Final

What is the wealth effect?

As the market value of houses and stocks increased, American households felt more wealthy and thus saved less.

Graphically, where does the marginal cost curve cross the average total cost curve?

At the minimum of the average total cost curve

After a successful marketing campaign there has been an increase in the demand for Vans shoes. What happened?

At the same price buyers of Vans shoes are willing to buy more.

What happens to the demand of a normal good when buyer's income increases?

Demand increases

Own price elasticity

E = Change in Q/change in P; if less than 1, then very inelastic. if greater than one, very elastic

If supply increases by much more than demand falls, what will happen to equilibrium price and quantity?

Equilibrium price will fall and equilibrium quantity will increase.

Law of diminishing marginal returns

Eventually, the marginal product for an input decreases as its use increases, holding all other inputs fixed.•As you add more and more of one input to fixed amount of all other inputs, the additional output you get becomes smaller and smaller.

Tom does not understand economics well. How would you best explain a demand function to Tom?

Explain it is a relationship between price and quantity from a buyer's perspective.

example of a substitution effect

For most goods consumers will purchase more of a cheaper good all else constant.

When does demand decrease?

If for the same amount of buyers are only willing to pay a lower price, or if at the same price, buyers are willing to buy less OR a combination of the two, demand has decreased

When does demand increase?

If for the same amount of buyers are willing to pay a higher price, if at the same price, buyers are willing to buy more, or a combination of the above, there is an increase in demand.

examples of perfect complements

Left shoe, right shoe; Ring angle indifference curves

You read a story in the FT on the topic of an increase in earnings for Apple last quarter. Is this a story on microeconomics or macroeconomics, and why?

Microeconomics since it deals with the performance of one firm.

If the market price of computer chips falls, this will cause what change in terms of the demand function?

Movement down the demand curve.

Dave is confused about the concept of supply as it is used in economics. Dave states, "Well, in the Army supply was the amount of goods we provided to the troops." How would you help Dave to understand how the term "supply" is used in economics?

Point out in economics "supply" refers to various price and quantity combinations sellers are willing to offer for sale.

Southwest Airlines benefits greatly from reduced jet fuel prices. In terms of a supply function, a reduction in the cost of jet fuel would do what?

Shift Southwest's supply curve outward or to the right

At the request of the European Union the government of Portugal raises taxes on firms doing business in Portugal. In terms of the supply function this will

Shift the supply curve of Portuguese firms backward or to the left

Tom is very confused. He does not understand what the term "marginal product" means. What do you tell Tom?

That it refers to the additional output from hiring an additional input or factor of production

On a graph of an indifference curve, the origin is zero and on the vertical axis what is measured?

The amount of one of the two goods the consumer is consuming

In a graph of a budget constraint how is an increase in the price of the good on the vertical axis represented?

The budget or income constraint becomes more flat.

Land Rover is a British producer of vehicles. If the UK leaves the European Union the management at Land Rover fears the number of potential buyers of Land Rover vehicles will decline significantly. How would this impact the demand function for Land Rover vehicles?

The demand curve would shift back or towards the origin.

What changes as we move along an isocost curve?

The input mix or combination of the factors of production

What changes as we move along an isoquant?

The input mix that produces the same level of output

It is estimated that your firm's goods have an own price elasticity of 0.02 in absolute value terms. If your firm decides to cut price in order to gain more market share, what will be the most likely outcome?

Total revenue will decline.

Buyer expectations affect demand as well. Ex: if buyers think that there are price changes increasing in the future, they try to buy before the prices increases right now which will lead in increase in demand. (T/F)

True

If price of pepsi decreases, demand for coke will decrease(T/F)

True

If price of pepsi increases, demand for coke will increase (T/F)

True

If prices are expected to decline in the future they will hold back and demand will decrease (shift towards the origin) (T/F)

True

If the price of hot dogs increases, the demand for hot dog buns will decrease (T/F)

True

Supply curve is always upward sloping (T/F)

True

deman curve is always downward sloping (T/F)

True

expectation of income decreases in the future, causes demand decrease(T/F)

True

expectation of income increases causes demand increases (T/F)

True

government taxes - decrease in demand for goods (T/F)

True

regulations will result in decrease in demand for the good/service(T/F)

True

In economics the concept of utility is most often associated with which of the following?

Usefulness or satisfaction from consuming a good or service

At what point of output are profits maximized or losses minimized?

Where marginal revenue equals marginal cost

Which of the following best describes Stiglitz's view of capitalism?

While great at producing wealth and allocating resources, capitalism also has a deplorable side to it.

changes in the budget line - price

a decrease in the price of a good rotates the budget line counter-clockwise. an increase rotates the budget line clockwise

demand

a price/quantity relationship from a buyer's perspective

Supply

a price/quantity relationship from a seller's perspective

moral hazard

after the transaction takes place; unequal information about the actions one party will undertake after the financial contract is in place.

if price is below equilibrium price...?

amount demanded will be greater than amount supplied (excess demand)

If price is above the equilibrium price...?

amount supplied will be greater than amount demanded, (excess supply)

Piketty's theory

argued k>g or the return to capital is greater than the growth rate of the economy

adverse selection

before a transaction takes place; one side of the transaction has more information than the other. As a result, only the poor quality goods/services are traded

change in demand

change in something other than the price of the good or service; movement/shift of the demand curve in or out ex: buyer expectations, Number of buyers in the market, buyer's income

Change in quantity demanded

change in the price of the good or service, movement along the demand curve, when only the price changes.

changes in the budget line - income

changes in income affect the budget line when looking at it graphically.

Examples of substitutes

coca cola & Pepsi

Isocost

combination of inputs that result in the same total costs

What happens to the demand of an inferior good when buyer's income increases?

demand decreases

what happens to demand when there is a decrease in the number of buyers in the market?

demand decreases

what happens to demand when there is an increase in the number of buyers in the market?

demand increases

indifference curves

do not cross anything. higher indifference curves represent higher levels of utility

Economists and accountants disagree on what is considered a cost. What do economists include in costs that accountants do not?

economists include opportunity costs (implicit). Accountants only count explicit costs.

George Akerlof's Lemon's Problem

high quality good vs low quality good with an uncertain buyer but knowledgeable seller

budget constraints

how much of each good can you buy with the amount of budget you can afford

Increases in Supply

if, for the same amount, sellers are willing to accept a lower price, or If, at the same price, sellers are willing to offer more for sale, or a combination of the two, then there has been an increase in supply.

Decrease in supply

if, for the same amount, sellers require a higher price, or If, at the same price, sellers are offering less for sale, or a combination of the two, then there has been a decrease in supply.

Kuznets theory

income inequality will first increase and then decrease as the economy developed (industrialized)

Stiglitz theory

inequality is driven by globalization: wage setters vs wage earners. Many of the trade agreements are structured to benefit the wage setters at the cost of the wage earners thus increasing inequality

what happens to the demand curve when demand decreases?

it shifts to the left

what happens to the demand curve when demand increases?

it shifts to the right

maximizing profits principle

marginal cost = marginal benefit(revenue)

explicit costs

money exchanging hands

Causes of changes in demand?

number of buyers in the market, buyer's tastes, buyers income.

implicit costs

opportunity costs + money costs, etc.

Isoquant

shows the trade-off between inputs that yields the same output when all inputs are variable.

Durlauf's Membership Theory of Inequality

social structures encourage segregation exacerbate inequality, inter-generational immobility drives inequality, your peers matter.

Causes for changes in supply

technology and productivity, cost of inputs, government taxes/regulation, Number of sellers in the market, seller expectation

marginal benefit

the additional benefit from undertaking an additional unit.

marginal cost

the additional cost from undertaking an additional unit

marginal rate of subsitution

the rate at which a consumer is willing to substitute one good for another and maintain the same satisfaction level

Marginal Rate of Technical Substitution (MRTS)

the rate at which inputs can be substituted and maintain same level of output; the slope of the isoquant

examples of Complements

toothpaste/toothbrushes, hot dogs and hot dog buns

examples of perfect subsitute

waffles/pancakes; down sloping indifference curves

perfectly elastic

when buyers are extremely price sensitive. increase in price leads to a decrease in total revenue. Also like: a decrease in price leads to an increase in total revenue

Perfectly inelastic

when buyers don't care about price. ex: will pay thousands of dollars for an iphone. an increase in price leads to an increase in total revenue, a decrease in price leads to a decrease in total revenue.

Equilibrium

where quantity demanded equals quantity supplied

ceteris paribus assumption

with other conditions remaining the same