Microeconomics

Profit

(P-ATC)*Q

1. Human Resources 2. Physical Resources 3. Natural Resources

3 types of resources (ingredients/inputs that people use to produce goods and services)

Create a table that determines the number of _____ and _______ someone should buy to maximize there utility.

-Combinations of Video Games and Comic Books -MU/P -Total Spending -Total Utility

Clayton Act

-Designed to define anticompetitive acts more clearly. ---Outlawed the following practice: mergers between competitors Practices were illegal if they "substantially lessen competition or tend to create a monopoly."

Sherman Act

price fixing is illegal existence of monopoly is not illegal, but attempting to monopolize is illegal

4 incentives of private-property owners

1. can gain by employing their resources in ways that are beneficial to others and bear opportunity cost of ignoring the wishes of others ex) using neutral colors in house to help sell it in the future 2. strong incentives to care for and properly manage what they own ex) keep car nice for future buyers 3. have an incentive to conserve for the future - especially if the property is expected to increase in value ex) save pizza for yourself or have a policy that everyone can eat it 4. have an incentive to lower the chance that their property will cause damage to the property of others ex) put dog on leash if it bites

D) There are few close substitutes for toothpaste A) Toothpaste takes up a small share in the average consumer's budget.

14) According to a study of the price elasticities of products sold in supermarkets, the price elasticity of demand for toothpaste is estimated at -0.45. Which of the following could explain why the price elasticity of demand for toothpaste is so low? A) Toothpaste takes up a small share in the average consumer's budget. B) Toothpaste is a luxury item. C) Toothpaste is heavily endorsed by dentists. D) There are few close substitutes for toothpaste.

B) The local Wal-Mart hires two more sales associates.

4) Which of the following is the best example of a short run adjustment? A) A local bakery purchases another commercial oven as part of its capacity expansion. B) The local Wal-Mart hires two more sales associates. C) Loyola completed negotiations to acquire a large piece of land to build its new lacrosse stadium. D) Toyota builds a new assembly plant in Texas.

C) inelastic.

5) According to an article in the Wall Street Journal, unlike airlines, even elite hotels don't have sophisticated systems that can react quickly to changes in demand. Even if they could, many hoteliers say people don't respond that much to lower rates. "We've tested this, cutting our rates by $50 [per night], and we didn't see an appreciable response in occupancy," says Jim Schultenover, a vice president for Ritz-Carlton. Based on this information, the demand for hotel rooms is A) elastic. B) unit-elastic. C) inelastic. D) perfectly elastic.

A) equal to the external cost.

6) If policymakers use a tax to control pollution, the tax should be set A) equal to the external cost. B) equal to the private cost. C) equal to the social cost. D) equal to the amount of the deadweight loss created.

A) The price elasticity of supply is likely to be higher in the long run than in the short run.

7) Over longer periods of time, increases in oil prices provide firms with incentives to explore and recover oil. What does this indicate about the long run price elasticity of supply for oil? A) The price elasticity of supply is likely to be higher in the long run than in the short run. B) The price elasticity of supply is likely to be lower in the long run than in the short run. C) The price elasticity of supply approaches zero in the long run. D) The price elasticity of supply is the same in the long run as in the short run.

1. using scarce resources is costly, so decision-makers make trade-offs 2. individuals choose purposefully (trying to get the most from their limited resources) 3. incentives matter (monetary and non-monetary) 4. individuals make decisions at the margin 5. information helps us make better choices, but acquisition is costly 6. beware of secondary effects 7. the value of a good or service is subjective (based on opinion) 8. the test of a theory is its ability to predict

8 guideposts to economic thinking

D) Ravi enjoyed his second round of golf less than his first round of golf.

8) Which of the following is likely to occur as the result of the law of diminishing marginal utility? A) Nune's total utility after drinking two cups of coffee is less than her total utility from drinking one cup of coffee. B) Lisa went to the animal shelter and adopted only one dog instead of two dogs. C) Delta Air Lines charges its customers a higher price for two one-way tickets versus one roundtrip ticket. D) Ravi enjoyed his second round of golf less than his first round of golf.

B) less than 8 chairs.

9) If diminishing marginal returns have already set in for Very Good Building & Development Company, and the marginal product of the 6th carpenter is 8 chairs, then the marginal product of hiring Ron Swanson as the 7th carpenter is A) negative. B) less than 8 chairs. C) more than 8 chairs. D) zero.

profit

=TR-TC =(P*Q)-(ATC*Q) =Q(P-ATC)

human resources

productive knowledge, skill, and strength of human beings - type of resource

Monopoly

A firm that is the only seller of a good or service that does not have a close substitute.

monopolist's demand curve

A monopolist's demand curve is the same as the market demand curve for the product.

D) affects the market equilibrium for gas.

A recent Wall Street Journal article advocates for an increase in the gas tax. If the government increases the tax on gas, it A) increases consumer surplus for gas. B) increases producer surplus for gas. C) eliminates the deadweight loss associated with gas. D) affects the market equilibrium for gas.

less

Based on the paragraph above, people who do not use public transportation can still benefit from it, as is shown by the higher home values. As a result, the social benefit from public transportation is ________ the private benefit to those who use public transportation. A) equal to B) greater than C) less than D) unrelated to

Federal Trade Commission Act

Create a special agency to perform both investigative and adjudicative functions. Created Federal Trade Commission (FTC) Antitrust Division of Department of Justice (DOJ) deal with cases on monopolization and price fixing. FTC focuses on mergers.

increases output by an amount smaller than the output added by the previous worker.

Diminishing marginal product of labor occurs when adding another worker A) decreases output. B) increases output by an amount larger than the output added by the previous worker. C) increases output by an amount smaller than the output added by the previous worker. D) increases output by an amount equal to the output added by the previous worker.

"I was ready to pay $300 for a new snowboarding jacket but I ended up paying only $180."

Example of consumer surplus

Implicit Collision

Firms don't openly make an agreement, but use some other strategy to collude. More common because it is hard to prove firms are colluding. Example: gas prices

C) Harvey is affected by the endowment effect

Harvey Miller owns a baseball that was hit for a home run by Ted Williams. Harvey, a long-time Boston Red Sox fan, recently refused to sell his baseball for $75,000 even though he would not have paid someone more than $10,000 for the baseball if he did not already own it. Harvey explained his decision not to sell the baseball by noting that: "Ted Williams was my hero. This baseball has a great deal of sentimental value for me." Which of the following can explain Harvey's behavior? A) Harvey is unrealistic about his future behavior B) Harvey fails to ignore sunk costs C) Harvey is affected by the endowment effect D) Harvey is behaving like a rational consumer

C) the marginal utility per dollar spent on cracker jacks and peanuts will be equal.

If Dan buys cracker jacks and peanuts rationally, then A) the total utilities of cracker jacks and peanuts consumed will be equal. B) the average utilities of cracker jacks and peanuts consumed will be equal. C) the marginal utility per dollar spent on cracker jacks and peanuts will be equal. D) the marginal utility of cracker jacks and peanuts consumed will be equal.

A downward sloping straight line.

If opportunity costs are constant, the production possibilities frontier would be graphed as

A) the percentage change in quantity demanded is greater than the percentage change in price (in absolute value).

If the demand for DVDs is elastic, then

B) average variable cost must be downward sloping.

If the marginal cost curve is below the average variable cost curve, then the A) average variable cost curve must be upward sloping. B) average variable cost must be downward sloping. C) marginal cost curve must be downward sloping. D) average variable cost must be horizontal.

must lie below the free market equilibrium price.

In order to be effective, a price ceiling

B) must lie below the free market equilibrium price.

In order to be effective, a price ceiling A) must lie above the free market equilibrium price. B) must lie below the free market equilibrium price. C) must equal the free market equilibrium price. D) must be high enough for firms to earn a profit.

all of the firm's costs are variable costs; there are no fixed costs of production.

In the long run

D) generates enjoyment or satisfaction

Jason gets utility out of a skateboard since the skateboard A) is scarce. B) has a high price. C) can be used for several purposes. D) generates enjoyment or satisfaction.

Explicit Collision

Public and institutional agreement between colluding firms. Less common because they are illegal. Example: Organization of Petroleum Exporting Countries (OPEC)

B) Starbucks Coffee, coffee, hot beverages

Rank these three items in terms of the elasticity of the demand for them at any given price, from most elastic to least elastic: hot beverages, coffee and Starbucks Coffee. A) hot beverages, coffee, Starbucks Coffee B) Starbucks Coffee, coffee, hot beverages C) coffee, Starbucks Coffee, hot beverages D) coffee, hot beverages, Starbucks Coffee

Demand

Rational consumer behavior: maximize utility given budget constraint Demand curve reflects the benefit that people get from consuming a product

Supply

Rational firm behavior: maximize profits given costs Supply curve reflects the costs that firms incur from producing a product

Adam Smith

Scottish moral philosopher, who expressed the 1st economic breakthrough book "An Inquiry into the Nature and Cause of the Wealth of Nations" in 1776 - wanted to explain why people in some nations are wealthier than others - directed by the "invisible hand" of market prices towards the production of goods most advantageous to society - wealth is not gold and silver, but is the goods and services produced and conserved by people - believes that competitive markets lead to coordination, order, and efficiency (without central authority)

Produce a combination of goods that lies outside its own production possibilities frontier.

Specializing in the production of a good or service in which one has a comparative advantage enables a country to do all of the following EXCEPT A) engage in mutually beneficial trade with other nations. B) increase the quantity of products that it can consume with no increase in resources. C) consume a combination of goods that lies outside its own production possibilities frontier. D) produce a combination of goods that lies outside its own production possibilities frontier.

Implications

Supply and demand can explain a lot of real-world events.

B) above; below

The area ________ the supply curve and ________ the price is equal to the total amount of producer surplus in a market. A) above; above B) above; below C) below; above D) below; below

producer surplus

The area above the market supply curve and below the market price is equal to the A) consumer surplus. B) producer surplus. C) marginal benefit. D) marginal cost.

The points along and inside the production possibility frontier.

The attainable production points on a production possibility curve are

Opportunity Cost

The highest-valued alternative that must be given up to engage in an activity.

B) the additional output that results when one more worker is hired, holding all other resources constant

The marginal product of labor is defined as A) the additional sales revenue that results when one more worker is hired. B) the additional output that results when one more worker is hired, holding all other resources constant. C) the additional number of workers required to produce one more unit of output. D) the cost of hiring one more worker.

substitutes for the iPhone

The market for smart phones has grown rapidly over the past few years, due in part to the overwhelming success of the Apple iPhone. Following the successful launch of the iPhone in 2007, companies such as Samsung, HTC, and LG have all introduced products to compete with the iPhone. The smart phones introduced to compete with the iPhone would be considered

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

The price elasticity of demand is equal to

the economic cost of using a factor of production is the alternative use of that factor that is given up.

The principle of opportunity cost is that

A) production function.

The relationship between the inputs employed by a firm and the output that it can produce with those inputs is the firm's A) production function. B) supply curve. C) marginal product of labor. D) average product of labor.

Price Elasticity of Demand

The responsiveness of the quantity demanded to a change in price.

Collusion

The situation that occurs when rival firms cooperate for their mutual benefit.

Economic Surplus

The sum of consumer surplus and producer surplus.

an increase in the price of white wine grapes

Vineyards can grow either red wine grapes or white wine grapes on their land. Which of the following would cause the supply of red wine grapes to decrease? A) an increase in the demand for red wine grapes B) a decrease in the price of white wine grapes C) an increase in the demand for red wine grapes D) an increase in the price of white wine grapes

Economists study decisions made because we live in a world of scarcity Every action is subject to opportunity costs.

What is economics?

C) The demand for the Prius had decreased, and the supply of the Prius had increased.

When Toyota introduced its 2010 Prius, it announced that the average retail price of the 2010 model would be lower than the average retail price was for the equivalent 2009 model. Which of the following would explain the price differential? A) The demand for the Prius had increased, and the supply of the Prius remained unchanged. B) The supply of the Prius had decreased, and the demand for the Prius remained unchanged. C) The demand for the Prius had decreased, and the supply of the Prius had increased. D) The demand for the Prius had increased, and the supply of the Prius had decreased.

A) more than the economically efficient output level.

When a negative externality exists, the free market produces A) more than the economically efficient output level. B) less than the economically efficient output level. C) products at a low opportunity cost. D) products at a high opportunity cost.

D) Pharmaceutical manufacturers should not be allowed to patent their products so prescription drugs would be more affordable.

Which of the following is a normative economic statement? A) Rising global demand for coal has led to increases in the price of coal. B) With rising mortgage rates and rising unemployment rates, the number of unsold homes has increased. C) The state of Texas is considering increasing funds for light-rail development to promote the use of public transportation. D) Pharmaceutical manufacturers should not be allowed to patent their products so prescription drugs would be more affordable.

D) shortage

Which of the following occurs when the quantity demanded is greater than the quantity supplied at the current market price? A) equilibrium B) ceteris paribus C) surplus D) shortage

C) Demand for cereal is more elastic when you graduate from Loyola than it is today.

Which of the following statements about the price elasticity of demand of cereal is correct? A) Demand for cereal in general is more elastic than the demand for Cinnamon Toast Crunch, a particular brand of cereal. B) Demand for cereal, a necessity, is more elastic than the demand for Orioles baseball tickets, a luxury. C) Demand for cereal is more elastic when you graduate from Loyola than it is today. D) Demand for cereal, which takes up a smaller percentage of your income, is more elastic than the demand for apartments, which take up a larger percentage of your income.

D) The more narrowly we define a market, the more elastic the demand for a product will be.

Which of the following statements is TRUE? A) Products with no substitutes will have elastic demand. B) The more time that passes, the more inelastic the demand for a product becomes. C) The demand curve for a necessity is more elastic than the demand curve for a luxury. D) The more narrowly we define a market, the more elastic the demand for a product will be.

B) can produce more of something than others with the same resources.

You have an absolute advantage whenever you A) are better educated than someone else. B) can produce more of something than others with the same resources. C) prefer to do one particular activity. D) can produce something at a lower opportunity cost than others.

D) horizontal.

___ 1. The demand curve for an individual firm's product in perfect competition is A) the same as market demand. B) downward sloping. C) vertical. D) horizontal.

D) consumer surplus.

___ 1. The difference between the highest price a consumer is willing to pay for a good and the price the consumer actually pays is called A) producer surplus. B) price floor. C) price ceiling. D) consumer surplus.

B) At equilibrium, quantity demanded equals quantity supplied

___ 3. Which of the following is the correct way to describe equilibrium in a market? A) At equilibrium, demand equals supply. B) At equilibrium, quantity demanded equals quantity supplied. C) At equilibrium, market forces no longer apply. D) At equilibrium, scarcity is eliminated.

Elastic Demand Inelastic Demand

_____ demand: price elasticity of demand > 1 in absolute value _______ demand: 0 < price elasticity of demand < 1 in absolute value

competition

___________ is good in a market setting because it results in newer, better, less expensive goods and services. - it encourages discovery and innovation

rationing

allocating a limited supply of a good or resource among people who would like to have more of it ex) money - people are willing to work to make income and get what they want - first-come-first serve - political process

economizing behavior

choosing the option that offers the greatest benefit at the least possible cost

production possibilities curve

curve that outlines all possible combinations of total output that could be produced - graph that describes the max amounts of production that are possible with full utilization of given resources

fallacy of composition

erroneous/crazy (not right) view that what is true for an individual is true for the group

private property ownership

ex) TV, strong incentive to take care of things and develop resources valued by others

common property ownership

ex) the beach, can't prevent others from damaging it

macroeconomics

focuses on how human behavior affects outcomes in highly aggregated markets (like market for labor or consumer products) - focuses on big groups

microeconomics

focuses on how human behavior/decisions affects the conduct of affairs within narrowly defined units (house or business firm)

PV(1+i)^n = FV

future value equation

secondary effects

indirect impact of an event or policy that may not be easily or immediately observable - often unintended and over-looked ex) drinking lots of beer: direct = happy indirect = hangover

normative economics

judgement about "what ought to be" - can't be proved false, because it is based on judgments ex) saying that gas prices are too high

natural resources

land, mineral deposits, oceans, and rivers - type of resource

scientific thinking

making a theory from basic principles and testing it against events in the real world - focused on the general behavior of a large population

Horizontal merger

merger between firms at the same part of the production process of a good.

Vertical merger:

merger of firms involved in different parts of the production process of a good.

do not equal

opportunity costs _________________ accounting costs

middlemen

people who buy and sell goods or services or arrange trades - reduce transaction costs - help trade happen ex) auto dealer - helps the manufacturer and buyer groceries - connects farmers to regular people

scarcity

present whenever there is less of a good resource freely available from nature than people would like - when we desire more goods and services than nature could provide - objective/factual - limited nature of resources keeps us from being able to completely fulfill our desires for goods and services - always present

property rights

rights to use, control, and obtain benefits from a good or resource involves: 1. right to exclusive use of property (owner has possession and control) 2. legal protection against people who want to use or abuse it without owner's permission 3. right to transfer, sell, exchange or mortgage the property

is not equal to

scarcity __________________ poverty - scarcity is objective/factual and is when limited nature of resources keeps us from being able to completely fulfill out desires for goods and services (if you have to pay for something, it is scarce) - poverty is subjective - our personal opinion if someone makes a good income or not

positive economics

scientific study of "what is" among economic relationships - doesn't have to be correct, but must be testable ex) gas price rises so less people buy it

choice

the acts of selecting among alternatives - trade-offs

By definition economics is the study of

the choices people make to attain their goals, given their scarce resources.

opportunity cost

the highest valued alternative that must be sacrificed as a result of choosing an option - the cost of an action as measured by the value of the best alternative foregone

economics

the study of human behavior, focusing on decision making

utility

the subjective benefit or satisfaction a person expects from a choice or a course of action (opinion-based) ex) spend your money on chocolate or veggies

transaction costs

time, effort, and other resources needed to search out, negotiate, and complete exchange ex) internet lowers transaction costs

physical resources

tools, machines, and buildings that enhance our ability to produce goods (capital) - type of resource

value, wealth

trade creates ___________ and increases the ____________ created by a society's resources because it gives goods to those who value them the most

marginal

used to describe the effects of a change in the current situation ex) comparing prices and seeing if the extra money is worth it or not - additional/extra

1. violating the ceteris paribus (other things constant) 2. good intentions do not guarantee desirable outcomes 3. association is not causation 4. what is true for one might not be true for all

what to avoid in economic thinking

benefit

when people engage in voluntary exchange (trade), both parties _______________ - trade doesn't create new material items - but they won't trade unless both parties _________________