Economics Unit 2

Question 1

The demand curve shows…

Answer 1

how much of a product people want and for how much money

Question 2

As the price for a good goes up, people tend to…

Answer 2

find substitutes for that product

Question 3

Demand

Answer 3

the different quantities of goods and services that consumers are willing and able to purchase at different price levels

Question 4

Law of demand

Answer 4

as the price of a product goes up, the quantity demanded goes down, and vice versa

Question 5

The substitution effect

Answer 5

consumers turn to a different product

Question 6

The income effect

Answer 6

consumer’s money doesn’t buy as much

Question 7

The law of diminishing marginal utility

Answer 7

Consumers gain less utility (satisfaction) with each unit they consume; less satisfaction leads to consumers buying a product only if the price is lower

Question 8

Determinants

Answer 8

1. price of a related/ substitute good
2. consumers disposable income
3. amount of consumers
4. expectations for future prices (anticipation, fear)
5. tastes and preferences (decisions)

Question 9

The supply curve shows…

Answer 9

how much of a good, producers are willing and able to supply at different prices

Question 10

Supply

Answer 10

the different quantities of goods and services that firms are willing and able to produce at different price levels

Question 11

Law of supply

Answer 11

as price increases, quantity supply increases and vice versa

Question 12

Profit motive

Answer 12

at higher prices, firms have the incentive to produce more goods/services and make more money

Question 13

Determinants

Answer 13

1. resource/price availability (factory price)
2. actions of government (taxes, regulation)
3. productivity/technology (innovation, improvement)
4. number of firms
5. other goods (alternatives)

Question 14

Market equilibrium

Answer 14

the point at which an economy is effectively allocating all of their resources

Question 15

Step one of graphing supply/demand graphs

Answer 15

before the change
-draw supply and demand
-label original equilibrium price and quantity

Question 16

Step two of graphing supply/demand graphs

Answer 16

the change
-did it affect supply or demand first?
-which determinant caused the shift?
- draw increase of decrease

Question 17

Step three of graphing supply/demand graphs

Answer 17

after the change
-label new equilibrium
-what happened to price?
-what happened to quantity?

Question 18

Surplus

Answer 18

extra supply (sale)

Question 19

Disequilibrium

Answer 19

price above market equilibrium
-markets feel pressured to lower prices to equilibrium

Question 20

Market shortage

Answer 20

prices are too low; demand is greater that supply
-customers feel pressured to pay higher prices

Question 21

In the free market, buyers and sellers…

Answer 21

voluntarily come together to seek mutual benefits

Question 22

Consumer surplus

Answer 22

the difference between what they are willing to pay, and they actually pay; below demand and above price

Question 23

Producer surplus

Answer 23

the difference between the price the seller received and how much they were willing to sell it for; above supply and below price

Question 24

How many types of government intervention are there?

Answer 24

4; price controls, production quotas, subsidies, excise taxes

Question 25

Price control

Answer 25

price is not where the government thinks it should be (too high/low)

Question 26

Why does the government interfere with prices?

Answer 26

to protect society

Question 27

Price floor

Answer 27

the minimum price of a good or service *must be above equilibrium

Question 28

Price ceiling

Answer 28

the maximum price of a good or service *must be below equilibrium

Question 29

Production quotas

Answer 29

a government-imposed limit of production levels (production ceiling)

Question 30

Subsidies

Answer 30

a government grant to producers aimed at encouraging increased production of international goods

Question 31

Excise tax

Answer 31

any tax on manufactured goods which is levied at the moment of manufacture; p2 - p1

Question 32

Pigouvian tax

Answer 32

a tax on any market activity that generates negative externalities; intended to correct an undesirable market outcome by being set equal to the social cost

Question 33

Tax wedge

Answer 33

the market inefficiency that is created when a tax is imposed on a good or service

Question 34

How do firms decide how to split the tax between consumers and producers?

Answer 34

based on the elasticity of demand

Question 35

Tax revenue

Answer 35

per unit/total * per unit * total

Question 36

Tax paid by the consumer

Answer 36

total * per unit; p1 - p2

Question 37

Tax paid by producers

Answer 37

p1 - p3

Question 38

Consumer surplus

Answer 38

area above tax revenue

Question 39

Dead weight loss

Answer 39

the triangle left of tax revenue

Question 40

Net revenue

Answer 40

rectangle below tax revenue; p3 - q2

Question 41

Total revenue

Answer 41

p * q sold

Question 42

Elasticity

Answer 42

the consumer's measurement of how responsive they are to a change in price

Question 43

Inelastic demand

Answer 43

wen price goes up, demand goes down just a little; little to no change

Question 44

Demand coefficient

Answer 44

percent change in quantity

Question 45

Unit elasticity

Answer 45

linear relationship between price and quantity (the relationship is equally indirect)

Question 46

Price elasticity of demand shows...

Answer 46

how sensitive consumers are to a change in price; used by the government to decide how to tax people

Question 47

Inelasticity

Answer 47

insensitive to change in price; percent change in price is greater than in quantity demand

Question 48

Characteristics of inelasticity

Answer 48

few substitutes, necessities, a small portion of income, required new

Question 49

Elastic demand

Answer 49

percent change in quantity demand is greater than the percent change in price

Question 50

characteristics of elastic demand

Answer 50

many substitutes, a large portion of income, luxuries or wants, plenty of time

Question 51

The flatter the curve...

Answer 51

the more elastic the demand

Question 52

Unit elasticity

Answer 52

percent change in price is equal to percent change in quantity

Question 53

In the short run, supply is...

Answer 53

inelastic

Question 54

In the long run, supply is...

Answer 54

elastic

Question 55

To produce more output, firms need...

Answer 55

more resources

Question 56

The total revenue test

Answer 56

price * quantity sold at that price; uses elasticity to show how changes in price will effect total revenue

Question 57

In elastic demand, price increase causes total revenue to...

Answer 57

decrease, and vice versa

Question 58

In inelastic demand, price increase causes total revenue to...

Answer 58

increase, and vice versa

Question 59

In unit demand...

Answer 59

price changes and total revenue remains unchanged

Question 60

Market failure

Answer 60

when the free market fails to deliver an efficient allocation of resources; resulting in loss of economic and social welfare

Question 61

Externalities

Answer 61

a third-person side-effect to someone or everyone rather that the original decision maker

Question 62

Why do externalities happen?

Answer 62

the free market fails to account for external costs/benefits of transactions

Question 63

Without government intervention, goods with social costs would be...

Answer 63

overproduced

Question 64

Negative externalities

Answer 64

spillover cost; a situation that results in external costs that spillover to society and are greater than the private costs to the decision-maker

Question 65

Positive externalities

Answer 65

spillover benefits; a situation that results in external benefits that spillover to society and are greater than the private benefits to the decision maker

Question 66

Public sector

Answer 66

part of the economy that is primarily controlled by the government

Question 67

Private sector

Answer 67

part of the economy run by private individuals/companies who seek profit

Question 68

To be a public good, a thing must be:

Answer 68

1. non-exclusionary- cannot exclude people from enjoying the benefits 2. shared consumption- one person's consumption of a good doesn't reduce it's usefulness to others

Question 69

Private goods examples

Answer 69

food, clothing, car, house

Question 70

Common goods examples

Answer 70

fish in the sea, atmosphere, public waterways

Question 71

Low-congestion goods

Answer 71

cable, satellite radio, WSI

Question 72

Free rider problem

Answer 72

when people benefit without paying

Question 73

Externalities in consumption

Answer 73

caused by the consumption of a product; vice versa with production

Question 74

The supply curve in a labor graph represents...

Answer 74

the amount of laborers in a market

Question 75

The partnership between the curve in a labor market is

Answer 75

direct

Question 76

Suppliers of labor

Answer 76

workers

Question 77

The demand curve in a labor graph represents...

Answer 77

the employers

Question 78

The equilibrium in a labor graph represents...

Answer 78

the wage rate where Qs = Qd

Question 79

Key assumptions of labor graphs

Answer 79

perfect buyers and sellers perfect information costless entry and exit from the market

Question 80

In labor graphs, price is replaced by...

Answer 80

wage