Microeconomics Ch 1 - 4

Market

A group of buyers and sellers of a good or service

Price ceiling

A legally determined maximum price that sellers may charge.

Price floor

A legally determined minimum price that sellers may receive

Competitive market equilibrium

A market equilibrium with many buyers and many sellers

Black markets

A market in which buying and selling take place at prices that violate government price regulations

Markets guarantee efficient outcomes.

False

Money is one of our nation's most important resource.

False

Marginal cost

The additional cost to a firm of producing one more unit of a good or service.

Quantity demanded

The amount of a good or service that a consumer is willing and able to purchase at a given price.

Quantity supplied

The amount of a good or service that a firm is willing and able to supply at a given price.

Demand curve

A curve that shows the relationship between the price of a product and the quantity of the product demanded.

Supply curve

A curve that shows the relationship between the price of a product and the quantity of the product supplied

Inferior good

A good for which the demand increases as income falls and decreases as income rises

Normal good

A good for which the demand increases as income rises and decreases as income falls.

Perfectly competitive market

A market in which there are many buyers and sellers, all the products are identical, and there are no barriers to new sellers entering the market

Economic efficiency

A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production, and in which the sum of consumer surplus and producer surplus is at a maximum.

Technological change

A positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs.

Shortage

A situation in which the quantity demanded is greater than the quantity supplied.

Surplus

A situation in which the quantity supplied is greater than the quantity demanded.

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants

Demand schedule

A table showing the relationship between the price of a product and the quantity of the product demanded.

Supply schedule

A table that shows the relationship between the price of a product and the quantity of the product supplied.

A normal good is a good for which the quantity demanded increases as the price decreases, holding everything else constant.

False

A positive technological change will cause the quantity supplied of a good to increase.

False

An equitable distribution of economic benefits is also an efficient distribution of economic benefits.

False

Scarcity is defined as the situation that exists when the quantity demanded for a good is greater than the quantity supplied.

False

The opportunity cost of an activity is the sum of the benefits of all alternatives foregone.

False

The slope of a non-linear curve is constant.

False

Three key economic ideas

People are rational, People respond to incentives, and Optimal decisions are made at the margin.

Microeconomics

Study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices

Tax incidence

The actual division of the burden of a tax between buyers and sellers in a market

Marginal benefit

The additional benefit to a consumer from consuming one more unit of a good or service.

Substitution effect

The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes.

Income effect

The change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power

Demographics

The characteristics of a population with respect to age, race, and gender

Market demand

The demand by all the consumers of a given good or service

Consumer surplus

The difference between the highest price a consumer is willing to pay and the price the consumer actually pays.

Producer surplus

The difference between the lowest price a firm would have been willing to accept and the price it actually receives

opportunity cost

The highest-valued alternative given up in order to engage in some activity

A negative relationship between two variables can be shown with a downward sloping curve in a graph.

True

The income effect of a price change refers to the change in the quantity demanded of a good that results from a change in purchasing power as a result of the price change.

True

The slope of a non-linear curve is measured by the slope of a tangent line to a point on the curve.

True

Economic variables

something measurable that can have different values, such as the incomes of doctors

Technology

the processes a firm uses for turning inputs into outputs of goods and services

Testability

good models generate testable predictions, which can be verified or disproven using data.

By encouraging inventions and innovations that increase the productivity of resources, an economy can eliminate the problem of scarcity.

False

Economists often disagree over positive rather than normative economic issues.

False

If the price of peaches, a substitute for plums, increases the demand for plums will decrease.

False

In response to a shortage the market price of a good will rise; as the price rises, the demand will decrease and supply will increase until equilibrium is reached.

False

The substitution effect explains why there is an inverse relationship between the price of a product and the quantity of the product demanded.

False

Complements

Goods and services that are used together

Substitutes

Goods and services that can be used for the same purpose.

As the number of firms in a market decreases, the supply curve will shift to the left and the equilibrium price will rise.

True

If consumers believe the price of MP3 players will increase in the future this will cause the demand for MP3 players to increase now.

True

If the demand for a product increases and the supply of the same product decreases, the equilibrium price will increase.

True

Microeconomics studies how households and firms make choices and how they interact in markets and how government attempts to influence their choices.

True

Sometimes, government intervention can improve the efficiency of resource allocation.

True

Rational

Using all available information to achieve your goals

Positive analysis

analysis concerned with what is.

Normative analysis

analysis concerned with what ought to be.

Assumptions and simplifications

every model needs them in order to be useful.

Capital

manufactured goods that are used to produce other goods and services

economic variable

something measurable that can have different values, such as the wages of software programmers.

Macroeconomics

the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth

Productive efficiency

where goods or services are produced at the lowest possible cost

Allocative efficiency

where production is consistent with consumer preferences: the marginal benefit of production is equal to its marginal cost

Law of supply

The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied

Law of demand

The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease

All economic decisions involve a trade-off.

True