MicroEcon Exam 1: Study Set 2 - Assignment Essays

question

Demand

answer

Relationship between the price of a good and the quantity of that good that people are willing and able to purchase during a specific period.

question

Demand Curve

answer

Relationship between Price and Quantity Demanded.

question

Changing Price Changes

answer

Quantity Demanded, not demand.

question

Changing P does not

answer

Change the demand Line

question

Law of Demand: Price Increases

answer

Demand Decreases

question

Law of Demand: Price Decreases

answer

Demand Increases.

question

Ceteris Paribus

answer

All other things held constant.

question

Law of Demand Curves Downward Sloping

answer

1) Price is a measure of sacrifice (relative prices matter)
2) Diminishing Marginal utility
3) Affordability

question

Factors that Shift the Demand Curve

answer

1) Income
2) Price of other goods
3) Tastes

question

Normal Good

answer

An increase in income increases the demand of the good. (Demand curve shifts to the right).

question

Inferior Good

answer

An increase in income decreases the demand for the good. (Shifts its demand curve to the left).

question

Demand Substitute

answer

Increase in the price of one good increases the demand for the other. (Shifts its demand curve to the right).

question

Demand Complement

answer

An increase in the price of one good decreases the demand for the other. (Shifts its demand curve to the left).

question

Supply

answer

Relationship between the price of the good and the quantity of that good that people (or more typically firms) are willing and able to sell during a specific time period.

question

Supply Curve

answer

Relationship between price and quantity supplied.

question

the supply curve is upward sloping because

answer

Higher P is needed to get more units supplied, due to their rising cost.

question

Factors that Shift the Supply curve:

answer

1) Price of Inputs
2) Resource Productivity (Tech)
3) Prices of other goods that can be produced with the same resources.
4) number of available sellers
5) expectations
6) Other

question

QS>QD

answer

Excess supply (Surplus)

question

QD>QS

answer

excess demand (Shortage)

question

Consumer Surplus

answer

difference between the maximum a buyer is willing to pay and the price to be paid.

question

Producer Surplus

answer

Difference between the price received and the minimum a seller is willing to accept.

question

Total Surplus

answer

The sum of consumer and producer surplus.

question

Market maximizes

answer

the sum of consumer and producer surplus.

question

Equilibrium P and Q can only change if

answer

either the D or S curve (or both) change.

question

If S and D curves both shift in the opposite direction (one left, one right)

answer

Can predict direction of P, but not Q.

question

If S and D curves both shift the in the same direction (both right or both left).

answer

Can predict direction of Q, but not P.

question

Price Ceiling

answer

Maximum price at which a good can legally be sold.

question

Price Floor

answer

Minimum price at which a good can legally be sold.

question

Price Ceilings set

answer

below the equilibrium price creates a market shortage. (Ceilings above the equilibrium price have no impact).

question

Price Floors set

answer

above equilibrium price creates a market surplus. (Floors set below the equilibrium price have no impact).

question

Non-Price Rationing

answer

1) Queuing (First come, first served.
2) Lottery
3) Favoritism
4) Ration Coupons
5) Side Payments (Tie in sales).

question

Positive Economics

answer

focus on the explanation/facts (objective).

question

Normative Economics

answer

Focus is on policy choice (subjective).

question

Price Elasticity of Demand

answer

A measure of the responsiveness of Qd to changes in price, ceteris paribus.

question

Ed>1

answer

(Relatively) Elastic

question

Ed<1

answer

(Relatively) Inelastic

question

Ed=1

answer

Unit Elastic

question

Total Revenue

answer

Price x Quantity

question

Ed>1: TR

answer

P up, TR down

question

Ed > 1: TR 2

answer

P down, TR up

question

Ed < 1: TR 1

answer

P up, TR up

question

Ed<1: TR 2

answer

P down, TR down.

question

Ed=1: TR

answer

P up or down does not change total revenue.

question

Elastic: Price Goes Up

answer

Demand goes down by a greater percentage, causing Total Revenue to decline.

question

Elastic: Price Goes Down

answer

Demand goes Up by a greater percentage, causing Total revenue to rise.

question

Inelastic: Price Goes Up

answer

Demand decreases by a smaller percentage, causing total revenue to rise.

question

Inelastic: Price Goes Down

answer

Demand increases by a smaller percentage, causing total revenue to fall.

question

Calculating Elasticity

answer

∆𝑄𝑑/𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑄𝑑/
∆𝑃/𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑃

question

Linear Downward Sloping D Line

answer

Elasticity Falls as price declines.

question

Perfectly Inelastic Demand

answer

Demand line is vertical, price does not affect Qd.

question

Perfectly Elastic Demand

answer

Demand line is horizontal, extremely small changes in price have very large effects on Qd.

question

Demand is more elastic

answer

1) the greater the availability and closeness of substitutes.
2) Luxury Goods
3) Greater the Percentage of consumers' budget spent on the good.
4) Longer the time period for consumers to adjust to the price change.

question

Demand is more inelastic

answer

1) substitutes not close, along with the product is in a product category
2) Necessities
3) Less of consumers budget
4) Less time period for consumers to adjust to the price change.

question

Price Elasticity of Supply

answer

A measure of the responsiveness of Qs, to changes on price, ceteris paribus.

question

Income Elasticity

answer

sensitivity of demand for a product relative to changes in income

question

Cross Elasticity

answer

A measure of the responsiveness in quantity demanded of one good to changes in the price of another good.

question

Majority of an excise tax is borne by

answer

The group with the relatively lower elasticity.

question

Case 1: Ed=0; price rises $5

answer

100% on consumers

question

Case 2: Ed=infinity; price remains the same

answer

100% on suppliers

question

Case 3: Es=infinity; price rises $5

answer

100% on consumers

question

Case 4: Es=0; price remains same

answer

100% on Suppliers

question

Consumer Share

answer

Es/Es+Ed

question

Placement of tax

answer

does not affect tax incidence.

question

Goal of firm

answer

Assume Profit Maximization

question

Profit

answer

Total Revenue-Total Cost

question

Opportunity cost

answer

the best alternative given up in choosing to do something else.

question

Sunk Cost

answer

Cost incurred in the past that cannot be recouped. (not a true economic cost).

question

Accounting profit

answer

Profit=TR-Explicit Costs

question

Economic profit

answer

Profit=TR-Explicit Costs-Implicit Costs

question

Example of Implicit Costs

answer

Opportunity cost of owners' time
Opportunity cost of firm's capital.

question

Profit>0

answer

Positive economic profit, above normal (average) rate of return.

question

Profit<0

answer

Negative Economic Profit, below normal (average) rate of return.

question

Profit=0

answer

Zero Economic profit, normal (average) rate of return.

question

Short-run

answer

Time interval during which amounts of some inputs can't be changed (That is, there is a fixed input).

question

Long-Run

answer

Time interval in which a firm is able to vary all inputs. (That is, there are no fixed inputs).

question

Total Cost

answer

variable cost + fixed cost

question

Variable Costs

answer

the component of Total cost that increases as output is increased. Tied to variable inputs).

question

Fixed Costs

answer

The component of Total Cost that does not change as output changes. (Fixed costs are generally associated with the fixed inputs).

question

ATC=AVC+AFC

answer

TC/q=VC/q+FC/q

question

Marginal Cost

answer

The change in cost resulting from a change in output. (Basically, it's the added cost of producing one more unit).

question

Marginal Cost (Symbol)

answer

Change in Total Cost/Change in Quantity.

question

Mc does not depend on the level of

answer

Fixed Costs

question

Marginal (Physical) Product of Labor

answer

The change in output resulting from a change in labor, holding other inputs fixed. (Basically, it's the added output resulting from adding another worker).

question

Law of Diminishing Marginal Returns

answer

As more of a variable input (eg labor) is added to a fixed input (eg capital), eventually the marginal product of the variable input will decline.

question

Point of Diminishing Marginal Returns

answer

Input (or output) level where the Law of DMR first takes hold.

question

Marginal Cost is

answer

inversely related to marginal productivity.

question

Short Run MC begins to rise

answer

at the point of diminishing marginal returns.

question

If MC>ATC

answer

then ATC rises as q increases.

question

If MC<ATC

answer

Then ATC falls as q increases.

question

If MC=ATC

answer

then ATC is constant as q increases.

question

MC curve intersects ATC curve at

answer

ATC curve's lowest point ALWAYS. Same is true for relationship between MC and AVC.

question

Vertical Difference between ATC and AVC

answer

is AFC.

question

AFC declines as q rises

answer

Thus ATC and AVC curves get closer together.

question

Increasing the price of a variable input (wage)

answer

ATC, AVC, and MC curve shift upward.

question

Increasing value of fixed cost.

answer

ATC curve shifts upward. (AVC and MC curves unaffected).

question

Increasing worker productivity (training or new tech)

answer

ATC, AVC, and MC curves shift downward.

question

Long run

answer

time interval in which the firm is able to vary all inputs. Therefore, for any output the firm chooses to product, it can employ the least cost input combination available.

question

Returns to Scale

answer

Economies of Scale
Constant Returns to Scale
Diseconomies of Scale

question

Economies of Scale

answer

As output rises, LRATC declines. (LRATC curve is downward sloping).

question

Constant Returns to Scale

answer

As output rises, LRATC is unchanged. (LRATC curve is horizontal).

question

Diseconomies of Scale

answer

As output rises, LRATC increases. (LRATC curve is upward sloping).

question

Minimum Efficient Scale

answer

Lowest output at which LRATC is attained.

question

Reasons for Economies of Scale

answer

1) Specialization
2) Pecuniary (pertaining to input prices).
3) Large set up costs
4) Other

1 of 103

question

Demand

answer

Relationship between the price of a good and the quantity of that good that people are willing and able to purchase during a specific period.

question

Demand Curve

answer

Relationship between Price and Quantity Demanded.

question

Changing Price Changes

answer

Quantity Demanded, not demand.

question

Changing P does not

answer

Change the demand Line

question

Law of Demand: Price Increases

answer

Demand Decreases

question

Law of Demand: Price Decreases

answer

Demand Increases.

question

Ceteris Paribus

answer

All other things held constant.

question

Law of Demand Curves Downward Sloping

answer

1) Price is a measure of sacrifice (relative prices matter)
2) Diminishing Marginal utility
3) Affordability

question

Factors that Shift the Demand Curve

answer

1) Income
2) Price of other goods
3) Tastes

question

Normal Good

answer

An increase in income increases the demand of the good. (Demand curve shifts to the right).

question

Inferior Good

answer

An increase in income decreases the demand for the good. (Shifts its demand curve to the left).

question

Demand Substitute

answer

Increase in the price of one good increases the demand for the other. (Shifts its demand curve to the right).

question

Demand Complement

answer

An increase in the price of one good decreases the demand for the other. (Shifts its demand curve to the left).

question

Supply

answer

Relationship between the price of the good and the quantity of that good that people (or more typically firms) are willing and able to sell during a specific time period.

question

Supply Curve

answer

Relationship between price and quantity supplied.

question

the supply curve is upward sloping because

answer

Higher P is needed to get more units supplied, due to their rising cost.

question

Factors that Shift the Supply curve:

answer

1) Price of Inputs
2) Resource Productivity (Tech)
3) Prices of other goods that can be produced with the same resources.
4) number of available sellers
5) expectations
6) Other

question

QS>QD

answer

Excess supply (Surplus)

question

QD>QS

answer

excess demand (Shortage)

question

Consumer Surplus

answer

difference between the maximum a buyer is willing to pay and the price to be paid.

question

Producer Surplus

answer

Difference between the price received and the minimum a seller is willing to accept.

question

Total Surplus

answer

The sum of consumer and producer surplus.

question

Market maximizes

answer

the sum of consumer and producer surplus.

question

Equilibrium P and Q can only change if

answer

either the D or S curve (or both) change.

question

If S and D curves both shift in the opposite direction (one left, one right)

answer

Can predict direction of P, but not Q.

question

If S and D curves both shift the in the same direction (both right or both left).

answer

Can predict direction of Q, but not P.

question

Price Ceiling

answer

Maximum price at which a good can legally be sold.

question

Price Floor

answer

Minimum price at which a good can legally be sold.

question

Price Ceilings set

answer

below the equilibrium price creates a market shortage. (Ceilings above the equilibrium price have no impact).

question

Price Floors set

answer

above equilibrium price creates a market surplus. (Floors set below the equilibrium price have no impact).

question

Non-Price Rationing

answer

1) Queuing (First come, first served.
2) Lottery
3) Favoritism
4) Ration Coupons
5) Side Payments (Tie in sales).

question

Positive Economics

answer

focus on the explanation/facts (objective).

question

Normative Economics

answer

Focus is on policy choice (subjective).

question

Price Elasticity of Demand

answer

A measure of the responsiveness of Qd to changes in price, ceteris paribus.

question

Ed>1

answer

(Relatively) Elastic

question

Ed<1

answer

(Relatively) Inelastic

question

Ed=1

answer

Unit Elastic

question

Total Revenue

answer

Price x Quantity

question

Ed>1: TR

answer

P up, TR down

question

Ed > 1: TR 2

answer

P down, TR up

question

Ed < 1: TR 1

answer

P up, TR up

question

Ed<1: TR 2

answer

P down, TR down.

question

Ed=1: TR

answer

P up or down does not change total revenue.

question

Elastic: Price Goes Up

answer

Demand goes down by a greater percentage, causing Total Revenue to decline.

question

Elastic: Price Goes Down

answer

Demand goes Up by a greater percentage, causing Total revenue to rise.

question

Inelastic: Price Goes Up

answer

Demand decreases by a smaller percentage, causing total revenue to rise.

question

Inelastic: Price Goes Down

answer

Demand increases by a smaller percentage, causing total revenue to fall.

question

Calculating Elasticity

answer

∆𝑄𝑑/𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑄𝑑/
∆𝑃/𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑃

question

Linear Downward Sloping D Line

answer

Elasticity Falls as price declines.

question

Perfectly Inelastic Demand

answer

Demand line is vertical, price does not affect Qd.

question

Perfectly Elastic Demand

answer

Demand line is horizontal, extremely small changes in price have very large effects on Qd.

question

Demand is more elastic

answer

question

Demand is more inelastic

answer

1) substitutes not close, along with the product is in a product category
2) Necessities
3) Less of consumers budget
4) Less time period for consumers to adjust to the price change.

question

Price Elasticity of Supply

answer

A measure of the responsiveness of Qs, to changes on price, ceteris paribus.

question

Income Elasticity

answer

sensitivity of demand for a product relative to changes in income

question

Cross Elasticity

answer

A measure of the responsiveness in quantity demanded of one good to changes in the price of another good.

question

Majority of an excise tax is borne by

answer

The group with the relatively lower elasticity.

question

Case 1: Ed=0; price rises $5

answer

100% on consumers

question

Case 2: Ed=infinity; price remains the same

answer

100% on suppliers

question

Case 3: Es=infinity; price rises $5

answer

100% on consumers

question

Case 4: Es=0; price remains same

answer

100% on Suppliers

question

Consumer Share

answer

Es/Es+Ed

question

Placement of tax

answer

does not affect tax incidence.

question

Goal of firm

answer

Assume Profit Maximization

question

Profit

answer

Total Revenue-Total Cost

question

Opportunity cost

answer

the best alternative given up in choosing to do something else.

question

Sunk Cost

answer

Cost incurred in the past that cannot be recouped. (not a true economic cost).

question

Accounting profit

answer

Profit=TR-Explicit Costs

question

Economic profit

answer

Profit=TR-Explicit Costs-Implicit Costs

question

Example of Implicit Costs

answer

Opportunity cost of owners' time
Opportunity cost of firm's capital.

question

Profit>0

answer

Positive economic profit, above normal (average) rate of return.

question

Profit<0

answer

Negative Economic Profit, below normal (average) rate of return.

question

Profit=0

answer

Zero Economic profit, normal (average) rate of return.

question

Short-run

answer

Time interval during which amounts of some inputs can't be changed (That is, there is a fixed input).

question

Long-Run

answer

Time interval in which a firm is able to vary all inputs. (That is, there are no fixed inputs).

question

Total Cost

answer

variable cost + fixed cost

question

Variable Costs

answer

the component of Total cost that increases as output is increased. Tied to variable inputs).

question

Fixed Costs

answer

The component of Total Cost that does not change as output changes. (Fixed costs are generally associated with the fixed inputs).

question

ATC=AVC+AFC

answer

TC/q=VC/q+FC/q

question

Marginal Cost

answer

The change in cost resulting from a change in output. (Basically, it's the added cost of producing one more unit).

question

Marginal Cost (Symbol)

answer

Change in Total Cost/Change in Quantity.

question

Mc does not depend on the level of

answer

Fixed Costs

question

Marginal (Physical) Product of Labor

answer

The change in output resulting from a change in labor, holding other inputs fixed. (Basically, it's the added output resulting from adding another worker).

question

Law of Diminishing Marginal Returns

answer

As more of a variable input (eg labor) is added to a fixed input (eg capital), eventually the marginal product of the variable input will decline.

question

Point of Diminishing Marginal Returns

answer

Input (or output) level where the Law of DMR first takes hold.

question

Marginal Cost is

answer

inversely related to marginal productivity.

question

Short Run MC begins to rise

answer

at the point of diminishing marginal returns.

question

If MC>ATC

answer

then ATC rises as q increases.

question

If MC<ATC

answer

Then ATC falls as q increases.

question

If MC=ATC

answer

then ATC is constant as q increases.

question

MC curve intersects ATC curve at

answer

ATC curve's lowest point ALWAYS. Same is true for relationship between MC and AVC.

question

Vertical Difference between ATC and AVC

answer

is AFC.

question

AFC declines as q rises

answer

Thus ATC and AVC curves get closer together.

question

Increasing the price of a variable input (wage)

answer

ATC, AVC, and MC curve shift upward.

question

Increasing value of fixed cost.

answer

ATC curve shifts upward. (AVC and MC curves unaffected).

question

Increasing worker productivity (training or new tech)

answer

ATC, AVC, and MC curves shift downward.

question

Long run

answer

time interval in which the firm is able to vary all inputs. Therefore, for any output the firm chooses to product, it can employ the least cost input combination available.

question

Returns to Scale

answer

Economies of Scale
Constant Returns to Scale
Diseconomies of Scale

question

Economies of Scale

answer

As output rises, LRATC declines. (LRATC curve is downward sloping).

question

Constant Returns to Scale

answer

As output rises, LRATC is unchanged. (LRATC curve is horizontal).

question

Diseconomies of Scale

answer

As output rises, LRATC increases. (LRATC curve is upward sloping).

question

Minimum Efficient Scale

answer

Lowest output at which LRATC is attained.

question

Reasons for Economies of Scale

answer

1) Specialization
2) Pecuniary (pertaining to input prices).
3) Large set up costs
4) Other

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