ECON 1 Final Review

Determinants of the elasticity of demand

Substitution possibilities, budget share, time

Total economic surplus

TS = CS + PS (buyer's reservation price - seller's reservation price)

If the price elasticity of demand equals .1, then demand is

inelastic

The level of an activity should be increased if

its marginal benefit exceeds its marginal costs

Utility Maximization

p1x1 + p2x2 = M MRS = P1/P2

If economic profit is 0, Accounting profit is

positive

Producer surplus

price seller receives for a product minus the seller's reservation price PS= P* - seller's RP

CPC (Consumption Possibilities Curve)

quantities of goods and services that a country can consume without trade CPC = PPC

Socially Optimal Quantity

quantity that maximizes the total economic surplus that results from producing and consuming the good

It takes Sam 5 minutes to make a pot of coffee and 20 minutes to make an omelet, while it takes Tom 6 minutes to make a pot of coffee and 30 minutes to make an omelet. According to the theory of comparative advantage, both Tom and sam will be able to consume more if: [-sam specializes in omelets and tom specializes in coffee -tom specializes in omelets and sam specializes in coffee -tom specializes in both -sam specializes in both]

sam specializes in omelets and tom specializes in coffee

Scarcity Principle

scarcity makes trade-offs necessary

Joaquin's marginal utility from an additional piece of pumpkin pie is 4 utils, and his marginal utility from an additional piece of pecan pie is 6 utils. If a piece of pumpkin pie costs $2.50 and a piece of pecan pie costs $3.00, then Joaquin

should reallocate his spending towards pecan pie and away from pumpkin pie

The rational spending rule

spending should be allocated across goods so that the marginal utility per dollar is the same

When the cross price of elasticity of demand for two goods is positive, then the two goods are

substitutes

Marginal utility

the additional utility gained from consuming an additional unit of a good

Economic surplus

the benefit of taking an action minus its cost

elastic

the demand for a good is elastic with respect to price elasticity of demand is greater than 1

inelastic

the demand for a good is elastic with respect to price if its price elasticity of demand is less than 1

unit elastic

the demand for a good is unit elastic with respect to price if its price elasticity of demand equals 1

Consumer surplus

the difference between the buyer's reservation price for a product and the price actually paid CS = buyer's RP - P*

Marginal benefit

the increase in total benefit that results from carrying out one additional unit of an activity

Marginal cost

the increase in total cost that results from carrying out one additional unit of an activity

As output rises, marginal cost eventually increases because of

the law of diminishing returns

Who bears the burden of the tax?

when elasticity of demand is higher than supply, producers bear the burden of the tax, and when elasticity of supply is higher than elasticity of demand, the consumers bear the burden of the tax

Implicit costs

opportunity costs of the resources provided by the firm's owner

Income elasticity of demand formula

% change in quantity demanded / % change in income

Cross-price elasticity of demand formula

% change quantity of good x / % change price of good y

Factors that Increase Supply

-A reduction in the price of inputs used in the production process (land, labor, capital) -An improvement in technology that reduces production costs -An improvement in weather -An increase in the number of suppliers -A decrease in expected future prices

Factors that Increase Demand

-An increased preference for goods or service -An increase in income (normal goods) -A decrease in income (inferior goods) -A decrease in the price of a complementary good or service -An increase in the price of a substitute good or service -An increase in population -An increase in expected future prices

If price rises by 12 percent, and in response, the quantity supplied increases by 3 percent, then the price elasticity of supply equals

.25

If the price elasticity of demand for peanut butter is .12, and the price increases by 3%, then the quantity demanded will decrease by

0.36 percent

Opportunity cost of good on y-axis

1 / |slope|

2 Formulas for Price Elasticity

1) % change in Qd / % change in price % change in Qs / % change in price 2) P/Q x 1/|slope|

It takes Sam 5 minutes to make a pot of coffee and 20 minutes to make an omelet, while it takes Tom 6 minutes to make a pot of coffee and 30 minutes to make an omelet. What is Tom's opportunity cost of making a pot of coffee?

1/5 of an omelet.

What might cause an increase in the supply curve (shift to the right)? [-an announcement that leads people to believe that coffee prices will be higher next year -a decrease in the price of fertilizer -an increase in the price of land in regions where coffee is grown -more than one of the above is correct -none of the above answers are correct]

A decrease in the price of fertilizers

Law of Demand

All else equal, the higher is the price of the good, the lower is the quantity demanded

The Cost-Benefit Principle

An individual (or a firm or a society) should take action if and only if the extra benefits from taking the action are at least as great as the extra costs

Prices will tend to be the least volatile in markets in which: [-both supply and demand are relatively elastic -both supply and demand are relatively inelastic -supply is highly elastic and demand is highly inelastic -supply is highly inelastic and demand is highly elastic]

Both supply and demand are relatively elastic

Income Effect

Change in quantity demanded of a good that results from the reduction in purchasing power when the price of the good increases

Factors that affect the PPC

Economic growth (increases in productive resources, improvements in knowledge or technology)

Determinants of price elasticity of supply

Flexibility of inputs, mobility of inputs, ability to produce substitute inputs, time

Catherine and Sean each spend $800 per month on food, but while Catherine earns $100,000 per year, Sean only earns $60,000 per year. All else equal, given this information, you would expect the price elasticity of demand for food to be: [-higher for Catherine than Sean -higher for Sean than Catherine -the same for Catherine and Sean -greater than 1 for both Catherine and Sean -equal to 1 for both Catherine and Sean]

Higher for Sean than Catherine

Suppose Karl divides his time between making birdhouses and growing artichokes. Karl's friend recently gave Karl some new woodworking tools that greatly reduced the amount of time it takes Karl to grow artichokes. Thus, the new tools, ___________ Karl's opportunity cost of growing artichokes

Increased

Winners and losers

Increases aggregate surplus -winners: consumers of important goods, producers of exported goods -losers: consumers of exported goods, producers of imported goods

When Thurston catches 10 fish a day, he can gather a maximum of 40 coconuts, and when he catches 20 fish a day, he can gather a maximum of 30 coconuts. If Thurston's opportunity cost of producing each good increases as he produces more of it, and he decides to catch 30 fish a day, the maximum number of coconuts he can gather must be

Less than 20

Budget constraint

M (income) = p1x1 + p2x2 (price times quantity)

Marginal rate of substitution

MRS = MU1/MU2 (1 on the x axis, 2 on the y)

Utility Maximization formula

MU1/P1 = MU2/P2

An increase in the equilibrium price and quantity of eggs is best explained by: [-An increase in the price of chicken feed -A decrease in the price of bacon if bacon and eggs are complements -a decrease in income if eggs are an inferior good -more than one of the above answers is correct -none of the above answers are correct]

More than one of the above answers are correct [a decrease in the price of bacon if bacon and eggs are complements and a decrease in income if eggs are an inferior good]

Total expenditure

P x Q

If supply and demand move in the opposite direction, then you can make definitive predictions about ___ but not ___

P*, but not Q*

Suppose the market demand curve is given by Qd=150-30P, and the market supply curve is given by Qs=30+10P. What is the equilibrium price and quantity?

P*=$3.00 Q*=60

Market Equilibrium

Price equals the Quantity supplied and Demanded P*=Q*

Profit Formula

Profit = TR - TC (total revenue - total cost)

If supply and demand move in the same direction, then you can make definitive predictions about ___ but not ___

Q*, but not P*

Economic Profit

Revenue - (Explicit + Implicit)

Accounting profit

Revenue - Explicit Costs

Revenue

Revenue = PQ = Total Expenditure

It takes Sam 5 minutes to make a pot of coffee and 20 minutes to make an omelet, while it takes Tom 6 minutes to make a pot of coffee and 30 minutes to make an omelet. Which of the following statements is correct? [-sam has a comparative advantage in omelets, but Tom has an absolute advantage in omelets. -tom has a comparative advantage in omelets, but sam has an absolute advantage in omelets -sam has both an absolute advantage and a comparative advantage in omelets -tom has both an absolute advantage and a comparative advantage in coffee]

Sam has both an absolute advantage and a comparative advantage in omelets

If plums and bananas are substitutes, then a decrease in the price of bananas will do what to the demand for plums?

Will lead to a decrease in the demand for plums [most likely]

Efficiency (or economic efficiency)

a condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels

Sunk costs

a cost that is beyond recovery at the moment a decision must be made

Which of the following will lead to an increase in supply of tennis balls? [-a decrease in the price of tennis racquets -an increase in the price of rubber used to make tennis balls -a decrease in the expected future price of tennis balls -more than one of the above answers is correct -none of the above answers are correct]

a decrease in the expected future price of tennis balls

Production Possibilities Curve (PPC)

a graph that shows the max amount of one good that can be produced for every possible level of production of the other good

Explicit costs

actual payments that a firm makes to its factors of production

Marginal product of labor (MPl)

additional output a firm gets by employing one additional unit of labor

where along a ppc will a country produce?

balancing marginal cost with marginal benefit marginal cost is its opportunity cost (slope ppc)

Substitution Effect

change in the quantity demanded of a good that results from buyers substituting into other goods when the price of that changes

Marginal revenue

change in total revenue from 1 unit increase in quantity sold

Allocative function of price

changes in prices direct resources away from overcrowded markets and towards markets that are undeserving

When the cross price of elasticity of demand for two goods is negative, then the two goods are

complements

Cross price is negative when two goods are _________ and positive when two goods are ________

complements ; substitutes

Rationing function of price

consumers who are purchasing product have higher reservation prices; prices naturally mean people who are willing to pay more to get them

Value of MPl (VMPl)

dollar value of the additional output a firm gets by employing 1 additional unit of labor

Excess supply causes prices to go

down

When Lorenzo eats 1 piece of pizza for lunch, his total utility is 23, and when he eats 2 pieces of pizza for lunch, his total utility is 42. Assuming that Lorenzo's marginal utility from eating pizza is always positive, we can infer that his total utility from eating 3 slices of pizza is

greater than 42 and less than 61

If the income elasticity of demand for hamburgers is negative and the income elasticity of demand for bacon is positive, then we know that: [-hamburgers and bacon are complements -hamburgers and bacon are substitutes -hamburgers are a normal good and bacon is an inferior good -hamburgers are an inferior good and bacon is a normal good]

hamburgers are an inferior good and bacon is a normal good

Marginal product

increase in total product given a one unit increase in input

As we produce more of a good, the OC of producing that good

increases

When supply shifts, P%Q

move in opposite directions

When demand shifts, P&Q

move in the same direction

Income elasticity of demand is positive when it is a ______ good and negative when it is a _______ good

normal ; inferior

Free trade agreements are often opposed because: [-free trade does not increase the total value of goods and services produced by a country -if a country has an absolute advantage in the production of a good, then there are no benefits to trading that good with other nations -free trade agreements do not consider the impact of trade on either the environment or working conditions -not everyone within a country will benefit from free trade]

not everyone within a country will benefit from free trade

Economic rent

the part of the payment for a factor of production that exceeds the owner's reservation price

Price elasticity of demand

the percentage change in the quantity demanded of a good or service that results from a 1% change in price

Utility

the satisfaction people get from their consumption activities (measured in utils)

Average benefit

the total benefit of undertaking N units of an activity divided by N

Average cost

the total cost of undertaking N units of an activity divided by N

Opportunity cost

the value of what must be forgone to undertake an activity

Average product

total product divided by the quantity of input used

Total product

total quantity produced at a given level of inputs

Imports

total surplus goes up -consumer surplus goes up -producer surplus goes down

Exports: winners and losers

total surplus goes up cs goes down ps goes up

Excess demand causes prices to go

up

When S&D are elastic, the quantity bought and sold is __________ but prices are more stable

volatile

When S&D are relatively inelastic, prices tend to be _________ but the quantity bought and sold in the market are relatively stable

volatile

|slope PPC| =

|slope CPC|

Opportunity cost of good on x-axis

|slope|