Economic Concepts

Question 1

Demand Curve

Answer 1

As price increases demand decrease

Question 2

DC - Positive Shift

Answer 2

An increase in demand at each price point (moves right)

Question 3

DC - Negative Shift

Answer 3

A decrease in demand at each price point (moves left)

Question 4

Direct Positive Demand Curve Shift Factors

Answer 4

1) Price of substitute goods
2) Expectations of price increase
3) Consumer income and wealth
4) Size of Market

Question 5

Negative Demand Curve Shift Factors

Answer 5

1) Price of complimentary goods
2) Consumer income and wealth
3) Group Boycott

Question 6

Price Elasticity

Answer 6

% change in QTY Demanded/% change in price

Question 7

If elasticity > 1

Answer 7

Demand is consider elastic, total revenue will decline if the price is increased

Question 8

If elasticity = 1

Answer 8

Demand is considered unitary, and total revenue will remain the same if price is increase

Question 9

If elasticity < 1

Answer 9

Demand is consider inelastic, total revenue will increase if the price is increased

Question 10

Income elasticity

Answer 10

% change in QTY demanded/% change in income

positive for normal goods and negative for inferior goods

Question 11

Cross Elasticity

Answer 11

% change in demand for product X/% change in demand for product Y
This will be a positive number for substitute goods and a negative number for compliments

Question 12

Marginal Utility

Answer 12

The satisfaction value to consumers of the next dollar they spend on a particular product

Question 13

Law of diminishing marginal utility

Answer 13

The more a consumer has of a particular product, the less valuable the next unit of the product.

Question 14

Personal disposable income

Answer 14

The available income of a consumer after subtracting payment of taxes or adding receipt of government benefits. Consumer will either spend or save.

Question 15

Marginal propensity to consume MPC

Answer 15

The percentage of the next dollar in personal disposable income that the consumer would be expected to spend

Question 16

Marginal propensity to save MPS

Answer 16

The percentage of the next dollar of disposable income that the consumer is expected to save (MPC plus MPS must equal 1)

Question 17

Supply Curve

Answer 17

As the price of a product increases, the quantity offered by sellers increases

Question 18

SC - Positive shift

Answer 18

An increase in supply at each price (the line moves to the right)

Question 19

SC - Negative shift

Answer 19

A decrease in supply at each price (the line moves to the left)

Question 20

Supply Curve Shift Direct

Answer 20

• Number of producers
• Government subsidies
• Price expectations

Question 21

Supply Curve Shift Inverse

Answer 21

• Changes in production costs

* Prices of other goods

Question 22

Market Equilibrium

Answer 22

The price at which the quantity demanded and quantity offered intersect is the equilibrium price

Question 23

ME - Government Intervention

Answer 23

When the government intervenes to impose price ceilings, setting the price below equilibrium, the
quantity demanded will exceed quantity offered, resulting in shortages of goods. When the government
intervenes to impose price floors, setting price above equilibrium, the quantity offered will
exceed quantity demanded, resulting in unsold surpluses of goods.

Question 24

Short Run Costs of Production

Answer 24

Over short periods of time and limited ranges of production, costs include fixed and variable
components:

Question 25

SR - Fixed Costs

Answer 25

Costs that won’t change even when there is a change in production. Average fixed costs are total fixed costs divided by units produced. An example is rent paid on the production facility.

Question 26

SR - Variable Costs

Answer 26

Costs that will rise as production rises. Average variable costs are total variable costs divided by units produced. An example is materials used in the manufacture of the product.

Question 27

SR - Total Costs

Answer 27

The sum of fixed and variable costs. Average total costs are total costs divided by units produced.

Question 28

SR - Marginal Costs

Answer 28

The increase in cost that will result from an increase in one unit in production. Only variable costs are relevant, since fixed costs won’t increase in such circumstances.

Question 29

Long-Run Costs of Production

Answer 29

In the long run, all costs are variable, since increasing production beyond certain levels will require increases in capacity, causing even “fixed” costs to rise.

Question 30

Return to scale Definition

Answer 30

is the increase in units produced (output) that results from an increase in production costs (input).

Question 31

Return to scale Formula

Answer 31

Return to scale = Percentage increase in output / Percentage increase in input

Question 32

RTS Results > 1

Answer 32

we have increasing returns to scale. This will normally occur up to a certain level for all firms because of economies of scale, or the increased efficiency that results from producing more units of a product (such as the ability to have employees specialize in different tasks and improve their abilities).

Question 33

RTS Results < 1

Answer 33

we have decreasing returns to scale. This will normally occur beyond a certain level for all firms because of diseconomies of scale, or the increased inefficiencies that result from expanding production (such as the greater difficulty management has in controlling the activities of larger numbers of employees and facilities).

Question 34

Unemployment - Frictional

Answer 34

This represents the time period during which people are unemployed as a result of changing jobs or newly entering the workforce. Because of the mobility of society, there is always some level of this type of unemployment, even in a society that effectively has “full” employment.

Question 35

Unemployment - Structural

Answer 35

This represents potential workers whose job skills do not match the needs of the workforce as a result of changing demand for goods and services of technological advances that reduce or eliminate the need for the skills they possess. Such unemployment normally requires retraining in order for these individuals to be employable again.

Question 36

Unemployment - Cyclical

Answer 36

This represents the unemployment caused by variations in the business cycle, when real GDP fails to grow at the pace necessary to employ all willing workers.

Question 37

Nominal interest rate

Answer 37

The rate as measured in terms of the nation’s currency

Question 38

Real interest rate

Answer 38

The rate adjusted for inflation

Question 39

Risk-free interest rate

Answer 39

The rate that would be charged to a borrower if the lender had an absolute certainty of being repaid (The rate paid on United States Treasury securities is often considered to be a useful measure of the risk-free interest rate.)

Question 40

Discount rate

Answer 40

The rate set by the Federal Reserve System at which a bank can borrow from a Federal Reserve bank

Question 41

Prime rate

Answer 41

The rate that banks charge their most creditworthy customers on short-term loans from the bank