ECON EXAM 2

demand schedule

a table showing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus

equilibrium price

the price at which the quantity of a good demanded in a given time period equals the quantity supplied

law of demand

the quantity of a good demanded in a given time period increase as its price falls, ceteris paribus

free rider

an individual who reaps direct benefits from someone else's purchase (consumption) of a public good

factor market

any place were factors of production (land, labor, capital, entrepreneurship) are bought and sold

product market

any place where finished goods and services (products) are bought and sold

market

any place where goods are bought and sold

vested interests

carrying a legal right of present or future enjoyment; specifically : a right vested in an employee under a pension plan

externalities

costs (or benefits) of a market activity borne by a third party; the difference between the social and private costs (or benefits) of a market activity

externalities

costs (or benefits) of a market transaction borne by a third party. Create a divergence of social and private costs (or benefits), causing suboptimal market outcomes - The market overproduces goods with external costs, underproduce goods with external benefits

government failure

government intervention that fails to improve economic conditions

antitrust

government intervention to alter market structure or prevent abuse of market power

social demand versus market demand

social demand= market demand + externality

surplus/shortage pressure on price

surplus: price goes down shortage: price goes up

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, ceteris paribus

market power

the ability to alter the market price of a good or service

market shortage

the amount by which the quantity demanded exceeds the quantity supplied at a given price: exceeds demand

market surplus

the amount by which the quantity supplied exceeds the quantity demanded at a given price: exceeds supply

ceteris paribus

the assumption that nothing else changing

private costs

the costs of an economic activity directly borne by the immediate producer or consumer (excluding externalities)

barter

the direct exchange of one good for another, without the use of money

laissez faire

the doctrine of "leave it alone," of nonintervention by government in the market mechanism

social costs

the full resource costs of an economic activity, including externalities

underproduction and overproduction when there are private and public goods

the market tends to underproduce public goods and overproduce private goods

optimal mix of output

the most desirable combination of output attainable with existing resources, technology, and social values

opportunity cost

the most desired goods or services that are forgone in order to obtain something else

law of supply

the quantity of a good supplied in a given time period increases as its price increases

determinants of demand

1. Taste 2. Popularity 3. Number of buyers

determinants of supply

1. Technology 2. Factor costs 3. Number of sellers

15. Which of the following is most likely a public good? A. A park B. Electricity C. A computer D. Social Security payments

A. A park

14. Market failure means that the economy is definitely producing: A. A suboptimal mix of output. B. At a point beyond the production possibilities curve. C. At a point inside the production possibilities curve. D. Zero output.

A. A suboptimal mix of output

3. Which of the following events would cause a rightward shift in the supply curve for automobiles? A. An improvement in the technology used to produce automobiles. B. An increase in the cost of labor for automobile producers. C. An increase in taxes for automobile producers. D. A decrease in the number of sellers.

A. An improvement in the technology used to produce automobiles

18. Social demand is equal to market: A. Demand plus externalities. B. Supply plus market demand. C. Demand minus externalities. D. Demand multiplied by externalities.

A. Demand plus externalities.

19. The free-rider problem arises because those who: A. Do not pay cannot be excluded. B. Pay are not willing to share. C. Demand the goods are excluded. D. Supply the goods are greedy.

A. Do not pay cannot be excluded

18. The federal government's role in protecting the environment is justified by considerations of: A. Externalities. B. Equity issues. C. Market power. D. Public goods.

A. Externalities

9. Ceteris paribus, the quantity demanded of a good will decrease in response to: A. Higher income. B. A higher price for the good. C. A rightward shift of the supply curve. D. A lower price for the good.

B. A higher price for the good

17. The term externalities refers to: A. The inequitable distribution of output. B. All costs and benefits of a market activity borne by a third party. C. The impact that imported goods have on domestic markets. D. Free-riders who benefit but do not pay.

B. All costs and benefits of a market activity borne by a third party

1. Which of the following is not a factor of production? A. Land. B. Wages. C. Labor. D. Capital.

B. Wages Right Answer: Entrepreneurship

13. Market failure occurs when: A. Market prices signal producers to produce the optimal mix of output. B. The economy produces at a point on the production possibilities curve. C. Producers supply the goods that earn the greatest profit. D. An imperfection in the market mechanism prevents an optimal outcome

D. An imperfection in the market mechanism prevents and optimal outcome

7. Which of the following provides the best example of the law of supply? A. Falling labor costs cause an increase in supply. B. Improved technology shifts the supply curve to the right. C. Some producers leave the industry, and the supply curve shifts to the left. D. An increase in price entices suppliers to produce more.

D. An increase in price entices suppliers to produce more

14. In economics, a public good: A. Is any good produced by the government. B. Has social costs that are lower than private costs. C. Is provided in an optimal amount by the market. D. Cannot be denied to consumers who do not pay.

D. Cannot be denied to consumers who do not pay

18. In economics, a public good: A. Is any good produced by the government. B. Has social costs that are lower than private costs. C. Is provided in an optimal amount by the market. D. Cannot be denied to consumers who do not pay.

D. Cannot be denied to consumers who do not pay

2. Any place where factors of production are bought and sold is a: A. Private-goods market. B. Stock market. C. Product market. D. Factor market.

D. Factor Market

cost-of-living adjustment for Social Security

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equilibrium in the market

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income transfers (Table 9.1)

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inequality

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10. A market: A. Is any place where goods are bought and sold. B. Must have a physical location so buyers and sellers can meet. C. Does not exist for the exchange of illegal goods and services. D. Must be approved by the government before it can exist.

A. Is any place where goods and services are bought and sold

13. A private good is unique because: A. Nonpayers can be prevented from consuming it. B. It can be enjoyed exclusively by free riders. C. The market is likely to produce too little of it. D. It is provided most efficiently by government.

A. Nonpayers can be prevented from consuming it

13. If a system of emission charges forces firms to internalize all external costs: A. Relative prices of polluting activities will rise. B. The elimination of externalities will fully compensate for any excessive market power. C. The elimination of externalities will allow greater production of all goods and services. D. Pollution will increase.

A. Relative prices of polluting activities will rise. (W)

20. External costs are equal to the difference between: A. Social costs and private costs. B. Marginal benefits and marginal costs. C. Average benefits and average costs. D. Marginal social benefits and marginal social costs.

A. Social costs and private costs

16. The communal nature of a highway means that no one individual is motivated to pay for it because even those who do not pay will still benefit from using it. This is an example of: A. The free-rider dilemma. B. Government failure. C. Inequity. D. A natural monopoly.

A. The free-rider dilemma

16. The market produces too few public goods because: A. The link between payment and consumption is broken. B. They must be paid for by wealthy individuals. C. Only the government can produce public goods. D. The market distributes goods to those with the most money.

A. The link between payment and consumption is broken.

12. If market prices and sales are used to signal desired output, then the optimal mix of output is determined by: A. The market mechanism. B. The political process. C. The Federal Reserve System. D. Government intervention.

A. The market mechanism

4. If demand is constant, a decrease in the supply of gasoline will cause the equilibrium price: A. To rise and quantity to fall. B. And quantity both to rise. C. To fall and quantity to rise. D. And quantity both to fall.

A. to rise and quantity to fall

19. Noise generated by an airport best illustrates: A. An inequity. B. An externality. C. Market power. D. Overproduction of private goods.

B. An externality

1. Which of the following participates in the product market? A. Consumers only. B. Consumers, governments and foreigners. C. Governments and consumers only. D. Foreigners only.

B. Consumers, governments, and foreigners (W)

17. Externalities are the: A. Domestic economic impact of foreign events. B. Difference between social and private costs or benefits. C. Outside costs that producers absorb. D. Effects of government actions on the private sector.

B. Difference between social and private costs or benefits.

15. If the economy relies entirely on markets to answer the WHAT question, it tends to: A. Overproduce private goods and overproduce public goods. B. Overproduce private goods and under produce public goods. C. Under produce private goods and overproduce public goods. D. Under produce private goods and under produce public goods.

B. Overproduce private goods and under produce public goods.

2. An increase in the supply of frozen yogurt will take place when: A. The price of frozen yogurt decreases. B. The cost of producing frozen yogurt decreases. C. The taxes on frozen yogurt increase. D. Consumer incomes increase.

B. The cost of producing frozen yogurt decreases

11. The tendency for the market to under produce public goods and overproduce private goods results from: A. the law of diminishing returns. B. the fact that people are reluctant to buy what they can get free. C. public goods are not as important as private goods. D. the law of conservation of matter and energy.

B. The fact that people are reluctant to buy what they can get free

19. Whenever net external benefits exist then: A. economic profits are zero. B. the social demand exceeds the market demand. C. the benefits associated with a product fall short of those accruing to the market. D. product differentiation increases the variety of products available to consumers.

B. The social demand exceeds the market demand

8. A market shortage occurs when: A. The quantity demanded is less than the quantity supplied at a given price. B. The market price is below equilibrium. C. Sellers produce a lot of the product and consumers like it a lot. D. A new product is introduced at the equilibrium price.

B. When market price is below equilibrium

15. The tendency for the market to under produce public goods and overproduce private goods results from: A. the law of diminishing returns. B. the fact that people are reluctant to buy what they can get free. C. public goods are not as important as private goods. D. the law of conservation of matter and energy.

B. the fact that people are reluctant to buy what they can get free

14. The tendency for the market to under produce public goods and overproduce private goods results from: A. the law of diminishing returns. B. the fact that people are reluctant to buy what they can get free. C. public goods are not as important as private goods. D. the law of conservation of matter and energy.

B. the fact that people are reluctant to buy what they can get free.

5. If demand is unchanged, a rightward shift in the supply curve for plasma TVs will cause: A. A decrease in equilibrium quantity and a higher equilibrium price. B. An increase in equilibrium quantity and a higher equilibrium price. C. An increase in equilibrium quantity and a lower equilibrium price. D. A decrease in equilibrium quantity and a lower equilibrium price.

C. An increase in equilibrium quantity and a lower equilibrium price.

4. A demand schedule refers to the combinations of price and quantity that represent the: A. Concerns of regulators. B. Preferences of businesses. C. Desires of consumers. D. Demands of producers.

C. Desires of consumers

12. Market failure establishes a basis for: A. Market power. B. Externalities. C. Government intervention. D. Private goods.

C. Government intervention

16. Market failure establishes a basis for: A. Market power. B. Externalities. C. Government intervention. D. Private goods.

C. Government intervention

5. The quantity of a good demanded in a given time period increases as the price falls, which is known as: A. Say's Law. B. The law of ceteris paribus. C. The law of demand. D. The opportunity cost.

C. Law of Demand

1. Ceteris paribus, which of the following will cause the demand curve for basketballs to shift to the left? A. The cost of producing basketballs increases. B. Consumer incomes increase. C. Parents decide soccer is a better sport for their children than basketball. D. People become more interested in basketball as more football players are arrested for drugs

C. People decide soccer is a better sport for their children than basketball

11. Which of the following does not explain why the market sometimes fails to produce the optimal mix of output? A. Some producers have market power. B. Public goods can have free-riders. C. Private goods cannot be consumed jointly. D. There are externalities associated with production.

C. Private goods cannot be consumed jointly.

7. If a market surplus exists: A. The only resolution is for the government to set the price. B. Consumers will compete for the product by offering to pay more. C. Producers will compete for customers by reducing prices. D. The equilibrium price is equal to the price ceiling.

C. Producers will compete for customers by reducing prices

4. Ceteris paribus, according to the law of supply, if the price of product Z increases from $6 to $8, then the: A. Quantity supplied will not be affected. B. Supply curve for Z will shift to the left. C. Quantity supplied of Z will increase. D. Quantity supplied of Z will decrease.

C. Quantity supplied of Z will increase

12. If external benefits occur when a good is consumed, then the government should: A. Tax the producers of the good. B. Make transfer payments to those who incur the externalities. C. Subsidize the consumption or production of the good. D. Enforce antitrust laws against producers of the good.

C. Subsidize the consumption or production of the good. (W)

6. The quantity of a good that suppliers are willing and able to supply at a given price in a given time period depends on: A. Income. B. Consumers' expectation of future prices and costs. C. The costs of producing the good. D. The consumer demand for the good.

C. The costs of producing the good

2. Ceteris paribus, _______ can change without shifting the demand curve for jackets. A. Income B. Taste C. The price of jackets D. The price of sweaters

C. The price of jackets (W)

10. Which of the following will not cause a shift in the demand curve for a good? A. Income. B. Taste. C. The price of the good itself. D. The prices of other related goods.

C. The price of the good itself (W)

9. A market surplus occurs when: A. People cannot buy the amount of goods and services that they are willing and able to buy. B. The price is less than the equilibrium price. C. The quantity supplied exceeds the quantity demanded at a given price. D. There is a price ceiling.

C. The quantity supplied exceeds the quantity demanded at a given price.

20. Externalities are a type of market failure because: A. Buyers do not have complete information about the product. B. Producers have too much power. C. Third parties bears the costs or benefits of a market activity. D. Goods and services are not distributed fairly.

C. Third parties bear the costs or benefits of a market activity

3. Economists make a distinction between changes in quantity demanded and changes in demand: A. Because the supply curve shifts whenever there is a change in demand. B. Because the demand curve shifts whenever there is a change in quantity demanded. C. To distinguish a movement along a demand curve from a shift of the demand curve. D. To distinguish a surplus from a shortage.

C. To distinguish a movement along a demand curve from a shift of the demand curve

20. If the economy relies entirely on markets to answer the WHAT question, it tends to _____ goods with external benefits and _____ goods with external costs. A. Overproduce; overproduce B. Overproduce; under produce C. Under produce; overproduce D. Under produce; under produce

C. Under produce, overproduce

17. A private good is a good that: A. Is financed by private dollars instead of taxes. B. Can be jointly consumed. C. Can be denied to those who do not pay for it. D. Consumers use privately in their homes.

C. can be denied to those who do not pay for it (W)

6. A price floor: A. Decreases the quantity producers are willing and able to supply relative to the equilibrium level. B. Increases the quantity demanded relative to the equilibrium level. C. Causes excess demand. D. Creates a market surplus.

D. Creates a market surplus (W)

11. The most desirable combination of output attainable with available resources, technology and social values is known as the: A. Economic choice of output. B. Efficient choice of production. C. Preferred output choice. D. Optimal mix of output.

D. Optimal mix of output

3. A market in which finished goods and services are exchanged is a: A. Financial market. B. Intermediate-goods market. C. Factor market. D. Product market.

D. Product Market

concept of market failure

When the market does not achieve optimal mix of output

shift in demand

a change in the quantity demanded at any (every) given price

demand curve

a curve describing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus

emission charge

a fee imposed on polluters, based on the quantity of pollution

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 excludes consumption by others

market power

enables a producer to twart market signals and maintain a suboptimal mix of output. Antitrust policy seeks to prevent or restrict market power.

supply increases (decreases) means supply line shifts--what direction(s)? what happens to equilibrium?

increases: shift to the right, equilibrium prices goes down, quanitity goes up decreases: shifts to the left, equilibrium price goes up, quantity goes down

price floor

lower limit imposed on the price of a good creates surplus, demand= decreases, supply= increases

means testing for Social Security and Medicare

make wealthier people pay more

demand increases (decreases) means demand line shifts which directions? What happens to equilibrium?

move: change in quantity demanded shift: change in demand, caused by change in popularity, consumers' income, or price of another good

difference between moving along supply line and shift of supply line

move: change in the quantity supplied shift: change in supply, may be caused by changes in costs of factors or production or changes in technology

income transfers

payments to individuals for which no current goods or services are exchanged (i.e. social security, welfare, unemployment benefits)

joint consumption

public good= consumption of it doesn't exclude consumption by others

sources of market failure

public goods, externalities, market power, and inequity

difference between public and private goods

public= non-excludable, non-rivaled private= Big Mac

market demand

the total quantities of a good or service people are willing and able to buy at alternative prices in a given time period; the sum of individual demands

market supply

the total quantities of a good that sellers are willing and able to sell at alternative prices in a given time period, ceteris paribus

market mechanism

the use of market prices and sales to signal desired outputs (or resource allocations)

why antitrust policies

to prevent or restrict market power to keep markets open and competitive

price ceiling

upper limit imposed on the price of a good or service creates shortages, demand= increases, supply= decreases