MicroEcon Midterm

Substitutes

2 goods are ______ if an increase in price of one good leads to an increase in demand for another (price of butter goes up, quantity goes down so demand of margarine increases)

Complements

2 goods are __________ if an increase in price of one good leads to a decrease in demand for another, and vice versa (price of gin goes down, quantity goes up and demand for tonic goes up)

Cause a shortage of bubble gum

A decrease in the price of bubble gum below equilibrium will

Decrease and quantity to decrease

A leftward shift of the market demand curve for HDTVs, ceteris paribus, causes equilibrium price to

Higher equilibrium quantity

A rightward shift in a demand curve and a rightward shift in a supply curve both result in a

Market Failure

An imperfection in the market mechanism that prevents optimal output

Market power

Antitrust activity addresses

Demand for baseballs to decrease

Assume a series of forest fires reduces the supply of lumber, which is an input in the production of wooden bats. Baseballs and wooden bats are complements. If the price of wooden bats increases, we can expect the

Decrease and the equilibrium quantity of ice cream to increase

Assume milk is used to produce ice cream. Ceteris paribus, a decrease in the price of milk will cause the equilibrium price of ice cream to

An increase in the demand for pens

Assume that pencils and pens are substitutes. If the price of pencils rises, then we will see

Price elasticity of demand should become larger

Ceteris paribus, as the number of substitutes for a good increases, the

tastes and preferences, price, availability, and income

Determinants of Demand

availability of inputs, expectation, technology, and subsidies

Determinants of Supply

3.5 percent for each 1 percent decrease in price, ceteris paribus

For product XYZ, the price elasticity of demand has an absolute value of 3.5. This means that quantity demanded will increase by

Per Capita GDP

GDP divided by population

Good with an external cost

If Good X has social demand that is less than market demand, then Good X must be a

Demand curve for corn will shift left

If corn products are found to cause cancer, then the

The elasticity number E is greater than 1

If demand is price-elastic, then

The demand curve will be very steep

If demand is very inelastic,

The quantity demanded will fall by 45 percent

If the elasticity of demand is 3, and the price rises by 15 percent, then

Fall

If the population of a country increases while its GDP remains unchanged, per capita GDP (average GDP per person) will _____

6 percent decrease

If the price elasticity of demand is 0.6, then a 10 percent increase in the price of the good will lead to a ________ in the quantity demanded

2

If the price of sandals increases by 10 percent and the quantity demanded falls by 20 percent, then the price elasticity of demand in absolute value is

Necessary good

Income elasticity equals 0

Normal good

Income elasticity is greater than 0

Inferior good

Income elasticity is less than 0

Marginal principle

Increase activity when marginal benefit > marginal cost Decrease activity when Mc > Mb

The doctrine of laissez faire (government should not intervene)

Markets are likely to do a better job of allocating resources than government directives

The demand for bottled water by individuals

Microeconomics is concerned with issues such as

transfer payments

Payments to individuals that are not in exchange for current goods and services being produced

Perfectly inelastic demand (vertical)

Price elasticity of demand is equal to 0

Unitary demand

Price elasticity of demand is equal to 1

Elastic demand (relatively flat)

Price elasticity of demand is greater than 1

Perfectly elastic demand (horizontal)

Price elasticity of demand is infinite

Inelastic demand (relatively steep)

Price elasticity of demand is less than 1

Responsive the quantity demanded is to a change in price

Price elasticity of demand shows how

The free-rider problem

Reflects the inability to exclude an individual from the benefits of someone else's purchase (people try to benefit from public good without paying for it)

1.29

Suppose the quantity demanded of ski boats falls from 4.0 million to 3.0 million as a result of an average price increase from $20,000 to $25,000 per boat. The absolute value of the price elasticity of demand is closest to

Other things remain equal

The Latin phrase ceteris paribus means

Produce less and charge a higher price than what would be socially optimal

The development of market power by a firm is considered to be a market failure because firms with market power will

The scarcity of resources relative to human wants

The fundamental problem of economics is

Gross Domestic Product (GDP)

The market value of an economy's production of final goods and services over a given time period

What to produce, how to produce, and for whom to produce

What are the three core economic questions societies must answer?

Food

Which of the following is a merit good?

Public good

a good or service whose consumption by one person does not exclude consumption by others

Private good

a good or service whose consumption by one person exclude consumption by others

Change in quantity demand (and quantity supplied)

a movement along the same demand curve caused by the change in price

Change in demand (and supply)

a shift in the entire demand curve caused by other factors except price

Positive economics

analysis that answers the question "what is" or "what will be"

Normative economics

analysis that answers the question "what should be"

Positive externality (external benefit)

benefit of mkt activity born by a third party

Externalities

cost (or benefit) of mkt activity born by a third party

Negative externality (external cost)

cost of mkt activity born by third party

Microeconomics

deal with the behavior of individual economics units. these units include consumers, workers, business firms

Government failure

government directives do not produce better economic outcomes

Inferior good

if the good is ________, then demand decreases as income increases (or vice versa)

Normal good

if the good is ________, then demand increases as income increases (or vice versa)

Market supply

it is a horizontal summation of all individual supply curves

Comparative advantage

lower opportunity cost (sacrificing less)

Efficiency

maximum output of a good from the resources used in productions

Public good take note

non-rival: one person consumes it does not exclude others from consuming non-excludable: it is impractical to exclude anyone from using it

Capital Intensive production process

process that uses high ratio of capital to labor input

Law of Demand

quantity of a product demanded is inversely related to its price (P increases, Q decreases and vice versa)

Market demand

shows a relationship between price and quantity demanded for all consumers in the market

Demand

the ability and willingness to buy specific quantities of a good at alternative prices in a given time period , ceteris paribus

Supply

the ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus

Human capital

the knowledge and skills possessed by the workforce

Opportunity cost

the most desired goods or services sacrificed in order to obtain something else ("next best alternative")

Economics

the study of how to best allocate scarce resources among competing uses

Market mechanism

the use of market prices and sales to signal desired outputs

Law of supply

there is a positive relationship between price and quantity supplied