MicroEconomics Chapter 5-10 Exam Study Guide
one-third
Jay and Jen are married with two children. They are preparing a household budget for the coming year. Based on statistical information for American households, approximately what portion of this family's annual consumption will most likely be budgeted for food and vehicle expenses?
the percentage change in quantity demanded divided by the percentage change in price.
Price elasticity of demand is defined as:
inelastic; elastic
Taxes on goods withdemand curves will tend to raise more tax revenue for the government than taxes on goods with _________demand curves.
Marginal Product (MP)
change in a firm's output when it employees more labor; mathematically, MP=ΔTP/ΔL
variable cost
cost of production that increases with the quantity produced; the cost of the variable inputs
fixed cost
cost of the fixed inputs; expenditure that a firm must make before production starts and that does not change regardless of the production level
perfect competition
each firm faces many competitors that sell identical products
constant returns to scale
expanding all inputs proportionately does not change the average cost of production
variable inputs
factors of production that a firm can easily increase or decrease in a short period of time
fixed inputs
factors of production that can't be easily increased or decreased in a short period of time
imperfectly competitive
firms and organizations that fall between the extremes of monopoly and perfect competition
diminishing marginal productivity
general rule that as a firm employs more labor, eventually the amount of additional output produced declines
revenue
income from selling a firm's product; defined as price times quantity sold
break even point
level of output where the marginal cost curve intersects the average cost curve at the minimum point of AC; if the price is at this point, the firm is earning zero economic profits
shutdown point
level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC; if the price is below this point, the firm should shut down immediately
tax incidence
manner in which the tax burden is divided between buyers and sellers
monopolistic competition
many firms competing to sell similar but differentiated products
production function
mathematical equation that tells how much output a firm can produce with given amounts of the inputs
Average Variable Cost (AVC)
variable cost divided by the quantity of output
oligopoly
when a few large firms have all or most of the sales in an industry
constant unitary elasticity
when a given percent price change in price leads to an equal percentage change in quantity demanded or supplied
substitution effect
when a price changes, consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price; always happens simultaneously with an income effect
collusion
when firms act together to reduce output and keep prices high
unitary elasticity
when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied
elastic demand
when the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
total product
synonym for a firm's output
marginal cost
the additional cost of producing one more unit; mathematically, MC=ΔTC/ΔL
marginal revenue
the additional revenue gained from selling one more unit
marginal utility per dollar
the additional satisfaction gained from purchasing a good given the price of the product; MU/Price
marginal utility
the additional utility provided by one additional unit of consumption
short-run average cost curve
the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs
diminishing marginal utility
the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit
market structure
the conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold
infinite elasticity
the extremely elastic situation of demand or supply where quantity changes by an infinite amount in response to any change in price; horizontal in appearance
zero inelasticity
the highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; vertical in appearancei
fungible
the idea that units of a good, such as dollars, ounces of gold, or barrels of oil are capable of mutual substitution with each other and carry equal value to the individual
economies of scale
the long-run average cost of producing output decreases as total output increases
diseconomies of scale
the long-run average cost of producing output increases as total output increases
entry
the long-run process of firms entering an industry in response to industry profits
exit
the long-run process of firms reducing production and shutting down in response to industry losses
private enterprise
the ownership of businesses by private individuals
wage elasticity of labor supply
the percentage change in hours worked divided by the percentage change in wages
Price elasticity of demand is defined as:
the percentage change in quantity demanded divided by the percentage change in price.
cross-price elasticity of demand
the percentage change in the quantity of good A that is demanded as a result of a percentage change in good B
elasticity of savings
the percentage change in the quantity of savings divided by the percentage change in interest rates
Production
the process of combining inputs to produce outputs, ideally of a value greater than the value of the inputs
price elasticity
the relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied
Total Cost (TC)
the sum of fixed and variable costs of production
Average Total Cost (ATC)
total cost divided by the quantity of output
accounting profit
total revenues minus explicit costs, including depreciation
economic profit
total revenues minus total costs (explicit plus implicit costs)
Exit the industry
A competitive firm is operating in the long run and is making an operating profit but is faced with economic losses. What should the firm do?
elastic
A price cut will increase the total revenue a firm receives if the demand for its product is:
one-third
Approximately what portion of annual consumption is typically spent by American households on shelter?
unit elastic
Demand is said to be __________ when the quantity demanded changes at the same proportion as the price.
elastic
Demand is said to be ___________ when the quantity demanded is very responsive to changes in price.
inelastic
Demand is said to be _____________ when the quantity demanded is not very responsive to changes in price.
*B) a systematic way of thinking; misguided conclusions
Economic theory offers ____________________ about the full range of possible events and responses, which can prevent __________________ about how households will respond to changes in prices or incomes.
rise and the equilibrium quantity to stay the same
If the demand curve for a life-saving medicine is perfectly inelastic, then a reduction in supply will cause the equilibrium price to:
rise and the equilibrium quantity to stay the same.
If the demand curve for a life-saving medicine is perfectly inelastic, then a reduction in supply will cause the equilibrium price to:
increase the quantity exchanged but result in no change in the price.
If the demand curve is perfectly elastic, then an increase in supply will:
price of competing products
If the quality differences of similar products are mostly imperceptible to the average consumer's eyes, which of the following will most likely play a major role in influencing the decisions of purchasers?*
equal to zero.
If the supply curve for a product is vertical, then the elasticity of supply is:
utility
In microeconomic terms, the ability of a good or a service to satisfy wants is called:
increasing returns to scale
In microeconomics, the term _____________________ is synonymous with economies of scale.
price
The elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in __________.
inelastic
The evidence on the supply curve of financial capital is controversial, but at least in the short run, the elasticity of savings with respect to the interest rate appears to be.
responsiveness of quantity demanded to a change in price.
The price elasticity of demand measures the:
diminishing marginal utility
The term ___________________ is used to describe the common pattern whereby each marginal unit of a consumed good provides less of an addition to utility than the previous unit.
preparing to exit operations
When a business adopts a strategy of reducing and/or discontinuing production in response to a sustained pattern of losses, it is
consumers are not very responsive to changes in price.
When demand is inelastic:
elastic
When economists are sketching examples of a demand or supply curve that is close to horizontal, they refer to that demand or supply curve as.
An oligopoly
_____________ occurs when circumstances have allowed several large firms to have all or most of the sales in an industry.
behavioral economics
a branch of economics that seeks to enrich the understanding of decision-making by integrating the insights of psychology and by investigating how given dollar amounts can mean different things to individuals depending on the situation
game theory
a branch of mathematics that economists use to analyze situations in which players must make decisions and then receive payoffs based on what decisions the other players make
price taker
a firm in a perfectly competitive market that must take the prevailing market price as given
prisoner's dilemma
a game in which the gains from cooperation are larger than the rewards from pursuing self-interest
income effect
a higher price means that, in effect, the buying power of income has been reduced, even though actual income has not changed; always happens simultaneously with a substitution effect
kinked demand curve
a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases
differentiated product
a product that is consumers perceive as distinctive in some way
production technologies
alternative methods of combining inputs to produce output
elasticity
an economics concept that measures responsiveness of one variable to changes in another variable
duopoly
an oligopoly with only two firms
firm
an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs.
product differentiation
any action that firms do to make consumers think their products are different from their competitors'
implicit costs
opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned
explicit costs
out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials
price elasticity of demand
percentage change in the quantity demanded of a good or service divided the percentage change in price
price elasticity of supply
percentage change in the quantity supplied divided by the percentage change in price
long run
period of time during which all of a firm's inputs are variable
short run
period of time during which at least one or more of the firm's inputs is fixed
consumer equilibrium
point on the budget line where the consumer gets the most satisfaction; this occurs when the ratio of the prices of goods is equal to the ratio of the marginal utilities.
average profit
profit divided by the quantity of output produced; also known as profit margin
factors of production
resources that firms use to produce their products, for example, labor and capital
total utility
satisfaction derived from consumer choices budget constraint (or budget line)shows the possible combinations of two goods that are affordable given a consumer's limited income
long-run average cost curve
shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology
inelastic demand
when the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice versa); this indicates a low responsiveness by consumers to price changes
elastic supply
when the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
inelastic supply
when the elasticity of supply is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in production by the firm; this indicates a low responsiveness of the firm to price increases (and vice versa if prices drop)
long-run equilibrium
where all firms earn zero economic profits producing the output level where P = MR = MC and P = AC
