Microeconomics Chapter 1-3 Quizzes (add 4 after sunday)
The market system's answer to the fundamental question "How will the system accommodate change" is essentially...
"Through the guiding function of process and the incentive function of profits"
Charlie is willing to pay $10 for a T-shirt that is prices at $9. If Charlie buys the T-shirt, then his consumer surplus is
$1
externality Externalities
-a cost or benefit accruing to a third party external to the market transaction. Positive externality: Spillover Benefits •Too little is produced •Demand-side market failures Negative Externality: Spillover Costs •Too much is produced •Supply-side market failures
Government set prices: Price Floor
-prices are set above the market price -chronic surpluses Example is the minimum wage law
The demand for commodity X is represented by the equation P=100-2Q and supply by the equation P=10+4Q. The equilibrium price is...
70
determinants of supply
A change in resource prices A change in technology A change in the number of sellers A change in taxes and subsidies A change in prices of other goods A change in producer expectations
Demand
A schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during specified periods of time. -Demand schedule (table) or demand curve (graph) -Amount consumers are willing and able to purchase at a given price assuming: • Other things equal • Individual demand -Market demand
Supply
A schedule or curve that shows the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specified period of time. -Supply schedule or a supply curve -Amount producers are willing and able to sell at a given price -Individual supply -Market supply
economic perspective
A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs. It considers: • Scarcity and choice. • Opportunity cost. • Purposeful behavior to increase utility. • Marginal analysis.
technology and capital goods
Advanced technology and capital goods are encouraged. Specialization • Division of labor • Geographic specialization
Refer to the above graph of the price is P3, then the total revenue is represented by area
B+C+D+E+F+G
In the provided graph, the equilibrium point in the market is where the S and D curves intersect. At equilibrium, the minimum acceptable total revenue that sellers would have been willing to receive is represented by the area
C
Determinants of Demand
Change in consumer tastes and preferences Change in the number of buyers Change in income: • Normal goods • Inferior goods Change in prices of related goods • Complementary good • Substitute good Change in consumer expectations • Future prices • Future income
Last Word: Elasticity and Pricing Power: Why Different Consumers Pay Different Prices
Charge different prices to different buyers based on price elasticities. Business air travelers. Children discounts. College tuition.
Government's Role in the Economy
Coase theorem: •Private sector bargaining can solve externality problem. •Government's role in correcting externalities. Optimal reduction of an externality: •Officials must correctly identify the existence and cause. •Government failure may occur.
The demise of command systems
Command systems fail to produce adequate amounts of goods and services. Examples: Soviet Union, North Korea, and pre- reform China • The coordination problem: Must correctly set output targets for all goods and services. • The incentive problem: No adjustments for surplus or shortage.
Interpretation of Elasticity of Demand
Ed > 1 demand is elastic. Ed = 1 demand is unit elastic. Ed < 1 demand is inelastic. Extreme cases: •Ed = 0 demand is perfectly inelastic. •Ed = ∞ demand is perfectly elastic.
Functions of entrepreneurs
Employ the other factors of production. Take initiative. Make strategic business decisions. Innovate. Take risk
Price Elasticity of Supply
Es > 1 supply is elastic. Es = 1 supply is unit elastic. Es < 1 supply is inelastic. Additionally, Es = 0 supply is perfectly inelastic.
A normal good would have a positive price-elasticity of demand
False
If the consumer is willing to pay a price higher than the actual price of a product, then the consumer will not buy the product because the consumer surplus will be negative.
False
The smaller the number of good substitutes for a product, the greater will be the price elasticity for demand for it.
False
in a curved graph that is dome-shaped, the tangent line at is maximum, or highest point, has an infinite slope
False
production subsidies are a way of internalizing external costs among polluting firms
False
purposeful behavior implies that everyone will make identical choices
False
A normal good is one...
For which its consumption varies directly with income
society's economizing problem
Four categories of economic resources: 1. Land: Includes all natural resources used in the production process. 2. Labor: Physical actions and mental activities that people contribute to production. 3. Capital (investment): All manufactured aids used in production. 4. Entrepreneurial ability: Special human resource distinct from labor.
Refer to the provided supply and demand graph for a product. In the graph, line S is the current supply of this product, while line S1 is the optimal supply from the society's perspective. If government corrects this externality problem and shifts production to the socially optimal level, then the product price will be equal to
G
What will be produced?
Goods and services that create a profit Consumer sovereignty "Dollar votes" • Allow consumers to indicate which goods and services should be produced • Determine which products and industries survive or fail
Active, but limited, Government
Government may be needed to alleviate market failures. Government can increase effectiveness of a market system. Possible government failure.
Last Word: Visible Pollution, Hidden Costs
Governments want to reduce air pollution. Must account for marginal benefits and marginal costs. ------Cap and trade: •Sets a cap for the total amount of emissions •Assigns property rights to pollute Rights can then be bought and sold
construction of a graph
Graph: A visual representation of the relationship between two variables Horizontal axis Vertical axis Independent variable Dependent variable Ceteris paribus
Income Elasticity Insights
High income elasticities: Most affected by a recession. Low or negative income elasticity: Not affected that much by a recession.
the Heritage Foundation in 2018 ranked which of the following economies to have the highest economic freedom?
Hong Kong
The Bear corporation find that its total spending on machine parts increases after the price of machine parts falls, other things being equal. Which of the following is true about the Bear Corporation's demand for machine parts with the price change?
It is price elastic
Applications of Price Elasticity of Demand
Large crop yields: Inelastic demand, lower total revenue Excise taxes: Inelastic demand, more total revenue Decriminalization of illegal drugs: Inelastic demand, more total revenue
Luxury and Time
Luxuries versus necessities: Luxury goods, demand is more elastic. Time: More time available, demand is more elastic.
market failures
Markets fail to produce the right amount of the product.
Income Elasticity of Demand
Measures responsiveness of buyers to changes in their income. Normal goods if elasticity is positive. Inferior goods if elasticity is negative.
Cross Elasticity of Demand
Measures responsiveness of purchases of one good to change in the price of another good. Substitute goods if elasticity is positive. Complementary goods if elasticity is negative. Independent goods if elasticity is zero or near-zero.
Price Elasticity of Supply Overview
Measures sellers' responsiveness to price changes. Elastic supply, producers are responsive to price changes. Inelastic supply, producers are not as responsive to price changes.
Government Set Prices: Price Ceiling
Price ceiling: • Set below equilibrium price • Rationing problem • Black markets Example is rent control.
The circular flow model
Private closed economy: • Households • Businesses -Sole proprietorship -Partnership -Corporation • Product market and the resource market • The real flow and the money flow
Efficient allocation
Productive efficiency • Producing goods in the least costly way • Using the best technology • Using the right mix of resources Allocative efficiency • Producing the right mix of goods • The combination of goods most highly valued by society
Negative Externalities
Resource Allocation Outcome: Overproduction of output and therefore overallocation of resources Ways to correct: 1.Private bargaining 2.Liability rules and lawsuits 3.Taxes on producers 4.Direct controls 5.Market for externality rights
Positive Externalities:
Resource Allocation Outcome: Underproduction of output and therefore underallocation of resources Ways to correct: 1.Private bargaining 2.Subsidies to consumers 3.Subsidies to producers 4.Government provision
slope of a nonlinear curve
Slope always changes. Use a line tangent to the curve to find slope at that point.
substitutability and Proportion of Income
Substitutability: More substitutes, demand is more elastic. Proportion of income: Higher proportion of income, demand is more elastic.
the Illinois central railroad once asked the Illinois commerce commission for permission to increase its commuter rates by 20 percent. The railroad argued that declining revenues made this rate increase essential. Opponents of the rate increase contended that the railroads revenues would fall because of the rate hike. It can be concluded that
The railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt it was elastic.
Price Elasticity of Supply and Time
Time is primary determinant of elasticity of supply. Time periods considered: •Immediate market period •Short run •Long run
Total Revenue Test Overview
Total Revenue = Price × Quantity Total Revenue Test Inelastic demand: P and TR move in the same direction. Elastic demand: P and TR move in opposite directions.
which of the following do economists consider to be capital
a construction crane
economists would classify all of the following as "land" except
a hydroelectric dam
If price and total revenue are directly related, demand is inelastic
True
If the quantity demanded for good A increases from 40 to 60 when price decreases from $9 to $7, price elasticity of demand in this price range is 1.6
True
When the marginal benefits exceed the marginal costs of producing a product, the allocative efficiency is not achieved in the market
True
allocative efficiency occurs where the collective sum of consumer and producer surplus is at a maximum
True
an example of an adverse selection problem is in insurance, where the people most likely to claim insurance payouts are the people who will seek to buy the most generous policies
True
Price elasticity of Demand Formula
Use percentages: •Unit free measure •Compare elasticities across products Eliminate the minus sign: •Easier to compare elasticities
Inverse Relationship
Variables move in OPPOSITE directions
Normative statements are concerned primarily with
What ought to be
the main mechanism that regulates the market system is...
competition
if the demand for a steak (a normal good) shifts to the left, the most likely reason is that...
consumer incomes have fallen
the difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays is called
consumer surplus
Refer to the competitive market diagram for product z. Assume that the current market demand and supply curves are Z are D2 and S2. If there are substantial external costs associated with the production of Z, then
government should levy a per-unit excise tax on Z to shift the supply curve toward S1
refer to the above graphs. For which graph is the supply perfectly inelastic?
graph C
economic systems differ from one another based on who owns the factors of production and...
how economic activities are coordinated and directed.
A nation can increase its production possibilities by...
improving labor productivity
from an economic perspective, when consumers leave a fast-food restaurant because the lines to be served are too long, they have concluded that the...
marginal cost of waiting is greater than the marginal benefit of eating in that restaurant
Depositors do not check their banks carefully for stability anymore, because of the federal deposit insurance program. This illustrates the problem of
moral hazard
the notion of "purposeful behavior" in the economic perspective suggests that...
one person's choice may differ from another's if their circumstances and information differ.
which of the following does not illustrate the asymmetric information problem.
ordinary stock buyers do not know what will happen to the stock's price next week.
If a college admits only a fixed number of applicants every year, then the school's supply curve for admissions is
perfectly inelastic
refer to the provided table. If the equilibrium price increases, then the
producer surplus will increase
Refer to the diagram. In the P1 to P2 price range, we can say
that demand is elastic with respect to price
When economic efficiency is attained, it implies all of the following, except
the gap between marginal benefits and marginal costs of production is at maximum.
The narrower the definition of a product
the larger the number of substitutes and the greater the price elasticity of demand
an increase in demand will increase equilibrium price to a greater extent
the less elastic the supply curve
If there are external benefits associated with the consumption of a good or service
the market demand curve will underestimate the true demand curve
which of the following is not characteristic of a product with relatively inelastic demand
there are a large number of good substitutes for the good
economic principles
-Generalizations -Other-things-equal assumption: The assumption that factors other than those being considered did not change. (Also called the "ceteris paribus assumption.") -Graphical expression
Microeconomics and Macroeconomics
-Microeconomics: The study of the individual consumer, firm, or market. -Macroeconomics: The study of the entire economy or a major aggregate of the economy.
Positive and Normative Economics
-Positive economics: Economic statements that are factual. -Normative economics: Economic statements that involve value judgments.
How the system deals with risk
Business owners and investors face risk: • Losses due to input shortages • Changes in consumer tastes • Natural disasters that affect the supply chain Employees and suppliers have security: • Paid whether the firm makes a profit or not Business risks are restricted to owners. Attracts needed inputs: Inputs are easier to obtain since many dislike risk. Focuses attention: • Owners personally responsible for outcome. • Will encourage prudent decisions. Manage risk well and the owners will prosper.
How will the system change?
Changes in consumer tastes Changes in technology Changes in resource prices
Who will get the output
Consumers with the ability and willingness to pay will get the product. Ability to pay depends on income.
In what type of business to the owners bear no personal financial responsibility for the company's debts and obligations
Corporations
Economics
Economics is a social science concerned with making optimal choices under conditions of scarcity. Economic wants exceed society's productive capacity.
Market Equilibrium
Equilibrium occurs where the demand curve and supply curve intersect. Equilibrium price and equilibrium quantity. Surplus and shortage. Rationing function of prices. Efficient allocation.
IF we observe that the price of gold is rising and the quantity of gold traded in the market is falling, then this must be the result of an increase in the supply of gold.
FALSE
The fundamental economic question regarding the distribution of output in the economy is equivalent to the question of who will produce the output.
FALSE
an increase in quantity supplied might be caused by an increase in resource costs
FALSE
in a command economy, the lead of each household makes the fundamental economic choices such as what to produce and how to produce output.
FALSE
in analyzing a market system, economists often assume that firms will choose the production techniques that will give them maximum revenues.
FALSE
(Last Word) In examining the relationship between student loans and college tuition researchers found that
Increases in student borrowing caused tuition costs to rise
Markets
Interaction between buyers and sellers. Markets may be: • Local • National • International Price is discovered in the interactions of buyers and sellers.
Laissez-Faire Capitalism
Keep the government from interfering. Power of government needed to: • Protect private property from theft. • Provide a legal environment for contract enforcement. People interact in markets to buy and sell.
Law of Demand
Law of demand: Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls Explanations: • Price acts as an obstacle to buyers • Law of diminishing marginal utility • Income effect and substitution effect
increasing opportunity costs
Law of increasing opportunity costs: As more of a particular good is produced, its marginal opportunity costs increase Production possibilities curve!!!!! • Concave shape. • Economic rationale.
Law of supply
Law of supply: Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls. Explanation: • Price acts as an incentive to producers. • At some point, costs will rise.
optimal output
MB=MC
Which of the following statements is an explanation for the law of increasing opportunity costs?
Many economic resources are better at producing one product rather than another.
Use of Money
Money makes trade easier. It is a medium of exchange. Without money, people would have to barter.
purposeful behavior
Rational self-interest. Individuals and utility. Firms and profit. Desired outcome.
when somebody buys an insurance policy, that person is seeking to transfer risk away from herself and pass it on to the insurance company.
TRUE
How will the system progress
Technological advance • Creative destruction: The hypothesis that the creation of new products and production methods destroys the market power of existing monopolies. Capital accumulation
Rationing Function of prices
The ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistent.
Command system
The command system is known as socialism or communism. Government ownership of resources. Decisions made by a central planning board. Examples: North Korea, Cuba, Myanmar
marginal analysis
The comparison of marginal benefits and marginal costs, usually for decision making. Marginal means "extra" or "additional."
The market system
The market system is a mix of decentralized decision making with some government control. Systems found in much of the world. Private markets are dominant force. Private ownership of resources. Self-interested behavior. Characteristics: Private property Freedom of enterprise Freedom of choice Self-interest Competition Market and prices
"In the corn market, demand often exceeds supply and supply sometimes exceeds demand" "The price of corn rises and falls in response to changes in supply and demand" In which of these two statements are the terms demand and supply being used correctly?"
The second statement
Invisible Hand
The tendency of competition to cause individuals and firms to unintentionally but effectively promote the interests of society even when each individual firm only attempts to pursue its own interests. 1776 Wealth of Nations by Adam Smith • Unity of private and social interest Virtues of the market system • Efficiency • Incentives • Freedom
Five fundamental questions
What goods and services will be produced? How will the goods and services be produced? Who will get the goods and services? How will the system accommodate change? How will the system promote progress?
A leftward shift of the supply curve for oil in the United States is most likely to result from
an increase in the costs of exploration and drilling for oil.
Direct relationship
both variables move in the SAME DIRECTION
The law of increasing opportunity costs is reflected in a production possibilities curve that is...
bowed out from the origin
in a market system, resources will move away from an industry when...
demand for the industry's product is decreasing
the market system
effectively harnesses the incentives of workers and entrepreneurs
If economic profits in a particular industry increase, then we would expect...
firms to enter that industry thus expanding it
Vertical line Slope
infinite
If there is a surplus of a product, its price...
is above the equilibrium level
If two variables are directly related, the relationship will have a graph that...
is an upward-sloping line
businesses seeking higher profits and resource suppliers seeking higher incomes lead to changes in the allocation of resources among different firms and end up with...
output that society wants
specialization in production is economically beneficial primarily because it
permits the production of a larger output with fixed amounts of resources.
If all discrimination in the United States were eliminated, the economy would...
produce at some point closer to its production possibilities curve.
The two basic markets shown by the simple circular flow mode; are
product and resource
According to Emerson: "want is a growing giant whom the coat of Have was never large enough to cover". According to economists, "want" exceeds "have" because...
productive resources are limited
an effective price floor will...
result in a product surplus
a government will create a surplus in a market when it...
sets a price floor above the equilibrium price.
International Trade
specialization Increase production possibilities
Which of the following pairs are not considered to be complementary goods
steel and cars
assume that a change in government policy results in greater production of both consumer goods and investment goods. We can conclude that...
the economy was not employing all of its resources before the policy change
Other things being equal, the law of demand suggests that as...
the price of iPads decreases, the quantity demanded will increase.
If A decreases, then B will also decrease. The graph relating the two variables A and B is...
upward sloping
the division of labor means that
workers specialize in various production tasks
Equation of a linear relationship
y = a + bx, where • y is the dependent variable • a is the vertical intercept • b is the slope of the line • x is the independent variable
Horizontal line slope
zero
the slope of a line parallel to the horizontal axis is...
zero
economic systems
• Set of institutionalized arrangements • Coordinating mechanism Differences in systems exist by • Degree of decentralized use of markets and prices in decision-making • Degree of centralized government control
Slope of a line
• Slopes and measurement units • Slopes and marginal analysis • Infinite and zero slopes Vertical intercept
Production Possibilities Model
An economic model that shows different combinations of two goods that an economy can produce. Assumptions: • Full employment. • Fixed resources. • Fixed technology. • Two goods. 1. Consumer goods. 2. Capital goods. L O 1.6
Applications of Elasticity of Supply
Antiques: Inelastic supply Reproductions: More elastic supply Volatile gold prices: Inelastic supply
Government Intervention
Correct negative externalities: •Direct controls •Pigovian tax Correct positive externalities: •Subsidies Government provision
Refer to the graph above. Which demand curve is perfectly inelastic.
D5
Producer Surplus
Difference between the actual price a producer receives and the minimum price they would accept. Extra benefit from receiving a higher price.
consumer surplus
Difference between what a consumer is willing to pay for a good and what the consumer actually pays. Extra benefit from paying less than the maximum price.
How will goods be produced
Minimize the cost per unit by using the most efficient techniques: • Technology • Prices of the necessary resources
Asymmetric Information
Occurs when one party to a transaction possesses substantially more information than the other party. Causes scarce resources to be allocated inefficiently. Typically requires government intervention to correct. Examples: ----Inadequate buyer information about seller: •Gasoline market •Licensing of surgeons ----Inadequate seller information about buyer: •Moral hazard problem •Adverse selection problem
the economizing problem
The economizing problem: Limited income and unlimited wants. The budget line • Attainable and unattainable combinations. • Trade-offs and opportunity costs.
Theories, principles, and morals
The scientific method is the procedure for the systematic pursuit of knowledge involving the observation of facts and the formulation of testing hypotheses to obtain theories, principles, and laws. It consists of several elements: • Observe. • Formulate a hypothesis. • Test the hypothesis. • Accept, reject, or modify the hypothesis. • Continue to test the hypothesis, if necessary. L O 1.2
product reviews help to alleviate problems associated with
asymmetric information
the socially optimal amount of pollution abatement occurs where society's marginal
benefit of abatement equals its marginal cost of abatement
the market system is also known as ______, while the command system is also known as _____.
capitalism, socialism
The state legislature has cut Gigantic State University's appropriations. GSU's Board of Regents decided to increase tuition and fees to compensate for the loss of revenue. the board is assuming that the
demand for education at GSU is inelastic
suppose Aiyanna's Pizzeria currently faces a linear demand curve and is charging a very high price per pizza and doing very little business. Aiyanna now decided to lower pizza prices by 5% per week for an indefinite period of time. We can expect that each successive week.
demand will become less price elastic
price elasticity of demand
elastic demand: •Sensitive to price changes. •Large change in quantity demanded. Inelastic demand: •Insensitive to price changes. •Small change in quantity demanded.
Which of the following is an example of a negative externality?
falling property values in a neighborhood where a disreputable nightclub is operating
Sellers will opt out of markets in which
information about buyers is inadequate which allows some buyers to consequently impose high costs on the sellers.
If price and total revenue vary in opposite directions, demand is
relatively elastic
other things the same, if a price change causes total revenue to change in the opposite direction, demand is
relatively elastic
In a competitive market economy, firms select the least-cost production technique because
to do so will maximize the firms profits
The total revenue received by sellers of a good is the same amount as the
total amount spent on the good by the buyers
which of the following statements is inconsistent with an elastic demand curve?
total revenue increases when price increases
graphically, if the supply and demand curves are linear, consumer surplus is measured as a triangle
under the demand curve and above the actual price
Efficient outcome requires:
•Demand curve must reflect full willingness to pay. •Supply curve must reflect all costs of production.