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Opportunity Cost and example
answer
the cost of using any resource by looking at the next best use to which the resource could be put i.e. great college basketball players not completing 4 years of college
question
Production Possibilities Curve
answer
a curve that defines the opportunity set for a firm and the possible outputs produced at given inputs
question
Why is PPC not a straight line?
answer
Diminishing returns- the marginal product declines as a country overspecializes in a good
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Pareto Optimality
answer
when there is no rearrangement that can make anyone better off without making another worse off
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demand curve
answer
the relationship between the demand for a good and the price of that good whether for the individual or the market
question
What do we hold constant in a demand curve?
answer
preferences, income, and the price of related goods
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What is the difference between a change in quantity demanded and a shift in demand?
answer
Change in quantity demanded: Shown by a move along the curve
Shift in demand: shift of the curve itself
Shift in demand: shift of the curve itself
question
Define price elasticity of demand. (And be able to solve problems using it)
answer
% change in quantity demanded/ % change in price
question
Example of price elasticity of demand. Yesterday, the price of envelopes was $3 a box, and Julie was willing to buy 10 boxes. Today, the price has gone up to $3.75 a box, and Julie is now willing to buy 8 boxes. Is Julie's demand for envelopes elastic or inelastic? What is Julie's elasticity of demand?
answer
To find Julie's elasticity of demand, we need to divide the percent change in quantity by the percent change in price.
% Change in Quantity = (8 - 10)/(10) = -0.20 = -20%
% Change in Price = (3.75 - 3.00)/(3.00) = 0.25 = 25%
Elasticity = |(-20%)/(25%)| = |-0.8| = 0.8
Her elasticity of demand is the absolute value of -0.8, or 0.8. Julie's elasticity of demand is inelastic, since it is less than 1.
% Change in Quantity = (8 - 10)/(10) = -0.20 = -20%
% Change in Price = (3.75 - 3.00)/(3.00) = 0.25 = 25%
Elasticity = |(-20%)/(25%)| = |-0.8| = 0.8
Her elasticity of demand is the absolute value of -0.8, or 0.8. Julie's elasticity of demand is inelastic, since it is less than 1.
question
Cross Price elasticity of demand
answer
measures the responsiveness of the demand for a good to a change in the price of another good. % change in qty demanded of product A/ % change in price of product B
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Example of cross price elasticity of demand: What is the cross price elasticity of demand for Pepsi if the demand for Pepsi decreases by 10% after the price of Coke decreases by 5%?
answer
Coke and Pepsi are substitute products. If Pepsi's demand decreases by 10% because Coke's price decreases by 5%, and assuming no change in the price of Pepsi and no change in other variables in the economy (ceteris paribus), then the cross price elasticity of demand for Pepsi relative to a price change in Coke is
e cp = (-10%) / (-5%) = +2.
e cp = (-10%) / (-5%) = +2.
question
What is a supply curve?
answer
the amount a firm is willing to supply at a given price
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What do we hold constant along a supply curve?
answer
In a supply curve we hold constant changes in technology and the price of inputs
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Why do supply and demand curves tend to be more highly elastic in the long- vs. the short run?
answer
Inelastic in the short run because the supply curve is in response to the current stock of machines.
The LR assumes that firms can adjust their stock of machines and buildings. Because the company can alter both the fixed and variable factors (i.e., all the factors of production). It can also find new or cheaper sources of raw materials; improve the training of labour; and introduce new technology or better machines. This allows the company to obtain more output without needing much increase in price.
The LR assumes that firms can adjust their stock of machines and buildings. Because the company can alter both the fixed and variable factors (i.e., all the factors of production). It can also find new or cheaper sources of raw materials; improve the training of labour; and introduce new technology or better machines. This allows the company to obtain more output without needing much increase in price.
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Income elasticity
answer
% change in quantity demanded/ % change in income
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What does income elasticity show?
answer
It shows how much consumption of a particular good increases with income. i.e. normal goods increases while inferior goods decreases.
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What do we mean when we say that markets are efficient?
answer
Markets are efficient when they maximize both the consumer and producer surpluses.
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Show the effect of a price ceiling set below the equilibrium market price.
answer
...
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Show the effect of a price floor which is set higher than the equilibrium market price.
answer
...
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When will a price floor have no effect on quantity bought and sold in the market place?
answer
A price floor will have no effect on quantity bought and sold in the marketplace when the price is set below equilibrium
question
Show a situation in which a sales tax of $1.00 per unit on a good results in a deadweight loss.
answer
...
question
Show a situation in which the same sales tax involves no deadweight loss
answer
...
question
Illustrate a consumer who is maximizing utility by purchasing particular amounts of the goods, X
and Y, in his/her budget
and Y, in his/her budget
answer
...
question
Illustrate, using a diagram, a shift in preferences.
answer
...
question
Draw a diagram illustrating an income effect.
answer
...
question
Draw a diagram showing a substitution (e.g. relative price) effect.
answer
...
question
What is the goal of the business firm?
answer
The goal of the business firm is to maximize profit
question
In the short run, if only one input is variable how does the firm decide how much of this input to use
in production?
in production?
answer
...
question
Average Variable Cost
answer
variable costs divided by the quantity of output
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Average Total Cost
answer
total cost divided by the quantity of output
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Marginal Cost
answer
the cost of producing one more unit of a good
question
Why is MR = AR for a perfectly competitive firm?
answer
Firms are assumed to sell where marginal costs meet marginal revenue, where the most profit is generated for profit maximization.
question
Why is the upward sloping part of the marginal cost curve = the supply curve of a firm?
answer
A perfectly competitive firm's supply curve is that portion of its' marginal cost curve that lies above the minimum of the average variable cost curve. A perfectly competitive firm maximizes profit by producing the quantity of output that equates price and marginal cost. As such, the firm moves along it's marginal cost curve in response to alternative prices. Because the marginal cost curve is positively sloped due to the law of diminishing marginal returns, the firm's supply curve is also positively sloped.
question
Draw a diagram with AVC, ATC, and MC curves for a typical perfectly competitive firm.
answer
...
question
Why does the competitive firm increase output until it reaches the Q level where P = MC (assuming
that MC> P if it expands output beyond that point)?
that MC> P if it expands output beyond that point)?
answer
...
question
Why are market demand curves in competitive markets downward sloping while individual firms
have demand curves that are horizontal (infinitely price elastic)?
have demand curves that are horizontal (infinitely price elastic)?
answer
...
question
. Draw a diagram showing a perfectly competitive firm that is maximizing profit in the short run.
(Assume the firm is making positive profits).
(Assume the firm is making positive profits).
answer
...
question
Draw a diagram showing a typical perfectly competitive firm in long-run equilibrium. Explain
how it got to be in this situation
how it got to be in this situation
answer
...
question
Why do economists say that competitive markets are "efficient"?
answer
They are efficient because perfectly competitive markets operate in equlibrum where producer surplus (the benefits received by the person who sells the good) equals consumer suplus (the benefits received by the person who sells the good)
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