Economics 1 Quiz 1

opportunity cost

meausres cost by what is given up in exchange

law of supply

the common relationship that a higher price is associated with a greater quantity supplied.

fixed costs

expenditures that msut be made before production starts and that do not change regardless of the level of production. examples include machinery or equipment, phsyical space, research and development costs

in a ppf the trade-off are represented by

a curved line because the law of diminishing returns holds as resources are added to an area, the marginal gains tend to diminish.

monopoly

a firm faces no competitors

fixed costs are sunk costs in the short run

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for more on marginal increase, etc see page 260

...

profit = total revenue - total cost

...

the average cost curve is

U-shaped far left: cost starts relatively high because little output, so the denominator is close to zero. average cost then declines as the fixed costs are spread over an increasing quantity of output. in the calculation, the rise in the numerator of total costs is relatively small compared to the rise in the denominator of quantity produced. but as output expands, average cost begins to rise- at the right side of curve, total costs begin rising more rapidly as diminishing returns kick in.

budget constraints and ppf's shift

budget constraint shift either as a result of movements of income or of prices. ppf shift either as a national economy expands or as the trade-offs between two good shift

marginal analysis

comparing the benefits and costs of choosing a little more or a little less of a good

Supply= Demand is known as

competitive equilibrium

variable costs

costs of production that increase with the quantity produced

variable costs often show a pattern of...

diminishing marginal returns, which occurs when the marginal gain in output diminishes as each additional unit of input is added.

average cost is calculated by...

dividing the total cost by the quantity of output.

perfect competition

each firm faces many competitors that sell identical products

when a firm looks at its total costs of production in short run, they can be divided into two categories...

fixed costs that can't be changed in the short run and variable costs that can be

law of diminishing returns

holds that as increments of additional resources are devoted to producing something, the marginal increase in output will become smaller and smaller

all choices on the ppf show...

productive efficiency because in such cases, there is no way to increase the quantity of one good without decreasing the quantity of the other.

average cost tells a firm whether it can earn profits given the price in the market.

profit= total revenue - total cost profit= (price)(quantity produced) - (average cost)(quantity produced)

if the marginal cost of production is below the average cost for producing previous units, as it is for the points left of where the MC crosses the AC, then producing one more additional unit will reduce average cost overall. and vise versa

refer to page 262

the slope of the budget constraint is determined by the...

relative price of the choices.

normative statements

statements which describe how the world should be

the average variable price reveals whether...

the firm is earning profit if fixed costs are left out of the calculation

comparative advantage

the goods in which a nation has its greatest productivity advantage or its smallest productivity disadvantage; also, the goods that a nation can produce at a lower cost when measured in terms of opportunity cost.

in a budget constraint the trade-off is determined by...

the relative prices of the goods.

Adam Smith's metaphor of the invisible hand suggests...

the remarkable possibility that broader social good can emerge from selfish individual actions

Demand curve tells us...

the total amount of a good that buyers would want to buy at each possible price

total revenue is quantity times price

...

three questions of economists

1. what is produced? 2. How is it produced? 3. For whom is it produced?

marginal cost

is calculated by taking the change in total cost between two levels of output and dividing by the change in output.

labor is considered a variable cost

since producing a greater quantity of a good or service typically means more workers, other examples include physical inputs like the metal and plastic involved in manufacturing a car or cloth for clothes

the budget constraint, also called opportunity set illustrates...

the range of possible choices available.

an interest rate has three components:

the risk premium to cover the risk of not being repaid, the rate of expected inflation, and the time value of money.

Supply curve tells us...

the total amount of a good that suppliers would want to sell at each possible price

the main economic trade-off for individuals are their decisions about..

what to consume, how much to work, and how much to save.

efficiency

when it is impossible to get more of something without experiencing a trade-off of less of something else

productive efficiency

when it is impossible to produce more of one good without decreasing the quantity produced of another good.

oligopoly

when several large firms have all or most of the sales in an industry

economies of scale

when the average cost of producing each individual unit declines as total out increases

economies of scale

when the average cost of producing each individual unit declines as total output increases

the total revenue for a profit-seeking firm is determined by the price that a firm can charge and the quantity that it can sell...

which in turn will be related to demand for its products and on the number of other firms that are selling similar or identical products.

variable cost at each level of output is determined (in barber shop example) by...

taking the amount of labor hired times the wage

utility

the level of satisfaction or pleasure that people receive from their choices

low marginal costs of production first pull down average costs and then higher marginal costs pull them up

the marginal cost curve meets the average cost curve at the bottom of the ac curve.

law of diminishing marginal utility

as a person receives more of a good, the marginal utility from each additional unit of the good is smaller than from the previous unit

variable costs are represented...

as the point where the total cost curve touches the vertical axis; that is, they are the costs incurred even if output is zero.

Formula for how compound interest accumulates over time is:

(amount at present) * (1+ Interest rate)^number of years= amount at future time

marginal utility

(economics) the amount that utility increases with an increase of one unit of an economic good or service.

production possibilities frontier

a diagram that shows the combinations of output that are possible for an economy to produce

marginal cost

is the additional cost of producing one more unit. calculated by taking the change in total cost and dividing it by the change in quantity. the marginal cost curve is generally upward sloping because diminishing marginal returns implies that additional units are more costly to produce.

Competitive equilibrium price

is the price at which the total amount that suppliers want to sell is equal to the total amount that demanders want to buy

the lesson of sunk costs...

is to forget about the money that's irretrievably gone and instead to focus on the marginal costs and benefits of future options.

monopolistic competition

many firms competing to sell similar but differentiated products

the budget constraint and the ppf illustrate three basic themes...

scarcity, trade-offs, and economic efficiency

positive statements

statements which describe the world as it is

on a graph, diminishing marginal returns is illustrated by...

the ever-steeper slope of the total curve- that is, the cost of producing each additional unit of output is rising

the marginal cost of producing an additional unit can be compared with the amount of revenue gained by selling that additional unit to reveal whether the marginal unit is adding to total profit-- or not.

thus, marginal cost helps in how profits would be affected by increasing or reducing production.

average variable cost

variable cost divided by the quantity of output. the curve will always lie below the curve for average cost, because average cost includes fixed price. however, as output becomes larger, fixed costs become relatively less important (since they don't rise with output), and so average variable cost sneaks closer to average cost