Microeconomics Midterm

5 factors that shift the supply curve

1. A change in input prices 2. A change in the prices of related goods and services 3. A change in technology 4. A change in expectations 5. A change in the number of producers

5 main factors that shift the demand curve

1. A change in the prices of related goods or services, such as substitutes or complements 2. A change in income: when income rises, the demand for normal goods increases and the demand for inferior goods decreases 3. A change in tastes 4. A change in expectations 5. A change in the number of consumers

12 Principles of microeconomics

1. Choices are always Necessary because Resources are scarce 2. The true cost of something is its opportunity cost 3. "How much" is a decision at the margin 4. People usually respond to incentives, exploiting opportunities to make themselves better off 5. There are gains from trade 6. Markets move toward equilibrium 7. Resources Should Be Used Efficiently to Achieve Society's Goals 8. Markets usually lead to efficiency 9. When Markets Don't Achieve Efficiency, Government Intervention Can Improve Society's Welfare 10. One person's spending is another person's income 11. Overall Spending Sometimes Gets Out of Line with the Economy's Productive Capacity 12. Government policies can change spending

three principal causes of market failure

1. Market power 2. Externalities 3. Goods that by nature are unsuitable for a market to allocate efficiently

Kim and Leah work together on a sales team, and part of their job involves writing articles and filling out worksheets. Their manager doesn't care who does what as long as they are productive.Using the same amount of time and resources, Kim can write either 10 articles or complete 5 worksheets and Leah can either write 3 articles or complete 9 worksheets. If Kim and Leah specialize and trade, which of the following is a trading price they will agree to? A) 1 article trades for 2 worksheets B) 1 article trades for 1/5 worksheets C) 1 article trades for 1/4 worksheets D) 1 article trades for 4 worksheets E) 1 article trades for 5 worksheets

A) 1 article trades for 2 worksheets

How much unemployment results from the imposition of a price Floor set at $10? A) 100 units B) 310 units C) 50 units D) 210 units

A) 100 units

If a decrease in income leads to an increase in the demand for macaroni, then macaroni is A) an inferior good. B) a neutral good. C) a necessity.

A) an inferior good.

Which of the following statements is true? A) An increase in demand causes an increase in equilibrium price; the increase in price causes supply to increase. B) A decrease in supply causes equilibrium price to rise; the increase in price then results in a decrease in quantity demanded. C) If both demand and supply decrease, there must be a decrease in equilibrium price; equilibrium quantity may either increase or decrease. D) If demand increases and supply decreases one cannot determine if equilibrium price will increase or decrease without knowing which change is greater.

B) A decrease in supply causes equilibrium price to rise; the increase in price then results in a decrease in quantity demanded.

Which of the following goods would have the most inelastic demand? A) ski vacations B) bread C) luxury cars D) big screen TVs

B) bread

A change in which variable will change the market demand for a product? A) the price of the product B) expected future prices C) the number of firms in the market D) the quantity supplied of the product

B) expected future prices

An ________ is represented by a rightward shift of the demand curve while an ________ is represented by a movement along a given demand curve. A) increase in demand; decrease in demand B) increase in demand; increase in quantity demanded C) decrease in demand; decrease in quantity demanded D) increase in quantity demanded; increase in demand

B) increase in demand; increase in quantity demanded

If the percentage increase in price is 15 percent and the value of the price elasticity of demand is -3, then quantity demanded A) will increase by 45 percent. B) will increase by 5 percent. C) will decrease by 45 percent. D) will decrease by 5 percent.

C) will decrease by 45 percent

Which of the following statements about specialization and trade is true? A) A country should specialize in and export the good for which it has absolute advantage. B) A country should specialize in and import the good for which it has comparative advantage. C) A country should specialize in and import the good for which it has absolute advantage. D) A country should specialize in and export the good for which it has a comparative advantage.

D) A country should specialize in and export the good for which it has a comparative advantage.

Jane and Charlotte have the same resources and time. Jane can either write 100 lines of code or process 20 reports, and Charlotte can either write 120 lines of code or process 20 reports. A) Jane has an absolute advantage in both goods. B) Charlotte has an absolute advantage in writing lines of code; nobody has an absolute advantage in processing reports. C) Charlotte has an absolute advantage in writing code and Jane has an absolute advantage in processing reports. D) Charlotte has an absolute advantage in both goods. E) Charlotte has an absolute advantage in writing code; both people have an absolute advantage in processing reports.

E) Charlotte has an absolute advantage in writing code; both people have an absolute advantage in processing reports.

trade-off

Giving up one thing for another

How does total revenue change when price changes?

If demand is elastic, total revenue falls when the price increases and rises when the price decreases. If demand is inelastic, total revenue rises when the price increases and falls when the price decreases. If demand is unit-elastic, total revenue is unchanged by a change in price.

shifts of the demand curve

a change in the quantity demanded at any given price. An increase in demand causes a rightward shift of the demand curve. A decrease in demand causes a leftward shift.

production possibilities frontier

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.

elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

circular flow diagram

a visual model of the economy that shows how dollars flow through markets among households and firms.

absolute advantage

ability to produce a particular good or service better than anyone else.

Why do individuals trade?

because there are gains from trade, which arise from specialization. Markets usually move toward equilibrium because people exploit gains from trade

in a circular flow diagram households:

buy and consume goods and services own and sell factors of production

Decrease in demand =

decreases both the equilibrium price and the equilibrium quantity

market demand curve

demand curve for a good or service is the horizontal sum of the individual demand curves of all consumers in the market.

the law of demand

demand curves slope downward; that is, a higher price for a good or service leads people to demand a smaller quantity, other things equal.

Demand is unit-elastic

exactly 1

comparative advantage

explains the source of gains from trade between individuals and countries. Everyone has a comparative advantage in something—some good or service in which that person has a lower opportunity cost than everyone else.

in a circular flow diagram markets for goods and services

firms sell households buy

microeconomics

focuses on the individual parts of the economy. How households and firms make decisions and how they interact in specific markets

Progressive tax

higher-income people pay a higher percentage of their income in taxes than lower-income people (The US tax system is primarily progressive, but also mixes in regressive tax)

in a circular flow diagram markets for factors of production

households sell firms buy

incidence of a tax

how the burden is divided between consumer and producer depends on the price elasticities of supply and demand. If the price elasticity of demand is higher than the price elasticity of supply, the tax falls mainly on producers; if the price elasticity of supply is higher than the price elasticity of demand, the tax falls mainly on consumers.

Efficient economy

if all opportunities to make some people better off without making other people worse off are taken. Resources should be used as efficiently as possible to achieve society's goals. But efficiency is not the sole way to evaluate an economy: equity, or fairness, is also desirable, and there is often a trade-off between equity and efficiency.

supply and demand model

illustrates how a competitive market, one with many buyers and sellers, none of whom can influence the market price, works.

production possibilities frontier

illustrates opportunity cost (showing how much less of one good can be produced if more of the other good is produced); efficiency (an economy is efficient in production if it produces on the production possibility frontier and efficient in allocation if it produces the mix of goods and services that people want to consume); and economic growth (an outward shift of the production possibility frontier). There are two basic sources of growth: an increase in factors of production—resources such as land, labor, capital, and human capital, inputs that are not used up in production—and improved technology.

Increase in demand =

increases both the equilibrium price and the equilibrium quantity

Decrease in supply =

increases the equilibrium price and decreases the equilibrium quantity

price floor issues

inefficiencies in the form of deadweight loss from inefficiently low quantity, inefficient allocation of sales among sellers, wasted resources, and inefficiently high quality. It also encourages illegal activity and black markets.

price ceiling issues

inefficiencies in the form of deadweight loss from inefficiently low quantity, inefficient allocation to consumers, wasted resources, and inefficiently low quality. It also encourages illegal activity as people turn to black markets

Too high spending results in

inflation

factors of production

land, labor, capital inputs used to produce goods and services

demand is inelastic

less than 1

quantity controls

limit the amount of a good that can be bought or sold. The quantity allowed is called the quota limit

macroeconomics

looks at the economy as a whole. Economy-wide phenomena, including inflation, unemployment, and economic growth

price ceiling

maximum market price below the equilibrium price, benefits successful buyers but creates persistent shortages. Because the price is maintained below the equilibrium price, the quantity demanded is increased and the quantity supplied is decreased compared to the equilibrium quantity.

price elasticity of demand

measure of the responsiveness of the quantity demanded to changes in the price. In practical calculations, it is usually best to use the midpoint method, which calculates percent changes in prices and quantities based on the average of starting and final values.

cross-price elasticity of demand

measures the effect of a change in one good's price on the quantity demanded of another good. The cross-price elasticity of demand can be positive, in which case the goods are substitutes, or negative, in which case they are complements.

price floor

minimum market price above the equilibrium price, benefits successful sellers but creates persistent surplus. Because the price is maintained above the equilibrium price, the quantity demanded is decreased and the quantity supplied is increased compared to the equilibrium quantity.

Demand is elastic

more than 1

Movement along the demand curve

occurs when a price change leads to a change in the quantity demanded.

Regressive tax

people with lower incomes pay a higher fraction of their income than people with higher incomes.

marginal tax rate

percentage of an increase in income that is taxed away, on high earners.

in a circular flow diagram firms:

produce and sell goods and services hire and use factors of production

Too low spending results in

recession

Increase in supply =

reduces the equilibrium price and increases the equilibrium quantity

why do people make choices?

resources are scarce

demand schedule

shows the quantity demanded at each price and is represented graphically by a demand curve.

supply schedule

shows the quantity supplied at each price and is represented graphically by a supply curve. Supply curves usually slope upward.

perfectly elastic supply

supply curve is a horizontal line

perfectly inelastic supply

supply curve is a vertical line

excise tax

tax on the purchase or sale of a good

Price elasticity of supply depends on

the availability of resources to expand production and on time

opportunity cost

the cost of choosing one thing over another (based on the value, subjective)

individual choice

the decision by an individual of what to do, which necessarily involves a decision of what not to do

individual consumer surplus

the difference between willingness to pay and price; the net gain to the consumer

income elasticity of demand

the percent change in the quantity of a good demanded when a consumer's income changes divided by the percent change in income. The income elasticity of demand indicates how intensely the demand for a good responds to changes in income. It can be negative; in that case the good is an inferior good. Goods with positive income elasticities of demand are normal goods. If the income elasticity is greater than 1, a good is income-elastic; if it is positive and less than 1, the good is income-inelastic.

equilibrium quantity

the price at which the quantity demanded is equal to the quantity supplied When the price is above its market-clearing level, there is a surplus that pushes the price down. When the price is below its market-clearing level, there is a shortage that pushes the price up.

perfectly inelastic demand

the quantity demanded is unaffected by the price the demand curve is a vertical line

economics

the study of choice and scarcity

total consumer surplus

the sum of all individual consumer surpluses in a market, is equal to the area below the market demand curve but above the price.

total surplus

the total gain to society from the production and consumption of a good, is the sum of consumer and producer surplus.

what determines the demand curve?

the willingness to pay of each individual consumer

perfectly elastic demand

there is a unique price at which consumers will buy as much or as little as they are offered the demand curve is a horizontal line.

interaction occurs

via trade between individuals

opportunity cost

what you're giving up to obtain an item

When does a movement along the supply curve occur?

when a price change leads to a change in the quantity supplied. When economists talk of increasing or decreasing supply, they mean shifts of the supply curve—a change in the quantity supplied at any given price. An increase in supply causes a rightward shift of the supply curve. A decrease in supply causes a leftward shift.

normative statements

•are statements about how the world should be. •Called prescriptive analysis

positive statements

•are statements that attempt to describe the world as it is. •Called descriptive analysis