ECONOMICS CH 6,11,12 (post midterm)

question

price elasticity of demand

answer

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

question

inelastic demand

answer

A situation in which an increase or a decrease in price will not significantly affect demand for the product

question

perfectly inelastic demand

answer

the case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero, cause a vertical curve

question

total revenue

answer

the total amount of money a firm receives by selling goods or services

question

quantity effect

answer

after a price increase, fewer units are sold, which tends to lower revenue

question

If demand for a good is unit-elastic (the price elasticity of demand is 1), an increase in price:

answer

does not change total revenue. In this case, the quantity effect and the price effect exactly offset each other.

question

When demand is inelastic:

answer

the quantity effect is dominated by the price effect; so a fall in price reduces total revenue.

question

When demand is elastic:

answer

the quantity effect dominates the price effect; so a fall in price increases total revenue.

question

cross price elasticity of demand

answer

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good

question

When two goods are substitutes, like hot dogs and hamburgers, the cross-price elasticity of demand is positive:.

answer

a rise in the price of hot dogs increases the demand for hamburgers — that is, it causes a rightward shift of the demand curve for hamburgers

question

If the goods are close substitutes, the cross-price elasticity will be:

answer

positive and large.

question

If the goods are not close substitutes, the cross-price elasticity will be:

answer

positive and small.

question

income elasticity of demand

answer

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

question

the demand for a good is income-elastic if the:

answer

if the income elasticity of demand for that good is greater than 1

question

the demand for a good is income-inelastic if:

answer

the income elasticity of demand for that good is positive but less than 1

question

perfectly inelastic supply

answer

Refers to a price elasticity of supply value of zero, and arises in the case of a vertical supply curve.

question

perfectly elastic supply

answer

Refers to a price elasticity of supply value of infinity, and arises in the case of a horizontal supply curve.

question

If the number of sellers in a market increases, then the

answer

price will decrease and quantity will increase

question

if the number of seller in a market decreases then the

answer

price will increase and quantity will decrease

question

production function

answer

the relationship between quantity of inputs used to make a good and the quantity of output of that good

question

fixed input

answer

an input whose quantity is fixed for a period of time and cannot be varied

question

variable input

answer

an input whose quantity the firm can vary at any time

question

total production curve

answer

shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input

question

marginal product

answer

the increase in output that arises from an additional unit of input

question

diminishing returns to an input

answer

when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input
it will cause the marginal output to slope upward

question

when marginal product < average product, average product:

answer

average product falls

question

when marginal product > average product, average product:

answer

average product rises

question

when marginal product = average product, average product:

answer

average product rises

question

average product is maximized when:

answer

when marginal product = average product

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variable costs

answer

costs that vary with the quantity of output produced

question

Total Cost Equation

answer

fixed cost + variable cost

question

total cost curve

answer

shows how total cost depends on the quantity of output

question

average total cost

answer

total cost divided by the quantity of output

question

marginal cost

answer

the cost of producing one more unit of a good

question

U-shaped average total cost curve

answer

a distinctive graphical representation of the relationship between output and average total cost; the average total cost curve at first falls when output is low and then rises as output increases.

question

average fixed cost

answer

fixed cost divided by the quantity of output

question

average variable cost

answer

variable cost divided by the quantity of output

question

2 opposing affects that increasing output has on average total cost:

answer

the spreading effect
the diminishing returns effect

question

the spreading effect

answer

the larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost

question

the diminishing effect

answer

the larger the output, the greater the amount of variable input required to produce additional units, leading to higher average variable cost

question

at low levels of output, the _______ effect is more powerful

answer

the spreading effect

question

at high levels of output, the _______ effect is more powerful

answer

the diminishing effect

question

minimum-cost output

answer

the quantity of output at which the average total cost is lowest—the bottom of the U-shaped average total cost curve.

question

At output greater than the minimum-cost output, marginal cost is:

answer

greater than average total cost and average total cost is rising.

question

At output less than the minimum-cost output, marginal cost is:

answer

less than average total cost and average total cost is falling.

question

At the minimum-cost output, average total cost is:

answer

equal to marginal cost.

question

long-run average total cost curve

answer

shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output

question

increasing returns to scale

answer

when long-run average total cost declines as output increases

question

decreasing returns to scale

answer

when long-run average total cost increases as output increases

question

constant returns to scale

answer

the property whereby long-run average total cost stays the same as the quantity of output changes

question

When demand is unit-elastic:

answer

the two effects exactly balance; so a fall in price has no effect on total revenue.

question

marginal decisions

answer

decisions about whether to do a bit more or a bit less of an activity

question

long run

answer

the time period in which a firm can adjust the quantity of any input.

question

If average variable cost is falling within a range of output, then in this range it must also be TRUE that:

answer

average variable cost is greater than marginal cost.

question

When a firm is experiencing decreasing returns to scale, the long-run average total cost curve is:

answer

upward sloping

question

After the point of diminishing returns, each additional worker:

answer

has less of the fixed input to work with, which causes each additional worker to produce less than the previous worker.

question

Over longer periods of time, demand tends to become:

answer

more elastic
this is because in the long run people have time to compensate for the changes unlike in the short run

question

When there are fewer substitutes, demand tends to be:

answer

less elastic

question

Price Effect of Supply

answer

The effect that prices have on the quantity of a product that suppliers offer for sale

question

price taking producers

answer

a producer whose actions have no effect on the market price of the good or service it sells.

question

price taking consumers

answer

a consumer whose actions have no effect on the market price of the good or service that the consumer buys.

question

perfectly competitive industry

answer

an industry in which all producers are price-takers

question

Two Necessary Conditions for Perfect Competition

answer

The industry must contain many producers, each having a small market share.
The industry must produce a standardized product.

question

market share

answer

the fraction of the total industry output accounted for by producer's output.

question

standardized product

answer

output of different producers regarded by consumers as the same good; also referred to as a commodity.

question

free entry and exit

answer

describes an industry that potential producers can easily enter or current producers can easily leave.

question

profit-maximizing principle of marginal analysis

answer

when faced with a profit-maximizing "how much" decision, the optimal quantity is the largest quantity at which the marginal benefit is greater than or equal to marginal cost

question

marginal revenue

answer

the additional income from selling one more unit of a good; sometimes equal to price

question

optimal output rule

answer

the principle that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost.

question

marginal revenue curve

answer

a graphical representation showing how marginal revenue varies as output varies.

question

price-taking firm's optimal output rule

answer

the principle that a price-taking firm's profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced.

question

economic profit

answer

total revenue minus total cost, including both explicit and implicit costs

question

accounting profit

answer

total revenue minus total explicit cost

question

minimum cost output

answer

the quantity of output at which the average total cost is lowest—the bottom of the U-shaped average total cost curve.

question

If the firm produces a quantity at which TR > TC

answer

the firm is profitable

question

If the firm produces a quantity at which TR = TC

answer

the firm breaks even

question

if the firm produces a quantity at which Tr < TC

answer

the firm incurs a loss

question

to be profitable, the market price must be __________________ the average total cost of quantity that it produces

answer

greater than

question

if the firm produces a quantity at which P > ATC

answer

then the firm is profitable

question

if the firm produces a quantity at which P = ATC

answer

then the firm breaks even

question

if the firm produces a quantity at which P < ATC

answer

then the firm incurs a loss

question

break-even price

answer

the market price at which a price-taking firm earns zero profits.

question

why should a firm produce output even if it falls below the ATC?

answer

because in the short run, fixed cost must still be paid and therefore does not increase the price to produce more of that good. (but variable costs do matter)

question

2 cases you need to consider when analyzing optimal production

answer

When the market price is below minimum average variable cost
When the market price is greater than or equal to minimum average variable cost

question

shut-down price

answer

the price at which a firm will cease production in the short run if the market price falls below the minimum average variable cost.

question

The firm should produce in the short run as long as price:

answer

is greater than minimum average variable cost

question

sunk cost

answer

a cost that has already been committed and cannot be recovered

question

short run individual supply curve

answer

shows how an individual producer's profit-maximizing output quantity depends on the market price, taking fixed cost as given

question

free entry

answer

the ability of a firm to enter an industry without encountering legal or technical barriers

question

industry supply curve

answer

a graphical representation that shows the relationship between the price of a good and the total output of the industry for that good.

question

short run industry supply curve

answer

a graphical representation that shows how the quantity supplied by an industry depends on the market price given a fixed number of producers.

question

short run market equilibrium

answer

an economic balance that results when the quantity supplied equals the quantity demanded, taking the number of producers as given

question

long run market equilibrium

answer

an economic balance in which, given sufficient time for producers to enter or exit an industry, the quantity supplied equals the quantity demanded

question

long run industry supply curve

answer

a graphical representation that shows how quantity supplied responds to price once producers have had time to enter or exit the industry.

question

the long-run industry supply curve slopes downwards when:

answer

when an industry faces increasing returns to scale, in which average costs fall as output rises.

question

the long-run industry supply curve slopes upwards when:

answer

producers must use some input that is in limited supply (that is, inelastically supplied). As the industry expands, the price of that input is driven up.

question

three conclusions about the cost of production and efficiency in the long-run equilibrium of a perfectly competitive industry

answer

1. In a perfectly competitive industry in equilibrium, the value of marginal cost is the same for all firms.
2. In a perfectly competitive industry with free entry and exit, each firm will have zero economic profit in long-run equilibrium.
3. The long-run market equilibrium of a perfectly competitive industry is efficient: no mutually beneficial transactions go unexploited.

question

In a perfectly competitive industry in equilibrium, the value of marginal cost is the same for all firms because:

answer

all firms produce the quantity of output at which marginal cost equals the market price, and as price-takers they all face the same market price.

question

In a perfectly competitive industry with free entry and exit, each firm will have zero economic profit in long-run equilibrium because:

answer

Each firm produces the quantity of output that minimizes its average total cost — corresponding to point Z in panel (c) of Figure 12-7. So the total cost of production of the industry's output is minimized in a perfectly competitive industry.

question

The long-run market equilibrium of a perfectly competitive industry is efficient: no mutually beneficial transactions go unexploited because:

answer

all consumers who have a willingness to pay greater than or equal to sellers' costs actually get the good. In addition, when a market is efficient, the market price matches all consumers with a willingness to pay greater than or equal to the market price to all sellers who have a cost of producing the good less than or equal to the market price.

question

the exception to the cost of production and efficiency in long run equilibrium

answer

an industry with increasing costs across the industry. Given a sufficiently high market price, early entrants make positive economic profits, but the last entrants do not as the market price falls. Average costs are minimized for later entrants, as the industry reaches long-run equilibrium, but not necessarily for the early ones.

question

diminishing returns means

answer

larger amount of labor are needed to produce an additional unit of output.
the profit per unit gets smaller and smaller

question

increasing returns means

answer

smaller amount of labor are needed to produce an additional unit of output.
the profit per unit gets bigger and bigger

question

when should a firm cease production immediately?

answer

When the market price is below minimum average variable cost, the price the firm receives per unit is not covering its variable cost per unit. A firm in this situation should cease production immediately.

1 of 104

question

price elasticity of demand

answer

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

question

inelastic demand

answer

A situation in which an increase or a decrease in price will not significantly affect demand for the product

question

perfectly inelastic demand

answer

the case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero, cause a vertical curve

question

total revenue

answer

the total amount of money a firm receives by selling goods or services

question

quantity effect

answer

after a price increase, fewer units are sold, which tends to lower revenue

question

If demand for a good is unit-elastic (the price elasticity of demand is 1), an increase in price:

answer

does not change total revenue. In this case, the quantity effect and the price effect exactly offset each other.

question

When demand is inelastic:

answer

the quantity effect is dominated by the price effect; so a fall in price reduces total revenue.

question

When demand is elastic:

answer

the quantity effect dominates the price effect; so a fall in price increases total revenue.

question

cross price elasticity of demand

answer

question

When two goods are substitutes, like hot dogs and hamburgers, the cross-price elasticity of demand is positive:.

answer

a rise in the price of hot dogs increases the demand for hamburgers — that is, it causes a rightward shift of the demand curve for hamburgers

question

If the goods are close substitutes, the cross-price elasticity will be:

answer

positive and large.

question

If the goods are not close substitutes, the cross-price elasticity will be:

answer

positive and small.

question

income elasticity of demand

answer

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

question

the demand for a good is income-elastic if the:

answer

if the income elasticity of demand for that good is greater than 1

question

the demand for a good is income-inelastic if:

answer

the income elasticity of demand for that good is positive but less than 1

question

perfectly inelastic supply

answer

Refers to a price elasticity of supply value of zero, and arises in the case of a vertical supply curve.

question

perfectly elastic supply

answer

Refers to a price elasticity of supply value of infinity, and arises in the case of a horizontal supply curve.

question

If the number of sellers in a market increases, then the

answer

price will decrease and quantity will increase

question

if the number of seller in a market decreases then the

answer

price will increase and quantity will decrease

question

production function

answer

the relationship between quantity of inputs used to make a good and the quantity of output of that good

question

fixed input

answer

an input whose quantity is fixed for a period of time and cannot be varied

question

variable input

answer

an input whose quantity the firm can vary at any time

question

total production curve

answer

shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input

question

marginal product

answer

the increase in output that arises from an additional unit of input

question

diminishing returns to an input

answer

question

when marginal product < average product, average product:

answer

average product falls

question

when marginal product > average product, average product:

answer

average product rises

question

when marginal product = average product, average product:

answer

average product rises

question

average product is maximized when:

answer

when marginal product = average product

question

variable costs

answer

costs that vary with the quantity of output produced

question

Total Cost Equation

answer

fixed cost + variable cost

question

total cost curve

answer

shows how total cost depends on the quantity of output

question

average total cost

answer

total cost divided by the quantity of output

question

marginal cost

answer

the cost of producing one more unit of a good

question

U-shaped average total cost curve

answer

a distinctive graphical representation of the relationship between output and average total cost; the average total cost curve at first falls when output is low and then rises as output increases.

question

average fixed cost

answer

fixed cost divided by the quantity of output

question

average variable cost

answer

variable cost divided by the quantity of output

question

2 opposing affects that increasing output has on average total cost:

answer

the spreading effect
the diminishing returns effect

question

the spreading effect

answer

the larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost

question

the diminishing effect

answer

the larger the output, the greater the amount of variable input required to produce additional units, leading to higher average variable cost

question

at low levels of output, the _______ effect is more powerful

answer

the spreading effect

question

at high levels of output, the _______ effect is more powerful

answer

the diminishing effect

question

minimum-cost output

answer

the quantity of output at which the average total cost is lowest—the bottom of the U-shaped average total cost curve.

question

At output greater than the minimum-cost output, marginal cost is:

answer

greater than average total cost and average total cost is rising.

question

At output less than the minimum-cost output, marginal cost is:

answer

less than average total cost and average total cost is falling.

question

At the minimum-cost output, average total cost is:

answer

equal to marginal cost.

question

long-run average total cost curve

answer

shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output

question

increasing returns to scale

answer

when long-run average total cost declines as output increases

question

decreasing returns to scale

answer

when long-run average total cost increases as output increases

question

constant returns to scale

answer

the property whereby long-run average total cost stays the same as the quantity of output changes

question

When demand is unit-elastic:

answer

the two effects exactly balance; so a fall in price has no effect on total revenue.

question

marginal decisions

answer

decisions about whether to do a bit more or a bit less of an activity

question

long run

answer

the time period in which a firm can adjust the quantity of any input.

question

If average variable cost is falling within a range of output, then in this range it must also be TRUE that:

answer

average variable cost is greater than marginal cost.

question

When a firm is experiencing decreasing returns to scale, the long-run average total cost curve is:

answer

upward sloping

question

After the point of diminishing returns, each additional worker:

answer

has less of the fixed input to work with, which causes each additional worker to produce less than the previous worker.

question

Over longer periods of time, demand tends to become:

answer

more elastic
this is because in the long run people have time to compensate for the changes unlike in the short run

question

When there are fewer substitutes, demand tends to be:

answer

less elastic

question

Price Effect of Supply

answer

The effect that prices have on the quantity of a product that suppliers offer for sale

question

price taking producers

answer

a producer whose actions have no effect on the market price of the good or service it sells.

question

price taking consumers

answer

a consumer whose actions have no effect on the market price of the good or service that the consumer buys.

question

perfectly competitive industry

answer

an industry in which all producers are price-takers

question

Two Necessary Conditions for Perfect Competition

answer

The industry must contain many producers, each having a small market share.
The industry must produce a standardized product.

question

market share

answer

the fraction of the total industry output accounted for by producer's output.

question

standardized product

answer

output of different producers regarded by consumers as the same good; also referred to as a commodity.

question

free entry and exit

answer

describes an industry that potential producers can easily enter or current producers can easily leave.

question

profit-maximizing principle of marginal analysis

answer

when faced with a profit-maximizing "how much" decision, the optimal quantity is the largest quantity at which the marginal benefit is greater than or equal to marginal cost

question

marginal revenue

answer

the additional income from selling one more unit of a good; sometimes equal to price

question

optimal output rule

answer

the principle that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost.

question

marginal revenue curve

answer

a graphical representation showing how marginal revenue varies as output varies.

question

price-taking firm's optimal output rule

answer

the principle that a price-taking firm's profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced.

question

economic profit

answer

total revenue minus total cost, including both explicit and implicit costs

question

accounting profit

answer

total revenue minus total explicit cost

question

minimum cost output

answer

the quantity of output at which the average total cost is lowest—the bottom of the U-shaped average total cost curve.

question

If the firm produces a quantity at which TR > TC

answer

the firm is profitable

question

If the firm produces a quantity at which TR = TC

answer

the firm breaks even

question

if the firm produces a quantity at which Tr < TC

answer

the firm incurs a loss

question

to be profitable, the market price must be __________________ the average total cost of quantity that it produces

answer

greater than

question

if the firm produces a quantity at which P > ATC

answer

then the firm is profitable

question

if the firm produces a quantity at which P = ATC

answer

then the firm breaks even

question

if the firm produces a quantity at which P < ATC

answer

then the firm incurs a loss

question

break-even price

answer

the market price at which a price-taking firm earns zero profits.

question

why should a firm produce output even if it falls below the ATC?

answer

because in the short run, fixed cost must still be paid and therefore does not increase the price to produce more of that good. (but variable costs do matter)

question

2 cases you need to consider when analyzing optimal production

answer

When the market price is below minimum average variable cost
When the market price is greater than or equal to minimum average variable cost

question

shut-down price

answer

the price at which a firm will cease production in the short run if the market price falls below the minimum average variable cost.

question

The firm should produce in the short run as long as price:

answer

is greater than minimum average variable cost

question

sunk cost

answer

a cost that has already been committed and cannot be recovered

question

short run individual supply curve

answer

shows how an individual producer's profit-maximizing output quantity depends on the market price, taking fixed cost as given

question

free entry

answer

the ability of a firm to enter an industry without encountering legal or technical barriers

question

industry supply curve

answer

a graphical representation that shows the relationship between the price of a good and the total output of the industry for that good.

question

short run industry supply curve

answer

a graphical representation that shows how the quantity supplied by an industry depends on the market price given a fixed number of producers.

question

short run market equilibrium

answer

an economic balance that results when the quantity supplied equals the quantity demanded, taking the number of producers as given

question

long run market equilibrium

answer

an economic balance in which, given sufficient time for producers to enter or exit an industry, the quantity supplied equals the quantity demanded

question

long run industry supply curve

answer

a graphical representation that shows how quantity supplied responds to price once producers have had time to enter or exit the industry.

question

the long-run industry supply curve slopes downwards when:

answer

when an industry faces increasing returns to scale, in which average costs fall as output rises.

question

the long-run industry supply curve slopes upwards when:

answer

producers must use some input that is in limited supply (that is, inelastically supplied). As the industry expands, the price of that input is driven up.

question

three conclusions about the cost of production and efficiency in the long-run equilibrium of a perfectly competitive industry

answer

question

In a perfectly competitive industry in equilibrium, the value of marginal cost is the same for all firms because:

answer

all firms produce the quantity of output at which marginal cost equals the market price, and as price-takers they all face the same market price.

question

In a perfectly competitive industry with free entry and exit, each firm will have zero economic profit in long-run equilibrium because:

answer

question

The long-run market equilibrium of a perfectly competitive industry is efficient: no mutually beneficial transactions go unexploited because:

answer

question

the exception to the cost of production and efficiency in long run equilibrium

answer

question

diminishing returns means

answer

larger amount of labor are needed to produce an additional unit of output.
the profit per unit gets smaller and smaller

question

increasing returns means

answer

smaller amount of labor are needed to produce an additional unit of output.
the profit per unit gets bigger and bigger

question

when should a firm cease production immediately?

answer

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