Micro test 2 (Practice test)
Trade deficit
$ value of exports < $ value of inputs ( ex. I buy from publix, but don't trade w/them )
Trade surplus
$ value of exports > $ value of inputs
Price elasticity of demand
% change in Q.D. __________________________ % change in price
Cross elasticity of demand (CPED)
% change in Q.D. (x) If # is positive; substitutes ______________________ = % change in Price (y) If # is negative; complements
Price elasticity of income
% change in Q.D. + = normal good ______________________ (increase income; inc. Q.D.) % change in income - = inferior good (increase income ; decrease Q.D.)
Unit elastic
( decrease in price = money spent stays the same ) x=1
Reasons for elasticity
-Availability of close Substitutes ***demand*** -Definition of market -Luxury vs. necessity -The goods' share of the budget -Passage of time***supply***
An increase in the price of a good
Decreases the quantity demanded of the good
Which of the following statements about the price elasticity of demand is correct?
Demand is more elastic in the long run than it is in the short run.
quasi-public goods
Excludable but not rival. Ex.) watching game of thrones at a friends house
A solution to the "tragedy of the commons" problem, such as overfishing, deforestation, and hunting of endangered animals, is to
Have government assign property rights to these resources so individuals have an incentive to conserve them
an increase in the supply of a good
decreases the quantity demanded of the good
The more substitutes there are for the good the more ____ it becomes
elastic
The observation that people tend to value something more highly when they own it than when they don't is called the
endowment effect
The rule of equal marginal utility per dollar spent suggests that consumers maximize utility by...
equalizing the marginal utility per dollar spent across goods and services.
An item has utility for a consumer if it
generates enjoyment or satisfaction
when an individual acts...
he ranks his choice higher than his opportunity cost ( MB > MC ) but cannot say by how much
Price elasticity of demand measures
how responsive quantity demanded is to a change in price.
suppose that a demand curve is inelastic, which would be true?
if sellers decrease the supply of a good, total money spent by consumers will increase
excludability
if you do not pay for it, you cannot consume it ( playing golf .. unless your with cito)
A tariff is a tax imposed by a government on
imports.
Which of the following is a source of a negative externality?
incomplete property rights or inability to enforce property rights
Law of diminishing marginal utility
increase supply of good = decrease the marginal utility
market failure
is when the market fails to produce the efficient level of output
economic efficiency
is where consumer surplus and producer surplus are maximized.
International trade remains
less important to the United States than it is to most other countries
advertising
provides useful services by furnishing information to the customers
Which of the following displays these two characteristics: nonrivalry and nonexcludability in consumption?
public goods
Elasticity of supply
responsiveness of quantity supplied to a change in price % change in Q.S. _____________________ % change in price
Ordinal
something can be ranked or compared, but we can't quantify it
Utility is
subjective and difficult to measure.
Utility
usefulness or satisfaction a person gets from using a good ( utility = ordinal )
elasticity
very sensitive to a change in price ( Decrease price = Increase Revenue ) x>1
Cardinal
we can quantify the rankings between two things. ( height, weight, temperature)
people care about fairness..
we get satisfaction from being ultralistic
The law of diminishing marginal utility suggests that
when consumers buy more of a product, they tend to like it less and less.
rivalry
when one person consumes a unit of good, no one else can consume that same good. ( If you buy a big mac, no one else can buy that same one )
analogy
when some firms go out of business from technological innovation
What are property rights?
the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it
When the price of summer tank tops falls and you buy more of them because they are relatively less expensive, this is called
the substitution effect
sunk costs
A cost that has already been paid and cannot be recovered. (should be ignored in consumer-decision making) Ex.) Buying a Yankee ticket, but realizing the game is at Fenway!
__________ is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
Comparative advantage
Passage of time
Consumers spend time looking for substitutes and its less costly to switch as time goes on MOST IMPORTANT DETERMINANT FOR SUPPLY*** ( increase in price = decrease Q.D. initially but later the decrease gets lower)
Suppose that a demand curve is elastic. Which of the following is true?
If sellers increase the supply of a good total money spent will increase
The demand for all beer is likely to be ____ the demand for Budweiser beer
More elastic than
Availability of close Substitutes
More ways of satisfying your ends so you will be more sensitive to price.... MOST IMPORTANT DETERMINANT FOR DEMAND** ( more substitutes = more elasticity )
Economists believe the most persuasive argument for protectionism is to protect infant industries. But the argument has crucial drawbacks. What is one of these drawback?
Protection lessens the need for firms to become productive enough to compete with foreign firms; this often results in infant industries never "growing up."
Many economists do not believe that switching costs lock consumers into the use of products that have technology inferior to other, similar products. These economists believe that
The gains from using a superior technology exceed the losses consumers incur from switching costs
when discussing consumer theory, we said that with an increase in the supply of a good
The marginal utility of the good decreases
externality
a benefit or cost experienced by someone who is not a producer or consumer of a good or service
Which of the following is not a source of comparative advantage?
a strong foreign currency exchange rate
Firms pay famous individuals to endorse their products because
apparently demand is affected not just by the number of people who use a product but also by the type of person that uses the product.
Whenever a buyer and a seller agree to trade,
both must believe they will be made better off.
Private good
both rival and excludable ex.) haircuts, food, clothing, and many other services
A country will always be an exporter of a good where it has a...
comparative advantage in production
Consumer theory
consumers act in a way that will make them as well off as possible ; in a way that will maximize their satisfaction or happiness given a constraint. (ex. Giving money to the poor makes you feel better about yourself) MB>MC
autarky
country does not trade with other countries
budget constraint
limited amount of money you spend on goods Ex.) "oh, nice shirt!" ... "$80!? no deal!"
Imposing trade barriers does all of the following except
lowers domestic prices.
Economists assume that the goal of consumers is to
make themselves as well off as possible.
A tariff on a consumer good
makes domestic consumers worse off.
Definition of market
more narrow the market is ; the more elastic the demand will be ( More substitutes )
The larger the share of a good in a consumer's budget, holding everything else constant, the
more price elastic is a consumer's demand.
equalmarginal principle
most bang for your buck
Luxury vs. Necessity
necessity = more inelastic (water) luxury = more elastic
free trade
no restriction on what a nation can import and export (mainly benefits consumers due to lower prices)
Public goods
not rival and not excludable. ex.) bathrooms, public pools, national defense
inelastic
not sensitive to a change in price x<1
If you expect the economy to boom and rise in the future, the firm that would increase sales are
one that sells a luxury good
The "tragedy of the commons" refers to the phenomenon where
people overuse a common resource.
Share of the good in the consumers budget
the bigger the share = more elastic time demand smaller the share = less elastic
Marginal utility
the change in total utility a person receives from consuming an additional unit
The law of diminishing marginal utility states that
the extra satisfaction from consuming a good decreases as more of a good is consumed, other things constant.
When the price of audio books, a normal good, falls, causing your purchasing power to rise, you buy more of them due to
the income effect.
Conceptually, the efficient level of pollution is the level for which
the marginal benefit of reducing pollution is equal to the marginal cost of reducing pollution.
A negative externality exists if
the marginal social cost of producing a good or service exceeds the private cost.
when discussing consumer theory we said that consumers optimize when
the marginal utility per dollar spent on all goods will be equal
The price elasticity of demand is equal to
the percentage change in quantity demanded divided by the percentage change in price.