test 4
The additional shifts in Aggregate Demand that result when fiscal policy increases income and thereby increases consumer spending.
Effect #1: Multiplier Effect Defined
Fiscal policy has another effect on Aggregate Demand that works in the opposite direction. A fiscal expansion raises Interest Rate (R)m which reduces investment, which reduces the new increase in AD
Effect #2: Crowding-Out Effect
An increase in the money supply Shifts AD right
Expansionary Monetary Policy
Price of related goods Income # buyers Tastes expectations
Factors That Shift the Demand Curve
1. Emergency Economic Stabilization Act of 2008 2. American Recovery and Reinvestment Act of 2009
Two main fiscal policy actions
Measure of personal satisfaction, which cannot be quantified. Try to maximize the satisfaction We cannot measure utility, but we assume that it is possible
Utility
Hypothetical measure of utility
Utils
refers to the limited amount of income available to consumers to spend on goods and services.
A budget constraint
Share of sales accounted for by the largest firms of the industry
A concentration ratio measures
its consumption by one person reduces its consumption by others.
A good is rivalrous in consumption if
cartel
A group of producers that agree to set common pricing or output goals is known as a
The demand for golf clubs decreases.
A huge 50 percent off sale on golf clubs is advertised for next week. What happens this week in the market for golf clubs?
decrease, increase
A minimum wage set above the equilibrium wage will ________ the quantity of labor demanded and ________ the quantity of labor supplied.
economies of scale occur. A natural monopoly is special type of monopoly that's able to lower its price when it produces and sells a larger quantity
A natural monopoly exists when
Yes, to minimize loss TR=2000*20=40000 TC-TR 50000-40000 =10000 loss which is better than 35000 loss
A perfectly competitive firm produces 2000 units of a good at a total cost of $50,000. The fixed cost of production is $35,000. The price of each good is $20. Should the firm continue to produce in the short run?
an externality.
A side effect of an action that affects the well-being of third parties is
at the current price of a cardboard box, the quantity demanded is less than the quantity supplied.
A surplus of cardboard boxes means that
$7.50 (6*300)/240 $600 not included as its fixed cost
Anna owns a dog grooming salon in Brunswick, Georgia. The above table has Anna's total product schedule. Anna pays each worker $300 per week and she pays rent of $600 a week for her salon. These are her only costs. When Anna has a staff of 6 workers, her average variable cost equals
650
Arthur makes custom guitars and is willing to sell them for $850. However, a customer paid Arthur $1500. Arthur's producer surplus is
AD & AS Monetary fiscal policy
AD & AS Monetary fiscal policy
A to C inside curve not using all resources on curve is efficient outside curve not attainable
According to Figure 2.4, an increase in unemployment may be represented by the movement from
A state of the economy where production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
Allocative efficiency
Supply of hybrid cars increasing
An increase in the productivity of producing hybrid cars results in
constant-cost industry.
An industry whose total output can be increased without a change in long-run per-unit costs is a(n)
There are no entry barriers in a perfect completion, but there are market barriers in an oligopoy
An oligopolist differs from a perfect competitor in that
6x & 8y check what u can buy first whats the utility?
Assume that an individual consumes two goods, X and Y. The total utility (assumed measurable) of each good is independent of the rate of consumption of other goods. The prices of X and Y are, respectively, $5 and $10. Given the above, if the consumer has $110 to spend on X and Y, which combination will the consumer choose?
0.9
At a price of $100, Beachside Canoe Rentals rented 11 canoes. When it increased its rental price to $125, 9 canoes were rented. Calculate the absolute value of the price elasticity of demand for canoe rentals, using the midpoint formula.
the opportunity costs of producing a good will increase as more of that good is produced
Because resources are not equally well suited to producing all goods,
Marginal Utility per Dollar for one good = Marginal Utility per Dollar for the other good
Best Consumption Bundle
loss of -$32,000. Bill's foregone salary of $40,000 is an implicit cost. Economic costs include both implicit and explicit costs.
Bill is an economics professor who earns $40,000 teaching but decides to leave and fulfill his dream of catering barbecues. During his year of barbecuing he earned total revenue of $60,000. He spent $30,000 on food and supplies. He also paid his wife $10,000 to help serve food. Bill also rented an industrial grill/fry truck for $12,000. bill had an economic__________________
Shows the consumption bundles available to a consumer who spends all of his or her income
Budget Line
Isolate the impact of one single variable while holding all other variables constant
By invoking the assumption of ceteris paribus, economists
Marginal Utility of the good ÷ Price of the good
Calculate MU per Dollar
Machines
Capital is a factor of production. An example of capital as a factor of production is
She should purchase the period fabric, complete the task and then sell the quilt
Cassie's Quilts alters, reconstructs, and restores heirloom quilts. Cassie has just spent $800 purchasing, cleaning, and reconstructing an antique quilt which she expects to sell for $1,500 once she is finished. After having spent $800, Cassie discovers that she would need some special period fabric that would cost her $200 in material and time in order to complete the task. Alternatively, she can sell the quilt "as is" now for $900. What should she do?
The equilibrium quantity of cocoa decreased.
Cocoa plantations in the west African country of Ivory Coast supply the raw ingredient for half the world's chocolate. A civil war flared in September 2002. What happened to the cocoa market?
Constant returns to scale exist when a firm's long-run average costs remain unchanged as it increases output.
Constant Returns to Scale
A decrease in the money supply Shifts AD left
Contractionary Monetary Policy
the choices that societies, people and institutions that make up societies, make in dealing with the issue of scarcity.
Economics is best defined as the social science that studies
Exist when a firm becomes large and its long-run average costs rise as it increases output.
Diseconomies of Scale
distance between supply and demand of where price is
calculate shortage and surplus
600
Figure 4-11 shows the demand and supply curves for the coffee market. The government believes that the equilibrium price is too low and tries to help almond growers by setting a price floor at $7.00. What is the value of the deadweight loss after the imposition of the price floor?
occur between 10,000 and 20,000 pictures frames per month.
Figure 8-11 illustrates the long-run average cost curve for a firm that produces picture frames. The graph also includes short-run average cost curves for three firm sizes: ATCa, ATCb and ATCc. Constant returns to scale
$2520
Figure 9-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market. What is the amount of its total fixed cost?
Effect #1: The Multiplier Effect Effect #2: The Crowding-Out Effect
Fiscal Policy has two affects on Aggregate Demand...
price equals marginal revenue.
For a perfectly competitive firm
downward sloping, horizontal
For the perfectly competitive broccoli producers in California, the MARKET demand curve for broccoli is _________ and the individual firm is _____________
taxing the production of the product so that the supply is decreased and market price is higher.
Governments can decrease the consumption of a product that creates negative externalities by
Pigou suggested social control measures and using subsidies and taxes to achieve an optimal allocation of resources in the face of various externalities
Governments effort to limit market failure with External factors
A monopoly power in the market can be controlled by the government by passing restrictive trade practice legislation and anti-monopoly laws. These regulations are targeted to remove unfair competition in the market, prevent iniquitous price discrimination and fixing prices that equal to competitive prices.
Governments effort to limit market failure with monopoly power
All public goods are non-rivaled and non-excluded and hence they are not available in the free market. Private companies can't provide these public goods and services. They can be provided only by the public authority. Benefits of public goods and services can't be divided. The government must make people share costs of public utilities so that each of them is better off.
Governments effort to limit market failure with public goods
Many economists and policymakers have opined that a government must nationalize industries that operate under decreasing costs, leading to overproduction. But many others disapprove of this idea. They feel government control could make matters worse. Yet others suggest that the private sector must produce goods and services and the government must impose a price regulation and tax them so that private and social costs and benefits can be balanced.
Governments solutions to market failure in case of increasing returns to scale
The Fed can decrease R- Interest Rate by increasing the money supply.
How Monetary Policy Works
A $20b increase in Government Spending/Saving shifts AD to right by $20b But a higher GDP (Y) increases Money Demand and Interest Rate, which reduces AD.
How the Crowding-Out Effect works
A fall in P - Prices reduces MD money demand, which lowers R- Interest Rate.
How the Interest-Rate Effect Works
the marginal utility per dollar spent on all goods will be equal.
If a consumer always buys goods rationally, then
zero
If a consumer receives 20 units of utility from consuming one candy bars, and 25 units of utility from consuming two candy bars, and 25 units of utlity from consuming three candy bars, the marginal utility of the third candy bar is
The quantity of wheat supplied increased and the supply of corn decreased
If a higher price for wheat decreases the quantity of corn being produced, which of the following describes what has occurred?
bus rides are an inferior good.
If income increases and the demand for bus rides decreases
an absolute advantage.
If you can produce more of something than others with the same resources, you have
the law of diminishing marginal utility.
If, as a person consumes more and more of a good, each additional unit adds less satisfaction than the previous unit consumed, we call this
- The government's wants to create economic growth, however this is often slowed by market failure. This will have an impact on international competitiveness - It is hard for governments to control and regulate market power - Future growth is based on new businesses entering the market and being able to grow. This can also be slowed by market failure
Implications Of Market Failure On The Government
The supply curve shifts to the left. (expectation)
In February, market analysts predict that the price of titanium will rise in March. What happens in the titanium market in February, holding everything else constant?
firms exit the industry, the market supply curve shifts leftward, and the market price rises.
In the long run when a perfectly competitive firm experiences negative economic profits
earns zero economic profits.
In the long run, a perfect competitor
In the short run, some resources are fixed therefore, the only way to increase inputs it to increase the variable input which is usually labor only in the long run can a bigger bakery be built (a fixed cost)
In the short run, firms increase output
only monoploy
In which market structure does one firm sell a good or service with no close substitutes and there is a barrier blocking the entry of new firms?
An inferior good is a type of good that decreases in demand when income rises.
Inferior Good
slopes down bc wealth effect, interest rate effect and exchange rate effect
Influence of monetary on aggregate demand
cost of the hot dogs and condiments
Jay set up his hot dog stand near the business district. His total variable cost includes the
Second Worker
Kenya owns a lawn mowing company. His total product schedule is in the above table. Diminishing marginal returns first occur with the______________________
goods that are of benefit to society, the lack of public goods in a free market would be considered market failure
Lack of public goods
A 1 percent decrease in the price of the good causes quantity demanded to increase by 2.5 percent.
Suppose the value of the price elasticity of demand is -2.5. What does this mean?
Changes in R do not affect MS, which is fixed by the Fed.
MS curve is vertical.
The fraction of extra income that households consume rather than save.
Marginal Propensity to Consume (MPC)
A situation in which a market left on its own fails to allocate resources efficiently if good is over consumed or under consumed 5 types: Lack of Public Goods Under-supply of merit goods Over-supply of demerit goods Externalities (4 of them) Common Access Resources and Threats to sustainability (Use of Fossil fuels)
Market failure
This occurs when the buyer has power over the sellers. It is the opposite of monopoly power, where the seller has power over the buyer. Supermarkets have some monopsony power.
Monopsony Power
rise, fall, or remain unchanged depending on the magnitude of the changes, but the equilibrium price of coal would fall
Most of the electricity in the United States is produced using steam turbines. Steam turbines are powered by fossil fuels such as coal or natural gas. Technological innovations in coal mining that enable more coal to be extracted at a lower cost from coal mines and decreases in the price of natural gas, a substitute for coal, would cause the quantity of coal to
A movement in a supply curve is a change in supply as a result of a change in price
Movement along supply curve
Movement along the demand curve is strictly a function of changes in price. Nothing else. If the price goes up, consumers will purchase less; if the price goes down, they will buy more. However, the amount of change along the demand curve is different for each product. This is known as the elasticity of demand.
Moving along the demand curve
A normal good is any good that increases in demand when income increases.
Normal Good
In order to maximize utility, a consumer must equate the marginal utility per dollar spent on each good and service in the consumption bundle.
Optimal Consumption Rule
B) a 15% increase in Price of umbrellas causes qty supplied to increase 30% PE= %Δ QTY Supplied/%ΔPrice so 2= 30/15
Suppose the value of the price elasticity of supply of umbrellas is 2. What does this mean? A) For every $1 increase in price, quantity supplied increases by 2 units. B) a 15% increase in Price of umbrellas causes qty supplied to increase 30%
Q= 3; P =$18 where MR=MC
Table 11-3 shows the demand and cost schedules for a monopolistically competitive firm. What are the profit-maximizing/loss-minimizing output level and price?
B) how responsive suppliers are to price changes
Price elasticity of supply measures A) how responsive sales are to a change in input prices. B) how responsive suppliers are to price changes
Each successive good of unit of a good or service consumed adds less to total utility than does the previous unit Satisfaction declines
Principle of Diminishing Utility
Goods that are both excludable and rival in consumption, paid by consumer for own personal use
Private Good
5 units of brownies, 4 units of ice cream, and 1 unit of pie. Mu1/P1 = Mu1/P2 (use TU by using running sum is doesnt work) 15=15=16
Refer to Exhibit 6-5. Each dessert is priced at $1. If you had $10 to spend on desserts, which of the following combinations of goods would you buy?
B) The marginal cost of the negative externality is measured by P3 - P1.
Refer to Figure 10-5. Which of the following statements is correct? A) The marginal benefit of the positive externality is measured by P3 - P1. B) The marginal cost of the negative externality is measured by P3 - P1.
-$400 Find the MR=MC quantity, then the price on the demand curve. this will give you the total revenue. Because the ATC is above price, we know there will be negative profits or a loss.
Refer to Figure 15.5. Assume the Custom Sweater Shop has fixed costs of $500 and is a monopolistically competitive firm. If this firm is producing the profit-maximizing level of output and selling it at the profit-maximizing price, the firm's profit is
2/3 of a gallon of milk (.67) Honey/Milk = Honeys opportunity cost Milk/Honey = Milk opportunity cost highest = comparative advantage
Refer to Figure 2-12. What is the opportunity cost of producing one gallon of honey for the country with the comparative advantage in producing honey?
a decrease in the economy's factors of production
Refer to Figure 2.6. Which of the following will shift an economy's production possibility frontier from ppf2 to ppf1?
there would be a shortage of 300 units
Refer to Figure 3-4. If the price is $15,
panel (d)
Refer to Figure 3-7. Assume that the graphs in this figure represent the demand and supply curves for ramen noodles, an inferior good. Which panel describes what happens in this market as a result of an increase in income?
low price
Refer to the above figure. Ajax and Greenco are oligopolists. Above you are given the payoff matrix for the two firms giving the payoff associated with different pricing strategies. What is the best strategy for Greenco if Ajax decides on charging a high price?
when price is below $2 When P <ATC, then the firm is making a loss
Refer to the attached figure. Profits will be negative
A shift in a supply curve is a change in supply for a reason other than a change in price
Shift in supply curve
A shift to the left in which less will be supplied at every price could be caused by Increase in average cost of production Taxation of raw materials A switch in production to a more lucrative option A decline in demand for the product
Shift left supply curve
Reduction in average costs of production Subsidy on raw materials Subsidy on labour Improvements in technology
Shift right supply curve
A 1 percent increase in income leads to a 3 percent increase in the purchase of Good Z.
Studies show that the income elasticity of demand for Good Z is approximately 3. What does this mean?
Marginal Private cost curve to left
Suppose a particular production process results in a large amount of pollution and the government decides to impose a tax to correct for this externality, such that the socially optimal output will be produced. The tax will have the effect of shifting the
forgone working or partying, depending on which was your next best choice.
Suppose that, instead of taking this test, you could either have worked and earned income or partied and had a pleasurable time. Your opportunity cost of taking the test is the
A 1 percent increase in the price of Good A leads to a 4 percent decrease in the purchase of Good B.
Suppose the cross-price elasticity of demand between two goods, A and B is approximately 4. What does this mean?
sales revenue rise Reveune=P*Q
Suppose the demand for good X is relatively inelastic. What happens to sales revenue if the price of Good X increases?
Consumes one more unit of Y and fewer units of X he will increase overall total utility (gain 8 but lose 5)
Suppose the marginal utility per dollar of good X is 5 while the marginal utility of per dollar of good Y is 8. If a person
decreases, shifts left
Suppose the price of leather used to produce shoes increases. The higher price of leather ________ the supply of shoes and the supply curve of shoes ________.
any merger if its effect was to substantially lessen competition or create a monopoly.
The Clayton Act prohibited
shows that under certain conditions externalities can be corrected in the market without resorting to nonmarket means.
The Coase theorem is significant because it
If the gvmt buys $20b of planes from Boeing, Boeing's revenue increases by $20b. This is distributed to Boeing's workers (as wages) and owners (as profits/stocks)
The Multiplier Effect Example
collusive price agreements among rival sellers.
The Sherman Act prohibited
federal Trade commission & anti trust division US dept of Justice
The U.S. Congress has given two government entities the authority to police mergers. These two entities are
a decrease in the price of laptops
The above figure shows the market for laptops. Which of the following causes a movement from B to A?
consumers have more time to adjust to change in price for good x then they have time to adjust to changee
The demand for good X will be more elastic than the demand for good Y when
should cut back on production as it incurs an economic loss of $500
The market price is $50 per unit for a good produced in a perfectly competitive market. The firm produces 100 units and the marginal cost is $52. The firm's average total cost is $55 and the average variable cost is 45, then the firm
increases; shifts rightward
The number of corn producers increases, so the supply of corn ________ and the supply curve of corn ________.
game theory
The tool that economists use to analyze the mutual interdependence of oligopolies is
Explicit costs only
Total Accounting Costs
Explicit + Implicit costs
Total Economic Costs
$150 750-600
Voss Calculator Company has a monopoly on the sale of graphing calculators. If it sells two of these calculators, its total revenue is $600, and if it sells three calculators, its total revenue is $750. The marginal revenue of the third calculator sold is
In perfect completion, firms produce identical goods, while monopolistic completions produce different goods
What is the difference between perfect competition and monopolistic competition?
The government can produce information about borrowers and provide it to investors free of charge. It can require borrowers to report honest information about themselves to investors, and it can set and enforce rules that govern the behavior of financial institutions so they do not take on too much risk. These prudential regulations for banks include banning certain activities and asset categories considered too risky, establishing minimum capital requirements, and requiring disclosure of financial information to regulators and investors.
What steps can the government take to reduce asymmetric information problems and help the financial system function more smoothly and efficiently?
social benefits are greater than private benefits.
When a positive externality exists,
the percentage change in quantity demanded will exceed the percentage change in price (in absolute value).
When demand is elastic,
The income Effect
When the price of audio books, a normal good, falls, causing your purchasing power to rise, you buy more of them due to A) the elasticity effect B) The income Effect
the price of gas falls, the quantity demanded of gas increases
Which of the following describes the law of demand? When other things remain the same, as
national defense rivary=consumption of one unit stops consumption by someone else excludability=anyone who doesnt pay cant have
Which of the following displays these two characteristics: nonrivalry and nonexcludability in consumption?
distribution of electricity
Which of the following goods is the best example of a natural monopoly?
The market price of the product is to high
Which of the following is NOT a barrier to entry that would allow a monopolist to keep potential competitors out of its market?
What is the impact on the quantity of Pepsi purchased if consumers' tastes change in favor of non-carbonated drink?
Which of the following is a microeconomic issue?
A 10 percent increase in income leads to a 4 percent increase in the consumption of beef.
Which of the following is a positive statement? A 10 percent increase in income leads to a 4 percent increase in the consumption of beef. In order to reduce the budget deficit, tax rates should be increased.
b.Incomplete property rights or availability to enforce property rights
Which of the following is a source of market failure? a. a lack of government intervention in a market b.Incomplete property rights or availability to enforce property rights
movie theater
Which of the following is the best example of a firm that competes in a monopolistically competitive market?
i &ii
Which of the following must a firm be able to do to successfully price discriminate? i. divide buyers into different groups according to their willingness to pay ii. prevent resale of the good or service iii. charge different prices based on production costs
a decrease in the price of NetFlix, a substitute for movies
Which of the following shifts the demand curve for movies leftward?
If marginal utility is positive then total utility must be rising
Which of the following statements is true? A)The law of diminishing marginal utility implies that marginal utility must decline as less units of a good are consumed. B)If marginal utility is positive then total utility must be rising
Total revenue (TR) minus total accounting costs (TAC)
accounting profit
how asymmetric information problems affect economic behavior
agency theory
direct: utility of user depends on number of users e.g. facebook indirect: utility of user depends on market-mediated effects of number of users (availability of complementary products
direct vs indirect network externality
Total revenue (TR) minus total economic costs (TEC)
economic profit
Exist when a firm's long-run average costs fall as it increases output. The law of diminishing marginal returns does not apply in the long-run.
economies of scale
Those paid to factors of production owned by people outside of the business (tangible, monetary costs)
explicit costs
Represent the opportunity costs of the owner(s), primarily intangible costs.....sacrifices....what is given up
implicit costs
someone having more information about a product will know a more accurate price to pay (adverse selection)
lemons problem
A period of time long enough to allow a firm to vary all of its inputs, to adopt new technology, and to increase or decrease the size of its physical plant.
long-run
The level of output at which all economies of scale have been exhausted.
minimum efficient scale
negative externality vs positive
negative externality vs positive
Consumption bundle that maximizes the consumer's total utility given his or her budget constraint.
optimal consumption bundle
Positive economic statements must be able to be tested and proved or disproved. Normative economic statements are opinion based, so they cannot be proved or disproved
positive / normative statements
restrict and specify certain activities that the borrower can engage in
restrictive covenants
The period of time during which at least one of the firm's inputs is fixed.
short-run
input price, cost to produce, substitutes, #firms in market, experctations
supply determinants
the effect that one user of a good or service has on others
what is a network externality