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Macroeconomics
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the study of economy-wide phenomena, including inflation, unemployment, and economic growth
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Positive Statement
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A statement based strictly on logic or facts
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Circular flow model
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The visual model of the economy. Shows how dollars flow through markets among households and firms.
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Normal good
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Other things constant, an increase in income leads to an increase in demand.
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Inferior good
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Other things constant, an increase in income leads to a decrease in demand.
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Substitute good
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Two goods, an increase in the price of one. Leads to an increase in the demand for the other.
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Equilibrium
answer
Various forces are in balance.
A situation in which market price has reached the level where (Quantity supplied = Quantity demanded)
Supply and demand curves intersect.
A situation in which market price has reached the level where (Quantity supplied = Quantity demanded)
Supply and demand curves intersect.
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Surplus
answer
Quantity supplied > quantity demanded
Excess supply, downward pressure on price.
- movements along the demand and supply curve
- decrease in quantity demanded
- increase in quantity supplied
Excess supply, downward pressure on price.
- movements along the demand and supply curve
- decrease in quantity demanded
- increase in quantity supplied
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Production Possibilities Frontier (PPF)
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various mixes of output that an economy can produce
EX. Rose produces meat; Frank produces potatoes; if they produce both they both benefit from specialization and trade
EX. Rose produces meat; Frank produces potatoes; if they produce both they both benefit from specialization and trade
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Price Floor
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A legal minimum on the price at which a good can be sold by law
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Suppose the government in response to angry voters during the summer imposes a price ceiling on cold beverage of $1.00 per can. However, the market price is $2.00 per can. What would you expect the outcome to be? Use supply and demand analysis to explain your reasoning.
answer
The market price would decrease below 1.00 since a ceiling price has been in place therefore the supply would increase and the demand would increase because it is more affordable than previously.
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What is the fundamental economic problem that faces all of society and how does it relate to the study of economics?
answer
Unlimited wants and scarcity!!! The economic problem exists because the needs and wants of people are endless. The resources available to satisfy needs and wants are limited.
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What is a normal and an inferior good and how these concepts related to changes in income?
answer
Normal good is a good for which, other things being equal, increase in income leads to a increase in demand.
Inferior good is a good for which, other things being equal, an increase in income leads to a decrease in demand.
Inferior good is a good for which, other things being equal, an increase in income leads to a decrease in demand.
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What is the difference between a movement and a shift in either a supply or demand curve?
answer
A shift is a whole movement to the right or left that changes quantity and price. A movement is a change in price level on the slope of either the supply or demand curve.
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What is market equilibrium? What role do prices play in bringing a market to equilibrium?
answer
A market state where supply = demand. When supply exceeds demand, sellers will usually lower prices of their good/service, and reduce production.
The reduction in price encourages people to buy, which further reduces supply.
The reduction in price encourages people to buy, which further reduces supply.
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Select one of the ten principles of economics and explain it.
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1st: To get something we like, we normally have to give up something else we like as well. Behavior of a person changes depending on the circumstances.
EX. you paying vs. someone else paying
EX. you paying vs. someone else paying
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What would each of the following factors have on the market for small cars? (Hint: be sure focus on the market for small cars.)
1. Smaller cars become more fashionable
2. Technologies such as fracking make oil production much more economical.
3. Income declines and small cars are an inferior good
4. The possibility of a major war in the Middle East increases.
5. The price of gasoline increases.
1. Smaller cars become more fashionable
2. Technologies such as fracking make oil production much more economical.
3. Income declines and small cars are an inferior good
4. The possibility of a major war in the Middle East increases.
5. The price of gasoline increases.
answer
1. Shift to right, Demand increased, Price increased, Quantity increased
2. Shift to left, Demand decreased, Price decreased, Quantity decreased
3. Shift to right, Demand increased, Price increased, Quantity increased
4. Shift to right, Demand increased, Price increased, Quantity increased
5. Shift to the right, Demand increased, Price increased, Quantity increased
2. Shift to left, Demand decreased, Price decreased, Quantity decreased
3. Shift to right, Demand increased, Price increased, Quantity increased
4. Shift to right, Demand increased, Price increased, Quantity increased
5. Shift to the right, Demand increased, Price increased, Quantity increased
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Economic Profit
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= total revenue - total costs (including explicit and implicit costs)
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Monopolistic Competition
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a market structure in which many companies sell products that are similar but not identical
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Marginal Cost
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Is the increase in Total Cost from producing one more unit
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Barriers to Entry
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business practices or conditions that make it difficult for new firms to enter the market
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Variable Cost
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Vary with the quantity produced.
- Fixed cost + variable cost = total costs
- Fixed cost + variable cost = total costs
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Marginal Revenue
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The change in total revenue from selling one more unit.
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Price Discrimination
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the business practice of selling the same good at different prices to different customers
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Economics of Scale
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In the long run, ATC falls as the amount of output increases.
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Average Fixed Cost (AFC)
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Fixed cost / quantity demanded.
AFC always falls as output increases.
AFC always falls as output increases.
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What is the key concept behind understanding pricing in an oligopoly? Give two
examples of models that
explain this behavior.
examples of models that
explain this behavior.
answer
The key concept is concentration ratios when understanding pricing in oligopoly.
A concentration ratio is the measure of proportion of total market share controlled by a given number of firms.
Two examples would be the Prisoner's Dilemma and Game theory.
A concentration ratio is the measure of proportion of total market share controlled by a given number of firms.
Two examples would be the Prisoner's Dilemma and Game theory.
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In the short run, under what conditions should a firm produce if its price is below average total cost? What are the conditions that it should not produce? Explain your reasoning.
answer
- if its other competitors were doing the same
- if their quantity supplied increased
- a lower price would have to be set in order to make that good/service more appealing.
- Do not price a product under total cost if the quantity demanded is high - a high demand means people will pay more for the good.
- if their quantity supplied increased
- a lower price would have to be set in order to make that good/service more appealing.
- Do not price a product under total cost if the quantity demanded is high - a high demand means people will pay more for the good.
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Describe the law of diminishing marginal returns
(product). How does that relate to cost?
(product). How does that relate to cost?
answer
The marginal product is when a unit of input is increased with an additional unit of output being increased.
A diminishing marginal product is when the max amount of product have been produced.
Once the max amount is reached, the scale will fall, causing prices of goods/services to fall also.
A diminishing marginal product is when the max amount of product have been produced.
Once the max amount is reached, the scale will fall, causing prices of goods/services to fall also.
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What is the role of profits in a market? What happens when there is a profit and when
there is a loss?
there is a loss?
answer
Profits are what the company earns after total revenue - the total cost. A profit maximizes revenue and a loss minimizes revenue.
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How would a firm seeking to maximize profits price its services?
Is there a difference between this for a competitive and monopoly market? (Consider marginal revenue)
Is there a difference between this for a competitive and monopoly market? (Consider marginal revenue)
answer
It must choose the level of output where Marginal Cost is equal to Marginal Revenue. The Marginal Cost curve is rising. MC=MR
There is a difference in maximizing profit price in a competitive and monopoly market. A monopoly market follows the marginal revenue rule whereas the competitive market is determined by total revenue and total cost.
There is a difference in maximizing profit price in a competitive and monopoly market. A monopoly market follows the marginal revenue rule whereas the competitive market is determined by total revenue and total cost.
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What are economies of scale and diseconomies of scale?
answer
Economics of scale are when in the long run, the ATC falls as the output increases.
Dis-economics of scale is the opposite of economics of scale, as in the long run, the ATC increases with the output being increased.
Dis-economics of scale is the opposite of economics of scale, as in the long run, the ATC increases with the output being increased.
question
Compare and contrast the structure, i.e., environment, of a monopoly market and a
competitive market. Be sure to discuss difference in number of firms, pricing power etc.
competitive market. Be sure to discuss difference in number of firms, pricing power etc.
answer
A monopoly market consist of a few large firms that are creating similar products. Monopolies are normally price makers.
In the competitive market, there are many small firms selling either identical or similar products.
Competitive markets are price takers. An example of a competitive market is like gas stations. They are in close distance and they adjust their prices based off other gas station's pricing.
In contrast, a monopoly doesn't have to alter their pricing as much because the products that they sell are similar throughout the market. In this case, monopoly markets tend to have more pricing power than competitive markets.
In the competitive market, there are many small firms selling either identical or similar products.
Competitive markets are price takers. An example of a competitive market is like gas stations. They are in close distance and they adjust their prices based off other gas station's pricing.
In contrast, a monopoly doesn't have to alter their pricing as much because the products that they sell are similar throughout the market. In this case, monopoly markets tend to have more pricing power than competitive markets.
question
What is the difference in outcome in terms of price, output and profit for a competitive
and monopoly market
structure?
and monopoly market
structure?
answer
Monopoly market price is greater than average cost. Output is MC=MR, which is lower than competitive output. A difference between price and MC results in super-normal profits.
Competitive market price is equal to marginal cost at the equilibrium output. Output is AR=MR=AC=MC are equal. A firm in the long run enjoys only normal profits.
Competitive market price is equal to marginal cost at the equilibrium output. Output is AR=MR=AC=MC are equal. A firm in the long run enjoys only normal profits.
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