Midterm 1

Look at the table Consumer Surplus and Phantom Tickets. If the box office price of a ticket to see Phantom of the Opera is $130 and there is no other market for tickets, the total consumer surplus for the five students is:

$20

(Table: Consumer Surplus and Phantom Tickets) Look at the table Consumer Surplus and Phantom Tickets. If the box office price of a ticket to see Phantom of the Opera is $50 and there is no other market for tickets, the total consumer surplus for the five students is:

$240

A friend comes up to you and offers to give you a free ticket to the local professional team's baseball game that night. You decide to attend the game. The game takes five hours and costs you $15 for transportation. If you had not attended the game, you would have worked at your part-time job for $8 an hour. What is the cost to you of attending the game?

$55

. If the government does not impose a price control, the price of a can of soda will equal:

.75

when a firm acts as a price taker...

1. a firm cannot influence the price of its products 2. a firm takes the market price as given 3. a firm makes decisions in pursuit of maximizing profits

sources of a shift in a market supply curve for a particular good:

1. a technological improvement 2. a change in the price of an input 3. a change in the natural envionrment 4. a change in the availability of credit

income elasticity of demand...

1. for a normal good is greater than 0 2. of necessities is relatively low

Possible consequences of rent control:

1. incumbent renters enjoy lower rents 2. not all those who wish to rent apartments at going rents are able to find apartments that are available 3. there is a shortage of available apartments

Look at the table The Market for Soda. If the government imposes a price ceiling of $0.50 per can of soda, the quantity of soda demanded will be:

10 cans

Look at the table Consumer Surplus and Phantom Tickets. If the price of a ticket to see Phantom of the Opera is $50, then Robert's consumer surplus is:

60$

Look at the table The Market for Soda. If the government imposes a price ceiling of $1.00 per can of soda, the quantity of soda demanded will be:

8 cans

Look at the table The Market for Soda. If the government imposes a price ceiling of $1.00 per can of soda, the quantity of soda supplied will be:

8cans

Marginal benefit:

:The increase in benefits resulting from an action. Or the increase in benefits resulting from producing one more unit of output

Deflation

:a continual decrease in the average price level

Sunk Costs

A cost that has already been paid and cannot be received

Whether or not a good is a necessity

A luxury is likely to have a number of substitutes; a necessity has very few

Rent control:

A policy which sets a legal maximum rent that can be charged for some apartments in some major cities.

Is it possible to have allocative efficiency without technical efficiency

Allocative efficiency only requires that the economy is producing to match the wants and needs of the economy. This can be done without producing as much as possible

Law of diminishing marginal utility:

As a consumer purchases more of a good in a specific time period, the additional satisfaction enjoyed from the additional unit of the good will diminish.

increasing marginal costs

As we increase the production of a good, the opportunity cost of producing one more unit of output eventually increase

Technology

Creation of new software has enabled many manufacturers to reduce the number of workers needed to manage supplies and to respond to orders. This in turn has reduced the resources necessary to produce goods and resulted in increased profits and increased incentives to expand production.

(Figure: Supply Curves) Look at the figure Supply Curves. Which graph shows a perfectly elastic supply curve?

D (horizontal)

Diminishing marginal returns:

Diminishing marginal returns:

GDP equation

GDP=consumption+Investment+Government Spending on goods & services + exports +imports

Allocative efficiency:

Given our wants, is the economy producing the kinds of goods and services we value the most

Substitutes

Goods or services that consumers consider as serving similar purposes.

Number of substitutes

Greater number of substitutes, the easier it is to switch from consumption of one good to another in response to a price increase or decrease.

Price

The most common reason is to earn a profit. If prices increase, a business can earn more profit by switching from other lines of business to producing more of the good with the now higher price. Thus, the amount of the good produced increases. On the other hand, if the price falls, the typical firm will have less of an incentive to produce the good, and will likely cut back production.

A Tax on a specific good

If demand is inelastic, an increase in the price leads to an increase in revenue, regardless of who gets that revenue The more elastic the demand curve, the more responsive consumers will be to the price increase that comes with the tax, the quantity demanded will fall and the less the increase in revenue to the government A tax on producers represents an increase in the cost of doing business, so supply would decrease, shifting the curve to the left.

Percentage of Income Spent on Good

If the amount spent on a good makes up a large part of one's income, then the person will likely be more sensitive to a change in price than if the amount spent is a small portion of her income

The primary influence on the price elasticity is the ability of the producer to increase production

If the market price increases and producers can respond easily (relatively cheaply) producing more, then the supply is elastic

Shortage

at the current market price, the quantity demanded is greater than the quantity supplied As the market price increases, two things happen simultaneously. The quantity demanded will begin to decrease as some buyers turn to substitute goods or find they can no longer afford to buy as much of a product as they did before.

Diminishing marginal returns:

Increasing one input, while holding all other inputs constant, will eventually result in smaller and smaller additions to output

Prices of input

Inputs: labor, land and capital used in producing goods and services. Inputs are often also described as factors of production An increase in the prices of any of the inputs will lead to a decrease in profits. Thus, there is a decrease in the incentives to produce and as a result a decrease in production.

Economic resources:

Labor, capital, and natural resources that can be used to produce goods and services

Taxes

Mandatory payments to governments from consumers and producers.

Surplus

at the current market price, the quantity supplied is greater than the quantity demanded This process of the surplus shrinking, prices being lowered by sellers and buyers, and the surplus shrinking further continues until the quantity demanded equals the quantity supplied.

Unemployment and capacity utilization:

Markets may not use all available resources; there may be unemployment of labor, of capital and of natural resources.

Clear skies and clear rivers are scarce goods?

Maybe, but only if they are in those areas of the world where we may have to give something else up in order to enjoy clear skies or clear rivers

Scarcity

Our wants are greater than our abilities to satisfy them. This necessitates making choices about how we use our resources

Subsidies:

Payments from governments to producers or consumers of specific goods and services.

Length of Time for Adjustment

The more time we have to adjust to a price change, the more elastic demand will be Demand over periods of a few weeks or months is relatively inelastic

A change in price does not change Supply. It changes the quantity supplied and is

a movement along a supply curve

Some things that influence how sensitive you are to changes in prices of goods and services you purchase

The number of substitutes for the good. Your interpretation of how necessary the good is. The percentage of your income spent on a good. The length of time you have to adjust your purchases.

Elasticity of demand:

The percentage change in quantity demanded divided by the percentage change in income Is a special case where the sign of the elasticity varies

with a more elastic demand curve,

a shift in the supply curve has a larger effect on the equilibrium quantity

Gross Domestic Product

The values of all of the final goods and services produced in a country in a year "product" in that all the final goods and services produce are included "Domestic" that it is only goods made in the US "Gross" meaning total domestic product is GDP minus depreciation or the value of the equipment, machines, and buildings that wear out

Will Total Revenue for a Business Rise or Fall When its Prices Change?

Total revenue equals the quantity sold (the same as the quantity demanded) times the price of the good. The law of demand tells us that if the price is lowered, the quantity demanded increases, and vice versa Price elasticity of demand: is the percentage change in quantity demanded divided by the percentage change in price

Economic Efficient:

Using all of our resources in a technically and allocatively efficient manner Action moves us toward economic efficiency if the benefits exceed the costs

with a relatively steep demand curve,

a shift n the supply curve has a larger effect on the equilibrium price

(Table: The Market for Soda) Look at the table The Market for Soda. If the government imposes a price ceiling of $0.50 per can of soda, there will be:

a shortage of 3 cans.

Economic model:

a simplified explanation of a part of the economy. Economic models often focus on specific relationships and make assumptions about other possible influences remaining constant

Supply

a table (schedule) or graph (curve) showing the quantity of a good that producers are willing to supply at each price, assuming that all possible influencing factors other than price remain constant

What determines the elasticity of demand

Whether or not a good is a necessity Number of substitutes Percentage of Income Spent on Good Length of Time for Adjustment

Demand may actually shift:

a change in the quantities consumers are willing and able to purchase at each price. The shift is caused by changes in anything other than a change in price

Marginal Analysis

a consumer will maximize total well-being if the last dollar spent on each good provides the same marginal (additional) utility as the last dollar spent on every good

Inflation

a continual increase in the average price level 3 main price indexes First measures the changes in prices of goods and services that the typical consumers buy (the consumer price index) Second uses the prices of goods sold by domestic producers (the producer price index) The third includes the entire GDP when calculating price changes (the GDP deflator)

Normal goods

a good is normal if in response to an increase in income, individuals increase their consumption of the good

Necessity

a good or service that is viewed by consumers as a high priority. Consumers tend to be less sensitive to price changes of goods that are assumed to be necessities

Price Ceiling:

a legal maximum price. An effective price ceiling is a legal maximum price that is below the equilibrium price Price may not go higher

Price floor:

a legal minimum price. An effective price floor is legal minimum price that is above the equilibrium

Equilibrium

a market is in equilibrium, with an equilibrium price and an equilibrium quantity, when the quantity demanded equals the quantity supplied

when there are diminishing returns...

as the output of the good measured on the horizontal axis increases, the slope of the production possibilities frontier becomes steeper

Price floors, which are legally established prices __ equilibrium, as a result there is excess___

above; surplus

Economic Models

an abstract description of a part of an economy. Simplifying assumptions are made, with a goal of understanding and explaining the effects of economic events

Production possibilities frontier:

an economic model showing possible combinations of outputs, given resources and technology

. Raclette is a popular wintertime dish in Switzerland. It is essentially melted Raclette cheese over boiled new potatoes. If the price of Raclette cheese decreased, we would expect to see:

an increase in demand for new potatoes.

an increase in the price of coffee is likely to result in...

an increase in the demand of products that are substitutes for coffee such as tea.

Diminishing marginal utility:

as a consumer purchases more of a good in a specific time period, the additional satisfaction enjoyed from the addition unit of the good will diminish

diminishing marginal utility

as an individuals bundle of goods includes more of a particular good, the individuals willingness to pay for an additional unit declines.

a shortage occurs when the going price is __ the equilibrium price. result is excess ___

below; demand

. according to the substitution effect

consumers will substitute away from the expensive good as the price of goods rises

Fixed costs:

costs that do not change as we make a decision

Suppose the price of cereal rose by 25% and the quantity of milk sold decreased by 50%. We know that the:

cross-price elasticity of demand for milk is -2.

Macroeconomics

economist study how fast the whole economy grows, what determines unemployment and inflation rates, and what policies might affect growth, inflation and unemployment

a leftward shift in the demand curve can be caused by...

expectation of lower prices in the future

the income effect explains

explains the effect of changing purchasing power

Net exports:

exports and imports are the total amounts spent in us dollars on goods and services that are exported and imported. Net exports (exports minus imports) are very close to what is normally described as the trade deficit

Capital

factories, machines, inventories, and tools in an economy. Sometimes described as physical capital. Capital is used in producing other goods and services

Complementary goods

goods that are used together. When the price of one good increases, purchases of the good that is used with it decreases

Substitute goods:

goods that can be substituted for one another. When the price of one of the goods increases, purchases of the other good increases

Government spending

government spending is the total spending on goods and services by all levels of government (federal, state, and local. This does not include expenditures normally described as transfer payments (social security, unemployment compensation, and welfare payments).

(Figure: Supply Curves) Look at the figure Supply Curves. Which graph shows a perfectly inelastic supply curve?

graph A (vertical)

the price elasticity of demand for luxury goods is

high

the price elasticity of supply for a product is normally...

higher in the long run than the short run

Paradox of Value:

hose with elastic demand. Because they are more sensitive to price changes, they will reduce their consumption by more than those with an inelastic demand.

Quantity demanded

how much buyers are willing and able to buy at each specific item

Law of demand

if everything else remains unchanged, a decrease in price will cause the quantity demanded to increase. An increase in price will cause the quantity demanded to decrease Works all the time luxury goods or medicine is an example of this

Inferior goods

if in response to an increase in income, individuals decrease their consumption of the good

Budget constraint

the line that represents the combo of goods someone can by spending all their income on the goods

Diminishing marginal returns:

if we increase only one resource and hold the others constant, we eventually get smaller and smaller increases in output

Labor force

includes those with a job and those who want a job but don't have one

Real income:

income adjusted for price changes. A measure of the amount of goods and services once can purchase

if the price of a normal good increases the...

income and substitution effects both lead to reduced consumption of the good

in giffen goods....

income effect dominates substation

the microeconomic perspective...

is a bottom up view of the economy studies the rate of productivity growth in each sector

Investment

is spending on new buildings, machines, tools, and new residential construction. Additions to inventories are also included. Investment spending represents an increase in capacity to produce future output

Real GDP per person (or per capita)

is the best measure of our well-being Even with a low percent of GDP increase it does make a huge difference in the long run.

The price elasticity of supply

is the percentage change in the quantity supplied divided by the percentage change in the price of the good. Governments sometimes establish price ceilings and price floors. Price ceilings can result in shortages; price floors can cause surpluses. Both create inefficient outcomes in markets.

Figure: Production Possibility Frontier Curve for Tealand 6. (Figure: Production Possibility Frontier for Tealand) Look at the figure Production Possibility Frontier for Tealand. In the figure, if Tealand is producing 10 million scones and 10 million cups of tea (point A), we know that the economy: A) is using its resources efficiently. B) is using its resources inefficiently. C) is fully employing its resources. D) has found new resources.

is using its resources inefficiently. .

Technical efficiency

is using the fewest possible resources to produce a given level of output. Or alternatively, producing the greatest possible amount of output, given inputs

resources are...

limited. there will be tradeoffs among alternatives you can use.

income effect:

liz buys only food and clothes. when the price of clothes increases it is as if she has no money to spend on both clothes and food. the impact of this loss of purchasing power on her purchases of clothes is termed the income effect

water has a lower price than diamond bc it has a...

lower marginal value

Equilibrium price:

the market price where the quantity demanded and quantity supplied are equal

Equilibrium Quantity:

the market quantity where the quantity demanded and quantity supplied are equal

"Final Goods"

means that it does not include intermediate purchases (the goods purchased to produce another good) Guitar strings are purchased to make a guitar, only the sale of the guitar (the final good) is counted and the strings (intermediate good) are not

The price elasticity of demand

measures how sensitive the quantity demanded is to changes in the price level of a good. It is the percentage change in the quantity demanded divided by the percentage change in the price of the good. If elasticity of demand is greater than one (absolute value), then demand is elastic. If it is less than one, it is inelastic.

Markets

methods through which buyers and sellers come together and determine the prices of goods and the quantities that will be exchanged

Is clean air a scarce good in economic terms?

no it's an economic good

Unemployment rate:

number of unemployed divided by the number in the labor force

along an indifference curve ___is constant

total utility

along an individual demand curve, an increase in the quantity demanded occurs when...

price has declined

What determines Production?

price, prices of input, technology,

Law of supply and demand:

prices and quantities in a competitive market will tend toward equilibrium levels where the quantity supplied equals the quantity demanded

Look at the figure Demand for Coconuts. If coconuts are a normal good and the income level of consumers falls, it will be represented in the figure as a movement from:

quantity decreases shift inward

The consumer price index (CPI)

reported by the Bureau of Labor Statistics (BLS) is the one most commonly referred to in by the press and used by statisticians

if a country is operating inside its production possibilities curve...

resources must be under-employed

Look at the figure Demand for Coconuts. If coconuts area normal good and the price of coconuts increases, it would be represented in the figure as a movement from:

shift along the curve

Look at the figure Supply of Coconuts. If the price of coconuts decreased, it would be represented in the figure as a movement from:

shift along the curve

A change in the number of firms, the prices of inputs and the available technology used in making the goods will all change supply and cause a

shift in the supply curve

Look at the figure Supply of Coconuts. An expectation on the part of coconut suppliers that the price of coconuts will be significantly higher in the very near future would be represented in the figure as a movement from

shift inward

Look at the figure Supply of Coconuts. If the prices of inputs (e.g., labor, fertilizer, and fuel) used to produce and transport coconuts decreased, it would be represented in the figure as a movement from:

shift inward

Look at the figure Demand for Coconuts. If coconuts are a normal good and consumers believe that the price of coconuts will rise significantly in the near future, it will be represented in the figure as a movement from:

shift outward

Look at the figure Supply of Coconuts. An improvement in the technology used to harvest coconuts (e.g., a faster, less expensive coconut picker) would be represented in the figure as a movement from:

shift outward

Look at the figure Demand for Coconuts. If fish is a substitute good for coconuts and the price of fish increases, it will be represented in the figure as a movement from:

shift outward (quantity increases)

Look at the figure Demand for Coconuts. If there is an increase in preference for coconuts, it will be represented in the figure as a movement from:

shift outward (quantity increases)

Look at the figure Supply of Coconuts. If the prices of inputs (e.g., labor, fertilizer, and fuel) used to produce and transport coconuts increased, it would be represented in the figure as a movement from:

shift outward: price increases

the elasticity of demand is _____ in the short run

smaller

Microeconomics:

study markets, firms, buyers, sellers and workers on an individual or "micro" basis

if the price of a product changes by 5% and as a result the quantity supplied changes by 2%...

supply is price inelastic

comparative advantage:

the ability of a country to produce a good at a lower relative cost than another country

Real GDP

the actual production of goods and services valued at a base years prices rather than current prices

Marginal utility:

the change in total utility or satisfaction resulting from consuming one more unit of a good or service

Consumer surplus

the difference between the total value to the consumer of consuming a specific amount of a good and the amount the consumer must pay for the amount of the good. For each unit purchased, the consumer surplus is the price the consumer is willing to pay minus the price the consumer actually has to pay

consumer surplus

the difference between what you pay for something, and what you are willing to pay

Marginal cost:

the increase in costs resulting from an action. Or the increase in costs resulting from producing one more unit of output

the formula for the price elasticity of demand is...

the percentage change in the quantity demanded divided by the percentage change in the price

if there is excess supply at the existing price...

the price of the good tends to decline

Inelastic demand:

the quantity demanded is not sensitive to changes in prices. Specifically, demand is inelastic if the percentage change in quantity demanded divided by the percentage change in price is less than one

Elastic

the quantity demanded is sensitive to changes in prices. Specifically, demand is elastic if the percentage change in quantity demanded divided by the percentage change in price is greater than one

Quantity Demand:

the quantity of a good or service that consumers intend to purchase in a given time period at a specific price Inverse relation between price and quantity demanded

Total utility:

the total amount of satisfaction enjoyed from consuming a specific amount of a good or service

Consumption

the total spending by individuals on consumption goods and services Buy on a daily basis: food, movies, clothing, cars, gasoline, housing, health care, utilities

at the equilibrium price...

there is no reason for the price to change

Labor force

those who have jobs plus looking for jobs; unemployed + employed

utility

to represent satisfaction gained from consuming a good or service or participating in an activity.

if demand for a product is perfectly price-inelastic the demand curve is...

vertical

Opportunity cost:

what one actually gives up doing when making a choice. It is the value of the best forgone alternative