Econ Chapters 1-4

efficiency loss (or deadweight loss)

is measured as the combined loss of consumer surplus and producer surplus from over- or underproducing.

Income Effect

occurs as a lower price increases the purchasing power of the money income of any consumer; this enables the individual to buy more at a lower price (or less at a higher price) without having to reduce consumption of any other goods

Productive Efficiency

• Producing a good by the most efficient means possible. • Using the "best" technology. • Using the "lowest cost" mix of resources.

Allocative Efficiency

• Producing the right mix of goods and services. • Producing the combination of goods most highly-valued by society.

The Determinants of the DEMAND Curve

* Income * Tastes, Preferences • Prices of Related Goods {Inferior, Substitute, Complementary} • Accumulated Wealth • Expectations about Prices, Incomes, and Availability • Government- Taxes and Subsidies

"Substitution Effect"

When the price of a "normal" good increases, consumers find it more advantageous to substitute another good for it; and vice-versa.

rations schemes lead to

1) Artificially created market "shortages" and "surpluses"; 2) Artificially high prices; 3) "Black markets"

An efficiency loss (or deadweight loss) A. is measured as the combined loss of consumer surplus and producer surplus from over- or underproducing. B. results from producing a unit of output for which the maximum willingness to pay exceeds the minimum acceptable price. C. can result from underproduction, but not from overproduction. D. can result from overproduction, but not from underproduction

A

College students living off-campus frequently consume large amounts of ramen noodles and boxed macaroni and cheese. When they finish school and start careers, their consumption of both goods frequently declines. This suggests that ramen noodles and boxed macaroni and cheese are A. inferior goods. B. normal goods. C. complementary goods. D. substitute goods

A

Consumer surplus A. is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price. B. is the difference between the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept. C. is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price. D. rises as equilibrium price rises

A

Other things equal, a fall in the market price caused by a change in supply will A. increase consumer surplus. B. decrease consumer surplus. C. increase producer surplus while leaving consumer surplus unchanged. D. decrease producer surplus while leaving consumer surplus unchanged.

A

Other things equal, if the price of a key resource used to produce product X falls, the A. supply curve of product X will shift to the right. B. demand curve of product X will shift to the right. C. supply curve of product X will shift to the left. D. supply curve of product X will not shift

A

The law of demand states that, other things equal, A. price and quantity demanded are inversely related. B. the larger the number of buyers in a market, the lower will be product price. C. price and quantity demanded are directly related. D. consumers will buy more of a product at high prices than at low prices

A

The law of supply indicates that, other things equal, A. producers will offer more of a product at high prices than at low prices. B. the product supply curve is downsloping. C. consumers will purchase less of a good at high prices than at low prices. D. producers will offer more of a product at low prices than at high prices.

A

Which of the following will cause a decrease in market equilibrium price and an increase in equilibrium quantity? A. an increase in supply B. an increase in demand C. a decrease in supply D. a decrease in demand

A

Which of the following will cause a decrease in market equilibrium price and an increase in equilibrium quantity? A. an increase in supply B. an increase in demand C. a decrease in supply D. a decrease in demand

A

Price Ceiling

A legally established maximum price a seller can charge

Price Floor

A legally established minimum price a producer/seller can be paid

A "Complementary" Good

As the price of an ordinary good decreases, its quantity demanded increases; as a result of this change in price, a related good's quantity demanded also increases (e.g. "complements", , , "goes together"). conversely, As the price of an ordinary good increases, its quantity demanded decreases; as a result of this change in price, a related good's quantity demanded also decreases.

A 'price ceiling' means that A. there is currently a surplus of the relevant product. B. government is imposing a legal price that is typically below the equilibrium price. C. government wants to stop a deflationary spiral. D. government is imposing a legal price that is typically above the equilibrium price

B

A newspaper reports that the average price of new homes in a certain city had decreased, and the number of new homes sold had also decreased. This situation is probably caused by A. declining costs of construction materials and services in that city. B. declining incomes of people in that city. C. higher government subsidies to new homebuyers in that city. D. a rising population in that city.

B

A recent study found that an increase in the federal tax on beer (which would increase the price of beer) would reduce the demand for marijuana. Based on this information we can conclude that A. beer and marijuana are substitute goods. B. beer and marijuana are complementary goods. C. beer is an inferior good D. marijuana is an inferior good

B

An 'effective' price floor will A. force some firms in this industry to go out of business. B. result in a product surplus. C. result in a product shortage. D. clear the market.

B

At the current price, there is a shortage of a product. We would expect price to A. increase, quantity demanded to increase, and quantity supplied to decrease. B. increase, quantity demanded to decrease, and quantity supplied to increase. C. increase, quantity demanded to increase, and quantity supplied to increase. D. decrease, quantity demanded to increase, and quantity supplied to decrease.

B

At the equilibrium price, A. quantity supplied may exceed quantity demanded or vice versa. B. there are no pressures on price to either rise or fall. C. there are forces that cause price to rise. D. there are forces that cause price to fall

B

If there is a surplus of a product, its price A. is below the equilibrium level B. is above the equilibrium level. C. will rise in the near future. D. is in equilibrium

B

In 2007, the price of oil increased, which in turn caused the price of natural gas to rise. This can best be explained by saying that oil and natural gas are A. complementary goods, and the higher price for oil increased the demand for natural gas. B. substitute goods, and the higher price for oil increased the demand for natural gas. C. complementary goods, and the higher price for oil decreased the supply of natural gas. D. substitute goods, and the higher price for oil decreased the supply of natural gas

B

One can say with certainty that equilibrium price will decline when supply A. and demand both decrease. B. increases and demand decreases. C. decreases and demand increases. D. and demand both increase.

B

Other things equal, an excise tax on a product will A. increase its supply. B. increase its price. C. increase the quantity sold. D. increase its demand.

B

What two conditions must hold for a competitive market to produce efficient outcomes? A.Demand curves must reflect all costs of production, and supply curves must reflect consumers' full willingness to pay. B. Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay. C.Firms must minimize production costs, and consumers must minimize total expenditures. D.Firms must maximize profits, and consumers must all pay prices equal to their maximum willingness to pay

B

Which of the following statements is true about price ceilings? A. price ceilings create surpluses for goods but shortages for services .B. Price ceilings cause goods to be rationed by some other means than legally determined market prices .C. Ration coupons are the only way to ration goods when price ceilings are in place. D. All of the other statements are correct

B

'Black markets' are associated with A. price floors and the resulting product surpluses. B. price floors and the resulting product shortages. C. ceiling prices and the resulting product shortages. D. ceiling prices and the resulting product surpluses.

C

A decrease in demand and an increase in supply will A. affect price in an indeterminate way and decrease the equilibrium quantity. B. increase price and affect the equilibrium quantity in an indeterminate way. C. decrease price and affect the equilibrium quantity in an indeterminate way. D. increase price and increase the equilibrium quantity.

C

A market is in equilibrium A. provided there is no surplus of the product. B. at all prices above that shown by the intersection of the supply and demand curves. C. if the amount producers want to sell is equal to the amount consumers want to buy. D. whenever the demand curve is downsloping and the supply curve is upsloping

C

A shift to the right in the demand curve for product A can be most reasonably explained by saying that A. consumer incomes have declined, and consumers now want to buy less of A at each possible price. B. the price of A has increased and, as a result, consumers want to purchase less of it. C. consumer preferences have changed in favor of A so that they now want to buy more at each possible price. D. the price of A has declined and, as a result, consumers want to purchase more of it

C

An 'effective' price ceiling will A. induce new firms to enter the industry. B. result in a product surplus. C. result in a product shortage. D. clear the market.

C

An 'effective' price floor on wheat will A. force otherwise profitable farmers out of business. B. result in a shortage of wheat. C. result in a surplus of wheat. D. clear the market for wheat.

C

An improvement in production technology will A. increase equilibrium price. B. shift the supply curve to the left. C. shift the supply curve to the right. D. shift the demand curve to the left.

C

Graphically, the market demand curve is A. steeper than any individual demand curve that is part of it. B. greater than the sum of the individual demand curves. C. the horizontal sum of individual demand curves. D. the vertical sum of individual demand curves

C

If the supply and demand curves for a product both decrease, then equilibrium A. quantity must fall and equilibrium price must rise. B. price must fall, but equilibrium quantity may rise, fall, or remain unchanged. C. quantity must decline, but equilibrium price may rise, fall, or remain unchanged. D. quantity and equilibrium price must both decline.

C

In markets where the supply curve is vertical, changes in A. demand will not cause the equilibrium price to change. B. supply will not cause the equilibrium price to change. C. demand will not cause the equilibrium quantity to change. D. supply will not cause the equilibrium quantity to change

C

In the following question you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X; (2) the equilibrium price (P) of X; and (3) the equilibrium quantity (Q) of X.An improvement in the technology used to produce X will A. decrease S, increase P, and decrease Q. B. decrease S, increase P, and increase Q. C. increase S, decrease P, and increase Q. D. decrease D, decrease P, and decrease Q.

C

Producer surplus is the difference between A. the maximum prices consumers are willing to pay for a product and the lower equilibrium price. B. the quantity supplied and quantity demanded at an above equilibrium price. C. the minimum prices producers are willing to accept for a product and the higher equilibrium price D. the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept.

C

The demand curve shows the relationship between A. money income and quantity demanded. B. price and production costs .C. price and quantity demanded. D. consumer tastes and quantity demanded

C

The market system automatically corrects a surplus condition in a competitive market by A. raising the price of the commodity in question while increasing the quantity demanded. B. raising the price of the commodity in question while decreasing the quantity demanded. C. reducing the price of the commodity in question while increasing the quantity demanded. D. reducing the price of the commodity in question while decreasing the quantity demanded.

C

The term "quantity demanded" A. refers to the entire series of prices and quantities that comprise the demand schedule. B. refers to a situation in which the income and substitution effects do not apply. C. refers to the amount of a product that will be purchased at some specific price D. means the same thing as demand

C

When the price of a product rises, consumers with a given money income shift their purchases to other products whose prices are now relatively lower. This statement describes A. an inferior good. B. the rationing function of prices. C. the substitution effect. D. the income effect.

C

A normal good is one A. whose amount demanded will increase as its price decreases B. whose amount demanded will increase as its price increases. C. whose demand curve will shift leftward as incomes rise. D. for which the consumption varies directly with income.

D

A price floor means that A. inflation is severe in this particular market. B. sellers are artificially restricting supply to raise price. C. government is imposing a maximum legal price that is typically below the equilibrium price. D. government is imposing a minimum legal price that is typically above the equilibrium price

D

An increase in the excise tax on cigarettes raises the price of cigarettes by shifting the A. demand curve for cigarettes rightward. B. demand curve for cigarettes leftward. C. supply curve for cigarettes rightward. D. supply curve for cigarettes leftward

D

Over time, the equilibrium price of a gigabyte of computer memory has fallen, while the equilibrium quantity purchased has increased. Based on this we can conclude that A. decreases in the demand for computer memory have exceeded increases in supply. B. decreases in the supply of computer memory have exceeded increases in demand. C. increases in the demand for computer memory have exceeded increases in supply. D. increases in the supply of computer memory have exceeded increases in demand.

D

What combination of changes would most likely decrease the equilibrium price? A. when supply decreases and demand increases B. when demand increases and supply increases C. when demand decreases and supply decreases D. when supply increases and demand decreases

D

When the price of a product falls, the purchasing power of our money income rises and thus permits consumers to purchase more of the product. This statement describes A. an inferior good. B. the rationing function of prices. C. the substitution effect. D. the income effect.

D

Budget Constraint Line

The various combinations of two products a consumer can purchase with a specific money income, given the products' prices.

An "Inferior" Good

DEMAND decreases as Income increases.

A "Normal" Good

DEMAND increases as Income increases.

"The Law of Increasing Opportunity Costs"

Not all production resources are equally well-suited to trade one-for-one in the production of alternative goods

Law of diminishing marginal utility

Refers to a decrease in added consumer satisfaction that results as an individual consumes additional unit of a good or service

A "Substitute" Good

The Demand Curve Goods -Behaviors, Changes in Consumption A "Substitute" Good As the price of an ordinary good decreases, its quantity demanded increases; as a result of this change in price, individual consumers "substitute" more of this good for a related good. conversely, As the price of an ordinary good increases, its quantity demanded decreases; as a result of this change in price, individual consumers "substitute" less of this good for a related good. The Demand Curve Goods -Behaviors, Changes in Consumption A "Substitute" Good

Consumer's Surplus

The accumulative difference between the prices that various consumer's are willing to pay to purchase of a good/service and its current market price

Producer's Surplus

The accumulative difference between the prices that various producers are willing to produce and sell a good/service and its current market price

Production Possibilities Model

The combinations of goods that can be produced if all available economic resources are being utilized efficiently.

Substitution Effect

exists when a lower price gives an incentive to substitute the lower-priced good for any now relatively higher-priced goods.