Unit 3 - Assignment Essays

question

The Substitution Effect

answer

When consumers react to an increase in a good's price by consuming less of that good and more of other goods

question

The Income Effect

answer

the change in consumption resulting from a change in real income

question

Elasticity

answer

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

question

inelastic demand

answer

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

question

Elastic demand

answer

A situation in which consumer demand is sensitive to changes in price

question

perfectly inelastic demand

answer

the case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero

question

Perfectly Elastic Demand

answer

the case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity

question

Unit-elastic demand

answer

demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value

question

Total revenue

answer

Price x Quantity

question

factors of price elasticity of demand

answer

Substitutes, percentage of total budget spent, and time consumers have to adjust to the price change

question

Cross-price elasticity of demand

answer

Effect of the demand of a good when the price of a related good changes

% change in quantity of "A" demanded / % change in price of "B"

the closer the substitutes = larger positive number

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

Price elasticity of supply

answer

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

question

willingness to pay

answer

the maximum amount that a buyer will pay for a good

question

Consumer surplus

answer

amount willing to pay - price paid

The area below the demand curve and above the price

question

Producer Surplus

answer

the amount a seller is paid for a good - the seller's cost of providing it

question

Total surplus

answer

consumer surplus + producer surplus

question

Efficient Market

answer

a market in which profit opportunities are eliminated almost instantaneously

question

Reallocation of consumption among consumers

answer

Attempt to increase total surplus by marketing to specific consumers

question

reallocation of sales among sellers

answer

Attempt to increase total surplus by altering who sells their products

question

Changes in the quantity traded

answer

allocates consumption to the buyers who value it the most (willing to pay the highest price)

allocates sales to the sellers who most value it (lowest cost)

ensures mutually beneficial transactions

question

Progressive Tax

answer

A tax for which the percentage of income paid in taxes increases as income increases

question

Regressive Tax

answer

A tax for which the percentage of income paid in taxes decreases as income increases

question

Proportional Tax

answer

A tax in which the average tax rate is the same at all income levels.

question

Excise tax

answer

a tax on the production or sale of a good

question

Tax Incidence

answer

the manner in which the burden of a tax is shared among participants in a market

question

Lump-Sum Tax

answer

a tax that is the same amount for every person

question

Administrative costs

answer

All executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing or selling.

question

Profit

answer

total revenue minus total cost

question

Explicit cost

answer

a cost that involves spending money

question

Implicit cost

answer

a non-monetary opportunity cost

question

implicit cost of capital

answer

the opportunity cost of the use of one's own capital - the income earned if the capital had been employed in its next best alternative use

question

Normal profit

answer

economic profit equal to zero

question

The Principle of Marginal Analysis

answer

every activity should continue until marginal benefit equals 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

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

Production function

answer

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

question

variable input

answer

Production inputs that the firm can adjust in the short run to meet changes in demand for their output. Often this is labor and/or raw materials

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

question

fixed cost

answer

a cost that does not change, no matter how much of a good is produced

question

variable cost

answer

a cost that rises or falls depending on how much is produced

question

total cost

answer

fixed costs + variable costs

question

average cost

answer

the total cost / the quantity produced

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 returns 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

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

economies of scale

answer

factors that cause a producer's average cost per unit to fall as output rises

question

increasing returns to scale

answer

when long-run average total cost declines as output increases

question

diseconomies of scale

answer

long-run average total cost rises as the quantity of output increases

question

decreasing returns to scale

answer

when long-run average total cost increases as output increases

question

constant returns to scale

answer

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

question

sunk cost

answer

a cost that has already been committed and cannot be recovered

question

perfectly competitive market

answer

A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.

Both buyers and sellers are price-takers (accept market/equilibrium price of industry)

question

Monopoly

answer

A market in which there are many buyers but only one seller

question

Oligopoly

answer

A market structure in which a few large firms dominate a market

question

imperfect competition

answer

occurs in markets that have few sellers or products that are not standardized

question

concentration ratios

answer

measure the percentage of industry sales accounted for by the "X" largest firms

question

Herfindal-Hirschman Index

answer

The square of each firm's share of market sales summed over the firms in the industry

question

The price-taking firm's optimal output rule

answer

P = MC, MR = MP

question

Minimum cost output

answer

ATC is the lowest

question

Break-even price

answer

The price where average revenue is equal to average total cost. Below this price, the firm will shut down in the long run.

question

shut-down price

answer

The price where average revenue is equal to average variable cost. Below this price, the firm will shut down in the short run.

question

short-run market equilibrium

answer

when the quantity supplied equals the quantity demanded, taking the number of producers as given

question

long-run market equilibrium

answer

when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur

question

downward-sloping industry supply curve

answer

decreasing costs across the industry

question

upward-sloping industry supply curve

answer

increasing costs across the industry

question

horizontal industry supply curve

answer

constant costs across the industry; each firm, regardless of whether it is an incumbent or a new entrant, faces the same cost structure (same cost curve)

1 of 68

question

The Substitution Effect

answer

When consumers react to an increase in a good's price by consuming less of that good and more of other goods

question

The Income Effect

answer

the change in consumption resulting from a change in real income

question

Elasticity

answer

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

question

inelastic demand

answer

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

question

Elastic demand

answer

A situation in which consumer demand is sensitive to changes in price

question

perfectly inelastic demand

answer

the case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero

question

Perfectly Elastic Demand

answer

the case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity

question

Unit-elastic demand

answer

demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value

question

Total revenue

answer

Price x Quantity

question

factors of price elasticity of demand

answer

Substitutes, percentage of total budget spent, and time consumers have to adjust to the price change

question

Cross-price elasticity of demand

answer

Effect of the demand of a good when the price of a related good changes

% change in quantity of "A" demanded / % change in price of "B"

the closer the substitutes = larger positive number

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

Price elasticity of supply

answer

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

question

willingness to pay

answer

the maximum amount that a buyer will pay for a good

question

Consumer surplus

answer

amount willing to pay - price paid

The area below the demand curve and above the price

question

Producer Surplus

answer

the amount a seller is paid for a good - the seller's cost of providing it

question

Total surplus

answer

consumer surplus + producer surplus

question

Efficient Market

answer

a market in which profit opportunities are eliminated almost instantaneously

question

Reallocation of consumption among consumers

answer

Attempt to increase total surplus by marketing to specific consumers

question

reallocation of sales among sellers

answer

Attempt to increase total surplus by altering who sells their products

question

Changes in the quantity traded

answer

allocates consumption to the buyers who value it the most (willing to pay the highest price)

allocates sales to the sellers who most value it (lowest cost)

ensures mutually beneficial transactions

question

Progressive Tax

answer

A tax for which the percentage of income paid in taxes increases as income increases

question

Regressive Tax

answer

A tax for which the percentage of income paid in taxes decreases as income increases

question

Proportional Tax

answer

A tax in which the average tax rate is the same at all income levels.

question

Excise tax

answer

a tax on the production or sale of a good

question

Tax Incidence

answer

the manner in which the burden of a tax is shared among participants in a market

question

Lump-Sum Tax

answer

a tax that is the same amount for every person

question

Administrative costs

answer

All executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing or selling.

question

Profit

answer

total revenue minus total cost

question

Explicit cost

answer

a cost that involves spending money

question

Implicit cost

answer

a non-monetary opportunity cost

question

implicit cost of capital

answer

the opportunity cost of the use of one's own capital - the income earned if the capital had been employed in its next best alternative use

question

Normal profit

answer

economic profit equal to zero

question

The Principle of Marginal Analysis

answer

every activity should continue until marginal benefit equals 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

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

Production function

answer

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

question

variable input

answer

Production inputs that the firm can adjust in the short run to meet changes in demand for their output. Often this is labor and/or raw materials

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

question

fixed cost

answer

a cost that does not change, no matter how much of a good is produced

question

variable cost

answer

a cost that rises or falls depending on how much is produced

question

total cost

answer

fixed costs + variable costs

question

average cost

answer

the total cost / the quantity produced

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 returns 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

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

economies of scale

answer

factors that cause a producer's average cost per unit to fall as output rises

question

increasing returns to scale

answer

when long-run average total cost declines as output increases

question

diseconomies of scale

answer

long-run average total cost rises as the quantity of output increases

question

decreasing returns to scale

answer

when long-run average total cost increases as output increases

question

constant returns to scale

answer

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

question

sunk cost

answer

a cost that has already been committed and cannot be recovered

question

perfectly competitive market

answer

question

Monopoly

answer

A market in which there are many buyers but only one seller

question

Oligopoly

answer

A market structure in which a few large firms dominate a market

question

imperfect competition

answer

occurs in markets that have few sellers or products that are not standardized

question

concentration ratios

answer

measure the percentage of industry sales accounted for by the "X" largest firms

question

Herfindal-Hirschman Index

answer

The square of each firm's share of market sales summed over the firms in the industry

question

The price-taking firm's optimal output rule

answer

P = MC, MR = MP

question

Minimum cost output

answer

ATC is the lowest

question

Break-even price

answer

The price where average revenue is equal to average total cost. Below this price, the firm will shut down in the long run.

question

shut-down price

answer

The price where average revenue is equal to average variable cost. Below this price, the firm will shut down in the short run.

question

short-run market equilibrium

answer

when the quantity supplied equals the quantity demanded, taking the number of producers as given

question

long-run market equilibrium

answer

when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur

question

downward-sloping industry supply curve

answer

decreasing costs across the industry

question

upward-sloping industry supply curve

answer

increasing costs across the industry

question

horizontal industry supply curve

answer

constant costs across the industry; each firm, regardless of whether it is an incumbent or a new entrant, faces the same cost structure (same cost curve)

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