Microeconomics

Price ceilings can cause a shortage if they are set _____________the market clearing price (Above / Below / At]

Below - If a price ceiling is set below the market-clearing price, it will create a shortage. If it is set at or above the market-clearing price, the market will clear and the ceiling will never serve as a constraint.

What two things does a market economy rely upon to direct production and consumption thorough market exchanges?

Incentives, and self-interested behavior of individuals

If the income elasticity of demand for a normal good is >1, is demand for the good income elastic or income inelastic?

Income elastic.

If demand for a product is inelastic and the producers want to increase their total revenues by changing the price, they should __________________ (Increase / Decrease) the price...

Increase- If the demand is inelastic because there are no substitutes available, an increase in price will not affect its demand. Thus, total revenue is increased.

What increases equilibrium quantity?

Increased demand.

What does it mean if the cross elasticity of demand coefficient is negative?

Indicates that good A and good B are complements. Complements are goods that are used together, such as coffee and cream or pens and paper

If quantity demanded changes by a smaller percentage than the price changes, demand is Elastic \ inelastic \Perfectly Elastic\Perfectly inelastic

Inelastic

When demand is perfectly elastic, the price elasticity of demand is equal to __________

Infinity

The payment to capital is called _________________________

Interest

What Permits nations to go beyond their production possibility curve without acquiring more resources or improving technology?

International trade

What is the economics term for individuals investing in their development through college, apprenticeships, practice, etc

Investing in human capital

As a factor of production, the physical and mental work of humans is called )_____________

Labor

Assume beef has a high income elasticity of demand. If incomes decrease, consumers will buy ___________ beef . [More / Less / the same amount]

Less

What does it mean if the elasticity coefficient is less than 1? What about more than 1?

Less than = demand is inelastic. Percent change in quantity demanded is less than the percent change in price. More than = Demand is elastic.

Suppliers will usually supply ______________________ of a good or service at lower prices. As prices rise, suppliers will supply ___________________ because it is more profitable

Less, more

If a product has a high elasticity of demand, and the objective is to increase overall revenue, a possible solution would be to ________________ prices [Lower / Raise ]

Lower

Is price determined by marginal or total utility?

Marginal

No response in quantity demanded to a change in price is considered.... Elastic \ inelastic \Perfectly Elastic\Perfectly inelastic

Perfectly inelastic

How is the principle of increasing costs depicted on the PPF chart?

The PPF chart will have a curved lie, rather than straight.

Why does a price ceiling set below the equilibrium price prevent a market from clearing?

The amount of product or service consumers wish to by at the imposed price, exceeds the amount suppliers are willing to supply at the imposed price.

Do centralized planning authorities also set wages and production levels?

Yes

Which two factors affect price elasticity of Demand

1 - Substitutes 2 - Time (more time to adjust, more elastic)

What are the three broad questions all economies must answer?

1 - What goodes and services will be produced, and in what quantities 2) How will they be produced (methods of production, combination of inputs) 3) For whom will the products and services be produced (who gets what share)

What are the 5 non-price determinants of demand?

1 -Consumer tastes 2- Size of the group demanding the good or service 3 - Income and wealth of the demanding group 4 - Prices of other goods and services 5- Expectations about future prices or income

In which to ways does a market economy have an advantage over traditional or command economies?

1) Flexibility, capacity for dealing with change

2 Factors that can cause the economy to grow

1) Improved technology 2) Increase in resource quantity (usually labor or capital)

What are the four factors of production?

1) Land 2) Labor 3) Capital 4) Entrepreneurship

What are the four assumptions of the PPF?

1) There are two products or services 2) All of the economies productive resources are being used. 3)Resources are interchangeable 4)We are looking at the economy over the short term

Who makes the production and distribution decisions in a command economy?

A centralized planning authority.

Define negative externality

A condition in which people or firms consume certain goods or engage in certain activities and pass some of the costs of production or consumption along to others.

A decrease in the needed equilibrium point for quantity, is caused by ...

A decrease in supply.

What does movement to a higher curve on the indifference map represent?

A gain in utility

What does it mean if the cross elasticity of demand coefficient is positive?

A positive cross elasticity coefficient indicates a substitute relationship between good A and good B

In terms of price ceilings, what would prevent a market from clearing?

A price ceiling set below the equilibrium point.

A good that has a price equal to the full opportunity cost of production, and its consumption provides benefits only to the person (or group) that purchases the good, is called....

A pure private good.

What is the different between Absolute Advantage and Comparative Advantage?

Absolute advantage means the producer can use the fewest number of inputs , compared to others, while comparative advantage means a producer has the lowest opportunity cost.

As a factor of production, LAND includes:

All natural resources that can be used as input to production, including minerals, water, air , forests, oil, rainfall, temperature - all natural features.

What is an indifference curve

An indifference curve shows all combinations of two goods (or services) among which a consumer is indifferent.

What does it mean when the coefficient of price elasticity of demand is equal to 1?

Any percent decrease or increase in price results in the exact same percent increase or decrease in the quantity demanded.

The elasticity between two points is the value of the coefficient at the midpoint between the points. In other words, the average of the two - what is this value called?

Arc Elasticity

How do traditional economies allocate products and services?

By tradition with established answers - i.e. resources, products and services distributed according to titles and social position i.e. king versus peasant.

Goods that are nonexcludable, but rival in consumption, are called....

Common resources (like ocean fish, or water in a river)

Indifference analysis is useful to gain an insight into the behaviors of __________.

Consumers

Microeconomics explains the interactions between ________________ and _______________

Consumers, producers

In the presence of a positive externality, in order to reach the socially optimal level of output,____________________ [consumption must decrease / consumption must Increase / Supply must Increase / Supply must decrease]

Consumption must increase

What are externalities?

Costs or benefits associated with consumption or production that are not incurred by the consumer or producer, and are therefore not reflected in market prices - Pollution is an example

If demand for a product is elastic and the producers want to increase their total revenues by changing the price, they should __________________ (Increase / Decrease) the price...

Decrease - A drop in price of a good that has elastic demand increases its sales and, thus, total revenue

What does it mean when a demand curve shifts left? Shifts right?

Demand has decreased, increased.

What does it mean for demand elasticity, when a demand curve is a vertical line? What does it mean in terms of price?

Demand is inelastic The quantity demanded is constant, regardless of price

How do you calculate the Income elasticity of demand

Divide percent change in quantity demanded by the percent change in income.

How do you calculate the cross elasticity of demand?

Divide percent change in quantity demanded of of product A, by the percent change in price of product B. Include "-" sign for reduction percents

How do you calculate the price elasticity of demand?

Divide the & change in quantity demanded by the % change in price

How do you calculate opportunity cost?

Divide the amount of Y given up, by the amount of X gained.

How do you calculate marginal utility per dollar

Divide the utils by the price per unit. i.e a coke providing 30 utils at a price of $3 has 10 utils per dollar.

The formula for an elasticity coefficient will always produce a negative number because demand curves are negatively sloped. T/ F

Economists just ignore the negative sign.

If quantity demanded changes by a larger percentage than the price changes, demand is Elastic \ inelastic \Perfectly Elastic\Perfectly inelastic

Elastic

Two types of market failure include:

Externalities and the underproduction of public goods.

The income paid for rent, for the production factor of land, is called a _____________________

Factor Payment.

Externalities are a form of market________________

Failure

The most appealing combination depicted on an difference curve will be closest to the origin. T/F

False - An indifference curve shows all equally appealing combinations of two goods or services. Every point on the curve is equally appealing to the consumer.

The budget line helps depict the best possible use of a consumer's budget based on his or her purchasing power. T/F

False - The budget line depicts the best possible combination of purchasing power for two possible consumer choices.

The market generally fails to provide an efficient outcome if the ___________________ problem exists.

Free Rider

People or firms who consume public goods without contributing to the cost of their production are called....

Free riders

In comparing a good with a lot of alternatives to an equally priced good with few alternatives, the good with more alternatives has an elasticity of demand that is : lower / higher / the same

Higher

Define Marginal Utility

Marginal utility is the number of Utils (measure of satisfaction) that a consumer gets from one more, on one less unit consumed - so If I can of coke gives me 20 utils and 2 gives me 30, the marginal utility of the 2nd coke is 10.

What is another term for Market Equilibrium?

Market-clearing price.

Encouraging self-centered behavior at the expense of community interests is a criticism of which economy type?

Market.

Define the principle of diminishing marginal utility

Means that marginal utility decreases, as consumption increases, i.e the 5th coke will have less of a marginal utility than the 2nd.

What does it mean if a good is excludable?

Means that nonpayers, or free riders, can be kept from consuming it.

What does it mean when the PPF curve shifts outward?

Means the economy is growing

What does "non rival" mean in terms of public goods.

Means the good is not used up in consumption - i.e. a sunset is not used up because a person looks at it.

What does is mean when a market is in disequalibrium?

Means the variables of demand and supply are moving toward equilibrium, but are not there yet.

What does it mean when goods have a zero (0) cross elasticity of demand.

Means they are completely unrelated, neither substitutes or compliments.

In economics, what does Elasticity measure?

Measures the way one variable responds to changes in other variables.

When production of a good takes place and there are negative externalities associated with that production ______________ [More output than is socially optimal is produced / Less output than is socially optimal is produced

More

In a traditional economy, how are most people's efforts applied?

Most people's efforts are applied to the production of food, clothing and shelter. Tradition determines what food is gown, cloths made, etc.

Quantity demanded is [Negativly\Positively] related to price, while quantity supplied is [Negativly\Positively] related to price.

Negatively, Positively

Is a vertical line demand curve responsive to price change?

No

Does price shift the demand curve?

No price does not impact the demand curve, but but price does impact demand

When does market equilibrium occur?

Occurs at that price for which quantity demanded by consumers, is equal to quantity supplied by suppliers. When the quantity supplied and demanded are equal, the market is in equilibrium.

If a demand curve is horizontal , is demand perfectly elastic, or perfectly inelastic?

Perfectly Elastic.

If quantity demanded becomes infinite, in which all that is available is demanded. demand is: Elastic \ inelastic \Perfectly Elastic\Perfectly inelastic

Perfectly elastic

Is demand perfectly elastic or perfectly inelastic if consumers will continue to buy the same amount no matter the change in price.

Perfectly inelastic

What is Price elasticity of supply?

Price elasticity of supply is the measure of the responsiveness of the quantity supplied to changes in the price.

What happens to prices when quantity demanded is less than quantity supplied?

Prices fall

What happens to prices when quantity demanded exceeds quantity supplied?

Prices rise

If product A is a substitute for product B, whats happens to product B's demand if product A's price increases?

Product B's demand will go up - people start using more of B because A has become more expensive.

Whats does P.P.F. stand for? what does it do?

Production Possibility Frontier model - identifies how an economy is using its resources and shows the various output combinations of two goods that can be produced with the available resources.

The reward for innovation, risk taking and organizations is called ______________________________

Profit

The fundamental function of an economic system is to....

Provide a mechanism for allocating goods and services.

Goods that are nonrival in consumption and not subject to exclusion are called.....

Public goods.

A good that is consumed (automatically) by all members of a community simultaneously is called a......

Pure public Good. It is impossible to exclude individuals from consumption, and the good is perfectly nonrival

Price, time period, ability and willingness of consumers to buy, all affect ____________________ [Price Demanded / Quantity Demanded / Income Required]

Quantity Demanded

How does Quantity supplied, differ from Supply.

Quantity supplied refers to the quantity suppliers are willing to supply at a specific price. Supply refers to the entire availability, and the quantity suppliers are willing to provide at various prices over a set period of time.

If a product, such as table salt, has relatively few substitutes, will demand be relatively elastic, or inelastic

Relatively inelastic

What is the income paid to LAND called, as a factor of production?

Rent

Entrepreneurship consists of the activities of combining the other factors of production to produce goods and services, take ________________ and introduce ________________________________________

Risks, new methods and procedures.

What does the production possibilities curve (PPF curve) show? What does it mean if a point is under / to the left of the line? What if it is above / to the right?

Shows all possible combinations of producing two products / services when all resources are fully employed. Any point under the line is not fully using all resources / Any point over the line is unattainable

What is it called when individuals produce more than they intend to consume, and will trade the excess for other things they need?

Specialization

Why do some criticize the market system?

The distribution of income in a market system can create extremes in wealth and poverty.

Define Marginal Cost

The effects on other variables as a result of small increases or decreases in one important variable i.e If we buy one more pizza, what is the impact on number of colas we can buy.

Define opportunity cost

The full value of the next best thing that is not produced, in favor of what is produced.

What is one essential question for market economies to answer?

The institution of property rights.

What does it mean if an elasticity coefficient is larger?

The larger the coefficient, the greater the responsiveness.

What is the law of demand?

The quantity demanded of a good or service, in a given time period, is negatively related to its price - i.e. all else being equal, consumers will buy more of a good or service at a lower price , than a higher one.

How are price changes reflected on a budget line chart?

The slope of the line changes - i.e. line terminates further along (or the opposite) the axis depending on whether the price increases or decreases.

What is the definition of Economics?

The study of how people choose to use their scarce resources in an attempt to satisfy everyone's wants.

Define marginal utility per dollar

The utils received per dollar spent for a product

Opportunity cost includes the value of the things you didn't do, but does not include ____________________________

The value of things that you would have done regardless.

When does a producer have comparative advantage?

When they have the lowest opportunity cost

How does a Command economy answer the three basic questions.

Through centralized command and control, as a planned economy

How does a traditional economy answer the three basic questions?

Through tradition or custom. Answers are based on how the questions were answered in the past.

As a factor of production, Capital or Real Capital, is defined as all aid to production that are human creations, including....

Tools, factories, warehouses, inventories - any man-made asset used to product goods and services.

How do you calculate total revenue

Total revenue is determined by multiplying the price of a good by the quantity demanded of the same good.

What does the maximization rule say about total utility

Total utility is maximized when the last dollar spent on Good A yields the same utility as the last dollar spent on Good B.

Define Total Utility

Total utility is the total number of utils provided by the first and every subsequent unit consumed - subsequent units will add their varying marginal utility to the prior units utility.

What are the three primary types of economy?

Traditional, Command, Market

Goods that have high and positive income elastisities are classified as luxury goods. True or False

True

Higher prices only yield higher revenues in a supply curve when the supply is elastic . T/F?

True

The greater the number of substitutes available, the greater the price elasticity of demand will be. True or False

True

True or false: A Market system, needs a legal system that defines trooper rights and enforces them against violations?

True

When a firm is forced to internalize the external costs it imposes on others, it will reduce the output it produces and charge a higher price for that output. - T / F

True - it will reduce the output it produces and charge a higher price for that output

If the income elasticity of demand is above 0, the item is not considered an inferior good. - True or False?

True.

In the presence of a positive externality, the market is said to experience market failure because it _______________________ [ underproduces / overproduces] the good that causes the externality.

Underproduce

What is the demand curve called when the coefficient of price elasticity of demand is equal to 1

Unit elastic demand

Define Utility

Utility is the satisfaction a consumer receives from consuming a good or service

What is the return factor for Labor

Wages

When will the equilibrium price change?

When demand changes and supply remains constant.

In terms of price floors, what would prevent a market form clearing?

When price floors are set above the equilibrium price.

When does perfect inelastic demand occur?

When the coefficient of price elasticity of demand = Zero.

When does an individual or entity have Absolute Advantage in producing a good or service?

When they can produce the good or service with fewer inputs or least amount of time, compared to anyone else.

A perfectly inelastic demand curve will yield a coefficient of elasticity of demand or exactly _____________

Zero

Goods that are excludable and nonrival are called....

a natural monopoly good, Examples: NetFlix movie, an iTunes song, or cable television.

What is the principle of marginal rates of substitution (MRS) is useful in identifying?

measures how substitution causes the value of another good to decrease based on consumer preference.

An indifference curve is ________________ [positively / negatively] sloping

negatively

The trade-off ratio along an indifference curve is called

the marginal rate of substitution (MRS)

If the coefficient of Income elasticity of demand is a negative number, what does that mean? What if it is positive?

the related good is said to be an inferior product. If positive, the good or service is considered normal.