MICRO FINAL EXAM
Refer to Figure 7-29. Which of the following statements is correct?
At Q4, the value to buyers is less than the cost to sellers. supply is greater than demand
Clorox Wipes. A decrease in the price of a complement (trashbags) would be represented by a movement from A is above B on the demand curve
B to A
Accounting Profit vs. Economic Profito
Accounting profit = the firm's total revenue minus their explicit costs. Economic profit = the firm's total revenue minus ALL of their costs (explicit AND implicit).
Adam Smith's "Invisible Hand":
Adam Smith (an economist in the 1700s) had the idea that if individual's act in their on self-interest in market economies, they will often end up doing what is best for society (as if guided by an "invisible hand"). For example, prices will adjust and the scarce resources will go to those who value them the post, and goods will be produced in the cheapest way
Price Elasticity of Supply:
measures how much the quantity supplied of a good changes when the price of that good changes = percentage change in quantity supplied / percentage change in price Always positive Supply is more elastic in the long run, because sellers are better able to adjust their inputs to change supply (i.e. build new factories, expand existing factories). Supply is less elastic (more inelastic) in the short run.
Microeconomics vs. Macroeconomics:
microeconomics is the study of how households and firms make decisions and how they interact in the marketplace, macroeconomics if the study of economy-wide phenomena such as inflation, economic growth, and unemployment
If the market price is less than P2, in the short run, the perfectly competitive firm will earn
negative economic profit and shut down
If the market price is less than P3 and greater than P2, in the short run, the perfectly competitive firm will earn
negative economic profit but continue to produce output
Max rescues dogs from her local animal shelter. When Max's income rises by 7 percent, his quantity demanded of off-brand dog biscuits decreases by 12 percent. For Max, the income elasticity of demand for dog biscuits is
negative, and dog biscuits are an inferior good
Natural monopoly:
one firm can produce the market quantity at a lower cost than could several firms
Rent Control:
our textbook example of a binding price ceiling in the market for apartments.
Minimum Wage:
our textbook example of a binding price floor in the unskilled job market.
What is the firm's profit-maximizing output and what is the price charged to sell this output?
p= $70 Q= 13 the price and qd before total cost of production increases
A binding price ceiling is shown in
panel b only
Assume that the graphs in this figure represent the demand and supply curves for limo rides and that limo rides and helicopter rides are substitutes. What panel describes what happens in this market when the price of helicopter rides fall?
panel d panel d has two demand curves where the rightmost curve (d1) is shifting left to d2
Suppose the U.S. government encouraged new teachers to take jobs in underperforming schools by paying the new teachers a $20,000 bonus. These teachers would be exemplifying the economic idea that
people respond to economic incentives.
Perfectly Competitive Market:
perfect competition is the type of market where there are many buyers, and many sellers producing and selling identical goods. Because of these characteristics, we consider each buyer and seller in a competitive market to be a price-taker (which means they take the market price as given).
Welfare without a Tax:
picture
Efficiency vs. Equality:
policies that promote efficiency make society better off (make the size of the economic pie bigger) whereas policies that promote equality make members of society more equal to one another (makes everyone's individual slices of the economic pie more equal to everyone else's).
Externality:
positive externalities are when the well-being of an bystander is impacted positively (and benefits) from a person or firm's actions, negative externalities are when the well-being of a bystander is impacted negatively (harmed) by a person or firm's actions
Positive vs. Normative Statements:
positive statements describe relationships we observe between economic variables, whereas normative statements include your personal opinion on what you think should or should not be the case.
Suppose that when the price of good X increases from $800 to $850, the quantity demanded of good Y increases from 65 to 70. We can conclude that the cross price elasticity of demand is _______ and goods X and Y are ________.
positive; substitutes
The overriding reason why households and societies face many decisions is that
resources are scarce.
Midpoint Method
see picture
Use the table below to answer the following question: If the price in the market were $24, there would be a Price: 20 22 24 26 28 Qd: 50 45 40 35 30 Qs: 20 25 30 35 40
shortage of 10 units
Market Demand Curve:
shows the relationship graphically between price and total quantity demanded for all buyers in a market.
Market Supply Curve:
shows the relationship graphically between price and total quantity supplied for all sellers in a market.
Incentive:
something that induces a person to act.
Specialization and Trade:
specializing in the good you have the comparative advantage in, means focusing your time/energy/resources on the production of that good
Law of Supply and Demand:
states that prices will adjust until quantity supplied equals quantity demanded. Shortages and surpluses are only temporary, as long as prices are allowed to fluctuate. Be able to identify what happens to the equilibrium price and quantity given a change in supply and/or demand.
Law of Supply:
states that the relationship between price and quantity supplied is positive. As the price of a good or service increases (ceteris paribus), sellers are willing and able to supply more. And as the price of a good or service decreases (ceteris paribus), sellers are not as willing nor as able to supply as much.
Law of Demand:
states that the relationship between price and the quantity demanded of a good or service is negative. In other words, as the price of a good or service increases (ceteris paribus) buyers are not as willing nor as able to purchase as much. And as the price of a good or service decreases (ceteris paribus), buyers are willing and able to purchase more.
Quantity Demanded:
the amount of a good or service that buyers are willing and able to purchase. It's not only what buyers WANT to purchase, but what they are ABLE to purchase (given the price and how much money the buyer has to spend).
Quantity Supplied:
the amount of a good or service that sellers are willing and able to supply.
"Ceteris Paribus" assumption:
the assumption that everything else is being held constant
Market Demand:
the demand for all buyers of a good or service. We obtain the market demand for a good/service by adding up the quantity demanded for each individual buyer in the market for each potential price. Be able to find the market quantity demanded by being given the individual demand for several buyers.
Deadweight Loss:
the fall in total surplus due to a market distortion (in this case, a tax). Deadweight Loss = . 5 * (P2 - P1) * (Q1 - Q2).
A rational decisionmaker takes an action if and only if
the marginal benefit of the action exceeds the marginal cost of the action.
Willingness to Pay:
the maximum amount that a buyer is willing to pay for a good/service. We also refer to this as the buyer's "reservation price". If the actual price of the good is above someone's WTP, they won't buy it. If the actual price is below their WTP, they will. If the actual price is equal to the buyer's max WTP, we consider that buyer to be "at the margin" about that decision - they are indifferent between spending the money on that good or spending it elsewhere.
Cost:
the minimum amount that a seller is willing to sell their good for.
Market Efficiency:
the most efficient price/quantity combination is the market equilibrium price and quantity. At market equilibrium, the buyers who buy the good are the ones who value it the most, the sellers who are producing the good at the ones who can do so at the lowest costs, and they are buying/selling a quantity where total surplus is maximized.
Absolute Advantage:
the producer with the absolute advantage is the one who can produce that good faster than the other producer
Comparative Advantage:
the producer with the comparative advantage is the one who can produce the good at a lower opportunity cost than the other producer (who gives up less to produce one more unit of that good).
Refer to Figure 4-4. The figure above represents the market for pecans. Assume that this is a competitive market. If the price of pecans is $9
the quantity supplied is greater than the economically efficient quantity. very low demand and large supply
Average Revenue (AR):
the revenue per unit. This is (for ALL firms) just whatever the price is. P=AR for all firms.
scarcity
the situation that results because we have unlimited wants and a limited amount of resources
Economics:
the study of how society manages and allocates its scarce resources
Market Supply:
the supply for all sellers of a good or service. It is found by adding the quantities supplied for each individual seller in a market for every potential price.
Hunter Hayes Concert Tickets. At a price of $15 supply and demand cross at $10 and 4 tickets at $15, 2 tickers 6-2= 4
there is a surplus of 4 tickets.
Perfect Competition:
this type of market has many firms where each firm is selling identical goods - these two assumptions mean these firms are "price-takers" - i.e. they take the market price as given. They can sell as much or little Q as they want to at that market price. Firms in competitive markets can also freely enter or exit the market.
Complements:
two goods for which if you have one, you must have the other good to go with it. Typical examples may include peanut butter and jelly, hot dogs and ketchup, a pillow and a pillowcase, etc. When the price of peanut butter increases, (by Law of Demand), your quantity demanded of peanut butter decreases and your demand for jelly also decreases. In other words, if peanut got more expensive, you'd want less peanut butter and less jelly.
Substitutes:
two goods for which you either want one or the other, not both. When the price of one good increases (ceteris paribus), your demand for the substitute good increases. And vice versa. Typical examples may include Coke and Pepsi, ice cream and frozen yogurt, etc. When the price of Coke increases, (by Law of Demand) your quantity demanded of Coke decreases and your demand for Pepsi increases (if Coke and Pepsi are substitutes). In other words, if Coke got more expensive, you'd want less coke and more pepsi.
Marginal Seller:
we can find the cost to the marginal seller (that $ amount for which they're at the margin about selling their good or not) by going to the quantity we are interested in, and going to the height of the supply curve at that quantity.
Marginal Buyer:
we can find the willingness to pay of the marginal buyer (that $ amount for which they're at the margin) by going to the quantity we are interested in, and going to the height of the demand curve.
Movement along a Demand Curve vs. a Shift in the Demand Curve:
we move from one point on a demand curve to another point on that same demand curve because of a change in the price of that good. If anything else changes (i.e. consumer's income, the price of another RELATED good, consumer's tastes, consumer's expectations about the future, or the number of buyers), the entire demand curve will shift one way or the other. The entire demand curve shifting to the right indicates an increase in demand (quantity demanded increases for EVERY price). The entire demand curve shifting to the left indicates a decrease in demand (quantity demanded decreases for EVERY price).
Movement along a Supply Curve vs. a Shift in the Supply Curve:
we move from one point on a supply curve to another point on that same supply curve because of a change in the price of that good. Shift: 1. input prices 2. an advance in technology 3. expectations of the seller 4. the number of sellers), the entire supply curve will shift one way or the other. The entire supply curve shifting to the right indicates an increase in supply (quantity supplied increases for EVERY price). The entire supply curve shifting to the left indicates a decrease in supply (quantity supplied decreases for EVERY price).
Market Power:
when one economic actor (or small group of actors) has a substantial impact on the market prices in a marketplace (ex: a monopoly being the only firm in a market)
Market Failure:
when the market left on its own will fail (not reach equilibrium). Typically occurs due to a negative externality occurring or when one economic actor or group of actors has market power
Equilibrium
where supply and demand intersect.
Principle of Comparative Advantage:
whoever has the comparative advantage in the production of some good should produce that good, and trade with another producer who has the comparative advantage in the production of a different good.
If the market price is P3, in the short run, the perfectly competitive firm will earn
zero economic profit.
If the economy is currently producing at point D, what is the opportunity cost of moving to point A?
zero spoons
Taxes:
BUYERS: a tax on buyers cause a change in the equalibrium price. We saw demand would decrease, which would change the equilibrium price, and then the buyers would have to pay the tax on top of that. The result was that, with a tax, the buyers end up paying more but ALSO the sellers end up receiving less per unit than they received before the tax. And the quantity of the good bought and sold decreases from what it was before the tax. Therefore, it doesn't matter whether the tax is initially placed on the buyers or the sellers of some good - BOTH the buyers AND the sellers will be burdened (affected negatively) by this tax.
Welfare with a Tax:
Be able to identify (if given labeled areas on a graph) or calculate (if given prices/ quantities on a graph) consumer surplus, producer surplus, tax revenue, and total surplus when there is a tax - you will be using the price the buyer pays with CS, the price the seller receives with PS, and remember that tax revenue is included in total surplus!
________ is (are) unattainable with current resources.
C
The demand curve representing the demand for a luxury good with several close substitutes is
C a negative slightly sloping d line
Variable Cost (VC)
Costs that change (vary) depending on how much output you produce. -labor -wages -ingrediants/ inputs
Table 2-8 shows the output per month of two people, Ellie and Delilah. They can either devote their time to making marble statues or making marble benches. Which of the following statements is true? Ellie: 12 statues, 14 benches Delilah: 14 statues, 7 benches
Delilah has a comparative advantage in making benches and Ellie in making statues.
Elastic demand
Demand is considered elastic if quantity demanded responds substantially to a change in price (price elasticity of demand >1 in absolute value) Demand is considered perfectly elastic if a small decrease in price makes quantity demanded infinite (price elasticity of demand = infinity). Goods with perfectly elastic demand have a horizontal demand curve. This means that if the price were to increase by a tiny bit, quantity demanded would become zero. If the price were to decrease by a tiny bit, quantity demanded would be infinite. At that market price, the seller can sell as much or as little as they want to. Goods with more alternatives for buyers have more elastic demand (because the buyer can more easily switch to another good, given a change in price)
inelastic demand
Demand is considered inelastic if quantity demanded responds only slightly to a change in price (price elasticity of demand <1 in absolute value) Demand is considered perfectly inelastic if quantity demanded stays the same regardless of price changing (price elasticity of demand = 0). Goods with perfectly inelastic demand have a vertical demand curve. This means that regardless of a change in price, quantity demanded stays the same (there's no change in quantity demanded).
unit elastic demand
Demand is considered unit elastic if quantity demand responds proportionally to the change in price (price elasticity of demand = 1 in absolute value)
Total Surplus
Equals consumer surplus + producer surplus. Graphically, it is the area below the demand curve and above the supply curve, from zero to the quantity bought and sold.
Assume the government imposes a tax of P3-P1. What area represents producer surplus when this good is taxed?
F
Which of the following statements is false?
FALSE: Trade-offs do not apply when the consumers purchase a product for which there is excess supply, such as a stock clearance sale. TRUE:Every individual, no matter how rich or poor, is faced with making trade-offs. Anytim e you have to decide which action to take you are facing an economic trade-off. Economics is a social science that studies the trade-offs we are forced to make because of scarcity.
Profit Maximization for a Competitive Firm:
For all firms, the maximum profit will occur at a quantity where MR=MC. If MR>MC, that means producing one more will make more in revenue than it will cost to produce it - so they should continue producing to make profit increase. If MR<MC, that means producing one more will cost more than the revenue they'd make off of it - so they should not produce that unit. For competitive firms, since we are given what the market price is and because P=MR, we are looking for the quantity where MC is equal to the price. I.e. find the quantity where P=MR=MC.
Opportunity costs of moving from one point on the PPF to another:
Going from one efficient point to another along the PPF will cost production of the other good (in other words, in order to produce more of good y, you'll have to give up producing some of good x to do so). Shape of the PPF (bowed outwards or linear) and implications: a linear PPF implies a constant trade off between good x and good y. The opportunity cost of goods x and y are constant for a linear PPF. The slope of a linear PPF is constant. A bowed outwards PPF has a changing opportunity cost (it depends on their current level of production what it will cost them to produce more of one good). The slope of a bowed outwards PPF changes.
Marginal Cost (MC):
How do costs increase when we produce one more unit? For example, if marginal cost = $5, that means "producing one more unit will cost an additional $5". It equals the change in total costs divided by the change in the quantity of output. The MC curve looks different, depending on the characteristics of the firm. But it is not unusual for the MC curve to look like a "Nike swoosh".
Using the figure above: which of the following statements is not correct?
INCORRECT: supply curve c is unit elastic extremely positive sloping straight supply line CORRECT: -supply curve A is perfectly inelastic --straight vertical supply curve -Supply curve B is perfectly elastic --straight horizontal supply curve -supply curve D is more elastic than supply curve C --slightly sloping positive straight supply curve
Imports vs. Exports:
Imports are goods that are produced abroad and sold domestically. Exports are goods that are produced domestically and sold abroad.
Demand curve:
In perfect competition, the demand for an individual firm's product is a horizontal line at the market price (if you increase the price above the market price, no one will buy from you). This means competitive firms can keep increasing the quantity produced and sold without lowering the price - i.e., MR=P for the competitive firm (producing one more unit increases TR by the price). A monopolist supplies the entire market with the product, so they face the market demand curve (the downward sloping market demand curve). This means to increase the quantity produced and sold, the monopolist must lower the price. So MR≠P for the monopolist. MR < P for the monopolist, so the MR curve is always below the market demand curve the monopolist faces. Output effect: higher output raises total revenue Price effect: lower price lowers total revenue. If the output effect is bigger, TR will increase (MR will be positive). If the price effect is bigger, TR will decrease (MR will be negative). If the output effect is equal to the price effect, TR will stay the same (MR will be zero).
In a competitive market the current price is $5. The typical firm in the market has ATC = $5.50 and AVC = $4.50.
In the short run firms will continue to operate, but in the long run firms will leave the market.
Consumer Surplus
Individual consumer surplus (for one buyer) = their WTP minus the price they actually pay. Measures the benefit to the buyer of purchasing the good at that price. When the price increases, CS decreases for two reasons: some consumers stop purchasing the good, and the ones who continue purchasing the good get less CS than before (because the price goes up) When the price decreases, CS increases for two reasons: consumers who were already purchasing the good at the higher price now get more additional CS, and new buyers enter the market and start purchasing the good because the new price is below their WTP.
Producer Surplus
Individual producer surplus (for one producer) = the price they are paid for their good minus their cost of producing it. Measures the benefit to the seller of selling their good at that price. When the price increases, PS increases for two reasons: the producers who were already producing and selling their good at the original lower price now get additional PS when the price goes up, and new producers enter the market and start selling their good when the price goes above their cost of production. When the price decreases, PS decreases for two reasons: some producers leave the market because the price drops below their cost of production, and the producers who are still selling their good get less PS because the price drops.
barriers to entry
Monopolies arise because of barriers to entry (when other firms cannot enter the market) 3 sources of barriers to entry: 1. A single firm owns a key resource 2. The government gives a single firm the exclusive right to produce the good (ex: patents & copyright laws) 3. natural monopoly
market power:
Monopolies have market power: the ability to influence the market price of the produce it sells. This makes them a price-maker. Competitive firms had no market power and were price-takers (each competitive firm had to take the price as given to participate in the market)
Assume Diana buys computers in a competitive market. It follows that
NONE ARE CORRECT: Diana has a limited number of sellers to turn to when she buys a computer. You Answered Diana will find herself negotiating with sellers whenever she buys a computer. if Diana buys a large number of computers, the price of computers will rise noticeably.
For a firm operating in a competitive industry, which of the following statements is not correct?
NOT CORRECT: total revenue is constant CORRECT: Price equals average revenue Price equals marginal revenue marginal revenue is constant
If a minimum wage of $9.50 is mandated, there will be a big chart agh
Neither a shortage nor a surplus will result, because this minimum wage will not be binding.
Total Revenue (TR):
Price * Quantity
Due to a fear of increases in produce prices, and the fear of contracting COVID-19 with a trip to the grocery store, many families started gardens this past spring. Starting a garden requires the purchase of seeds (for example: tomato seeds). As a result of this change in consumer's expectations/tastes, what happened to producer surplus in the market for tomato seeds? (Hint: draw a supply and demand diagram to help you).
Producer surplus increased
Profit:
Profit equals the firm's total revenue minus their total costs. (P-ATC)*Q
At price P3, the firm would produce
Q3 units
Clorox Wipes. Acquiring new machinery that could produce Clorox wipes more quickly (i.e. an advance in technology) would be represented by a movement from supply curve 1 is above and to the left of supply curve 2
S1 to S2
Which of the following events would increase producer surplus?
Sellers' costs stay the same and the price of the good increases.
Costs in the Short run vs. Costs in the Long Run
Some costs are fixed in the short run (i.e. the size of the factory), while all costs are variable in the long run (i.e. given a few years, we can alter any type of input - including factory size). So in the L-R, we will (for example) pick the factory size that will make our cost per unit (our ATC) as low as possible.
For each watch that Switzerland produces, it gives up the opportunity to make 50 pounds of chocolate. Germany can produce 1 watch for every 100 pounds of chocolate it produces. Which of the following is true about the comparative advantage between the two countries?
Switzerland has the comparative advantage in watches.
Total Cost (TC)
TC= FC + VC
Total Revenue:
TR = PxQ. If price increases, TR also increases only if demand is inelastic. If demand is elastic, an increase in price will lead to a decrease in TR. If demand is unit elastic, an increase in price will keep TR the same.
Assume that Mexico and the United States each has 2400 hours available. Originally, each country divided its time equally between the production of limos and jets. Now, each country spends all its time producing the good in which it has a comparative advantage. As a result, the total output of limos increased by (same numbers from above)
The U.S. should export limos, and Mexico should export jets.
Socially efficient vs. monopoly:
The competitive equilibrium or socially efficient price/quantity combination occurs at the intersection of the demand curve at the MC curve. This is the price/quantity combination where total surplus is maximized. At any quantity, we can go to the height of the demand curve to see the value to the buyer of (what buyers are WTP) for that unit. At any quantity, we can go to the height of the supply curve to see the cost to the seller of that unit. So, to maximize total surplus, we would want to keep producing units as long as buyers are willing to pay more than it cost the sellers to produce those units.oThe monopolist produces a quantity that is less than the socially efficient quantity, and charges a price that is higher than the socially efficient price. This results in a deadweight loss (DWL) similar to what we saw in chapter 8 with our tax unit. There are quantities for which it would cost the monopolist less to produce them than people are willing to pay for them, so producing those units would increase total surplus. Since the monopolist does not produce those units, a deadweight loss results (mutually beneficial trades don't occur, and total surplus decreases).
Average Total Cost (ATC)
The cost per unit. It incorporates both those fixed and variable costs. The ATC curve is typically U-shaped.
Short run Market Supply Curve
The firm determines how much to supply (i.e. how much quantity to produce and sell) by the following: if P<AVC, produce zero output (shut down). If P>AVC, produce the profit-maximizing level of output by producing where P=MR=MC.
Average Fixed Cost (AFC)
The fixed cost per unit. It decreases as output increases.
Consider a demand curve that has a constant elasticity value of 0. What happens to quantity demanded and total revenue when price increases?
The quantity demanded does not change but total revenue increases.
Efficient Scale
The quantity that makes the cost per unit (i.e. the ATC) as low as possible. This is the quantity associated with the minimum point of that U-shaped ATC curve.
Suppose an excise tax of $1 is imposed on every case of beer sold and sellers are responsible for paying this tax. How would the imposition of the tax be illustrated in a graph?
The supply curve for cases of beer would shift up by $1.
Tax Incidence:
The tax burden falls more heavily on the side of the market that is less elastic. The buyers in those markets bear more of the tax burden when these goods are taxed (the increase in the price they pay is much larger than the decrease in the price the sellers receive). When supply is less elastic than demand, the tax burden falls more heavily on the sellers. In these cases, it's harder for the sellers to leave the market and produce something else when the price they receive decreases. The price the seller receives falls by much more than the increase in the price the buyer pays.
Average Variable Cost (AVC)
The variable cost per unit. The AVC curve is typically U-shaped.
Equilibrium Price:
This is the price for which quantity supplied equals quantity demanded. It is known as the "market clearing price".
Equilibrium Quantity:
This is the quantity where quantity supplied equals quantity demanded.
Suppose that the quantity of labor supplied increases by 40,000 at each wage level. dollars: 7.50 8.50 9.50 10.50 11.50 12.50 labor supplied: 530k 550k 570k 590k 610k 630k labor demanded: 650k 630k 610k 570k 550k
W = $9.50; Q = 610,000
Production Function:
We can look at firm's production function using a graph, table, or equation. When we do so, we are looking at varying one (or more) of the firm's inputs and seeing how output varies in response.
Profit-Maximization for the Monopolist:
We first find the profit-maximizing quantity (in the same way we found the profit-maximizing quantity for the competitive firm): find the quantity where MR=MC. Then, charge the highest price buyers are willing to pay for that quantity, by going to the height of the demand curve at that quantity. Just like with the competitive firm, we can calculate the monopolist's TR, TC, and profit. TR for the monopolist = the price the monopolist charges x the quantity the monopolist produces and sells. TC for the monopolist = the cost per unit (ATC) for the monopolist x the quantity the monopolist produces and sells (remember you need to find the ATC at the quantity, by going from your quantity up to the ATC curve and over). Profit = TR-TC, or you can use this version of your profit equation: profit = (P-ATC) x Q.
Figure 4-8 shows the market for beer. The government plans to impose a per-unit tax in this market. As a result of the tax, is there a loss in consumer surplus?
Yes, because consumers pay a price above the economically efficient price.
Sunk cost:
a cost that has already been paid for and cannot be recovered, so an economist says not to include a "sunk cost" in your future decisions.
Diminishing Marginal Product of Labor:
a firm displays this characteristic when an additional worker is actually less productive (contributes less to the total output) than the worker added before him (i.e. when the marginal product of labor decreases with an additional worker).
Monopoly:
a firm that is the only seller of a product without close substitutes
Demand Curve:
a graph showing the relationship between price and quantity demanded.
Supply Curve:
a graph showing the relationship between price and quantity supplied.
Price Ceiling:
a legal maximum on the price. When the government says the price cannot be above a certain amount.
Price Floor:
a legal minimum on the price. When the government says the price cannot be below a certain amount.
Exit: long run
a long run decision to produce zero output (aka going out of business). If a firm exits the market, it has no costs to pay. A firm will exit the market (i.e. eventually go out of business) if they're making negative economic profit/incurring losses. -This would be the case if TR<TC. Per unit, this would mean that P<ATC. So a competitive firm will eventually exit the market if P<ATC. -A new firm will enter the market if current firms are earning profits (i.e. if TR>TC. Per unit, this would mean that P>ATC. So a new competitive firm will enter the market if P>ATC.
Elasticity:
a measure of the responsiveness of demand or supply to a change in one of its determinants.
Shortages vs. Surpluses:
a shortage occurs when quantity demanded is greater than quantity supplied due to the price being below the equilibrium price. -In the case of a binding price ceiling, that shortage is unable to be relieved by raising the price. A surplus occurs when quantity supplied is greater than quantity demanded due to a price being above equilibrium price. -In the case of a binding price floor, that surplus is unable to be relieved by lowering the price. Be able to know, whether given a graph or table, whether a binding price control will result in a shortage or surplus - and how big that shortage/ surplus will be.
Shortage:
a situation that results when quantity demanded is greater than quantity supplied. This happens when the market price is less than the equilibrium price. At a price lower than equilibrium price, buyers are willing and able to purchase more than sellers are willing and able to supply - so there is excess demand. Shortages cause an upward pressure on the price (cause prices to rise) so that sellers can supply more to meet that excess demand.
Surplus:
a situation that results when quantity supplied is greater than quantity demanded. This happens when the market price is greater than the equilibrium price. At a greater than equilibrium price, sellers are willing and able to supply more than buyers are willing and able to purchase - so there is excess supply. Surpluses cause a downward pressure on the price (cause prices to decrease) so that sellers can sell some of their excess supply.
Demand Schedule:
a table showing the relationship between price and quantity demanded.
Supply Schedule:
a table showing the relationship between price and quantity supplied.
Clorox Wipes. An increase in the price of Clorox Wipes would cause a movement from B is above A on the supply curve
a to b
Circular Flow Diagram:
a visual model of the economy that shows how dollars and inputs/outputs flow between households and firms Households buy goods and services from the firms, households sell their factors of production to the firms. Firms produce goods and services and sell them to households, firms buy factors of production from the households to produce the goods and services. Factors of production: the inputs used to produce a good/service. Includes land (natural resources), labor (human input), and capital (man-made inputs including machinery, buildings, etc.)
What area represents the increase in producer surplus when the market price rises from P1 to P2?
a+b
Assume the government imposes a tax of P'-P'''. What is total surplus in this market with the tax?
abce (on test it was jklm but I used a diff graph for this quizlet)
In order to reach point L, the economy would have to
acquire more resources or experience a technological change.
When the government taxes a good or service, it
affects the market equilibrium for that good or service
In the long run, the firm can operate on which of the following average total cost curves
all a b and c are correct
Production Possibilities Frontier:
an economic model showing the various combinations of output that are possible (or impossible) given the economy's current resources and level of technology The x- and y-intercepts of a PPF: the x-intercept shows how much of good x the firm/economy could produce if they use all of their resources and technology to only produce good x. The y-intercept shows much of good y the firm/economy could produce if they use all of their resources and technology to only produce good y. Efficient allocations: points along the PPF. Inefficient allocations: points below/within the PPF. Unattainable/Impossible Allocations: points outside/beyond the PPF. The firm is unable to produce these combinations of output.
Electric car enthusiasts want to buy more electric cars at a lower price. All of the following events would have this effect except
an increase in the price of gasoline (a substitute for electric cars).
A perfectly elastic demand implies that
any rise in price above that represented by the demand curve will result in a quantity demanded of zero.
Regan grows flowers and makes ceramic vases. Jayson also grows flowers and makes ceramic vases, but Regan is better at producing both goods. In this case, trade could
benefit both Jayson and Regan
In the above figure, the long-run average cost curve exhibits diseconomies of scale
between 20 and 25 units per hour
Suppose a tax of $2 per unit is imposed on this market. What will be the new equilibrium quantity in this market?
between 50 and 100 units
In this market, a minimum wage of $7.25 is
binding and creates unemployment (a labor surplus or a shortage of jobs).
A government-imposed price of $12 in this market is an example of a
binding price ceiling that creates a shortage
Suppose the demand for macaroni is inelastic, the supply of macaroni is elastic, the demand for cigarettes is inelastic, and the supply of cigarettes is elastic. If a tax were levied on the sellers of both of these commodities, we would expect that the burden of
both taxes would fall more heavily on the buyers than on the sellers.
Total consumer surplus (for all buyers participating in the market):
can be found by summing the consumer surplus for each buyer, OR (if we have a graph) by calculating the area below the demand curve and above the price, from zero to the quantity bought and sold.
Total producer surplus (for all sellers participating in the market):
can be found by summing the producer surplus for each seller, OR (if we have a graph) by calculating the area above the supply curve and below the price, from zero to the quantity bought and sold.oKeep in mind what happens to producer surplus when the price changes, and why.
Who has the absolute advantage in the production of pinatas? jordan stuffed animal 3 piñata 10 christian stuffed animal 3 piñata 6
christian
Specializing in the production of a good or service in which one has a comparative advantage enables a country to do which of the following?
consume a combination of goods that lies outside its own production possibilities frontier
Fixed Cost (FC):
costs that do not change, and you have to pay, regardless of how much output you produce. A firm must still pay the fixed costs of production, even if they produce zero output that day. -rent -cost of land
If the government imposes a price ceiling of $50 on this good, then total surplus will
decrease very small supply and very small demand
If the government removes a binding price floor from a market, then the price paid by buyers will
decrease, and the quantity sold in the market will increase.
Rational Decision Makers:
economists assume that people are rational (systematically and purposefully do the best they can to achieve their objectives) and that they think at the margin (weighing the marginal benefit and marginal cost of every action).oWe assume people do something only as long as the marginal benefit of doing so is greater than the marginal cost of doing so: MB>MC
Use the graph below to answer the following question. Between point A and B, price elasticity of demand is
elastic
Opportunity Cost:
everything you give up in order to do something/produce something/etc. It is the next-highest-valued alternative use of that resource. For example, the opportunity cost of going to college is the monetary cost of going to college PLUS what you could have earned in those four years (your foregone income).
Explicit vs. Implicit Costs:
explicit costs require an actual payment, whereas implicit costs don't. Implicit costs usually consist of foregone income (what you could have earned at another job), what you could have earned from having money in a savings account, etc.
If the market price is $6.30, in the long run,
firms will neither exit nor enter the market.
Price of the Trade:
for a trade to benefit both parties, the price of the trade (how you trade good X for good Y) must lie between the two opportunity costs. This way each party can trade for the other good at a cheaper price than if they were to produce that good themselves.
Inferior goods:
goods for which, when your income increases (ceteris paribus), your demand for them decreases. And when your income decreases (ceteris paribus), your demand for them increases. Typical examples may include cheap ramen noodles, off-brand items, used goods, bus rides, etc.
Normal goods:
goods for which, when your income increases, your demand for them increases. And when your income decreases, your demand for them decreases. Typical examples may include steak, cars, purses, etc.
Figure 2-9 shows the production possibilities frontiers for Greenland and Iceland. Each country produces two goods, snow cones and popsicles. Refer to Figure 2-9. Which country has a comparative advantage in the production of popsicles? greenland Max 240 snowcones max 200 popsicles iceland Max 270 snowcones max 180 popsicles
greenland
Suppose that when the price of hamburgers decreases, the Landry family decreases their purchases of chicken nuggets. To the Landry family
hamburgers and chicken nuggets are substitutes.
Monopoly Deadweight loss (DWL)
here are quantities for which it would cost the monopolist less to produce them than people are willing to pay for them, so producing those units would increase total surplus. Since the monopolist does not produce those units, a deadweight loss results (mutually beneficial trades don't occur, and total surplus decreases).
Marginal Product (MP):
how does output change when we change one of the inputs by one unit?
Marginal Revenue (MR):
how revenue changes when we sell one more unit. It is calculated as the change in total revenue, divided by the change in quantity. For COMPETITIVE FIRMS, this is equal to the price (i.e. for competitive firms, when they sell one more unit, revenue increases by whatever that market price is). So P=MR for the competitive firm only.
Central Planning vs. Market Economy:
in a central planning economy, a central planner (government official) decides the allocation of scarce resources. They decide what goods and services will be produced, who will produce them, how much will be produced, etc. In a market economy, resources are allocated by the decisions of buyers and sellers as they interact in the market for goods and services (guided by prices and self-interest)
Refer to Table 3-2. The table above shows the demand schedules for caviar of two individuals (Ari and Sonia) and the rest of the market. If the price of caviar falls from $45 to $35, the market quantity demanded would im too lazy to type the chart its big
increase by 70 oz.
Refer to Figure 15-2. If the firm's average total cost curve is ATC1, the firm will
make a profit
Income Elasticity of Demand:
measures how much quantity demanded changes when consumer's income changes =percentage change in quantity demanded / percentage change in price Normal goods have positive income elasticities of demand, inferior goods have negative income elasticities of demand.
Price Elasticity of Demand:
measures how much quantity demanded changes when the price of a good or service changes. percentage change in quantity demanded / percentage change in price
Cross-Price Elasticity of Demand:
measures how much the quantity demanded of one good changes when the price of a different (but related) good changes = percentage change in quantity demanded of good 1 / percentage change in price of good Substitutes have positive cross-price elasticities of demand, complements have negative price elasticities of demand.
What is the fixed cost per bowl (AFC) when 2 workers are hired?
$0.29 per bowl 2 workers 170 rice bowls $40 variable cost $90 total cost
Suppose the vertical distance between points A and B represents the tax in the market. The price that the sellers receive per unit after the tax is imposed is
$10 point b
At the equilibrium price, consumer surplus is
$1000
Use the above table to answer the following question. If the market price is $99, total consumer surplus in the market is
$109 150-99 135-99 120-99 100-99 all = 109
What is the new price the buyers pay if the tax is $4?
$12 8+4 I think
Using the midpoint method, in which range is demand most elastic? price: $0 3 6 9 12 15 qd: 1000 800 600 400 200 0
$12 to $15
The table represents a demand curve faced by a restaurant in a competitive market. For this firm, the price is
$13 the difference between total revenues
What is the total revenue for the monopolist?
$1488 lowest quantity highest price
Figure: Coffee Market shows the demand and supply curves for the coffee market. The government believes that the equilibrium price is too low and tries to help almond growers by setting a price floor at $7.00. Refer to Figure: Coffee Market. What is consumer surplus in this market when the price floor of $7 is imposed?
$1500 600+900?
Julia prepares tax returns and does bookkeeping. Last year her revenues from the tax and bookkeeping business were $150,000, and her expenses for the business were $15,000. When she started her tax and bookkeeping business, Julia gave up her supplemental job doing in-home pet sitting. She used to earn $10,000 per year from pet sitting. Assume that she incurred no costs for her pet sitting business. Julia's explicit costs are?
$15000
As the diagram is drawn, what is the size of the tax in this market? A tax is placed on this good
$2 3.5-2.5 s after tax - s before tax
Suppose the government imposes a tax of $6 per unit. What is consumer surplus with the tax?
$20 taking the difference of the highest consumers would pay and the actual price they pay
What is the socially efficient price and quantity combination?
$22, 83 units where mc and demand meet
What price/quantity combination will the monopolist use to maximize profit?
$24, 62 units highest price for lowest quantity
Suppose the government imposes a tax of $6 per unit. What will be the deadweight loss due to the tax?
$30 Deadweight Loss = . 5 * (P2 - P1) * (Q1 - Q2).
The vertical distance between points A and B represents a tax in the market. How much tax revenue will the government collect?
$3000 tax times the quantity transacted in the market
If the market price is $10, what is the competitive firm's total cost?
$35
Assume the demand curve and supply curve are straight lines. What is consumer surplus at equilibrium
$48 12*4 where qd and qs are both $12.00 * $4.00
If the market price is $10, what is the competitive firm's profit?
$50
This firm experiences diminishing marginal product of labor with the addition of which worker?
$50 total cost in the first column (0) is $50
What is the deadweight loss due to the monopolist's price/quantity combination?
$500
Each worker at Casa Bonita costs $12 per hour. The cost of each oven is $20 per day regardless of the number of tacos produced. What is the total daily cost of producing at a rate of 55 tacos per hour if the restaurant operates 8 hours per day?
$520
Paul goes to Dick's Sporting Goods to buy a new tennis racquet. He is willing to pay $200 for a new racquet, but buys one on sale for $125. Paul's consumer surplus from the purchase is
$75
The price-quantity combination that would maximize total surplus is
$90 and 10 units where s and d meet
Tax Revenue =
$T x Q The amount of the tax (in dollars) times the quantity bought/sold with the tax. This is the amount of money the government makes from the tax. We assume (somewhat optimistically) that the tax revenue will be used in a way that goes back to benefit the public (aka the buyers and sellers in a market). Maybe it will be used to build a nice park, a new public school, pave a road, etc. Because of this, we include the tax revenue in our total surplus. So total surplus with a tax will equal consumer surplus plus producer surplus plus tax revenue.
Originally, each producer divided his time equally between the production of novels and the production of poems. Now, each producer spends all his time producing the good in which he has a comparative advantage. As a result, the total output of novels increased by Perry ppf max 12 poems max 2 novels Jordan ppf max 12 poems max 4 novels
1 novel
1. assume love's kitchen only produces cakes and roast chicken. a combination of 40 cakes and 50 roast chickens would appear choice: A B C D E F quantity of cakes produced: 80 60 40 20 00 quantity of roast chickens produced: 0 25 50 75 100 2. Love faces ________ opportunity costs in the production of cakes and roast chicken.
1. along Love's production possibilities frontier. 2. constant
How can PPFs move?
1. an advance in technology 2. gaining more resources
Table 2-4 shows the output per day of two gardeners, Gabe and Lucy. They can either devote their time to mowing lawns or cultivating gardens. What is Gabe's opportunity cost of mowing a lawn? Gabe: Lawns mowed: 10 Gardens cultivated: 6 Lucy: Lawns mowed: 5 Gardens cultivated: 4
1/2 of a cultivated garden
Assume that Mexico and the United States each has 2400 hours available. Originally, each country divided its time equally between the production of limos and jets. Now, each country spends all its time producing the good in which it has a comparative advantage. As a result, the total output of limos increased by Hours needed to make 1 USA Limo 30 USA jet 150 Mexico limo 50 mexico jet 150 Quantity produced in 2400 hours USA limo 80 USA jet 16 mexico limo 48 mexico jet 16
16
If Perry spends all of his resources and technology producing novels, what is the maximum amount of novels he can produce? same #s from above
2 novels
What is total output when 5 workers are hired?
225 units
If the firm can sell its output for $1 per unit, what is the profit-maximizing level of output?
230 units
If the economy is currently producing at point B, what is the opportunity cost of moving to point C?
26 thousand forks
Table 2-8 shows the output per month of two people, Ellie and Delilah. They can either devote their time to making marble statues or making marble benches Ellie: 12 statues, 14 benches Delilah: 14 statues, 7 benches
3 statues
Assume that Jordan and Christian each has 180 minutes available. If each producer divides his time equally between the production of stuffed animals and pinatas, then the total combined production between the two producers is same #s as above
48 stuffed animals and 24 pinatas
Studies indicate that the price elasticity of demand for beer is about 0.9. A government policy aimed at reducing beer consumption changed the price of a case of beer from $10 to $20. According to the midpoint method, the government policy should have reduced beer consumption by
60%
This firm experiences diminishing marginal product of labor with the addition of which worker? # of workers: 1 2 3 4 5 6 7 # of ovens: 2 2 2 2 2 2 2 output (tacos produced/ hr): 5 10 20 35 55 70 80
6th worker
Use the above graph to answer the following question. If this economy uses all of it's resources to produce quesadillas, what's the maximum amount of quesadillas it can possibly produce?
70 (where the curve ends on the x axis)
Suppose Nicole can record two makeup tutorials per hour or she can record four dance tutorials per hour. Angela can record one makeup tutorial per hour or she can record three dance tutorials per hour. Which of the following is true? A. Nicole has the absolute advantage in makeup tutorials. B. Nicole has the comparative advantage over Angela in makeup tutorials. C. Angela has the comparative advantage over Nicole in dance tutorials.
A B and C
Economic Profit vs. Economic Loss
A firm earns positive economic profit if their TR>TC. Per unit, that's if P>ATC. If that's occurring, new firms will enter that market in the long run. A firm incurs negative economic profit (i.e. economic losses) if their TC>TR. Per unit, that's if P<ATC. If that's occurring, these firms will exit that market in the long run.
Zero-Profit Condition:
A firm earns zero economic profit if their TR=TC. Per unit, that's if the P=ATC. If this happens, firms will neither exit nor enter the market in the long run. Therefore, we consider this to be the "long-run equilibrium".
Constant Returns to Scale
A firm exhibits constant returns to scale if increasing output keeps the cost per unit the same (i.e. ATC stays constant as Q increases)
Diseconomies of Scale
A firm exhibits diseconomies of scale if increasing output makes the cost per unit rise (i.e. makes ATC increase).
Economies of Scale
A firm exhibits economies of scale if increasing output makes the cost per unit decrease (i.e. makes ATC decrease)
Binding Constraints vs. Not Binding Constraints:
A price ceilings/floors are binding constraints when it changes the price from the equilibrium to something else, and it is now illegal for the price to adjust back to the equilibrium price. It will also affect the quantity now bought and sold. A "not binding" price ceiling/floor has no effect on the price/quantity because it is still legal for the price to fluctuate back to the equilibrium. Please be able to decipher whether a price control will be binding or not binding.
Shutdown short run
A short run decision to produce zero output. If a firm "shuts down", it will still have to pay its fixed costs. -If TR>VC, they should stay open in the S-R and produce the profit-maximizing level of output. -if P>AVC, they should stay open in the S-R and produce the profit-maximizing level of output. -If TR<VC, they should shut down in the S-R and produce zero output. This "shutdown" rule per unit is if P<AVC, they should shut down in the S-R and produce zero output.