Microeconomics Midterm

The minimum wage was instituted to ensure workers

a minimally adequate standard of living.

If the demand for a good falls when income falls, then the good is called

a normal good.

market power

a single buyer or seller has substantial influence on market price (monopoly)

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded at various prices

Under rent control, bribery is a potential mechanism to

bring the total price of an apartment (including the bribe) closer to the equilibrium price.

A model...

can be accurately described as a simplification of reality

efficiency

maximizing the size of the pie

price elasticity of demand

measures how much the quantity demanded responds to a change in price

elasticity

measures how one variable responds to changes in another variable

Demand for an inferior good is...

negatively related to income

As a result of a decrease in price,

new buyers enter the market, increasing consumer surplus.

As policy advisors, economists make ____ statements which attempt to prescribe how the world should be

normative

a price ceiling above the equilibrium price is....

not binding - has no effect on the market outcome

economists are best viewed as....

policy advisors

The law of supply states that, other things equal, when the price of a good

rises, the quantity supplied of the good rises

In a market economy, economic activity is guided by...

self interest and prices

A monopoly is a market with one...

seller, and that seller sets the price

the quantity supplied of a good is the amount that....

sellers are willing and able to sell

Assumptions

simplify the complex world, make it easier to understand

If the number of sellers in a market increases, then the

supply in that market will increase.

rational people...

systematically and purposefully do the best they can to achieve their objectives AND respond to incentives

income elasticity of demand measures how

the quantity demanded changes as consumer income changes

macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

economics

the study of how society manages its scarce resources

welfare economics

the study of how the allocation of resources affects economic well-being

Producer surplus directly measures

the well-being of sellers.

a key determinant of the price elasticity of supply is the...

time horizon

Suppose scientists provide evidence that people who drink energy drinks are more likely to have a heart attack than people who do not drink energy drinks. We would expect to see

a decrease in the demand for energy drinks.

demand curve

a graphical object that shows how the price affects quantity demand, other things being equal

A group of buyers and sellers of a particular good or service is called

a market.

the minimum wage was instituted to ensure workers...

a minimally adequate standard of living

A key determinant of the price elasticity of supply is the

time horizon.

supply schedule

a table that shows the relationship between the price of a good and the quantity supplied

circular-flow diagram

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

Making rational decisions at the margin means that people

compare the marginal costs and marginal benefits of each decision.

the most oblivious benefit of specialization and trade is that they allow us to...

consume more goods than we otherwise would be able to consume

An example of positive analysis is studying

how market forces produce equilibrium.

complements

if an increase in the price of one good causes a fall in demand for the other (bagels and cream cheese) negative relationship

substitutes

if an increase in the price of one good causes an increase in the demand for the other good (pizza, hamburgers) positive relationship

a price floor below the equilibrium price is....

not binding - has no effect on the market outcome

price elasticity is higher when....

1. close substitutes are available 2. for narrowly defined goods than broadly defined ones 3. for luxuries than for necessities 4. in the long run than the short run

4 things that shift the S curve?

1. input prices 2. technology 3. number of sellers 4. expectations

5 things that shift the demand curve

1. number of buyers 2. income 3. price of related goods 4. tastes 5. expectations

Production Possibilities Frontier (PPF)

A graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology

price ceiling

A legal maximum on the price at which a good can be sold (rent)

price floor

A legal minimum on the price at which a good can be sold (minimum wage)

Which of the following statements about models is correct?

A model can be accurately described as a simplification of reality.

consumer surplus formula

CS=WTP-P

Which tools allow economists to determine if the allocation of resources determined by free markets is desirable?

Consumer and producer surplus

What characteristics make a perfectly competitive market?

Different sellers sell identical products. There are many buyers and sellers. Sellers must accept the price the market determines. NOT: there is no free entry or exit

a item with many substitutes is E or I?

E

a luxury item is E or I?

E

an increase in TR for a sale is E or I?

E

responsive is E or I?

E

Suppose the number of buyers in a market increases and a technological advancement occurs also. What would we expect to happen in the market?

Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.

Which of the following is not a result of rent control?

Fewer new apartments offered for rent, Less maintenance provided by landlords, Bribery, Answer: Higher quality housing

a decrease in TR for a sale is E or I?

I

a necessity item is E or I?

I

an item with few substitutes is E or I?

I

non responsive is E or I?

I

If opportunity cost remains constant...

PPF is a straight line

If opportunity cost of a good rises as the economy produces more of a good....

PPF is bow-shape

Producer surplus formula

PS= P-Cost

Adam Smith

The Wealth of Nations (1776), invisible hand

Which of the following statements exemplifies a principle of individual decision making?

The cost of something is what you give up to get it.

Which of the following is likely to have the most price elastic demand?

a. Ice cream b. Frozen yogurt c. Häagen-Dazs® vanilla bean ice cream d. Vanilla ice cream Answer: C

When the government prevents prices from adjusting naturally to supply and demand, it

adversely affects the allocation of resources.

A tax on the buyers of smart watches encourages....

buyers to demand a smaller quantity at every price

the price elasticity of demand measures...

buyers' responsiveness to a change in the price of a good

The line that relates the price of a good and the quantity demanded of that good is called the demand

curve, and it usually slopes downward.

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

absolute advantage

the ability to produce a good using fewer inputs than another producer

if the number of sellers in a market increases, then the...

demand in that market will decrease

when two variables move in opposite directions, the curve relating them is...

downward sloping, and we say the variables are negatively related

scientists try to ________, while policy advisors try to _______

explain the world, improve it

To improve living standards, policymakers should

formulate policies designed to increase productivity.

Central planning refers to

government guiding economic activity. Today many countries that had this system have abandoned it.

Economists at the Department of Justice

help enforce the nation's antitrust laws.

elastic curve is more

horizontal (side to side)

In the simple circular-flow diagram, the participants in the economy are

households and firms.

Microeconomics is the study of

how individual households and firms make decisions.

microeconomics is the study of...

how individuals and firms make decisions

An increase in the overall level of prices in an economy is referred to as

inflation

rent-control laws dictate...

only a maximum rent that landlords may charge tenants.

As scientists, economists make ______ statements which attempt to describe how the world is

positive

Demand for a normal good is....

positively related to income

Normative statements are...

prescriptive

the supply curve shows how....

price affects quantity supplied, other things being equal

equality

refers to distributing the pie fairly among members of the society

being interdependent

relying upon one another for the goods and services we consume

the quantity demanded of a good is....

the amount of the good that buyers are willing and able to purchase at a given price

the quantity supplied of any good is the....

the amount that sellers are willing and able to sell

Law of Demand:

the claim that the quantity demanded of a good falls when the price of the good rises, other things equal

Law of Supply:

the claim that the quantity supplied of a good rises when the price of the good rises, other things being equal

scarcity

the limited nature of society's resources

willingness to pay (WTP)

the maximum amount that a buyer will pay for a good

What would cause a movement upward and to the left along the demand curve for a good?

the price of olives

Economics is the study of how society manages its

unlimited wants and limited resources.

invisible hand

used to promote generic economic well-being works through the price system, the ability of free markets to reach desirable outcomes despite the self-interest of market participants

inelastic curve is more

vertical (straight up and down)

The opportunity cost of an item is

what you give up to get that item.

externalities

when the production or consumption of a good affects bystanders (pollution)

efficiency

when the society gets the most from its scare resources

Consider the market for gasoline. Buyers

would lobby for a price ceiling, whereas sellers would lobby for a price floor.

If the price a consumer pays for a product is equal to a consumer's willingness to pay, then the consumer surplus relevant to that purchase is

zero