Study guide for Microeconomics 2

What happens to demand when there is a change in the number of consumers:

# Consumers↑ → D↑

Use the table below to choose the correct answer. The table is a schedule of the supply and demand for ground hamburger meat (both given in thousands of pounds per month). Price per Pound Quantity Demanded Quantity Supplied $0.50 16 1 $1.00 13 3 $1.50 10 5 $2.00 7 7 $2.50 4 9 $3.00 1 11 The equilibrium market price of ground hamburger meat would be a. $1 per pound. b. $2 per pound. c. $2.50 per pound. d. $3 per pound.

$2 per pound.

Income Elasticity formula

% change in quantity demanded / % change in income Inferior Good = Income Elasticity < 0 Necessity Good = 0< Income Elasticity <1 Luxury Good = Income Elasticity >1

price elasticity of demand formula

% change in quantity demanded / % change in price

cross price elasticity formula

% change in quantity demanded of good A / % change in price of good B

Price Elasticity of Supply formula

% change in quantity supplied / % change in price

Price Elasticity of Supply formula

% change in quantity supplied / % change in price Complements = Cross-Price Elasticity is Negative Substitutes = Cross-Price Elasticity is Positive

Understand how the labor market and goods and services market are linked together

-It works the same as the market for goods and services, with just a different name for price and quantity

Market Equilibrium/ when is it efficient? What happens when there is excess supply or excess demand?

-Market Equilibrium: A state in which the conflicting forces of supply and demand are in balance.-Occurs where the demand curve intersects the supply curve.-The market equilibrium is economically efficient.Efficient: no excess supply or excess demandExcess supply: quantity supplied > quantity demandedExcess demand: quantity demanded > quantity supplied Understand the invisible hand

What are price floors? What does a price floor above equilibrium price create? Below?

-Price floor: A legally established minimum price buyers must pay for a good or resource -A price floor above equilibrium price creates a surplus -A price floor below equilibrium price does nothing -The minimum wage is an example of a price floor. Raising minimum wage increases excess labor supply (unemployment)

Understand how the labor market works:1. Know why labor demand is downward sloping2. Know why labor supply is upward sloping

-Price for labor is called the wage (W) -Quantity of labor is called employment (E)Firms demand labor - Labor demand curve is downward sloping because as wage decreases, firms will want to employ more people ---- Workers supply labor - Labor supply curve is upward sloping because as wage increases, people will want to work more

Understand the law of supply and why supply curves are upward sloping.

-The law of supply: There is a direct (positive) relationship between the price of a good or service and the amount that suppliers are willing to produce- Results in an upward sloping supply curve

Understand the law of demand and why demand curves are downward sloping.

-There is an inverse (negative) relationship between the price of a good and the quantity that buyers are willing to purchase -Results in a downward sloping demand curve.

Know the shifters of supply:

1. A change in resource price: Presource ↑→ S↓ 2. A change in technology: Technology ↑ → S↑ 3. A change in Nature or Politics: Depends on Change 4. A change in taxes: Taxes ↑ → S↓

What are the four factors that shift the production possibilities curve inward and outward?

1. A change in the economy's resource base *Investment: the purchase, construction, or development of resources 2. A change in technology 3. A change in the rules under which an economy functions 4. A change in work habits

• Know everything there is to know about market equilibrium:

1. All trades generating more benefits than costs are undertaken 2. No trades generating more costs than benefits are undertaken 3. The combined area of producer and consumer surplus is maximized 4. There is no excess supply or excess demand

Name the four pitfalls to avoid in economic thinking:

1. Violation of the ceteris paribus principle 2. The belief that good intentions equal desirable outcomes * The Nirvana Fallacy: The logical error of comparing the actual situation with its idealized counterpart rather than the actual alternative. (grass is always greener on the other side) 3. The belief that association is causation 4. The fallacy of composition

What are the 3 questions that every economy faces?

1. What will be produced? 2. How will it be produced? 3. For whom will it be produced?

What are the shifters of demand?

1. change in income 2. change in price of a related good 3. change in customer's taste 4. change in # of buyers 5. change in future expectations of price

Human Economic Resources

A human resource includes people who run farms and factories.

natural economic resources

A natural resource is collecting objects such as gold and oil from the earth

Individuals are rational (TRUE OR FALSE)

A person will maximize his/her utility(happiness) at the minimum cost. Very subjective.

incentive theory

A theory that states that people are motivated by external rewards. Incentives matter: people respond in predictable ways to changes in costs and benefits

What happens to demand when there is a change in Expectations

A. Expected Price: Pfuture ↑ → D↑ B. Expected Income: Ifuture ↑ → D↑

What Happens to Demand When There Is A Change in Consumer Income (For Normal And Inferior Goods):

A. Normal Goods: I↑ → DNormal ↑ B. Inferior Goods: I↑ → DInferior ↓

What happens to demand when there is a change in the price of a related good (for substitutes and compliments):

A. Substitutes: Psubstitute ↑ → D ↑ B. Compliments: Pcompliments ↑ → D↓

What is consumer surplus and where do you find it on a graph?

Consumer surplus: The difference between the maximum amount consumers would be willing to pay and the amount that they actually pay . -Consumer surplus is the area below the demand curve but above the price. ex. What happens if price falls? rises?

What are secondary effects?

Effects that happen later on, often as a result of the primary effects.

Be able to read a production possibilities curve and identify efficient, inefficient, and unattainable points, as well as what is produced at each point and what is given up and gained when moving from one point to another.

Efficient points: * *Produced *Given up: *Gained: Inefficient points:* *Produced *Given up: *Gained: Unattainable points: * *Produced *Given up: *Gained:

Complements = Cross-Price Elasticity is Positive TRUE OR FALSE

FALSE

Substitutes = Cross-Price Elasticity is Negative TRUE OR FALSE

FALSE

Understand how voluntary trade creates value and leads to economic progress

How trade creates value... 1. When individuals engage in voluntary exchange, both parties are made better off 2. By channeling goods and resources to those who value them most, trade creates value and increases the wealth created by a society's resources.

Price of elasticity What do the results mean if they're more than one? Equal to one? Less than one?

If the answer equals more than one: elastic Equals to one: unitary elastic Less than one: inelastic

income elasticity of demand

Income Elasticity = = (%Δ𝑄)/(𝐷%Δ𝐼)=((𝑄0―𝑄1)/(𝑄0+𝑄1))/((𝐼0―𝐼1)/(𝐼0+𝐼1))

Understand the concepts of elasticity of supply and elasticity of demand; what kinds of curves for each?

Inelastic: not as responsive to a change in price (steeper curves)Elastic: more responsive to a change in price (flatter curves)

Why do we often make decisions without full information?

Information helps us make better choices, but is costly

Use the following information to answer the the following question(s). JoAnn considers cola and plain sparkling water to be good substitutes. Suppose the price of sugar, a key ingredient used to produce cola, falls. According to the substitution effect, which of the following is most likely to occur? a. JoAnn will purchase less cola and more sparkling water. b. JoAnn will purchase more cola and less sparkling water. c. JoAnn will purchase more of all goods due to her higher real income. d. JoAnn's demand curve will decrease (shift in), causing her to purchase less cola.

JoAnn will purchase more cola and less sparkling water.

Scarcity

Limited quantities of resources to meet unlimited wants

Individuals make decisions at the margin: What does marginal specifically mean? What is a cost-benefit analysis (like the drive or fly example)?

Marginal: Describes the effect of a change in the current situation ex. Ponderosa Buffet ex. Supersizing your extra value meal ex. Drive or Fly Cost-benefit analysis: one will undergo an action when the marginal benefits outweigh the marginal costs*

Price Elasticity of Demand =

Price Elasticity of Demand = (%Δ𝑄𝐷)/(%Δ𝑃)=((𝑄0―𝑄)/(1𝑄0+𝑄1))/((𝑃0―𝑃1)/(𝑃0+𝑃1)) Take the Absolute Value (Ignore the negative)

Price Elasticity of Supply=

Price Elasticity of Supply= (%Δ𝑄𝑆)/(%Δ𝑃)=((𝑄0―𝑄1)/(𝑄0+𝑄1))/((0―𝑃1)/(𝑃0+𝑃1)) Always Positive

Know how to find and calculate producer surplus involving one or more individuals, or on a graph (the area above the supply curve, but below price)

Producer surplus: The difference between the minimum price suppliers are willing to accept and the price they actually receive. - Producer surplus is the area above the supply curve but below price. ex. What happens if price falls? Rises?

What is the difference between a change in quantity demanded and a change in demand?

Quantity Demanded: a movement along the curve caused by a change in the price of the good in question Change in Demand: a shift of the curve caused by anything other than the change in price of the good in question

Understand the difference between socialism and capitalism and know why capitalism tends to work better at creating economic growth and progress.

Socialism: A system of economic organization where ownership and control of the means of production rest w the state (ie N Korea) -Resource allocation is determined by centralized planning -Collective Decision Making: method of organization that relies on public sector decision making to solve problems Capitalism: 1) Productive resources are owned privately 2) goods and resources are allocated through market prices

consumer equilibrium

The condition in which an individual consumer's budget is spent and the last dollar spent on each good yields the same marginal utility; therefore, utility is maximized.

How a change in price affects revenue will depend on price elasticity of demand

The quantity effect dominates

If we observe a decrease in the price of a good and a decrease in the amount of the good bought and sold, this could be explained by a. an increase in the supply of the good. b. an increase in the demand for the good. c. a decrease in the demand for the good. d. a decrease in the supply of the good.

a decrease in the demand for the good.

A capital resource

a tool, machine, or building that people use to produce goods and services

Know that elasticity is higher (more elastic) when.... (a-e)

a. As you move up the straight line demand curve .b. When there are more good substitutes .c. When the product is more narrowly defined .d. When it makes up a large share of the When it makes up a large share of the consumer's budget e. in the long-run

The test of a theory is its ___________.

ability to predict

Know what transaction costs are and understand the importance of middlemen

Transaction Costs: The time, effort, and other resources needed to search out and complete an exchange. Middleman: A person who buys and sells goods or services or arranges trades. A middleman reduces transaction costs.

When a reduction in the price of a good allows a consumer to purchase more of all goods, this effect is called the a. income effect. b. substitution effect. c. elasticity effect. d. monetary effect.

income effect.

when external costs (negative externalities) are present in a market,

more of the good will be produced than the amount consistent with economic efficiency

The three kinds of economic resources are

natural, human, and capital resources

What's the difference between positive and normative economic statements?

positive economic statements are testable, normative economic statements are not.

To an economist, the term "demand" means a. the amount people are willing to purchase at various prices. b. those wants or needs that are urgent or pressing. c. wants that are economic in character rather than social, cultural, or spiritual. d. the desire of persons for a good, regardless of whether they are willing to pay the price necessary to purchase it.

the amount people are willing to purchase at various prices.

If widgets and gidgets were substitutes, an increase in the price of gidgets would cause a. the demand for widgets to increase. b. the demand for widgets to fall. c. the demand for widgets to remain unchanged, it would only affect the quantity demanded of widgets. d. none of the above

the demand for widgets to increase.

How a change in price affects revenue will depend on price elasticity of demand unitary

the effects are the same (no change in total revenue)

Know that the height of the demand curve is?

the maximum price consumers are willing to pay for an additional unit

Know that the height of the supply curve is:

the minimum price that sellers are willing to accept to supply an additional unit.

How a change in price affects revenue will depend on price elasticity of demand Inelastic

the price effect dominates

law of diminishing marginal utility

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

Economics

the study of how society manages its scarce resources

Suppose the price of widgets falls, and as a result, the demand for gadgets increases. We can conclude that a. widgets and gadgets are substitutes. b. widgets and gadgets are complements. c. widgets and gadgets are unrelated products. d. the value of gadgets to consumers is greater than the value of widgets.

widgets and gadgets are complements.

If Joe's income increased, and as a result, he purchased more wine and less fast food, a. wine is a normal good and fast food is an inferior good for Joe. b. wine is an inferior good and fast food is a normal good for Joe. c. both wine and fast food are inferior goods for Joe. d. both wine and fast food are normal goods for Joe.

wine is a normal good and fast food is an inferior good for Joe.

Know the characteristics of private property rights and four incentives they provide:

1. Use resources in ways that other people value 2. Care for and manage what you own 3. Conserve for the future 4. Make sure your property does not damage anybody else's property

two reasons why when the price of a good increases (decreases), people will buy less (more) of the good

1. Income effect 2. Substitution effect

Know the 8 guideposts to economic thinking:

1. Resources are scarce, so decision makers must make tradeoffs (Know the concept of opportunity cost) 2. Individuals are rational: They try to get the most from their limited resources 3. Incentives matter: people respond in predictable ways to changes in costs and benefits 4. Individuals make decisions at the margin: Be able to calculate marginal benefits, marginal costs, and perform a cost-benefit analysis (drive or fly example) 5. Information helps us make better choices, but is costly: we often make decisions without full information 6. Beware of secondary effects 7. The value of a good or service is subjective 8. The test of a theory is its ability to predict

A firm has the choice to use $10,000 worth of resources to produce one of two goods A or B. Suppose that the total value to consumers of the two goods (as is reflected in the revenue the firm could get for selling these goods) was $7,000 for good A and $15,000 for good B. Which of the following would be true? a. The firm would make more profit if it chose to produce good B than good A. b. The total value for consumers created by this firm would be higher if it produces good B than if it produces good A. c. If the firm could find another good to produce with these resources that could sell for $20,000, it would create even more value for consumers (as well as more profit) .d. All of the above are true.

All of the above are true.

Studies indicate the demand for cigarettes is highly inelastic, while the demand for green peas tends to be elastic. Other things constant, how will this affect the incidence of an excise tax on these products? a. Consumers will tend to bear a greater share of the burden of an excise tax on cigarettes than of an excise tax on peas. b. Consumers will tend to bear a greater share of the burden of an excise tax on peas than of an excise tax on cigarettes. c. Producers will bear a greater share of the burden of an excise tax on cigarettes than of an excise tax on peas. d. Uncertain; elasticity of demand exerts no impact on how the burden of an excise tax is distributed between consumers and producers.

Consumers will tend to bear a greater share of the burden of an excise tax on cigarettes than of an excise tax on peas.

opportunity cost

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another

cross price elasticity

Cross - Price Elasticity = = (%Δ𝑄𝐷𝑋)/(%Δ𝑃𝑌)=((𝑄0𝑥―𝑄1𝑥)/(𝑄0𝑥+𝑄1𝑥))/((𝑃0𝑦―𝑃1𝑦)/(𝑃0𝑦+𝑃1𝑦)) Complements = Cross-Price Elasticity is Negative Substitutes = Cross-Price Elasticity is Positive

What happens to supply when there is a change in nature or politics?

Depends on the Change

Which of the following is true? a. If a government program generates more costs than benefits, from an efficiency standpoint, it should be undertaken. b. If a government program generates more cost than benefits, the program should be subsidized. c. Economists use the standard of economic efficiency when judging alternative policies and outcomes. d. All of the above are true.

Economists use the standard of economic efficiency when judging alternative policies and outcomes.

What happens to supply when there's a change in resource price?

Presource ↑→ S↓

Complements = Cross-Price Elasticity is Negative TRUE OR FALSE

TRUE

Substitutes = Cross-Price Elasticity is Positive TRUE OR FALSE

TRUE

What happens to demand when there is a change in consumer tastes and preferences?

Tastes and Preferences↑ → D↑

What happens to supply when there is a change in taxes?

Taxes ↑ → S↓

What happens to supply when there's a change in technology?

Technology ↑ → S↑

the PPC outlines what/ assumes what?

The PPC outlines all possible combinations of total output that could be produced, assuming a: 1. fixed amount of productive resources 2. given amount of technical knowledge 3. full and efficient use of resources

Understand the invisible hand principle.

The tendency for people, while pursuing their own interests, to promote the economic well-being of society. ex. Lines at Walmart

Explain the law of comparative advantage:

The total output of a group of individuals, an entire economy, or a group of nations will be greatest when the output of each good is produced by whoever has the LOWEST opportunity cost.

Which of the following provides the best example of a public good? a. elementary and secondary education b. residential trash pickups provided by a local government c. an unscrambled television signal d. the medical services provided by a local hospital

an unscrambled television signal

(I) People in low income countries should not be allowed to work at jobs that pay less than $5 an hour. (II) Internet music swapping software reduces the number of new CDs purchased at full price. a. I is a positive economic statement; II is a normative statement. b. I is a normative economic statement; II is a positive statement. c. Both I and II are positive statements. d. Both I and II are normative economic statements.

b. I is a normative economic statement; II is a positive statement.

(I) Competition reflects the allocation of goods through markets; if goods were allocated by some other method, competitive behavior would be absent. (II) The market system encourages individuals to engage in competitive behavior that is expected to enhance their personal income. a. I is true; II is false b. I is false; II is true. c. Both I and II are true. d. Both I and II are false.

b. I is false; II is true.

The value of a good is a. objective .b. subjective. c. independent of who consumes the good. d. determined by the amount of labor required to produce it.

b. subjective.

All things equal, the price elasticity of supply a. will be greater in the short run than in the long run. b. will be greater in the long run than in the short run. c. is the same for the short run and the long run. d. approaches zero in the long run.

b. will be greater in the long run than in the short run.

1.Economics is primarily the study of a. why people like to make money. b. the management of a business. c. the choices people make as the result of scarcity. d. how to make money in the stock market.

c. the choices people make as the result of scarcity.

If consumer purchases of a good are highly sensitive to the price of the good, this is illustrated by a a. demand curve that is relatively flat (more horizontal). b. demand curve that is relatively steep (more vertical). c. supply curve that is relatively flat (more horizontal). d. supply curve that is relatively steep (more vertical).

demand curve that is relatively flat (more horizontal).

The spillover effects of actions that affect the well-being of nonconsenting third parties are called a. side components. b. externalities. c. free riders. d. internalizations.

externalities.

The price of a product falls from $15 to $10, and as a result, the quantity demanded increases from 240 to 300 units. We can conclude that over this range the price elasticity of demand for the product is a. elastic. b. inelastic. c. of unitary elasticity. d. equal to -0.4.

inelastic.

The opportunity cost of an option a. measures the undesirable aspects of the option. b. includes only the monetary cost of the option. c. is the highest-valued alternative that must be given up as the result of choosing the option. d. is objective, and it will be the same for all individuals.

is the highest-valued alternative that must be given up as the result of choosing the option.

Which of the following are the four major factors that may undermine the ability of the invisible hand to produce market efficiency? a. externalities, private goods, poorly informed buyers or sellers, lack of competition b. public goods, externalities, lack of competition, poorly informed buyers or sellers c. competition, poorly informed buyers or sellers, externalities, public goods d. public goods, lack of competition, well-informed buyers and sellers, externalities

public goods, externalities, lack of competition, poorly informed buyers or sellers

Know the difference between a change in quantity supplied and a change in supply

quantity supplied: a movement along the curve caused by a change in the price of the good in question a change in supply: a shift of the curve caused by anything other than the change in price of the good in question

The value of a good or service is ___________.

subjective

The law of comparative advantage explains why a. specialization and exchange will make it possible for trading partners to expand their joint output. b. there will be an inverse relationship between the price of a product and the quantity of it that will be demanded. c. larger firms will have lower per unit costs than smaller firms. d. an increase in the price of a good will lead to an expansion in the quantity supplied by business firms.

specialization and exchange will make it possible for trading partners to expand their joint output.

The Laffer curve illustrates the principle that a. when tax rates are quite high, reducing tax rates will increase tax revenue. b. when tax rates are quite low, reducing tax rates will increase tax revenue. c. when tax rates are quite high, reducing tax rates will decrease tax revenue. d. increasing tax rates always increases tax revenue.

when tax rates are quite high, reducing tax rates will increase tax revenue.