Microeconomics Exam 1
The amount you are willing to buy at each price (QD)
Quantity demanded
If something is worth doing, keep doing it until MB=MC or stop just before MC becomes greater than MB
Rational Rule
Keep buying until the MB=MC
Rational Rule for Buyers
What should you follow to maximize your economic surplus?
Rational Rule for Buyers
Keep providing/selling until price equals marginal cost
Rational Rule for Sellers
As the price rises, what happens to the horizontal gap (shortage)?
narrows and shortage is reduced
To estimate an individual demand for something we ask what holding other factors constant?
"How many of something do you expect to buy at each price?"
What do we ask to estimate an individual supply for something?
"How many or how much of something do you expect to sell at each price?"
What are the four steps to estimating market demand?
1. Survey a sample of individuals that represent the market by asking each person the quantity they will buy at each price. 2. Add up the QD by survey respondents for each price. 3. Scale up the quantities demanded by the survey respondents so that they represent the whole market. 4. Plot the total quantity demanded by the market at each price, yielding the demand curve.
What three questions must society answer?
1. What goods and services to produce? 2. How to produce goods and services? 3. Who receives the goods and services?
What two things causes a MC curve to slope upward meaning marginal costs rise as you keep providing?
1. rising input costs 2. diminishing marginal product of labor
Something has changed that causes you to buy less at every price
A decrease demand
Which of the following are correct about fixed costs? (i) They do not change with the level of production in the short run (ii) They include variable costs (iii) They are present even when the firm is producing zero units (iv) They are irrelevant to marginal cost A. (i),(iii), and (iv) B. (ii) and (iv) C. (i), (ii), (iii), and (iv) D. (i), (ii), and (iii)
A. (i),(iii), and (iv)
(Figure: Market for Steel Bars) Which graph illustrates what will happen in the market for processed, industrial steel bars when the price of raw steel falls? A. Graph A B. Graph B C. Graph C D. Graph D
A. Graph A
Dell and Apple are competitors in the computer market. Which graph illustrates the effect of a rise in the price of Dell computers on the demand for Apple computers? A. Graph D B. Graph C C. Graph B D. Graph A
A. Graph D
Which principle tells you that the true cost of something is the next best alternative you have to give up to get it? A. The opportunity cost principle B. The cost-benefit principle C. The interdependence principle D. The marginal principle
A. The opportunity cost principle
A seller at a farmer's market wants $10 for a bag of 10 apples. You think his price is too high, so you counter with an offer of $6 for the bag. The seller then offers you a much smaller bag of five apples for $6. You bargain again, and the seller lets you buy the 10 apples for $8. This scenario is an example of: A. a market in action B. a shortage C. perfect competition D. a centrally planned market
A. a market in action
Graphically, shortages will always occur: A. at prices below the equilibrium price B. at the equilibrium price C. at prices above the equilibrium price D. when the quantity supplied exceeds the quantity demanded
A. at prices below the equilibrium price
The key to using the cost-benefit principle is to think about ___________ aspects of a decision. A. both financial and nonfinancial B. only nonfinancial C. neither financial nor nonfinancial D. only financial
A. both financial and nonfinancial
In a voluntary economic transaction between a buyer and a seller, __________ can earn economic surplus from the transaction. A. both the buyer and the seller B. only the buyer C. neither the buyer nor the seller D. only the seller
A. both the buyer and the seller
An equilibrium price is: A. determined by the intersection of the demand and supply curves B. the price that prevails when there is a shortage C. the price that occurs when there is a surplus D. the price that prevails when quantity supplied is less than quantity demanded
A. determined by the intersection of the demand and supply curves
The Rational Rule for Sellers says that a seller should sell one more unit of an item if the price is: A. greater than or equal to the marginal cost B. greater than or equal to the marginal benefit C. less than the marginal benefit D. less than the marginal cost
A. greater than or equal to the marginal cost
A market consists of ten similar suppliers that are making the same supply decisions. To find the market supply of these ten suppliers, you: A. multiply the individual supply of one of the suppliers by ten B. find the average quantity produced by the ten suppliers C. take the individual supply of one supplier D. take one-tenth of the individual supply of each supplier and add it up
A. multiply the individual supply of one of the suppliers by ten
A business manages to become more efficient. As a result of this improved efficiency, it will: A. shift its supply curve to the right B. reduce the quantity that it supplies to the market C. shift its supply curve to the left D. automatically charge higher prices for its product
A. shift its supply curve to the right
If the price of jet fuel rises, the A. supply of airline flights decrease B. supply of jet fuel decreases C. supply of jet fuel increases D. quantity supplied of jet fuel falls
A. supply of airline flights decrease
An individual supply curve is: A. the marginal cost curve B. the same as the total market supply curve C. positively sloped because of technological advancement D. lower than the marginal cost of producing an item
A. the marginal cost curve
A downward-sloping demand curve implies: A. there is an inverse relationship between price and quantity demanded B. buyers are willing to buy less when prices are lower C. there is a positive relationship between price and quantity demanded D. there is no relationship between price and quantity demanded
A. there is an inverse relationship between price and quantity demanded.
Variable costs are the costs that A. vary with the quantity of output produced B. are incurred to build factories and assembly plants C. are independent of the amount of output produced D. stay fixed with the quantity of output produced
A. vary with the quantity of output produced
We can think of "costs" in the terms of what?
Alternatives
Which of the following graphs illustrates what we expect to see in the market for printing paper if the price of printing paper rises? A. Graph B B. Graph C C. Graph A D. Graph D
B. Graph C
Something has changed that causes you to buy more at each and every price
An increase demand
What does the demand curve sloping downward indicate?
An inverse (or negative) relationship between price (p) and quantity demanded (QD)
Use the table to answer the question. What is the equilibrium price in this market? A. $11 B. $9 C. $7 D. $3
B. $9
The United Kingdom plans to end the use of gas-powered and diesel-powered cars by the year 2040. At the same time, car manufacturers, such as General Motors and Nissan, are increasing the number of electric car models they produce. Based on this information, which of the following statements is/are correct? (i) If the supply of new electric cars is greater than the demand for new electric cars, then the price of electric cars will fall in the future. (ii) The demand for gasoline will fall in the future. (iii) The demand for electricity will rise in the future. (iv) The demand for diesel will rise in the future. A. only (i) B. (i), (ii), and (iii) C. (i) and (ii) D. (ii) and (iv)
B. (i), (ii), and (iii)
The table contains the monthly demand for soda cans for four students. If these four students make up the entire market. What is the total market demand for soda at $1.50 per can? A. 125 cans B. 148 cans C. 45 cans D. 99 cans
B. 148 cans
Use the table to answer the question. What is the equilibrium quantity in this market? A. 330 units B. 300 units C. 100 units D. 240 units
B. 300 units
What happens to the equilibrium price and quantity when demand increases and at the same time supply decreases, but the demand shift is larger than the supply shift? A. The equilibrium price rises, and the equilibrium quantity falls B. Both the equilibrium price and the equilibrium quantity rise C. The equilibrium price falls, and the equilibrium quantity rises D. Both the equilibrium price and the equilibrium quantity fall
B. Both the equilibrium price and the equilibrium quantity rises
A bakery hires a baker who can make 15 cakes per day. The bakery then decides to hire a second baker who will use the kitchen at the same time as the first baker. The bakery finds that the second baker can produce only an additional nine cakes per day. What concept does this scenario illustrate? A. The marginal principle B. Diminishing marginal product C. The opportunity cost principle D. The cost-benefit principle
B. Diminishing marginal product
Consider your decision to attend class each day or skip it. Which of the four core principles of economics applies to the notion that by attending class you are not doing the next best activity you would prefer to do, such as napping or going to the gym? A. Cost-benefit principle B. Opportunity cost principle C. Marginal principle D. Interdependence principle
B. Opportunity cost principle
Kathleen is a manager at an electronics store, and she has to decide how many workers to hire. If she hires one worker, her revenue is $400 per day. If she hires another worker, she can make another $350 per day. The marginal benefit of hiring another worker decreases by $50 with each additional hire. Assuming that workers are paid $20 per hour and work eight hours, how many employees should Kathleen hire, and what will be the total revenue of her store? A. She will hire four workers and the revenue of the store will be $1,300 B. She will hire five workers and the revenue of the store will be $1,500 C. She will hire six workers and the revenue of the store will be $1,650 D. She will hire seven workers and the revenue of the store will be $1,750
B. She will hire five workers and the revenue of the store will be $1,500
If Tesla cars become less expensive, what will happen in the market for other electric cars? A. The quantity demanded of Tesla will fall B. The demand for other electric cars will fall C. The demand for other electric cars will rise D. The quantity demanded of Teslas will not change
B. The demand for other electric cars will fall
You eat M&Ms every day. When you go to the store to buy some, you find that M&Ms are more expensive than they were last month. Which of the following could explain why M&Ms are more expensive? A. Consumers are now purchasing fewer M&Ms compared to other types of chocolates B. The supply of cacao beans, used to produce chocolate, has fallen around the world C. A new study finds that the benefits of eating chocolate are not as great as previously thought D. A new robot has been installed at the Mars chocolate company that reduces the time needed to produce M&Ms by half
B. The supply of cacao beans, used to produce chocolate, has fallen around the world
Why are supply curves typically upward-sloping? A. They slope upward due to the law of demand B. They slope upward because higher prices lead individual businesses to supply a larger quantity and more businesses are willing to supply goods and services C. They slope upward because sellers prefer to sell more when prices are lower D. They slope upward because sellers demand more when prices are lower
B. They slope upward because higher prices lead individual businesses to supply a larger quantity and more businesses are willing to supply goods and services
Refer to the graph from HW2 to answer the question. The movement from point W to point P represents: A. an increase in quantity demanded B. a decrease in demand C. an increase in quantity demanded D. an increase in demand
B. a decrease in demand
Quantity demanded is on the horizontal axis when you plot a demand curve and show the: A. amount of a good that a seller is willing to sell at a particular price B. amount of a good that a person is willing to buy at each price C. amount where opportunity cost is equal to the marginal benefit D. amount of a good that a person actually buys at the market price
B. amount of a good that a person is willing to buy at each price.
Refer to the graph from HW2 to answer the question. The movement from point M to point N represents: A. a decrease in quantity demanded B. an increase in quantity demanded C. a decrease in demand D. an increase in demand
B. an increase in quantity demanded.
The cost-benefit principle state that ___________ are the incentives that shape decisions. A. incomes B. costs and benefits C. framing effects D. opportunity costs
B. costs and benefits
As a result of technological innovation, automated water pumps are being installed on the farms of Kenyan tomato farmers. As a result of the increased use of automated water pumps, the equilibrium price of tomatoes will: A. rise, due to a fall in supply B. fall, due to a rise in supply C. rise, due to a rise in demand D. fall, due to a fall in demand
B. fall, due to a rise in supply
Dr. Chang is buying shirts online and has to decide how many shirts to buy. He should buy another shirt if the: A. marginal benefit of the next shirt is less than the price of the shirt B. marginal benefit of the next shirt is at least as high as the price of the shirt C. total benefit when purchasing one more shirt is less than the total cost of the shirts D. total benefit when purchasing one more shirt is at least as high as the total cost of the shirts
B. marginal benefit of the next shirt is at least as high as the price of the shirt
The opportunity costs of attending college include the: A. effort and hard work B. potential income that could be earned working C. cost of clothes to wear at school D. cost of room and board
B. potential income that could be earned working.
Peanut butter and peanut oil are complements-in-production. When the price of peanut butter rises, the: A. quantity supplied of peanut butter will fall B. supply of peanut oil will rise C. supply of peanut oil will fall D. quantity supplied of peanut butter will remain unchanged
B. supply of peanut oil will rise
Use the figure to answer the question: Which of the following events would lead to a shift of the supply curve from Old supply to New supply? A. increased taxation of raw materials used by producers B. technological advance in production techniques C. a natural disaster that causes a shutdown of production D. a decrease in the size of the market
B. technological advance in production techniques
A large amount of harvested grain used to make flour grows mold due to flooding. How will this affect the supply of flour in the market? A. the supply of flour will increase in the market B. the supply of flour will decrease in the market C. The supply of flour will remain unchanged in the market D. Suppliers of flour will switch to supplying grain
B. the supply of flour will decrease in the market
An equilibrium in a market occurs: A. at the halfway point on the price axis B. when the quantity supplied equals the quantity demanded C. at the halfway point on a demand curve D. when suppliers have sold all the goods and services that they have produced
B. when the quantity supplied equals the quantity demanded
Why is the Ceteris Paribus assumption important?
Because we want to make sure that we hold everything else constant and consider what happens when the price changes
In order to make a good decision, Cost-Benefit Principle says that only pursue the choice if the ___________________ , and it says ask yourself about your WTP before you look at the price tag.
Benefit is greater than or equal to cost
Benjamin is willing to pay $700 for a new iPad. Apple (the producer of iPads) is selling a new iPad for $600. It costs Apple $400 to produce this iPad. How much economic surplus does Apple receive if Benjamin purchases this iPad; and how much economic surplus does Benjamin receive? A. $700; $100 B. $600; $300 C. $200; $100 D. $100; $200
C. $200; $100
Kevin Williamson goes to a local coffee shop and orders a medium-sized latte. His willingness to pay for that latte is $6. The price of the latte is $2. The cost to the coffee shop to produce the latte is $1. How much economic surplus does Kevin gain when he purchases the latte? A. $6 B. $1 C. $4 D. $2
C. $4
Consider the data in the table. The price of gasoline is $3.99 per gallon at the gas station. If Rexhall Fuel Supplies is a rational seller, how many gallons of gasoline should this seller be willing to sell? A. 30 million galls per week B. 42 million gallons per week C. 20 million gallons per week D. 14 million gallons per week
C. 20 million gallons per week
Which of the following scenarios depicts a seller who is following the Rational Rule for Sellers? A. Andy's Diner finds that the marginal cost of a fish and chips meal is $7 and lists the item for sale at $6.50 B. An auto-rickshaw driver in New Delhi, India, calculates a trip to have a marginal cost of 350 rupees and accepts a ride request for 315 rupees C. American Airlines determines the marginal cost of an extra passenger to be $75 and sells a discount seat for $250 D. Mindy sets up a lemonade stand and calculates the cost of an additional cup of lemonade at 50 cents, and sells it for 25 cents.
C. American Airlines determines the marginal cost of an extra passenger to be $75 and sells a discount seat for $250
(Figure:Market of Printing Paper) Which of the following graphs illustrates what we expect to see in the market for printing paper if the price of printing paper rises? A. Graph A B. Graph B C. Graph C D. Graph D
C. Graph C
Which of the following scenarios illustrates the law of demand? A. Francis does not care about the price of coffee at the coffee shop- he must buy two cappuccinos every day, regardless of the price B. John likes to drink spring water. At $2 he buys four bottles of water, and at $1.50 he still buys four bottles of water C. Kathleen eats more steak when the price is low, and less when the price is high D. A research company finds that the more expensive a particular brand of a designer handbag, the more that consumers are willing to purchase the brand
C. Kathleen eats more steak when the price is low, and less when the price is high.
The marginal benefit of consuming an item is: A. The difference between what the consumer is willing to pay and the actual market price of the item B. The total benefit from buying several units of the item C. The additional benefit from buying one more unit of that item D. The additional number of consumers who buy a unit of an item
C. The additional benefit from buying one more unit of that item
Recent evidence suggests exercise promotes longevity and reverse aging. Based on this information, what might happen in the market for exercise-related goods and services? A. The demand for gyms will not change B. People will reduce their purchases of exercise equipment C. The demand for exercise machines and/or gyms will increase D. The demand for exercise equipment will not be affected
C. The demand for exercise machines and/or gyms will increase
What happens to the equilibrium price and quantity when demand decreases and at the same time supply increases, and the demand shift is relatively smaller than the supply shift? A. The equilibrium price rises, and the equilibrium quantity falls B. Both the equilibrium price and quantity will rise C. The equilibrium price falls, and the equilibrium quantity rises D. Both the equilibrium price and quantity will fall
C. The equilibrium price falls, and the equilibrium quantity rises
Suppose that you have a pumpkin stall at a farmer's market, and the Halloween season arrives. You know that your customers will want to buy many pumpkins to decorate their houses and make pumpkin pies. Which of the following is a likely result of this scenario? A. You will take fewer pumpkins to the market to sell. B. You will be able to sell only the highest-quality pumpkins. C. You can charge a higher price per pumpkin. D. You will wind up with many unsold pumpkins.
C. You can charge a higher price per pumpkin.
A normal good is: A. a good which is only purchased by high-income consumers B. a good which is normally purchased by many consumers C. a good for which higher income causes an increase in demand D. a good for which higher income causes a decrease in demand
C. a good for which higher income causes an increase in demand.
Substitutes-in-production: A. are always priced the same B. use substitute inputs in production C. allows a business to have alternative uses of its resources by manufacturing other products using the same inputs D. allows a business to produce goods together
C. allows a business to have alternative uses of its resources by manufacturing other products using the same inputs
Joshua Murphy is planning on studying late into the night for his economics exam. How many cups of coffee should he buy tonight? Joshua should keep buying coffee throughout the evening until the marginal: A. cost of purchasing one more coffee is positive B. benefit of purchasing one more coffee is less than the marginal cost C. benefit of purchasing one more coffee equals the marginal cost D. benefit of purchasing one more coffee is positive
C. benefit of purchasing one more coffee equals the marginal cost.
A rational buyer will: A. buy the product only when the marginal benefit of consuming the product is twice as much as the price of the product B. not consider costs versus benefits when purchasing a product C. keep buying a product until marginal benefit equals price D. buy a product until the marginal benefit of consuming the product is less than the price of the product
C. keep buying a product until marginal benefit equals price.
When you calculate marginal costs, they should include: A. both the variable and fixed costs B. the market price of the product C. only variable costs D. only fixed costs
C. only variable costs
Decisions should reflect the __________ costs, rather than just the __________ costs. A. opportunity; nonfinancial B. nonfinancial; financial C. opportunity; financial D. financial; marginal
C. opportunity; financial
When there is a shortage of highly skilled workers in a particular region: A. there is a corresponding surplus of low-skilled workers in the region B. unemployment rises among highly skilled workers C. the incomes of highly skilled workers fall D. highly skilled workers can negotiate higher salaries
D. highly skilled workers can negotiate higher salaries
The relationship between price expectations and demand is: A. negative; when future prices are expected to rise, current demand will fall B. negative; when future prices are expected to fall, current demand will rise C. positive; when future prices are expected to rise, current demand will rise D. positive; future prices are generally expected to rise
C. positive; when future prices are expected to rise, current demand will rise
A shortage occurs when: A. quantity supplied exceeds quantity demanded B. there is excess production C. quantity demanded exceeds quantity supplied D. when there is insufficient demand
C. quantity demanded exceeds quantity supplied
An individual demand curve is a graph: A. that plots the market price of a product at different points in time B. that plots the quantity of an item that someone plans to buy, at one single price point C. that plots the quantity of an item that someone plans to buy, at each price D. that plots the quantity of an item that a seller plans to sell, at each price
C. that plots the quantity of an item that someone plans to buy, at each price.
The law of demand refers to: A. the positive relationship between price and quantity supplied B. the inverse relationship between price and quantity supplied C. the inverse relationship between price and quantity demanded D. the positive relationship between price and quantity demanded
C. the inverse relationship between price and quantity demanded
One way to do this is to have a __________ who makes important economic decisions on production and consumption.
Central Planner
In charge of economy
Central planner
Holding other factors constant
Ceteris Paribus assumption
Goods that "go well together"; a decrease in the price of used good results in an increase in the demand for another good
Complements
Evaluate the full set of costs and benefits (both financial and non-financial) of any choice, and only pursue the choice if the benefits are at least as large as the costs
Cost-Benefit Principle
What are the four key principles?
Cost-benefit Principle, Opportunity cost Principle, Marginal Principle, and Interdependence Principle
What are examples of planned economies?
Cuba, former soviet unit, and North Korea
What happens to the equilibrium price and quantity when demand decreases and at the same time supply increases, but the demand shift is relatively larger than the supply shift? A. The equilibrium price rises, and the equilibrium quantity falls B. Both the equilibrium price and the equilibrium quantity will rise C. The equilibrium price falls, and the equilibrium quantity rises D. Both the equilibrium price and quantity will fall
D. Both the equilibrium price and quantity will fall
(Figure: Market for Printing Paper) Which of the following graphs shows what will happen in the market for printing paper if the price of printing paper rises? A. Graph A B. Graph B C. Graph C D. Graph D
D. Graph D
What is quantity supplied? A. It is a graph that plots the quantities of an item that a seller plans to sell at different prices B. It is a graph that plots how much a seller produces at different points in time C. It is the amount of an item that a buyer is willing to buy at a particular price D. It is the amount of an item that a seller is willing to sell at a particular price
D. It is the amount of an item that a seller is willing to sell at a particular price
How is the economic surplus generated by a decision calculated? A. It is the sum of the benefits arising from the decision B. It is the sum of costs arising from the decision C. It is the total benefits plus total costs arising from the decisions D. It is the total benefits minus total costs arising from the decision
D. It is the total benefits minus total costs arising from the decision.
The accompanying table provides data for five different oatmeal cookie sellers. Out of the sellers listed, who all are following the law of supply? A. Ken and Ben B. Len, Ken, Ren, and Ben C. Ren only D. Len, Ren, and Jen
D. Len, Ren, and Jen
A new study discovers the health benefits of eating fish regularly. At the same time, some consumers decide to become vegetarians. What is the effect of these events on the equilibrium price and quantity in the fish market? A. The equilibrium price rises, and the equilibrium quantity falls B. The equilibrium price falls, and the equilibrium quantity rises C. The equilibrium price falls, and the change in the equilibrium quantity is ambiguous D. The change in both the equilibrium price and quantity is ambiguous
D. The change in both the equilibrium price and quantity is ambiguous
Which of the following is NOT a factor that can shift supply? A. The price of a complement-in-production B. The expected future price of a product C. The price of a substitute-in-production D. The market price of a product
D. The market price of a product
You're shopping online, and you place an item in your virtual cart. Two days later, you return to the visual cart to check out and find that the item is now more expensive. Assuming that the market is competitive, what could explain the price increase? A. There is a surplus of the item B. There is decreased demand for the item C. New sellers are offering the same product D. There is a shortage of the item
D. There is a shortage of the item
According to the marginal principle, keep increasing quantity until the marginal benefit of an additional item is ________ the marginal cost of an additional item. A. less than B. greater than C. greater than or less than D. equal to
D. equal to
You are considering whether you should go out to dinner at a restaurant with your friend. The meal is expected to cost you $50, you typically leave a 20% tip, and a round-trip Uber ride will cost you $15. You value the restaurant meal at $30 and the time spent with your friend at $50. You should ___________ to dinner with your friend because the benefit of doing so is ___________ than the cost. A. not go; less B. not go; greater C. go; less D. go; greater
D. go; greater
The interdependence principle: A. implies that consumers depend on each other to make purchase decisions in the market B. is the same as the cost-benefit principle C. refers to the marginal benefit of consuming additional units of an item D. implies that buyers decisions are affected by many factors other than the price of an item
D. implies that buyers decisions are affected by many factors other than the price of an item.
Diminishing marginal benefit: A. is when buying an additional item yields a larger marginal benefit than the previous item B. is not important in determining a consumer's purchase decision C. is when consumers do not follow the rational rule D. is when buying an additional item yields a smaller marginal benefit than the previous item
D. is when buying an additional item yields a smaller marginal benefit than the previous item.
If a seller expects prices to rise in the future: A. there will be no change in the seller's actions today B. the quantity supplied will increase today C. the supply will increase today D. it will stock up today and sell the goods with the price rises
D. it will stock up today and sell the goods with the price rises
Nerida Kyle could either commute to work via Uber or purchase a new car. The average cost of her one-way Uber trip is $15. Nerida works five days a week for 50 weeks a year. Based solely on avoiding the cost of an Uber, Nerida should purchase a car if the cost of the car is _________ than ________ per week. A. greater; $75 B. greater; $150 C. less; $75 D. less; $150
D. less; $150
The _____________ suggests, decisions about quantities are best made incrementally. A. interdependence principle B. cost-benefit principle C. opportunity cost principle D. marginal principle
D. marginal principle
You are thinking of going out to dinner at a restaurant with your friends. The meal is expected to cost you $50, you typically leave a 20% tip, and a round-trip Uber ride will cost you $20. You value the restaurant meal at $20, and the time spent with your friends at $30. You should __________ to dinner with your friends because the benefit of doing so is ________ than the cost. A. go; greater B. go; less C. not go; greater D. not go; less
D. not go; less
Graphically, the equilibrium quantity can be identified as the: A. maximum quantity that sellers are willing to sell B. quantity corresponding to the intersection of the demand curve and the price axis C. maximum quantity that buyers are willing to buy D. quantity corresponding to the intersection of the demand and supply curves
D. quantity corresponding to the intersection of the demand and supply curves
Paints and paintbrushes are complements. If the price of the paint rises, we can expect: A. the quantity demanded of paint to increase B. the quantity demanded of paintbrushes to remain unchanged C. the demand for paintbrushes to increase D. the demand for paintbrushes to decrease
D. the demand for paintbrushes to decrease
A table that indicates the quantity of a good or service that would be demanded at each price
Demand Schedule
Your choice of buying a house (housing market) depends on the interest rate on mortgage (credit market)
Dependencies between markets
If Microsoft hires the best computer programmers in Seattle, it affects other Seattle-based start-up companies to find talented programmers
Dependencies between others (people or businesses)
The amount of money you spend on entertainment depends on how much you spend on food. It reflects the fact that you have limited resources, such as income
Dependencies between your own choices
What are the four types of Interdependencies?
Dependencies between your own choices, between others (people or businesses), between markets, and overtime
"Is it better to buy a house now or to wait?" depends on expectations of future earnings, house prices, and interest rates
Dependencies over time
Extra output produced by next worker hired is smaller than output produced by previous worker; occurs when additional resources are added to a fixed amount of other resources
Diminishing Marginal Product of Labor
Each additional item yields a smaller MB than the previous item
Diminishing marginal benefit
As you can see, demand curves slope ________.
Downward
What is an example of the opportunity cost principle?
Each honor you spent studying Economics has an opportunity cost because it's an hour you can't spend sleeping or working.
The difference between total benefits and total costs
Economic Surplus (ES)
A small set of ideas or principles that you can apply over and over
Economics
The maximum output one can have when using all available resources
Efficient Outcome
When Supply meets Demand in a market
Equilibrium
There is one price at which Qs=Qd
Equilibrium price (p*)
What happens in equilibrium?
Every seller who wants to sell an item can find a buyer and every buyer can find a willing seller because of this balancing, there is no tendency for the market price to change
These are costs that do not vary when you charge quantity of output you produce; firms have to pay these costs whether or not they expand their production
Fixed cost
When a price tag shows both the sale price and the original price making you feel like you are saving money when purchasing
Framing
Are you more likely to eat a donut if your department is offering them for free, or if someone is selling them for $3 on the drill field?
Free donut because the benefit of having the donut is identical in both cases but the cost is not! ($3 VS $0)
Describes the most that you produce when using all available resources given to you
Frontier
Amount of a good that a seller is willing to sell at each price
Quantity Supplied (QS)
What is an example of a complement?
If price of pizza decreases (people buy more pizza), demand for coke increases other examples of complements are cars and gas, phone and screen protector, paint and paintbrushes, etc.
What is an example of a substitute?
If the price of pepsi increases (people buy less pepsi), the demand for coke increases, shifting more of pepsi the D.C. for coke to the right
What are the four factors hat shift the demand curve?
Income, preferences/taste, prices of related goods, and expectation
Economists are interested in demand for an entire market, such as Starkville, or Mississippi , or the United States. As we have more and more and more people in the market, the total quantity demanded _______ and this affects the shape of the demand curve to what?
Increases It becomes a smooth line
Plots demand schedule on a graph showing the quantity of an item that someone plans to buy at each price. Price is on the vertical axis and QD is on the horizontal axis.
Individual demand curve
A graph of the quantity that a business plans to sell at each price; summarizes a business selling plan
Individual supply curve
These are the goods that you buy less of as your income rises
Inferior goods
A charge in price at input charges marginal cost
Input prices
What are the four factors that shift the supply curve?
Input prices, productivity and technology, prices of related outputs, and expectation
Implies that a buyer's choice depends on many other factors other than the price of a good itself
Interdependence Principle
Your best choice depends on your other choices, the choices others make, changes in other markets, and expectations about the future
Interdependence Principle
What three questions should you ask about your WTP before you look at the price tag?
Is it worth buying it? Is it worth producing it? Is it worth doing it?
explains why supply curve is upward sloping
Law of Supply
What is economics about?
Making choices given limited resources
The extra benefit you get from one more unit of something (one more worker)(extra revenue generated by that extra worker)
Marginal Benefit (MB)
The extra cost of that extra unit of something (one more worker) (wage you pay to that extra worker)
Marginal Cost (MC)
Decisions about quantities are best made in small increments. In case of deciding "How many workers to hire"; suggests that you evaluate whether the extra benefit from hiring one more worker exceeds the extra cost of that extra worker
Marginal Principle
Your demand curve is also your what curve?
Marginal benefit curve
Any place where buyers and sellers come together
Market
A sum of all individual demand so we add up the QD by three consumers for each price
Market Demand
Operate with every individual making their own production and consumption decisions
Market Economies
Extent of which a seller can charge a higher price without losing many sales to competing businesses
Market Power
The total amount of an item that producers in a market are planning to sell at each price
Market Supply
Graph plotting the total quantity of an item supplied by the entire market at each price; upward sloping
Market Supply curve
A graph plotting the total quantity of an item demanded, by the entire market, at each price
Market demand curve
Does the Sunk Cost impact your decision?
No
These are the goods that you buy more of as your income rises
Normal good
What are examples of a market economies?
North America, Europe, and South Korea
Market with only a handful of large sellers
Oligopoly
The true cost of something is the next best alternative that you must give up in order to get it
Opportunity Cost Principle
Whenever you use any scarce resource there is a what?
Opportunity cost
To visualize the opportunity cost we use a tool called what?
P.P.F
Means it is a market in which all of the sellers sell an identical good and there are many sellers, each seller is small relative to the size of the entire market
Perfect competition
Rely on government to make these decisions
Planned economies
MC=
Price
Means you simply take the market price as given and follow along, charging the prevailing market price
Price taker
Perfectly competitive firms are what?
Price takers
The different sets of outputs that are attained with your scarce resources
Production Possibilities Frontier (PPF)
Lead to rising marginal cost as you buy more of an input, it's opportunity costs rise! As you keep producing more out-traits you would need to hire more workers because there is a limited number of workers , it may become harder to find workers, and you may need to offer higher wages to attract more workers
Rising input costs
All resources are limited
Scarcity
When the Qd exceeds Qs; occurs when the price is below its equilibrium
Shortage
For the purpose of simplicity, we assume that an individual demand curve has what type of line like the U>S. market demand curve?
Smooth line
Goods that serve as replacement for one another
Substitutes
Allows a business to have alternative uses it's resources by manufacturing other products using same inputs and equipment
Substitution-in-production
Cost that has already been incurred and can't be reversed
Sunk Cost
A table that indicates the quantity of a good that would be supplied at each price
Supply schedule
When the Qs exceeds Qd; occurs when the price is above equilibrium
Surplus
How can firms estimate the market demand in practice?
Survey
ES=
TB-TC
When following C-B Principle, both buyer and seller (not just seller or buyer) benefit from voluntary exchange
Take-away
Following the Cost-Benefit Principle in our choices increases our economic surplus, because Cost-Benefit Principle says what?
That you should pursue the choice only if the benefits are greater than or equal to costs
Consumers will demand more of a good at lower prices than at higher prices
The Law of Demand
What explains why D.C. slopes downward?
The Law of Demand
If you keep buying until P=MB what happens?
The same curve illustrates the MB of each additional unit of a good
Are costs paid under either attending college or work full-time considered opportunity cost?
They are not
Costs are sometimes hard to quantify. Going back to the donut example, suppose the donut is still free but you have to listen to a lecture.
This is an extra cost. Q:How do we measure the cost of listening to a lecture? A:You could think about how much you would pay to avoid it. If the cost of listening to a lecture is greater than the benefit ($2), you should avoid getting the donut.
Which way do demand curves never slope?
Upward
The costs that vary with the quantity of output
Variable Cost
What do you ask yourself during an opportunity cost situation?
What could I be doing with this limited resource?
In the donut example, you can ask what?
What is my WTP for the donut?
"What is the most that you would be willing to pay in order to obtain a particular benefit or to avoid a particular benefit or to avoid a particular cost."
Willingness to Pay (WTP)
A simple trick that economists use is?
Willingness to Pay (WTP)
Now suppose having one donut provides you with the benefit that is worth $2 to you.
Would not pay $3 since benefit ($2) < cost ($3). But you would still accept the free donut since benefit ($2) > cost ($0)
What happens when you are providing outputs that are on the frontier?
You can't produce more of one output unless you produce less of the other.
When you apply the C-B Principle what happens?
You should hire one more worker only if the MB is at least as large as the MC. After you have decided to hire that extra worker. You should repeat the process for hiring another worker.
What are examples of a market?
a flea market, a store (target), Amazon.com, and your garage
Change in prices causes what?
a movement along the S.C. , yielding a change in Qs
MC's are your what?
additional variable costs
Because the benefit of having a donut is ____________________________________ but, in practice, Cost-Benefit principle can be more challenging than it sounds, because ___________________ is often difficult (in other words, how do we know if a donut is worth $2 to you in practice?)
already quantified into dollar values ($2) measuring benefits
For a substitute, an increase in the price of one good results in what?
an increase in the demand for its substitutes
Why does the cost-benefit principle evaluate a full set of costs and benefits?
because costs and benefits are the incentives that shape decisions, so weigh the balance of costs and benefits
Whenever MB>MC we should take action why?
because our economic surplus increases by doing so
Why are variable costs part of opportunity cost?
because these are the costs that the company increases when it expands their production, but would not occur if the company does not expand production
What are the two seller's decisions?
choosing the price and choosing the quantity to supply
When there is a surplus the price will what?
decrease
Surplus puts what type of pressure on the price?
downward
A change in demand shifts the D.C. what way?
either right or left
The quantity demanded and quantity supplied in equilibrium
equilibrium quantity (Q*)
The price will continue to what until the gap (surplus) is completely eliminated?
fall
Marginal cost do not include what?
fixed costs
Economics is built upon what that can be used to provide insight into just about any problem that is worth thinking about?
four core principles
Quantity supplied is on what axis on a supply curve?
horizontal axis
What does the S.C. summarize?
how much a business will change the quantity it supplies if the price changes
ES measures what?
how much a decision has improved your well-being
What does the Interdependence Principle think about?
how other things can affect my decision
A higher price leads to what?
individual businesses to supply a larger quantity
Knowing that a company operates in a perfectly competitive market is important why?
it affects how much you can change in a market
Whenever you face a decision about how many of something to choose what happens?
it is always easier to break it into a series of smaller or marginal decisions
Lower input prices lead to what?
lower marginal costs which in turn increase the quantity a business is willing to supply at any given price, thus S.C. shifts to right
As long as a firm follows the rational rule of sellers, its supply curve is also what?
marginal cost curve
Higher price equals what?
more businesses are supplying their goods/services
What are the two types of goods?
normal and inferior goods
In the Cost-Benefit Principle you should always consider what?
not just the financial cost of the donut but also the non-financial cost (getting sick and not being able to go to school/work is costly!)
On a supply curve there is what type of relationship between price and quantity supplied?
positive
As advances and production increases, what happens?
production costs decrease, which causes firms to supply more at every price, shifting the S.C. to the right
The lower the price, the higher the what?
quantity demanded
The price will continue to what until the gap (shortage) is completely eliminated?
rise
Demand decreases as you income does what for inferior goods?
rises
Demand increases as your income does what for normal goods?
rises
Income is what?
scarce
Price change causes a movement along the S.C., not a what?
shift of supply curve
What are the two forces pushing markets towards equilibrium?
shortage and surplus
An increase in supply means what?
something has changed that causes you (seller) to produce more for each and every price
What are the two types of related goods?
substitutes and compliments
Fixed costs are considered what?
sunk costs
Whenever MB>MC what should you do?
take the action because our economic surplus increases by doing so
Diminishing marginal benefit says what?
that MB will eventually begin to decrease as you take an action
Scarcity implies what?
that we always face a trade-off
What happens if you waste your resources or use them inefficiently?
your outputs will be located below or under the curve, indicating that you will end up producing less of each output than you other wise could
What does the Opportunity Cost Principle consider?
the alternatives before making a choice
What does the cost-benefit principle consider?
the costs and benefits of a choice when evaluating a decision
In a market economy, prices coordinate what?
the decisions of buyers and sellers
Firms/businesses are unlikely to know what for all their individual customers?
the demand curves
The higher the price of a good, what?
the higher the QS is
New technology lowers what?
the marginal cost of production as technology
Your decision should always reflect what?
the opportunity cost whether it is financial, non-financial, or both
D.C. illustrates what?
the price at which you will buy each quantity of a good
Exxon's supply of a good (gas) will increase if what?
the price of an couple-in-production (asphalt) rises
MC is simply what?
the price you pay for that extra unit of a good
The opp. cost principle highlights what?
the problem of scarcity. Any resource we spend pursuing one activity leaves fewer resources to pursue others.
If you keep producing until P=MC, then what?
the same curve illustrates the MC of producing each additional unit
The more closely related a substitute is what happens?
the stronger the demand curve shifts.
What does the Marginal Principle think about?
think at the margin, always asking whether a bit more or a bit less of something would be an improvement
If producers expect price to increase in the future, what happens?
this will affect their supply today
If consumers expect prices to increase in the near future what will happen?
this will increase your demand and today
When you are operating in a perfectly competitive market, your best pricing strategy is to what?
to charge a price that is pretty much identical to whatever your competitors are charging. When selling identical goods, you cannot charge more than the prices your competitors charge.
A decrease demand shifts the D.C. what way?
to the left
A decrease in supply shifts S.C. which way?
to the left
An increase in demand shifts the D.C. what way?
to the right
An increase in supply shifts your S.C. which way?
to the right
Todays demand curve shifts what way?
to the right
Consumer expectations of future prices can change what?
today's demands
Shortage puts what type of pressure on the price?
upward
Supply curve slopes what way?
upward
What are the two types of costs?
variable and fixed costs
Price is on what axis on a supply curve?
vertical axis
Where does the crossing point occur?
where MB=MC
When MB=MC what happens?
you are neither better off nor work off but it makes the analysis a bit simpler
When your income increases, what happens?
you can afford to buy a large quantity of both gas and food at each and every price level, shifting your D.C. for gas (and for food) to the right
If you operate in a market with only a handful of sellers, it's likely that what?
you can have a important influence on the price
Ceteris Paribus says that if your income falls, what happens?
you would probably choose to buy less gas (and food) at each and every price, shifting your D.C. for gas (and for food) to the left
PPF illustrates what?
your alternative outputs
When the factors change, what changes?
your demand