Exam 1 Microeconomics
Concerned with what is
Positive analysis
occurs when production is in accordance with consumer preferences.
Allocative efficiency
when the percentage change in quantity demanded is greater than the percentage change in price
Demand is elastic
when the percentage change in quantity demanded is less than the percentage change in price.
Demand is inelastic
when the percentage change in quantity demanded is equal to the percentage change in price.
Demand is unit elastic
The study of the choices people make to attain their goals, given their scarce resources.
Econ
measures how one economic variable long dash —such as the quantity demanded long dash —responds to changes in another economic variable long dash —such as the price.
Elasticity
As you move up a linear demand curve, the price elasticity of demand in absolute value
Increases
How else can you calculate the price elasticity of demand?
Price elasticity of demand can be calculated using final values for price and quantity. And Price elasticity of demand can be calculated using initial values for price and quantity.
One of the basic facts of life is that people must make choices as they try to attain their goals. This unavoidable fact comes from a reality an economist calls
Sarcity
What is the advantage of the midpoint formula
The midpoint formula will give the same value whether moving from the higher price to the lower price or from the lower price to the higher price.
Economists assume that when there is a change in demand and/or supply, that prices reach a new equilibrium:
after an adjustment period that varies
Market price is determined by
both supply and demand
The disappearance of the family farm can be partially attributed to the fact that the elasticity of demand for wheat is __________, while at the same time, the income elasticity for wheat is __________.
inelastic; low
When you compute a price elasticity of demand the answer is always:
negative. According to the law of demand when we increase the price of a product the quantity demanded will fall, or vice versa. As with any fraction when the numerator and denominator have opposite signs the fraction will be negative. Since we know it will always be negative we commonly refer to elasticity coefficients in absolute value terms. If the absolute value is greater than one it is elastic, or the quantity demanded is very responsive to a change in price.
When nations specialize in their comparative advantage and engage in trade:
overall standards of living increase
The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the _ the payoff to devoting additional resources to that activity.
smaller
Covers the study of topics such as inflation and unemployment
Macro
—the quantity demanded is infinitely responsive to price, and the price elasticity of demand equals infinity. Thus, an increase in price causes the quantity demanded to fall to zero.
Perfectly Elastic
the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero. Thus, an increase in price causes the quantity demanded to not change
Perfectly inelastic
The price elasticity of supply always has a:
Positive Value. According to the law of supply, suppliers will always be willing and able to supply more units as prices increase. Therefore when prices increase the quantity supplied will increase. When prices decrease the quantity supplied will decrease as well.
Occurs when a good or service is produced at the lowest possible cost.
Productive Efficiency
In his 1776 book, "An Inquiry into the Nature and Causes of the Wealth of Nations," Adam Smith notes that specialization increases productivity. Which of the following was the cause of this phenomenon?
The division of labor
The current price of wheat is $1.00 per bushel, and the price elasticity of demand for wheat is known to be 0.50. A bad harvest causes the supply of wheat to decrease and as a result the price of wheat rises by 20%
The percentage change in quantity demanded for wheat will decline by 10% and farm revenues will rise. The elasticity of demand is the percentage change in quantity divided by the percentage change in price. An elasticity of demand coefficient of 0.50 indicates that the quantity demanded will fall by .50 x 20% = 10%. Since wheat is inelastic we know that farm revenues will rise as a result.
The market for corn is initially in equilibrium. Suppose that the production of biofuels, which use corn as an input, increase, and at the same time, increases in the price of oil cause farm production costs to rise. Which of the following explains the effect on equilibrium price and quantity in the corn market?
The price of corn will rise, but the effect on equilibrium quantity cannot be determined without more information
Firms often rely on market experiments to calculate the price elasticity of demand for a new product.
True
What is the cross-price elasticity of demand for two goods that are unrelated?
Zero. If the two products are unrelated then a change in the price of one product will have no impact on the quantity demanded of the other good. When the numerator is equal to zero the elasticity coefficient will always be zero.
An increase in the price of a substitute for iPads will lead to __________ in the quantity demanded of iPads so the cross-price elasticity of demand will be __________.
an increase, positive. When the substitute good increases in price (+) it will result in people switching and buying iPads instead of the substitute good. This will also be an increase so the overall cross-price elasticity will be positive. Complementary goods would result in negative cross-price elasticity and a decrease in quantity demanded as a result of a price increase.
If the cross-price elasticity of demand between two products is -3.0, then the two products are:
complements. When two products are complements, or goods that are consumed together, when the price of one good increases the demand for the other good will fall. Therefore any negative relationship indicates the goods are complements. Substitute goods will have a direct relation between the price of one good and the demand for the other. And if the goods are not related there should be no change in the quantity demanded for one good due to a price change in the other good.
If the supply of Good B is perfectly elastic and price falls the quantity supplied will:
fall to zero. Perfectly elastic supply means that any decline in price results in zero units being supplied if the price falls. If the supply did not change it would be perfectly inelastic. Quantity supplied will not increase when prices fall.
When demand is...a decrease in price reduces total revenue, and an increase in price increases total revenue. When demand is elastic, a decrease in price increases total revenue, and an increase in price decreases total revenue. The sportswriter argues that a drop in the ticket price would decrease revenues, so he is assuming that demand is relatively price inelastic.
inelastic
If price falls and revenue decreases, then demand is...., but if price falls and revenue increases, then demand is ..... Conversely, if price rises and revenue decreases, then demand is...., but if price rises and revenue increases, then demand is.....
inelastic elastic elastic inelastic
concerned with what ought to be.
normative analysis
Econ is about...which measures the costs and benefits of different courses of action.
positive analysis
What is the midpoint method for calculating price elasticity of demand? The midpoint method for calculating price elasticity of demand is:
the change in quantity divided by the average of the initial and final quantities divided by the change in price divided by the average of the initial and final prices