Microeconomics 201 - Assignment Essays %

question

Three fundamental economic questions

answer

What is produced?
How is it produced?
For whom is it produced?

question

Market-orientated economy

answer

An economy where most decisions are made by buyers and sellers

question

Command economy

answer

An economy where the government either makes or strongly influences how economic decisions are made

question

Division of labor

answer

The way in which the work required to produce a good or service is divided into tasks performed by different workers

question

Specialization

answer

When workers focus on particular tasks in the overall production process for which they are well suited

question

Three categories of economic resources

answer

Land, Labor, Capital

question

Budget constraint

answer

Model used to illustrate individual choice in a situation of scarcity

question

Utility

answer

The amount of satisfaction or pleasure people receive from their choices. Measured in utils

question

Simple interest

answer

The quick method of calculating the interest charged on a loan

question

Compound interest

answer

Interest that is calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan

question

Opportunity Cost

answer

Whatever must be given up to obtain what is desired

question

Marginal analysis

answer

Comparing the costs and benefits of choosing a little more or a little less

question

Law of diminishing returns

answer

As a person consumes more of a good, the marginal utility from each additional unit is smaller than from the previous unit

question

Sunk cost

answer

Costs that were incurred in the past, can not be recovered and thus should not affect current decisions

question

Individuals are _________ maximizers

answer

Utility

question

Firms exist to maximize _________

answer

Profits

question

Profit formula

answer

Profit = Total Revenue - Total Cost
and
Profit = (Price x Quantity sold) - (Average cost x Quantity produced)

question

Total Revenue formula

answer

Total Revenue = Price x Quantity Sold

question

Total Cost formula

answer

Total Cost = Average Cost x Quantity produced

question

Productive efficiency

answer

When it is impossible to produce more of one good without decreasing the quantity produced of another. Occurs at any point on the PPF. Occurs when average cost is minimized

question

Allocative efficiency

answer

When the mix of goods produced represents the allocation that society most desires. Occurs at one point on the PPF. Occurs when price meets marginal cost

question

Substitution effect

answer

When there is a utility maximizing incentive to consume more of a relatively lower priced good and less of the higher priced good

question

Income effect

answer

A change in the demand of a good or service, induced by a change in the consumer's income

question

What stops us from having everything we desire?

answer

Scarcity

question

What is a consequence of the division of labor?

answer

A greater number of goods and services offered in an economy

question

Why has globalization become so prevalent in the past half century?

answer

Transportation and communication have become much cheaper than in the past

question

Law of Demand

answer

As price rises, quantity demanded falls

question

Law of Supply

answer

As price rises, quantity supplied rises

question

Equilibrium

answer

Where quantity supplied meets quantity demanded

question

Factors that cause the demand curve to shift

answer

1. Change in income
2. Change in the composition of the population
3. Change in taste
4. Change in expectations of future conditions and prices
5. Change in the price of related goods

question

Factors that cause the supply curve to shift

answer

1. Change in natural conditions
2. Change in the price of a key input production
3. Discovery of new technology
4. Change in government policies

question

Normal good

answer

As income increases, demand increases

question

Inferior good

answer

As income increases, demand decreases

question

Price Ceiling

answer

Maximum price allowed by law. May cause shortages

question

Price Floor

answer

Minimum price allowed by law. May cause surpluses

question

Consumer surplus

answer

The benefit consumers receive from buying a good or service. The area below the demand curve, but above market price

question

Producer surplus

answer

The benefit producers receive from selling a good or service. The area above the supply curve, but below the market price

question

Social Surplus

answer

Social surplus = Consumer surplus + producer surplus

question

Deadweight loss

answer

The loss in social surplus due to the market producing an inefficient quantity. When the market is not at equilibrium

question

Price elasticity of demand

answer

How much a percentage change in price leads to a percentage change quantity demanded

question

Elastic

answer

Any change in price leads to a greater magnitude change in quantity demanded. From 1 to infinity

question

Inelastic

answer

Any change in price leads to a smaller magnitude change in quantity demanded. From 0 to 1

question

Unitary elastic

answer

PED = 1, total revenue is maximized

question

Perfectly elastic

answer

PED = infinity

question

Perfectly inelastic

answer

PED = 0

question

As price increases, price elasticity of demand....

answer

Increases

question

As the price of a good increases in an elastic price range, what will happen to total revenue?

answer

Total revenue will decrease

question

Labor Market
Supply:
Demand:

answer

Supply: Individuals
Demand: Firms

question

Financial Capital Market
Supply:
Demand:

answer

Supply: Savers/Lenders/Investors
Demand: Borrowers

question

Shifts in Labor Demand

answer

1. Change in the quantity of the product being produced
2. Change in how the output is produced
3. Change in technology
4. Government Regulation

question

Shifts in Labor Supply

answer

1. How the job is perceived by workers relative to other choices, regardless of pay
2. Government policies affecting the number of workers trained

question

Shifts in Financial Capital Supply

answer

1. Anything that makes people want to alter existing levels of present and future consumption
2. Change in comparable rates of return
3. Change in comparable risk

question

Shift in Financial Capital of Demand

answer

1. Change in confidence of the ability to repay

question

Venture capital

answer

Financial investments in new companies that are still relatively small in size, but have the potential to grow substantially

question

Bonds

answer

A financial contract through which a borrower agrees to repay the amount that was borrowed and also a rate of interest over time. Must pay interest rate on time, but keep ownership

question

Stocks

answer

Claim on a partial ownership of a firm. You don't have to pay interest, but you lose ownership

question

Three factors investors consider before supplying financial captial

answer

Liquidity, rate, return

question

Dividends

answer

A direct payment from a firm to its shareholders

question

Liquidity

answer

How easy it is to convert to cash

question

Fundamental trading

answer

Buying or selling stocks based on estimates of the future expected profits of a firm

question

Momentum trading

answer

Buying or selling stocks by following current trend. Buying when the price seem to be rising

question

Absolute advantage

answer

When one nation can produce a product at a lower resource cost relative to another nation

question

Comparative advantage

answer

When one nation can produce a product at a lower opportunity cost relative to another nation. It is impossible for one country to have advantage in both goods

question

Protectionism

answer

Government policies to reduce or block imports. It benefits domestic producers and harms domestic consumers

question

Tariff

answer

Tax imposed on imports

question

Quotas

answer

Numerical limitations on imports

question

Total Cost

answer

Total cost = Fixed Cost + Variable Cost

question

Fixed cost

answer

Expenditures that must be made before production starts and do not change regardless of the level of production

question

Variable cost

answer

Costs of production that increase with the quantity produced. Slope curves rapidly due to diminishing marginal returns

question

Average cost

answer

Total cost / Quantity. Tells us whether or not we are making a profit while factoring out fixed cost.

question

Average variable cost

answer

Variable cost / Quantity. Shows us the shut down point

question

Average fixed cost

answer

Fixed cost / Quantity

question

Marginal cost

answer

Change in Total Cost / Change in Quantity. Shows us whether any unit of output is adding to or taking away from profit

question

Perfect Competition

answer

Near infinite number of firms
Massive competition
Each firm sells identical products
Productive and allocative efficient long run
Don't have control of the price

question

Profit maximizing point

answer

Marginal revenue = marginal cost

question

Shutdown point

answer

Price = Average variable cost

question

Zero profit point

answer

Price = Average cost. Should be expected in long run

question

In the short run _______ costs can be adjusted

answer

some

question

In the long run _____ costs can be adjusted

answer

all

question

Barriers to entry

answer

The legal forces that may discourage or prevent potential competitors from entering a market

question

Monopoly

answer

-Long run profit
- One firm
-High barriers to entry

question

Monopolistic Competition

answer

-Many firms selling a differentiated product
-Distinguishable from other in some way
-Low barriers of entry
-Long run zero profit

question

Oligopoly

answer

-Few firms
-A majority of sales within a market are held by a small number of firms
-Long run profit
-Collusion
-Not productive or allocative

question

Collusion

answer

When firms act together to reduce output and raise prices

question

Four firm concentration ratio

answer

Calculated by adding the market shares of the four largest firms

question

Herfindahl - Hirshman Index

answer

Take the market share of each firm, square them, and add them together

question

Nationalization

answer

When government takes ownership of a firm

question

Privatization

answer

When government owned firms become privately owned

question

Externality

answer

The impact of a market exchange on a third party who is outside or "external" to the exchange

question

Positive externality

answer

Third parties benefits at no cost to them. Exists when social benefits are greater than private benefits

question

Negative externality

answer

Third party incurs costs at no benefit to them. Example pollution. Exists when social costs are greater than private costs

question

Market failure

answer

A situation in which the market on its own fails to allocate resources efficiently in a way that balances social costs and benefits

question

Command and control regulation

answer

Laws that specify allowable quantities of pollution and may also detail which pollution control technologies must be used

question

Natural monopoly

answer

When one firm would be more efficient producing a good or service than multiple firms

question

Public good

answer

A good that is nonexcludable and nonrivalrous and thus difficult for producers to sell to consumers

question

Nonexcludable

answer

When it is costly or impossible to keep someone from using the good

question

Nonrivalrous

answer

When one person uses the good, others can also use it

question

Free rider

answer

Someone who wants others to pay for a public good but then plan to use it anyway

question

Imperfect information

answer

A situation where either the buyer, the seller, or both, are uncertain about the qualities of what is being bought/sold

question

The Lemon

answer

As a buyer, you can not be sure that what you're buying is of good value

question

Moral hazard

answer

When people have insurance against a certain event, they are less likely to guard against that event

question

Adverse selection problem

answer

The problem that arises when one party has more information than the other party. As a result the party with less information feels that they are at a disadvantage

question

Special interest politics

answer

Small but organized group that can exert a disproportionate effect on political outcomes

question

Pork barreling

answer

Spending that benefits mainly a single political district

question

Logrolling

answer

When a group of legislators all agree to vote for a package of otherwise unrelated laws that they individually favor

question

Voting cycle

answer

Occurs with three or more choice in which no choice has a majority

1 of 106

question

Three fundamental economic questions

answer

What is produced?
How is it produced?
For whom is it produced?

question

Market-orientated economy

answer

An economy where most decisions are made by buyers and sellers

question

Command economy

answer

An economy where the government either makes or strongly influences how economic decisions are made

question

Division of labor

answer

The way in which the work required to produce a good or service is divided into tasks performed by different workers

question

Specialization

answer

When workers focus on particular tasks in the overall production process for which they are well suited

question

Three categories of economic resources

answer

Land, Labor, Capital

question

Budget constraint

answer

Model used to illustrate individual choice in a situation of scarcity

question

Utility

answer

The amount of satisfaction or pleasure people receive from their choices. Measured in utils

question

Simple interest

answer

The quick method of calculating the interest charged on a loan

question

Compound interest

answer

Interest that is calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan

question

Opportunity Cost

answer

Whatever must be given up to obtain what is desired

question

Marginal analysis

answer

Comparing the costs and benefits of choosing a little more or a little less

question

Law of diminishing returns

answer

As a person consumes more of a good, the marginal utility from each additional unit is smaller than from the previous unit

question

Sunk cost

answer

Costs that were incurred in the past, can not be recovered and thus should not affect current decisions

question

Individuals are _________ maximizers

answer

Utility

question

Firms exist to maximize _________

answer

Profits

question

Profit formula

answer

Profit = Total Revenue - Total Cost
and
Profit = (Price x Quantity sold) - (Average cost x Quantity produced)

question

Total Revenue formula

answer

Total Revenue = Price x Quantity Sold

question

Total Cost formula

answer

Total Cost = Average Cost x Quantity produced

question

Productive efficiency

answer

When it is impossible to produce more of one good without decreasing the quantity produced of another. Occurs at any point on the PPF. Occurs when average cost is minimized

question

Allocative efficiency

answer

When the mix of goods produced represents the allocation that society most desires. Occurs at one point on the PPF. Occurs when price meets marginal cost

question

Substitution effect

answer

When there is a utility maximizing incentive to consume more of a relatively lower priced good and less of the higher priced good

question

Income effect

answer

A change in the demand of a good or service, induced by a change in the consumer's income

question

What stops us from having everything we desire?

answer

Scarcity

question

What is a consequence of the division of labor?

answer

A greater number of goods and services offered in an economy

question

Why has globalization become so prevalent in the past half century?

answer

Transportation and communication have become much cheaper than in the past

question

Law of Demand

answer

As price rises, quantity demanded falls

question

Law of Supply

answer

As price rises, quantity supplied rises

question

Equilibrium

answer

Where quantity supplied meets quantity demanded

question

Factors that cause the demand curve to shift

answer

1. Change in income
2. Change in the composition of the population
3. Change in taste
4. Change in expectations of future conditions and prices
5. Change in the price of related goods

question

Factors that cause the supply curve to shift

answer

1. Change in natural conditions
2. Change in the price of a key input production
3. Discovery of new technology
4. Change in government policies

question

Normal good

answer

As income increases, demand increases

question

Inferior good

answer

As income increases, demand decreases

question

Price Ceiling

answer

Maximum price allowed by law. May cause shortages

question

Price Floor

answer

Minimum price allowed by law. May cause surpluses

question

Consumer surplus

answer

The benefit consumers receive from buying a good or service. The area below the demand curve, but above market price

question

Producer surplus

answer

The benefit producers receive from selling a good or service. The area above the supply curve, but below the market price

question

Social Surplus

answer

Social surplus = Consumer surplus + producer surplus

question

Deadweight loss

answer

The loss in social surplus due to the market producing an inefficient quantity. When the market is not at equilibrium

question

Price elasticity of demand

answer

How much a percentage change in price leads to a percentage change quantity demanded

question

Elastic

answer

Any change in price leads to a greater magnitude change in quantity demanded. From 1 to infinity

question

Inelastic

answer

Any change in price leads to a smaller magnitude change in quantity demanded. From 0 to 1

question

Unitary elastic

answer

PED = 1, total revenue is maximized

question

Perfectly elastic

answer

PED = infinity

question

Perfectly inelastic

answer

PED = 0

question

As price increases, price elasticity of demand....

answer

Increases

question

As the price of a good increases in an elastic price range, what will happen to total revenue?

answer

Total revenue will decrease

question

Labor Market
Supply:
Demand:

answer

Supply: Individuals
Demand: Firms

question

Financial Capital Market
Supply:
Demand:

answer

Supply: Savers/Lenders/Investors
Demand: Borrowers

question

Shifts in Labor Demand

answer

1. Change in the quantity of the product being produced
2. Change in how the output is produced
3. Change in technology
4. Government Regulation

question

Shifts in Labor Supply

answer

1. How the job is perceived by workers relative to other choices, regardless of pay
2. Government policies affecting the number of workers trained

question

Shifts in Financial Capital Supply

answer

1. Anything that makes people want to alter existing levels of present and future consumption
2. Change in comparable rates of return
3. Change in comparable risk

question

Shift in Financial Capital of Demand

answer

1. Change in confidence of the ability to repay

question

Venture capital

answer

Financial investments in new companies that are still relatively small in size, but have the potential to grow substantially

question

Bonds

answer

A financial contract through which a borrower agrees to repay the amount that was borrowed and also a rate of interest over time. Must pay interest rate on time, but keep ownership

question

Stocks

answer

Claim on a partial ownership of a firm. You don't have to pay interest, but you lose ownership

question

Three factors investors consider before supplying financial captial

answer

Liquidity, rate, return

question

Dividends

answer

A direct payment from a firm to its shareholders

question

Liquidity

answer

How easy it is to convert to cash

question

Fundamental trading

answer

Buying or selling stocks based on estimates of the future expected profits of a firm

question

Momentum trading

answer

Buying or selling stocks by following current trend. Buying when the price seem to be rising

question

Absolute advantage

answer

When one nation can produce a product at a lower resource cost relative to another nation

question

Comparative advantage

answer

When one nation can produce a product at a lower opportunity cost relative to another nation. It is impossible for one country to have advantage in both goods

question

Protectionism

answer

Government policies to reduce or block imports. It benefits domestic producers and harms domestic consumers

question

Tariff

answer

Tax imposed on imports

question

Quotas

answer

Numerical limitations on imports

question

Total Cost

answer

Total cost = Fixed Cost + Variable Cost

question

Fixed cost

answer

Expenditures that must be made before production starts and do not change regardless of the level of production

question

Variable cost

answer

Costs of production that increase with the quantity produced. Slope curves rapidly due to diminishing marginal returns

question

Average cost

answer

Total cost / Quantity. Tells us whether or not we are making a profit while factoring out fixed cost.

question

Average variable cost

answer

Variable cost / Quantity. Shows us the shut down point

question

Average fixed cost

answer

Fixed cost / Quantity

question

Marginal cost

answer

Change in Total Cost / Change in Quantity. Shows us whether any unit of output is adding to or taking away from profit

question

Perfect Competition

answer

Near infinite number of firms
Massive competition
Each firm sells identical products
Productive and allocative efficient long run
Don't have control of the price

question

Profit maximizing point

answer

Marginal revenue = marginal cost

question

Shutdown point

answer

Price = Average variable cost

question

Zero profit point

answer

Price = Average cost. Should be expected in long run

question

In the short run _______ costs can be adjusted

answer

some

question

In the long run _____ costs can be adjusted

answer

all

question

Barriers to entry

answer

The legal forces that may discourage or prevent potential competitors from entering a market

question

Monopoly

answer

-Long run profit
- One firm
-High barriers to entry

question

Monopolistic Competition

answer

-Many firms selling a differentiated product
-Distinguishable from other in some way
-Low barriers of entry
-Long run zero profit

question

Oligopoly

answer

-Few firms
-A majority of sales within a market are held by a small number of firms
-Long run profit
-Collusion
-Not productive or allocative

question

Collusion

answer

When firms act together to reduce output and raise prices

question

Four firm concentration ratio

answer

Calculated by adding the market shares of the four largest firms

question

Herfindahl - Hirshman Index

answer

Take the market share of each firm, square them, and add them together

question

Nationalization

answer

When government takes ownership of a firm

question

Privatization

answer

When government owned firms become privately owned

question

Externality

answer

The impact of a market exchange on a third party who is outside or "external" to the exchange

question

Positive externality

answer

Third parties benefits at no cost to them. Exists when social benefits are greater than private benefits

question

Negative externality

answer

Third party incurs costs at no benefit to them. Example pollution. Exists when social costs are greater than private costs

question

Market failure

answer

A situation in which the market on its own fails to allocate resources efficiently in a way that balances social costs and benefits

question

Command and control regulation

answer

Laws that specify allowable quantities of pollution and may also detail which pollution control technologies must be used

question

Natural monopoly

answer

When one firm would be more efficient producing a good or service than multiple firms

question

Public good

answer

A good that is nonexcludable and nonrivalrous and thus difficult for producers to sell to consumers

question

Nonexcludable

answer

When it is costly or impossible to keep someone from using the good

question

Nonrivalrous

answer

When one person uses the good, others can also use it

question

Free rider

answer

Someone who wants others to pay for a public good but then plan to use it anyway

question

Imperfect information

answer

A situation where either the buyer, the seller, or both, are uncertain about the qualities of what is being bought/sold

question

The Lemon

answer

As a buyer, you can not be sure that what you're buying is of good value

question

Moral hazard

answer

When people have insurance against a certain event, they are less likely to guard against that event

question

Adverse selection problem

answer

The problem that arises when one party has more information than the other party. As a result the party with less information feels that they are at a disadvantage

question

Special interest politics

answer

Small but organized group that can exert a disproportionate effect on political outcomes

question

Pork barreling

answer

Spending that benefits mainly a single political district

question

Logrolling

answer

When a group of legislators all agree to vote for a package of otherwise unrelated laws that they individually favor

question

Voting cycle

answer

Occurs with three or more choice in which no choice has a majority

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