is:

Inelastic *In general goods or services that are necessities or their price represents a low proportion of a consumer's total income, they will tend to be inelastic.

People find it difficult to get along without necessities, therefore demand for necessities:

Is relatively inelastic. *Consumers need necessities and therefore will be relatively less sensitive to the price changes.

If an individual demands a particular good, it means that he or she...

Is willing and able to purchase the good at some point

A producer tries to maximize profits by operating at an output where:

MC equals price. * What counts is total profits, profits per unit is the difference between price and the ATC curve, so maximum profit will occur at a point where MC equals price.

The change in total output that results from one additional unit of input is the:

Marginal physical product *Marginal physical product is equal to the change in total product divided by the change in the quantity of resource applied.

List market structures in the correct order from the most to the least market power

Monopoly, oligopoly, monopolistic competition, perfect competition *The smaller the number of producers in a market the more their market power.

The law of diminishing returns indicates that the marginal physical product of a factor declines as more:

Of the factor is used, holding other inputs constant. *The fixed factors of production must be used with more and more units of the variable factor and beyond some point additional amounts of input will yield less and less output.

The price elasticity of demand is defined as the...

Percentage change in quantity demanded divided by the percentage change in price. *Using percentages rather than absolute amounts to measure price elasticity, allows us to compare different products with different prices.

Price elasticity of demand indicates the consumer response to changes in...

Price *Price elasticity of demand measures consumer's sensitivity to price changes.

The response of quantity demanded to price changes is shown by...

Price elasticity of demand *The responsiveness (or sensitivity) of consumers to a price change is measured by the price elasticity of demand.

The limits to the production of any good are reflected in the...

Production function *A production function shows the potential total output available by using various amounts of inputs.

substitute goods

Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises. ***The demand for a good increases when the price of a substitute for the good goes up.

. If marginal cost equals price, then _____ is at a maximum

Profit *Once marginal cost equals price then any additional output will decrease profit.

Total revenue minus total costs equals:

Profit *While profit can be negative or positive, it is the difference between total revenue and total costs.

During the short run:

Some inputs are fixed *Although in the short run variable factors of production can be changed, fixed factors of production cannot.

Which of the following is true about the short run? A. Some inputs are fixed. B. It is less than one year. C. It is one to two years. D. All inputs are variable.

Some inputs are fixed *The short run is defined as a period of time in which only variable factors of production can be changed.

What are determinants of price elasticity?

The availability of substitutes, the price of the good relative to income, whether the good is a necessity or luxury.

General profit maximizing rule

The general rule is that the firm maximizes profit by producing that quantity of output where marginal revenue equals marginal cost

Javier goes to an all-you-can-eat buffet at a Chinese restaurant and consumes three plates of food. Which of the following explains why the third plate of food does not provide as much satisfaction as the second plate?

The law of diminishing marginal *When Javier orders at the buffet each additional plate yields less and less additional satisfaction as he consumes the dinner.

Assume a toy company hires an additional worker to assemble toys, and the size of the factory and amount of equipment remain constant. As a result, the level of output increases but by a smaller amount than when the previous additional worker was hired. This is an example of:

The law of diminishing returns *The fixed factors of production must be used with more and more units of the variable factor and beyond some point additional amounts of input will yield less and less output.

Which of the following is not true for a competitive firm?

The marginal cost curve is horizontal at the equilibrium price *For a competitive firm the marginal revenue curve is horizontal at the equilibrium price

law of diminishing returns

The marginal physical product of a variable input declines as more of it is employed with a given quantity of other (fixed) inputs. As more labor is used, each unit of labor has increasingly less amounts of the other inputs to work with.

As more labor is hired in the short run, diminishing returns are observed because:

The new workers have less capital and land to work with *The fixed factors of production must be used with more and more units of the variable factor and beyond some point additional amounts of input will yield less and less output.

Economic cost is:

The value of all resources used to produce a good or service. *Economic costs equal both the explicit and implicit costs to produce a good or service.

implicit costs

The value of resources used, even when no direct payment is made - money is not exchanged, but a resource is used

Which does NOT characterize a competitive market? A. A few firms B. No market power C. Identical products D. Marginal cost equals price

a few firms *a competitive market is composed of many firms with no one firm's output large relative to the total market

monopolistic competition

a market structure in which many companies sell products that are similar but not identical

Price Elasticity

a measure of the sensitivity of demand to changes in price

price taker

accept whatever the market price happens to be. They have no market power to charge a different price because its many free-entry competitors are selling identical products. They face a typically horizontal demand curve.

If price is greater than marginal cost, a competitive firm should increase output because additional units of output will:

add to the firm's profits (or reduce loses) *if the additional revenue is greater than the additional cost the profit will increase or the loss will decrease

If there are only four companies that produce tennis balls, the market could be considered:

an oligopoly *An oligopoly is composed of firms with a significant amount of market share and market power and might contain three or more firms.

The law of demand states that...

price and quantity demanded are inversely related *It is an inverse relationship because for most goods the higher (lower) the price the less (more) demanded.

As the marginal utility of a good diminishes, so does the

price consumers are willing to pay

Total Revenue

price x quantity sold

market power

refers to a firm's ability to set and change prices.

In economics, elasticity means...

responsiveness

Total utility

the total amount of satisfaction obtained from consumption of a good or service

average total cost

total cost / total output

The pleasure or satisfaction obtained from goods and services is known as:

utility *Utility is a measure of the satisfaction received from the consumption of a good or service

total cost =

variable costs + fixed costs