MicroEconomics Chapter 5-10 Exam Study Guide

one-third

Jay and Jen are married with two children. They are preparing a household budget for the coming year. Based on statistical information for American households, approximately what portion of this family's annual consumption will most likely be budgeted for food and vehicle expenses?

the percentage change in quantity demanded divided by the percentage change in price.

Price elasticity of demand is defined as:

inelastic; elastic

Taxes on goods withdemand curves will tend to raise more tax revenue for the government than taxes on goods with _________demand curves.

Marginal Product (MP)

change in a firm's output when it employees more labor; mathematically, MP=ΔTP/ΔL

variable cost

cost of production that increases with the quantity produced; the cost of the variable inputs

fixed cost

cost of the fixed inputs; expenditure that a firm must make before production starts and that does not change regardless of the production level

perfect competition

each firm faces many competitors that sell identical products

constant returns to scale

expanding all inputs proportionately does not change the average cost of production

variable inputs

factors of production that a firm can easily increase or decrease in a short period of time

fixed inputs

factors of production that can't be easily increased or decreased in a short period of time

imperfectly competitive

firms and organizations that fall between the extremes of monopoly and perfect competition

diminishing marginal productivity

general rule that as a firm employs more labor, eventually the amount of additional output produced declines

revenue

income from selling a firm's product; defined as price times quantity sold

break even point

level of output where the marginal cost curve intersects the average cost curve at the minimum point of AC; if the price is at this point, the firm is earning zero economic profits

shutdown point

level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC; if the price is below this point, the firm should shut down immediately

tax incidence

manner in which the tax burden is divided between buyers and sellers

monopolistic competition

many firms competing to sell similar but differentiated products

production function

mathematical equation that tells how much output a firm can produce with given amounts of the inputs

Average Variable Cost (AVC)

variable cost divided by the quantity of output

oligopoly

when a few large firms have all or most of the sales in an industry

constant unitary elasticity

when a given percent price change in price leads to an equal percentage change in quantity demanded or supplied

substitution effect

when a price changes, consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price; always happens simultaneously with an income effect

collusion

when firms act together to reduce output and keep prices high

unitary elasticity

when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied

elastic demand

when the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price

total product

synonym for a firm's output

marginal cost

the additional cost of producing one more unit; mathematically, MC=ΔTC/ΔL

marginal revenue

the additional revenue gained from selling one more unit

marginal utility per dollar

the additional satisfaction gained from purchasing a good given the price of the product; MU/Price

marginal utility

the additional utility provided by one additional unit of consumption

short-run average cost curve

the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs

diminishing marginal utility

the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit

market structure

the conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold

infinite elasticity

the extremely elastic situation of demand or supply where quantity changes by an infinite amount in response to any change in price; horizontal in appearance

zero inelasticity

the highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; vertical in appearancei

fungible

the idea that units of a good, such as dollars, ounces of gold, or barrels of oil are capable of mutual substitution with each other and carry equal value to the individual

economies of scale

the long-run average cost of producing output decreases as total output increases

diseconomies of scale

the long-run average cost of producing output increases as total output increases

entry

the long-run process of firms entering an industry in response to industry profits

exit

the long-run process of firms reducing production and shutting down in response to industry losses

private enterprise

the ownership of businesses by private individuals

wage elasticity of labor supply

the percentage change in hours worked divided by the percentage change in wages

Price elasticity of demand is defined as:

the percentage change in quantity demanded divided by the percentage change in price.

cross-price elasticity of demand

the percentage change in the quantity of good A that is demanded as a result of a percentage change in good B

elasticity of savings

the percentage change in the quantity of savings divided by the percentage change in interest rates

Production

the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs

price elasticity

the relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied

Total Cost (TC)

the sum of fixed and variable costs of production

Average Total Cost (ATC)

total cost divided by the quantity of output

accounting profit

total revenues minus explicit costs, including depreciation

economic profit

total revenues minus total costs (explicit plus implicit costs)

Exit the industry

A competitive firm is operating in the long run and is making an operating profit but is faced with economic losses. What should the firm do?

elastic

A price cut will increase the total revenue a firm receives if the demand for its product is:

one-third

Approximately what portion of annual consumption is typically spent by American households on shelter?

unit elastic

Demand is said to be __________ when the quantity demanded changes at the same proportion as the price.

elastic

Demand is said to be ___________ when the quantity demanded is very responsive to changes in price.

inelastic

Demand is said to be _____________ when the quantity demanded is not very responsive to changes in price.

*B) a systematic way of thinking; misguided conclusions

Economic theory offers ____________________ about the full range of possible events and responses, which can prevent __________________ about how households will respond to changes in prices or incomes.

rise and the equilibrium quantity to stay the same

If the demand curve for a life-saving medicine is perfectly inelastic, then a reduction in supply will cause the equilibrium price to:

rise and the equilibrium quantity to stay the same.

If the demand curve for a life-saving medicine is perfectly inelastic, then a reduction in supply will cause the equilibrium price to:

increase the quantity exchanged but result in no change in the price.

If the demand curve is perfectly elastic, then an increase in supply will:

price of competing products

If the quality differences of similar products are mostly imperceptible to the average consumer's eyes, which of the following will most likely play a major role in influencing the decisions of purchasers?*

equal to zero.

If the supply curve for a product is vertical, then the elasticity of supply is:

utility

In microeconomic terms, the ability of a good or a service to satisfy wants is called:

increasing returns to scale

In microeconomics, the term _____________________ is synonymous with economies of scale.

price

The elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in __________.

inelastic

The evidence on the supply curve of financial capital is controversial, but at least in the short run, the elasticity of savings with respect to the interest rate appears to be.

responsiveness of quantity demanded to a change in price.

The price elasticity of demand measures the:

diminishing marginal utility

The term ___________________ is used to describe the common pattern whereby each marginal unit of a consumed good provides less of an addition to utility than the previous unit.

preparing to exit operations

When a business adopts a strategy of reducing and/or discontinuing production in response to a sustained pattern of losses, it is

consumers are not very responsive to changes in price.

When demand is inelastic:

elastic

When economists are sketching examples of a demand or supply curve that is close to horizontal, they refer to that demand or supply curve as.

An oligopoly

_____________ occurs when circumstances have allowed several large firms to have all or most of the sales in an industry.

behavioral economics

a branch of economics that seeks to enrich the understanding of decision-making by integrating the insights of psychology and by investigating how given dollar amounts can mean different things to individuals depending on the situation

game theory

a branch of mathematics that economists use to analyze situations in which players must make decisions and then receive payoffs based on what decisions the other players make

price taker

a firm in a perfectly competitive market that must take the prevailing market price as given

prisoner's dilemma

a game in which the gains from cooperation are larger than the rewards from pursuing self-interest

income effect

a higher price means that, in effect, the buying power of income has been reduced, even though actual income has not changed; always happens simultaneously with a substitution effect

kinked demand curve

a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases

differentiated product

a product that is consumers perceive as distinctive in some way

production technologies

alternative methods of combining inputs to produce output

elasticity

an economics concept that measures responsiveness of one variable to changes in another variable

duopoly

an oligopoly with only two firms

firm

an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs.

product differentiation

any action that firms do to make consumers think their products are different from their competitors'

implicit costs

opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned

explicit costs

out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials

price elasticity of demand

percentage change in the quantity demanded of a good or service divided the percentage change in price

price elasticity of supply

percentage change in the quantity supplied divided by the percentage change in price

long run

period of time during which all of a firm's inputs are variable

short run

period of time during which at least one or more of the firm's inputs is fixed

consumer equilibrium

point on the budget line where the consumer gets the most satisfaction; this occurs when the ratio of the prices of goods is equal to the ratio of the marginal utilities.

average profit

profit divided by the quantity of output produced; also known as profit margin

factors of production

resources that firms use to produce their products, for example, labor and capital

total utility

satisfaction derived from consumer choices budget constraint (or budget line)shows the possible combinations of two goods that are affordable given a consumer's limited income

long-run average cost curve

shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology

inelastic demand

when the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice versa); this indicates a low responsiveness by consumers to price changes

elastic supply

when the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price

inelastic supply

when the elasticity of supply is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in production by the firm; this indicates a low responsiveness of the firm to price increases (and vice versa if prices drop)

long-run equilibrium

where all firms earn zero economic profits producing the output level where P = MR = MC and P = AC