Principles of Microeconomics Exam 1

If an employer offers a potential employee $40,000, but the employee would be willing to work for $35,000, and the employer will make $55,000 from the work that the employee does. Assuming that the employee takes the job for $40,000, what is the employer's economic surplus?

$15,000

Changes in Demand

Shifts or pivots in the demand curve

Normal Good

a good for which, other things equal, an increase in income leads to an increase in demand ex. newest iPhone, dental services,

If prices are free to adjust, then eventually a:

market will be drawn to equilibirum

income elasticity is negative for

inferior goods

Which of these BEST exemplifies a market in equilibrium?:

A bicycle shop selling a bike to every customer that wants one

Positive Economics

predicts the consequences of alternative actions, answering the questions "what is?" or "what will be?"

Microeconomics

the study of how households and firms make decisions and how they interact in markets

Cross Price Elasticity of Demand

- A measure of how responsive the demand of one good is to price changes of other goods - Measures the percentage change in quantity demanded that follows from a 1% price rise in another good - This is a positive for substitutes. If the price of Pepsi goes up, you buy more Coke instead. - It is a negative for complements. If the price of a printer rises, you buy fewer cartridges.

economic surplus

- the benefit of taking an action minus its cost - It is a measure of how much your decision has improved your well-being. - When you follow the cost-benefit principle, every decision you make will yield larger benefits than costs.

opportunity cost principle

- the true cost of something is the next best alternative you must give up to get it. Calculating opportunity costs: an example What happens if Nerida purses an MBA? - She pays $60,000 in tuition, pays for room and board, quits her current job and loses that income, and spends her time studying. What happens if she pursues her next best alternative? (continuing to work at her current job) - She earns $70,000 per year, still has to pay for rent and meals, and spends her time working.

Determinants of Demand

1. Income - Money earned over a period of time 2. Wealth - Net Worth 3. Tastes - Changes in Taste 4. Price of Substitutes - Wine 5. Price of Complements - Pizza 6. Future Prices - Memorial Day

Determinants of Supply

1. Input Prices - Resources and Raw Materials 2. Technology - More Efficient Use of Resources 3. Number of Sellers 4. Future Prices - Price Expectations 5. Government Policies A. Subsidies B. Taxes C. Restrictions 6. Weather (Agriculture)

StubHub, a website that sells tickets for different forms of entertainment, such as concerts and sporting events, is an example of what?

A secondary market, because they sell tickets in an unofficial market from where the tickets were originally sold

the marginal principle

Increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost. The marginal principle helps break down decisions of quantity into either/or choices. - Marginal benefit: The extra benefit from one unit (of goods purchased, hours studied, etc.) - Marginal cost: The extra cost from one extra unit

Lisa has a stand at the local farmer's market where she sells honey from her farm. Every week, Lisa sells out of honey while still having people waiting in line to buy some. What is happening in the market for Lisa's honey?

Quantity demanded exceeds quantity supplied, creating a shortage.

Priya is a student at Florida State University. She graduates soon and has started applying for jobs at various companies. What role is Priya playing in the labor market?

Supplier. Her company is playing demanders because they're demanding her labor

Market Equilibrium

Supply and demand are equal.

You purchased a ticket to the musical Hamilton through a verified reseller for $457.00. When your ticket arrives, you see that the face value printed on it is $259.00.

The face value is below the equilibrium price because the rate in the secondary market exceeds the face value. The equilibrium price would be the market-clearing price determined by the forces of supply and demand. Thus, it would be at or close to the price you pay in the secondary market, namely, $457.00. At the face value, by contrast, the ticket is priced below the equilibrium price. Hence, there is a shortage of tickets, enabling intermediaries like the reseller to buy up tickets and resell them at higher prices.

If a decision boosts a person's economic surplus, then it must be true that the decision boosted:

Total benefits more than total costs

cross-price elasticity is negative for

complements

How can a manager maximize the economic surplus when hiring workers?

When the marginal cost of hiring the last worker is equal to the marginal benefit

When are out-of-pocket costs also opportunity costs?

When the out-of-pocket costs do not exist in the next best alternative.

Seller/Supplier:

You consider which politician to vote for in an upcoming election You seek employment in the industry for which you have trained You've written a book and several publishers are interested in purchasing the rights to publish your work. Dodger starts a dog walking business Angie sells her used guitar on Craigslist John lists his house for sale Jessica throws a birthday party for her sister

Buyers/Demander:

You purchase coffee in a coffee shop You're considering which job applicant to hire at your company Melanie sends in her application to UNH Brendan asks his friends to help him move

Inferior Good

a good for which, other things equal, an increase in income leads to a decrease in demand ex. 10-year old used car As incomes increase, less consumers are willing to purchase older cars. They are likely to substitute to new vehicles or at least slightly used vehicle instead. Likewise, as incomes decrease purchasing a newer vehicle may be too expensive, so consumers may settle for an older car.

Demand Curves

a graph of the relationship between the price of a good and the quantity demanded

Supply Curves

a graph of the relationship between the price of a good and the quantity supplied

Cross Price Elasticity of Demand (Between two Products)

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good

Shortages

a situation in which quantity demanded is greater than quantity supplied

In the market for grades, students are on the _____ side

demand

Julie's family is preparing for their Fourth of July cookout, so they head to the local grocery store. Among the pandemonium they are able to obtain everything on their shopping list, including hot dogs and hamburgers. In the market for hamburgers, the Fourth of July creates an increase in the _____for hamburger and a(n) _____ in the equilibrium price and quantity of hamburgers.

demand; increase

Advertising can be a shifter of the _____curve and is considered a change in _____.

demand; preferences

fixed costs

don't change when you vary the quantity of output you produce

What happens to equilibrium price and quantity when there's an increase in demand?

equilibrium price increases and equilibrium quantity increases

You are the CEO of a car manufacturing company, and realize that you may have to lay off 10,000 employees unless you take some other form of action. Your Chief Financial Officer comes up with two solutions: the first saves 6,000 jobs, and the second causes the company to lose 4,000 jobs. The first option sounds ideal at first; however, both options give the same outcome of cutting 4,000 jobs and saving 6,000 jobs. This example represents the concept of:

framing effect

The phenomenon that occurs when small differences in how choices are described can lead people to make different decisions is known as the:

framing effect example: If a retail store has an item that is priced well above its other products in an effort to make the majority of its products seem inexpensive by comparison

Neutral Good

goods that have a demand that is not dependent to the income.

Ayalon owns a fast food restaurant that is open 18 hours a day. He is considering the idea of having his restaurant remain open 24 hours a day, but he realizes that the success of this plan may be affected by the changing hours of his competitors. Ayalon is taking into account the _____ principle.

interdependence

elasticity

measures the responsiveness of quantity to other factors

income elasticity is positive for

normal goods

Jamal is an engineer working at a large lithium-ion battery producer. He recently made a breakthrough causing the production cost of lithium-ion batteries used in smartphones to go down. In the market for smartphones, this innovation will cause the equilibrium quantity to _____and the equilibrium price to _____.

rise; fall

Changes in Supply

shifts or pivots in the supply curve

cross-price elasticity is positive for

substitutes

demand is more elastic when

substitutes exist

Amancio is going into his fourth year of school when he is offered a prestigious position at a software company. Instead of applying the opportunity cost principle to see if he should quit school and take the job, he decides to stay in school, because he has already spent so much time and money on furthering his education. Amancio's hasty decision has been negatively affected by:

sunk costs

The cost-benefit principle suggests that you should buy an item when

the benefit exceeds the cost.

Law of Demand

the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises There is a negative relationship between price and quantity demanded

Law of Supply

the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises there is a positive relationship between price and quantity of a good supplied

Capital

the equipment and structures used to produce goods and services

Nasser owns a business that produces t-shirts, but he is struggling with the dilemma of how many shirts to produce, so he begins by asking himself if he should produce one more shirt. Which economic principle is exemplified by this situation?

the marginal principle

Macroeconomics

the study of the nation's economy as a whole

ALS medical research funds: The ALS ice bucket challenge goes viral, leading to greater awareness of the benefits of and need for ALS research. As a result:

the supply of and demand for ALS research increase(s), causing the equilibrium price (or opportunity cost) of such research to rise, fall, or remain unchanged and the equilibrium quantity to rise.

Smartphones: Microchips used in smartphones become less costly to produce. As a result:

the supply of smartphones increase(s), causing the equilibrium price to fall and the equilibrium quantity to rise.

Complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other Shampoo and conditioner, tables and chairs, and wine and cheese are examples of pairs of goods which are often consumed or used together. The cross-price elasticity of each of these pairs is likely to be negative, and they are considered to be complementary goods.

variable costs

vary with the quantity of output you produce

Opportunity Cost

whatever must be given up to obtain some item

1. Reading this textbook will help establish a solid foundation for understanding concepts you will learn in more advances economic courses. This is an example of 2. Reading this textbook will require time and effort but will improve your grade. This is an example of 3. The time you spend reading this textbook can also be used to study for a different exam. This is an example of 4. Each page you read will help you increase your understanding of the material.

1. interdependence principle 2. cost-benefit principle 3. opportunity cost principle 4. marginal benefit principle

Surpluses

a situation in which quantity supplied is greater than quantity demanded

Equilibrium

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

Marco owns a shoe store. He recently got an exclusive pair of shoes that he decides to sell for $300 when all other vendors are selling them for $250. Marco is surprised when nobody comes to buy the shoes from him. What situation has Marco created?

a surplus

Substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other Beef and chicken and shoes and sandals are both pairs of goods which are more likely to be used in place of each other, instead of together. If the price of beef goes up, the quantity demanded of chicken increases as people switch consumption to the cheaper good. These goods are more likely to be considered substitutes.

congestion effect

Some products become less valuable when more people use them

Price Elasticity of Supply

- Measures how responsive buyers are to price changes. - Measures by what percent the quantity demanded changes in response to a 1% price change

Income Elasticity of Demand

- Measures how responsive quantity demanded is to changes in income - It measures the percent change in quantity demanded following a 1% rise in income - This is positive for normal goods (such as restaurant meals) - This is negative for inferior goods (such as ramen noodles)

price elasticity of supply

- Measures how responsive sellers are to the price changes - By what percent the quantity supplied will increase following a 1% price rise - The larger this percentage change in quantity supplied is, the more responsive sellers are to price changes

The Cost-Benefit Principle

Costs and benefits are the incentives that shape decisions. You should evaluate the full set of costs and benefits of any choice and only pursue those whose benefits are at least as large as their costs.

Dr. Larson is a professor at a state university. He is known for being tough but fair in his grading, and rarely gives out A's on his assignments. Considering that Dr. Larson is on the supply side and his students are on the demand side, why is it so difficult to attain an A?

Demand is high, so price is high

Normative Economics

answers the question, what ought to be? Normative questions lie at the heart of policy debates.

supply is more elastic when

firms have flexibility

Compared to terminally ill people, healthy people are _____likely to try risky experimental drugs because their opportunity cost is _____.

less, higher

the interdependence principle

- Your best choice depends on the other choices you make, the choices others make, developments in other markets, and expectations about the future. - When any of these factors change, your best choice might change.

Rational Rule

- identifies the optimal amount of an activity. - If something is worth doing, keep doing it until your marginal benefits equals your marginal costs - allows business owners to experiment their way to the point where economic profits are maximized

Akari's boss has offered to pay her for up to 5 hours of overtime today. Akari has already been working for 10 hours and is deciding whether to work more hours. 1. When Akari considers whether she should work one more hour, she is applying the _____________ 2. When Akari weighs the money she will earn from working overtime against what she gives up to work the extra hours, she is applying the ______________ 3. If Akari decides to work the extra hours because she does not think any overtime will be offered in the near future, she is applying the _________________ 4. If Akari decides to work overtime because her next best alternative is watching TV at home, she is applying the _________________

1. marginal principle 2. cost-benefit principle 3. interdependence principle 4. opportunity cost principle