AGEC 203 Exam 1 Study Questions

Natural Resource Economics

Branch of economics that focuses on resource allocation questions from a societal perspective

What are the 5 factors which will cause demand to shift to a new function?

Change in consumer income, change in population, change in tastes and preferences, change in related product prices, and change in peoples' expectations

Define Marginal Utility

Change in satisfaction from one more equal unit of a good or service

Explain the consumer equilibrium is the regard to consumer satisfaction and expenditures

Consumer equilibrium is when the slope of the indifference curve is equal to the slope of the budget line. Therefore it is the regard to consumer satisfaction and expenditures because its marginal utility and price are equal. MUY1/MUY2 = PY1/PY2 or MUY1/PY1 = MUY2/PY2

Cross Elasticity of Demand Complementary Products

Cross Elasticity is negative as price of y1 goes up, quantity of y2 goes down chips and slasa

Cross Elasticity of Demand Substitute Products

Cross elasticity is positive as price of y1 goes up, this brings about an increase in consumption of y2 chicken and beef

What are the 4 characteristics of firms in a pure competition model?

Homogenous product, no barriers to enter and exit, mobility of factors to produce, and many small producers

Define Aggregate Demand

Horizontal summation of the quantities of a product demanded by all individuals Ina market at a specific price

Factors that mitigate natural resource scarcity

Technology, scale economies, substitution in consumption, improved transportation & trade, conservation

Why are the production stages 1 and 3 considered to be irrational stages?

The firms are to maximize its net earnings over the cost of x1 used, the firm can increase its net revenue by moving into stage 2 from either stage

Define Demand

The schedule which shows the various amounts of a product or service which consumers are willing and able to purchase for a series of prices Ina given market at a given time

Resource Scarcity

direct & indirect sacrifices made to obtain a unit of the resource

Characteristics of an indifference curve

downward sloping to the right convex to the origin do NOT intersect with each other consumer is always trying to increase utility

Crustal Abundance

estimate of gross volume

Budget Line

how much we can buy with a given budget price of y1/price of y2 = slope of the budget line = slope of the indifference curve

Firms are

price takers

Natural resources have both ____ & ______ resources

stock & flow

Reserves

the amount of a resource that can be profitably produced at current prices using current technology

Private or Market Good

the horizontal summation of individual Willingness to Pay (WTP)

Price elasticity

the responsiveness of the change in quantity of a product due to a change in price of the product

All points on an indifference curve represent

the same number of utility

Economics

the science and the art of allocating scarce resources among competing uses in an effort to maximize human satisfaction over time

Marginal Willingness to Pay

the sum of individual MWTP. Important for natural resource and environmental policy

Law of Demand

there is an inverse relationship between the quantity of a product purchased & that product's price

Private good

vertical summation of individual WTP

Public Good

when available to one person is automatically available to others non-rival, non-exclusive

Law of diminishing marginal utility

when someone consumes more of a commodity

Consumer Equilibrium

when the indifference curve is equal to the slope of the budget line

Demand

a schedule which shows the various amounts of a product or service which consumers are willing and able to purchase for a series of prices in a given market at a given time

Marginal Rate of subsitiution

(Any point on the graph) is the rate at which one good can be substituted for another without a change in the level of satisfaction equals the slope of the indifference curve MRS=change y1/change y2

Reasons for a downward sloping Demand curve

(negative) -diminishing marginal utility -marginal utility per dollar increases as cost per unit goes down -more people can get into the market as price per unit goes down

Price elasticity of demand affected by

-availability of substitutes -number of alternative uses for the product -price of commodity relative to consumer's total expenditures for that type of product -degree of necessity

Factors Affecting Income Elasticity

-level of income -type of product -where measure is made -family residence

Factors affecting aggregate demand

-number of consumers in a market -consumer income (per capita) -tastes, preferences, habits, and fads -price and availability of substitutes -environmental factors

Underlying assumptions for demand theory

-people will maximize satisfaction -individuals have limited incomes -people are aware of all goods & services available to them and are able to make choices -choices are made relative to a given time period

Relatively Inelastic demand

0<E<1

Howe's 8 major resource issues

1) Finite Supply 2) Location of Resource Supply 3) Shift towards nonrenewable 4) over-exploitation of select resources 5) Decline in environmental services 6) Global commons 7) Decreasing Quality of Services 8) Market failure

Pure Competition

1) Homogenous product 2) No barrier to entry or exit 3) Mobility of factors of production 4) Many small producers

Monopolistic Competition

1) Many sellers of product 2)each firm's product (or service) can in some way be distinguished from that of other producers 3) numerous good substitiutes for product 4) some mobility of factors of production

Oligopoly

1) small numbers of producers 2) high degree of product differentiation 3) the supply of one firm affects the total market supply 4) there are barriers to entry and exit 5) products 6) production factors quite rigid

Why economists like pure competition

1)P=MR No -> Firms controls the market 2)Firms produce at P=MC 3)Firms MC=min ATC (produce at lowest ATC) 4)Lowest opportunity cost of resources to produce the output

Define Demand vs. Quantity Demanded

A change in demand is when the shoe curves shifts, and a change in quantity demanded is movement along the demand curve due to a change in price

Criteria for stage 2 of production

APP>MPP, MPP and APP are both positive

Macroeconomics

Aggregate or National in scope (inflation, unemployment, taxes, interest rates, gov. programs)

Ceteris Paribus

All of the things equal

What 4 factors influence the measure of income elasticity

Family level of income, type of product, level of preparation, and where measure is made

Define Derived Demand

Demand schedules for resources that are used in producing final products

What are the 3 benefits provided to society by firms in the oligopoly market structure?

Diverse options, drives innovation, and firm/brand identity

What are the 3 characteristics of a set of indifference curves?

Downward and sloping to the right, convex to the origin, and doesn't intersect with each other

Unitary elastic

E=1

Infinitely Elastic

E=infinity

Relatively Elastic Demand

E>1

Income Elasticity of Demand

Ei=(Q2-Q1/Q2+Q1)/(I2-I1/I2+I1)

Price Elasticity formula

Ep=(Q2-Q1/Q2+Q1)/(P2-P1/P2+P1)

True or False: A change in demand and a change in quantity demanded are the same thing.

False

True or False: All budget lines, both parallel and non-parallel represent the same price relationship among 2 products or service

False

True or False: For most rational people the marginal utility for a product increases as more units of the product are obtained

False

True or False: One of the factors affecting the price elasticity of demand is consumers per capita income.

False

True or False: The Capper-Volstead Act was designed to stop p monopolies from excluding other rims in the market.

False

True or False: The current DuPont and Dow merger is an example of a horizontal merger.

False, it is an example of a conglomerate merger.

True or False: All public goods are rival and nonexclusive.

False, it is non rival and nonexclusive

If Ei>1

Superior

What 4 factors that will influence the price elasticity of demand for a product

If good substitutes are available, price of commodity relative to consumer total income, wider range of uses, and the degree of necessity

Dependent vs Independent Variable

Independent variable changes the dependent

E<0

Inferior

How does the law of variable proportions differ from the law of diminishing marginal returns?

Law of DMR is centered around the point of DMR, and law of variable proportions talks about the different types of production responses

What are 3 benefits to society of firms in pure competition?

Low prices, resources are allocated as society desires, and allows for market price equilibrium to lower marginal revenue until it equals average cost of production

Criteria for stage 3 of production

MPP<0, APP>MPP

Criteria for stage 1 of production

MPP>APP, MPP and APP are both positive

MRS=

MUy1/MUy2 = PY1/PY2

What are the 4 characteristics of monopolistic competition?

Many sellers of a product, each firm's product can be distinguished, numerous good substitutes for product, and some mobility of factors of production

What are the 4 characteristics of a firm in a monopoly market model?

Many sellers of product, each firm's product can be distinguished from that of others, numerous good substitutes for product, and some mobility of factors of production

Define Utility

Measure of personal satisfaction derived from owning and using goods and services for some period of time

If 0<Ei<1

Neutral

What are four assumptions that underlie demand theory?

People will maximize satisfaction, individuals have limited income, people are aware of all goods and services available to them and are able to make choices among these goods, and choices are made relative to a given specific time period

Microeconomics

Personal & business (consumer econ, private businesses, production, etc.)

Reserve Ration

Reserves/annual rate of use

Define Budget Line

Shows all combinations of goods that a person can buy with a given amount of money

Define Indifference Curve

Shows all the combinations of goods that yield an individual the same amount of satisfaction or utility

ATC=

Total cost/output

True of False: Utility is the total satisfaction a person receives from owning or using a good or service for a specific period of time

True

True or False: A consumer is in equilibrium in the choice of 2 products when their indifference curve is tangent to their budget line

True

True or False: A good is considered superior if the income elasticity of demand is >1.

True

True or False: An indifference curve shows all combinations of 2 products or services which equally satisfy a person

True

True or False: Cross price elasticity of demand measures the percentage change in the quantity of one good when the price of another good is changed.

True

True or False: For products with an elastic demand, as price per unit decreases the total revenue will increase.

True

True or False: Marginal cost can be determined by dividing the change in TVC by the change in output, since the change in TFC is zero.

True

True or False: Marginal cost for a firm is directly linked with the firm's MPP curve.

True

True or False: Marginal revenue is the change in total revenue that comes from the sale of one more unit of output.

True

True or False: One Method of determining the profit maximizing level of output is to produce where MC equals MR.

True

True or False: One of the underlying assumptions of demand or utility theory is that people will try to maximize their satisfaction.

True

True or False: Price elasticity of demand refers to the responsiveness of a change in quantity demanded relative to a change in price of the product.

True

True or False: Supply for a firm is the same as its MC curve above the AVC curve.

True

True or False: The boundary between stages 1 and 2 can be determined by finding where AVC is equal to MC.

True

True or False: The measure of inferior, neutral and superior goods deals with income elasticity of demand.

True

Define Opportunity Cost

Value of other opportunities given up in order to produce or consume any good

Define law of diminishing marginal returns

When successive equal units of a variable input are added to a given quantity of fixed resources, there will be a point where additions to total output will decline

MC=

change in total cost/change in output

Marginal utility=

change in utility/ change in good

Economic measures of scarcity

cost, price, rent