Econ Final

Question 1

Why is perfect competition efficient? (1)

Answer 1

The price is already set. Firms have to be price-takers. If they set a price lower than their competitors, they don’t have enough market power to attract a significant increase in customers. If they set a price higher, they will lose all their customers to competitors.

Question 2

Why is perfect competition efficient? (2)

Answer 2

The set price achieves maximum allocative efficiency. Since P = MC, marginal benefit for consumers equals marginal cost for sellers. This ensures that there is no over or underproduction.

Question 3

Why is perfect competition efficient? (3)

Answer 3

Firms make zero economic profit in the long run. This means all opportunity costs are covered and resources are allocated to their most valuable use

Question 4

Long run and short-run equilibrium for perfect competition

Answer 4

In long run equilibrium, ATC = P. In short run, ATC can be great than MR (economic loss) or less than MR (economic profit.) This will cause firms to either enter or leave the industry in the long run.

Question 5

Perfect competition: AVC

Answer 5

In the short run, as long as P > AVC, firms will stay open so they can pay off some of its fixed costs as opposed to incurring all of them.

Question 6

Supply and demand: Graphs

Answer 6

Regular, Regular Supply/Demand Shift, Price Ceiling/Floor, Quota, Tax Incidence

Question 7

Supply and demand: DWL

Answer 7

Mutually beneficial actions that no longer occur due to price no longer being equal to marginal cost. Measure of inefficiency, show how much potential welfare society is losing due to its current actions.

Question 8

Supply and demand: Elasticity

Answer 8

How responsive quantity demanded by consumers is to price. If demand is inelastic (necessities), consumers bear more of a tax burden. If demand is elastic, producers bear more of the burden since producers reduce quantity demanded sharply.

Question 9

Supply and demand: Other concepts

Answer 9

Inferior/Normal Goods, Substitutes/Complements, Shortage/Surplus

Question 10

IS Curve

Answer 10

Investment-Saving. Illustrates how lower real interest rates raise spending and hence output

Question 11

MP Curve

Answer 11

Monetary Policy. Shows the current real interest rate

Question 12

Macroeconomic Equilibrium.

Answer 12

Intersection point between IS and MP curve. Can be negative, positive or zero output gap. When total production = total spending (goods market satisfied) + real IR matches central bank’s policy choice (monetary policy satisfied).

Question 13

Output Gap

Answer 13

How actual output differs from the economy’s potential output

Question 14

Real IR (method 1)

Answer 14

Nominal IR minus inflation rate

Question 15

Real IR (method 2)

Answer 15

Risk free IR + risk premium

Question 16

Boom

Answer 16

Boom is when output is at or above potential, people are optimistic about economic future. Rightward IS shift

Question 17

Bust

Answer 17

Bust is when output is below potential, people are pessimistic about future. Leftward IS shift

Question 18

Monetary Policy

Answer 18

Fed can cut real interest rate, shifting to a new equilibrium with higher output

Question 19

Fiscal Policy

Answer 19

Increased gov spending shifts Is curve right, shifted by change in G times multiplier

Question 20

MP Curve Shifters

Answer 20

Change in risk-free rate or risk premium

Question 21

IS Curve Shifters

Answer 21

Change in spending (times multiplier)

Question 22

Macro: Three core indicators of health

Answer 22

Real GDP, Unemployment rate, inflation rate

Question 23

Real GDP

Answer 23

Inflation-adjusted measure of a country’s total economic output. Measured by total expenditure (C + I + G + Xₙ), total income, or the total value of all final goods and services produced.”

Question 24

Unemployment rate

Answer 24

Percentage of the labor force that is unemployed but actively seeking work. It demonstrates the health of the labor market. There are three types of unemployment: frictional, structural, and cyclical

Question 25

Inflation Rate

Answer 25

The rate at which the overall price level is rising. Measured by CPI, comparing the price of a basket of goods over a period of time. GDP deflator can also be used to measure inflation (nominal/real GDP * 100)

Question 26

Three functions of money

Answer 26

1. Unit of account, store of value, medium of exchange

Question 27

Business cycle phases

Answer 27

Expansion, peak, recession, trough

Question 28

Unexpected inflation

Answer 28

Confuses price signals (ex. sudden increase in bread consumers think demand increased), hurts lenders helps borrowers at a fixed interest rate

Question 29

Expected inflation

Answer 29

Time + effort people spend reducing cash holdings (shoe-leather costs) + expense business face updating prices (menu costs)

Question 30

Why does Gov still create DWL?

Answer 30

To correct externalities or to help achieve equity.

Question 31

Correcting an externality (smoking)

Answer 31

Correcting an externality (smoking): Governments tax cigarettes to reduce smoking because secondhand smoke imposes health costs on non-smokers that are not reflected in the market price.

Question 32

Equity (apartment costs)

Answer 32

Governments impose rent control or provide housing subsidies to make apartments affordable for low-income households, even if this creates inefficiencies in the housing market.