ECON CH3 + CH4
Which of these is correct about the market for red delicious apples? - It is a planned economy, because a centralized power is dictating all production factors. - It is perfectly competitive, because an identical good is being sold. - It is perfectly competitive, because different goods are being sold. - It is perfectly competitive, because there are few buyers of identical goods.
- It is perfectly competitive, because an identical good is being sold.
A guitar manufacturer finds a cheaper source for wood in the production of their electric guitars. During this time, a sharp decrease occurs in the popularity of rock music in favor of electronic dance music created using computers. What effect will this have on price and quantity? - Price falls; the change in quantity is unknown. - Price falls; quantity falls. - Price rises; the change in quantity is unknown. - Price rises; quantity rises.
- Price falls; the change in quantity is unknown.
what is a market
- a setting that brings both buyers and sellers together
Marco owns a shoe store. He recently stocked a style of shoe that he decides to sell for $200 when all other vendors are selling them for $250. Marco is surprised when he quickly sells his entire stock of the shoe. What situation has Marco created?
- a shortage
What are substitutes in production
- alternative uses of your resources. Your supply of a good will decrease if the prices of a substitute-in-production rises - refinery diesel production and price rises so normal fuel production goes down
In perfectly competitive markets, _____ are price-takers.
- both buyers and sellers
what does a shift in supply do to price and quantity
- causes price and quantity to move in opposite directions
what does a shift in demand do to price and quantity
- causes price and quantity to move in same direction
What is a planned economy
- centralized decisions are made about what is produced and who gets what (Cuba, Soviet Union)
What is a variable cost
- costs like labor and raw materials that very depending on how much quantity you output - if we produce another gallon of gas how many more workers do we have to pay overtime, or more crude oil do we have to buy
What are fixed costs
- costs that don't vary when you change the quantity of output produced
A dust storm destroys the majority of a farmer's peanut crop, causing him to raise the price of his peanut butter. What kind of shift does this create in the market for bread, a complement to peanut butter? - decrease in demand - increase in supply - increase in demand - decrease in supply
- decrease in demand for compliments like bread
what does left shift in supply curve mean
- decrease in supply
Your supply of a good will _____, shifting the supply curve to the left, if the price of a substitute-in-production _____.
- decrease; rises
Malik is a local politician running for governor in his state. What role does Malik play in the market for votes? - organizer - market - borrower - demander
- demander
What is the 3 step recipe for predicting market outcomes
- determine which curve is shifting (supply, demand, or both) - determine if it's an increase (shift right) or decrease (shift left) - determine how prices and quantities will change in the new equilibrium
What are market economies
- each individual makes their own production and consumption decisions (USA, Europe)
What are complements in production
- goods that are made together - your supply of good will increase if price of compliment-in-production rises - asphalt is byproduct of refineries so more oil = more asphalt
what does right shift on supply curve mean
- increase supply
Eric and Jerome are the only producers of athletic stopwatches, their _____ add up to equal the _____.
- individual supply curves; market supply curves
what is another way to refer to the supply curve
- marginal cost curve (the cost added by producing one additional unit of a product or service)
When your suppliers decrease the prices of your inputs, they decrease your _____, and this will shift your supply curve to the _____.
- marginal costs; right
In what order should you make supply decisions
- marginal principle (should I supply one more gallon of gas) - cost-benefit (is price of extra gallon worth the cost to make it) - opportunity cost (if my business doesn't produce this extra gallon of gas what else can we use those resources for?) - interdependence principle (look at other things in market)
What does the change in price do to the supply curve
- moves the point along the fixed line
What is market equilibrium
- point where there is no tendency for change - when the quantity supplied perfectly matches the quantity demanded (this means equilibrium price matches equilibrium quantity)
What is the rational rule for sellers in competitive markets
- sell one more unit if the price is greater than or equal to marginal cost
to maximize your profits, keep applying the rational rule for sellers until what?
- until price = marginal cost
What is a shortage
- when quantity demanded is larger than quantity supplied (TP during covid) - surplus is the opposite
When following the Rational Rule for Sellers in Competitive Markets, it is NOT true that: - your supply curve is upward-sloping because of rising marginal costs. - your supply curve is your marginal cost curve. - price = marginal cost. - your supply curve is downward-sloping because of rising marginal costs
- your supply curve is downward-sloping because of rising marginal costs.
what does perfect competition mean in a market (gasoline)
1. all firms in an industry sell identical good 2. there are many buyers and sellers, each person is a very small % of total people buying product
Supply curves are upward sloping because of rising marginal costs due to:
1. diminishing marginal product (hiring 2 workers created a bigger diff in output than 3 new workers) 2. rising input costs
What are 6 factors that shift demand curves
1. income increases demand for normal goods and decreases demand for inferior goods 2. preferences including advertising and social pressure 3. prices of compliments and substitutes 4. expectations 5. congestion and network effects 6. the type and number of buyers
what are 5 key factors that shift the supply curve: (NOT THE CHANGE IN PRICE)
1. input prices (crude oil cost goes up) 2. productivity and technology (refinery now has new tech to increase production) 3. prices of related outputs (diesel fuel rises, substitutes-in-production) 4. expectations 5. the type and number of sellers
What are some symptoms of disequilibrium
1. queuing (waiting for turn to park car increases price since its also the cost of you waiting) 2. bundling of extras (buying dinner = valet so then your extra is dinner and your car is parked) 3. secondary market (park car in driveway escaping the parking meters)
If an oil refinery can supply 5 million gallons per week when the price is $1 per gallon, what will be the market quantity supply for 40 refineries having the same supply decisions?
200 million gallons
What is an individual supply curve
a graph plotting the quantity of an item that a business plans to sell at each price
what does it mean when a market is a price-taker
someone who decides to charge the prevailing price and whose actions do not affect the prevailing price - they just accept the market price and don't change it ($3 per gallon for all gas stations)
What is the law of supply
The tendency for quantity supplied to be higher when the price is higher
What is the market supply curve
graph plotting the total quantity of an item supplied by the entire market, at each price
Increasingly, markets are moving to the:
internet
The Rational Rule for Sellers is important but does NOT:
tell sellers how to set the price against the competitors.
The quantity supplied and demanded in equilibrium is:
the equilibrium quantity.
what is the marginal product of an input
the increase in output that arises from an additional unit of input (like labor) - we hire 3 more workers, the marginal product is how many more toys we produce after hiring those 3 new workers
