Microeconomics
4 Different Kinds of Goods
-private goods -public goods -common resources -club goods
Total cost
the market value of the inputs a firm uses in production
Opportunity Cost
whatever must be given up to obtain some item
Midpoint Method
(end value-start value)/(midpoint) *100%
Percentage Change
(end value-start value)/(start value) *100%
What shifts the demand curve?
-# of buyers -income -prices of related goods -tastes -expectations -
Not Binding Constraint
-a price ceiling above the equilibrium price -a price floor below the equilibrium price -has no effect on the market outcome.
Perfectly Competitive Market
-all goods exactly the same -buyers and sellers so numerous that no one can affect market price
Inferior Good
-an increase in income leads to a decrease in demand -shifts Demand curve to the left
Normal Good
-an increase in income leads to an increase in demand -shifts Demand curve to the right
What shifts the supply curve?
-input prices -technology -# of sellers -expectations
Competitive Market has two characteristics
-many buyers and sellers -goods offered by the various sellers are largely the same
Types of Elasticity
-perfectly inelastic -inelastic -unit elastic -elastic
Binding Constraint
-the equilibrium price is above the ceiling -the equilibrium price is below the floor -causes a shortage -illegal
10 Principles of Economics
1. People face trade-offs 2. The cost of something is what you give up to get it 3. Rational People think at the margin 4. People respond to incentives 5. Trade off can make everyone better off 6. Markets are usually a good way to organize economic activity 7. Governments can sometimes improve market outcomes 8. A country's standard of living depends on its ability to produce goods and services 9. Prices rise when the government prints too much money 10. Society faces a short-run tradeoff between inflations and unemployment
Average Revenue equals..
AR = TR/Q = P
Average Total Cost equals..
ATC = TC/Q or ATC = AFC/AVC
Economies of Scale
ATC falls as Q increases
Diseconomies of Scale
ATC rises as Q increases
Constant Returns to Scale
ATC stays the same as Q increases
Tax on Buyers shifts which curve?
Demand
Firms vs Household
Firms: produce and sell goods and services. Hire and use factors of production Households: Buy and consume goods and services. Own and sell factors of production
The Coase Theorem
If private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own. example: solving a problem privately. if your neighbor is having a party but you are studying for a big test, figure out a compromise that benefits the both of you
Marginal Cost equals..
MC = (change in total cost)/(change in Q)
Marginal Product of Labor equals..
MPL = (change in Q)/(change in labor)
Marginal Revenue equals..
MR = (change in TR)/(change in Q)
Inelastic
P.E.S < 1 supply curve: relatively steep sellers price sensitivity: relatively low elasticity < 1
Unit Elastic
P.E.S = 1 supply curve: intermediate slope sellers price sensitivity: intermediate elasticity = 1
Perfectly Elastic
P.E.S = infinity supply curve: horizontal sellers price sensitivity: extreme elasticity: infinity
Elastic
P.E.S > 1 supply curve: relatively flat sellers price sensitivity: relatively high elasticity > 1
Price Elasticity of Supply
P.E.S= (%change in QS)/(%change in price)
Perfectly Inelastic
P.E.S=0 supply curve: vertical sellers price sensitivity: none elasticity: 0
Revenue equals..
Price X Quantity
What two roles do Economists play?
Scientists: try to explain the world Policy advisors: try to improve it
Tax on Sellers shifts which curve?
Supply
Total Cost equals..
TC = FC + VC
Total Revenue equals..
TR = price X quantity
The Production Possibilities Frontier
The production possibilities frontier shows the combinations of output that the economy can possibly produce.
Sunk Cost
a cost that has already been committed and cannot be recovered
Price Ceiling
a legal maximum on the price at which a good can be sold example: price control
Price Floor
a legal minimum on the price at which a good can be sold example: minimum wage
Competitive Market
a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
Free Rider
a person who receives the benefit of a good but avoids paying for it
Corrective Tax
a tax designed to induce private decision-makers to take account of the social costs that arise from a negative externality
Tariff
a tax on imports
Marcus sells 300 candy bars at $0.50 each. His total costs are $125. His profits are: a. $25 b. $124.50 c. $125 d. $150
a. $25
People can be prevented from using a good is the good is: a. a private good or a club good b. a price good or a common resource c. a public good or a common resource d. a private good or a public good
a. a private good or a club good
If demand is price inelastic, then: a. buyers do not respond much to a change in price b. buyers respond substantially to a change in price, but the response is very slow c. buyers do not alter their quantities demand much in response to advertising, fads, or general changes in tastes d. the demand curve is very flat
a. buyers do not respond much to a change in price
If the price elasticity of supply for wheat is less than 1, then the supply of wheat is: a. inelastic b. elastic c. unit elastic d. quite sensitive to changes in income
a. inelastic
A direct or positive relationship exists between a country's: a. productivity and its standard of living b. amount of government spending and its productivity c. the total population and its average citizen's income d. rate of population growth and the extent of its trade with other countries
a. productivity and its standard of living
Accounting Profit equals..
accounting profit = total revenue minus total explicit costs
Which of the following statements about the circular-flow diagram is correct? a. one must imagine that the economy operated without money in order to make sense of the diagram b. the diagram leaves out details that are not essential for understanding the economic transactions that occur between households and firms c. the government cannot be excluded as a decision maker in a circular-flow diagram d. all of the above
b. the diagram leaves out details that are not essential for understanding the economic transactions that occur between households and firms
Price controls are usually enacted: a. as a means of raising revenue for public purposes b. when policymakers believe that the market price of a good to service is unfair to buyers or sellers c. when policymakers tax a good d. all of the above
b. when policymakers believe that the market price of a good to service is unfair to buyers or sellers
Tsintah weaves traditional Navaho rugs. She weaves and sells 50 rugs. Her average cost of production per rug is $50. She sells each rug for a price of $65. Tsintah's total revenues are: a. $750 b. $2,500 c. $3,250 d. $5,750
c. $3,250
Which of the following is an example of the free-rider problem?: a. Both Zoe and Zach receive low-cost dental care at the local dental school, so neither of them pays the full cost of the care b. Alfred receives a free lunch from the local "Meals on Wheels" program because of his low monthly income c. Bruce owns Buster, a large dog who barks whenever anyone walks near his house. Betty lives next to Bruce, and Buster's barking can be heard whenever anyone walks near her house, too. Thus, Better receives free protection from burglars because of Buster's barking. d. Sam purchases a burger at a fast food restaurant and gets a second burger free because the restaurant is having a buy one, get one free sale.
c. Bruce owns Buster, a large dog who barks whenever anyone walks near his house. Betty lives next to Bruce, and Buster's barking can be heard whenever anyone walks near her house, too. Thus, Better receives free protection from burglars because of Buster's barking.
If a binding price floor is imposed on the market for eBooks, the: a. the demand for eBooks will decrease b. the supply of eBooks will increase c. a surplus of eBooks will develop d. all of the above
c. a surplus of eBooks will develop
The Mansfield Public Library has a large number of books that anyone with a library card may borrow. Anyone can obtain a card for free. Because the number of copies of each book is limited, not everyone can have the same book at the same time. What type of good would the library books be classified as in this case?: a. private goods b. club goods c. common resources d. public goods
c. common resources
In a market economy, government intervention: a. will always improve market outcomes b. reduces efficiency in the presence of externalities c. may improve market outcomes in the presence of externalities d. is necessary to control individual greed
c. may improve market outcomes in the presence of externalities
An externality is the impact of: a. society's decisions on the well-being of society b. a person's actions on that person's well-being c. one person's actions on the well-being of a bystander d. society's decisions on the poorest person in the society
c. one person's actions on the well-being of a bystander
Markets fail to allocate resources efficiently when: a. demanders and suppliers cannot agree on a price b. goods are rival in consumptions and excludable c. property rights are not well established d. too many buyers and sellers exist in the same market
c. property rights are not well established
The production possibilities frontier illustrates: a. the combinations of output that an economy should produce b. the combinations of output that an economy should consume c. the combinations of output that an economy can produce d. all of the above
c. the combinations of output that an economy can produce
Melody decides to spend three hours working overtime rather than going to the park with her friends. She earns $20 per hour for overtime work. Her opportunity cost of working is: a. the $60 she earns working b. the $60 minus the enjoyment she would have received from going to that park c. the enjoyments she would have received had she gone to the park d. nothing, since she would have received less than $60 worth of enjoyment from going to the park
c. the enjoyments she would have received had she gone to the park
When a nation first begins to trade with other countries and the nation becomes an importer of corn: a. this is an indication that the world price of corn exceeds the nation's domestic price of corn in the absence of trade b. this is an indication that the nation has a comparative advantage in producing corn c. the nation's consumers of corn become better off and the nation's producers of corn become worse off d. all of the above
c. the nation's consumers of corn become better off and the nation's producers of corn become worse off
In economics, the cost of something is: a. the dollar amount of obtaining it b. always measured in units of time given up to get it c. what you give up to get it d. often impossible to quantify, even in principle.
c. what you give up to get it
Positive Statements
claims that attempt to describe the world as it is. scientists make positive statements
Normative Statements
claims that attempt to prescribe how the world should be. policy advisors make normative statements
Fixed Costs
costs that do not vary with the quantity of output produced ex: loan payments, rent
Variable Costs
costs that vary with the quantity of output produced ex: cost of materials
The principle that "people face tradeoffs" applies to: a. individuals b. families c. societies d. all of the above
d. all of the above
The basic tools of supply and demand are: a. useful only in the analysis of economic behavior in individual markets b. useful in analyzing the overall economy, but not in analyzing individual markets c. central to microeconomic analysis, but seldom used in macroeconomic analysis d. central to macroeconomic analysis as well as to microeconomic analysis
d. central to macroeconomic analysis as well as to microeconomic analysis
Which of the rolling statements is correct about the roles of economists?: a. economists are best viewed as policy advisers b. economists are best viewed as scientists c. in trying to explain the work, economists are policy advertisers; in trying to improve the world, they are scientists d. in trying to explain the work, economists are scientists; in trying to improve the world, they are policy advisers
d. in trying to explain the work, economists are scientists; in trying to improve the world, they are policy advisers
A tariff is a: a. limit on how much of a good can be exported b. limit on how much of a good can be imported c. tax on an exported good d. tax on an imported good
d. tax on an imported good
You are in charge of the local city-owned aquatic center. You need to increase the revenue generated by the aquatic center to meet expenses. The mayor advises you to increase the price of a day pass. The city manager recommends reducing the price of a day pass. You realize that: a. the mayor thinks demand is elastic, and the city manager thinks demand is inelastic b. both the mayor and the city manager think that demand is elastic c. both the mayor and the city manager think that demand is inelastic d. the mayor thinks demand is inelastic, and the city manager thinks demand is elastic
d. the mayor thinks demand is inelastic, and the city manager thinks demand is elastic
Implicit Costs
do not require a cash outlay ex: the opportunity cost of the owner's time
Economic Profit equals..
economic profit = total revenue minus total costs (including explicit and implicit costs)
Club Goods
excludable but not rival in consumption ex: cable TV
Private Goods
excludable, rival in consumption ex: food
EXPORTS Consumer Surplus Producer Surplus Total Surplus before and after trade
exports before trade: consumer surplus = A + B producer surplus = C total surplus = A + B + C exports after trade: consumer surplus = A producer surplus = B + C + D total surplus = A + B + C + D
Excludable
if a person can be prevented from using it
Rival in Consumption
if one person's use of the good diminished others' use
IMPORTS Consumer Surplus Producer Surplus Total Surplus before and after trade
imports before trade: consumer surplus = A producer surplus = B + C total surplus = A + B + C imports after trade: consumer surplus = A + B + D producer surplus = C total surplus = A + B + C + D
Price Elasticity of Demand
measures how much the quantity demanded responds to a change in price P.E.D= (%change in QD)/(%change in price)
negative vs positive externalities
negative: -air pollution from a factory -the neighbor's dog barking -second-hand smoke positive: -vaccines -going to college to raise the population's education level, reduces crime rate = improves the government -someone wearing perfume (smell good)
Public Goods
not excludable, not rival in consumption ex: national defense, fighting poverty
The Revenue of a Competitive Firm (chart)
page 281.
Profit equals..
profit = total revenue - total cost
Shortage
quantity demanded is greater than quantity supplied
Surplus
quantity supplied is greater than quantity demanded
Explicit Costs
require an outlay of money ex: paying wages to workers
Common Resources
rival in consumption, but not excludable ex: fish in the ocean
Shift vs. Movement Along Curve
shift: change in supply or change in demand movement: change in quantity supplied or change in quantity demanded
Production Function
shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good
Shutdown vs. Exit
shutdown: a short-run decision not to produce anything because of market conditions exit: a long-run decision to leave the market
Substitutes vs. Compliments
substitutes: if an increase in the price of one good causes an increase in demand for the other good ex: coke and pepsi compliments: if an increase in the price of one good causes a fall in demand for the other good ex: bagels and cream cheese
Comparative Advantage
the ability to produce a good at a lower opportunity cost than another producer
Absolute Advantage
the ability to produce a good using fewer inputs than another producer
Total revenue
the amount a firm receives from the sale of its output
Transaction Costs
the cost that parties incur in the process of agreeing to and following through on a bargain
Deadweight Loss
the fall in total surplus that results from a market distortion, such as a tax
Marginal Product
the increase in output that arises from an additional unit of input
Tax Incidence
the manner in which the burden of a tax is shared among participants in a market
Law of Demand
the quantity demanded of a good falls when the price of the good rises, other things equal
Law of Supply
the quantity supplied of a good rises when the price of the good rises
Efficient Scale
the quantity that minimizes ATC
externality
the uncompensated impact of one person's actions on the well-being of a bystander
