Final Test Chapters 19-21, 26, 30 Flashcards
(85 cards)
1
Q
How are price and quantity related?
A
Inversely
2
Q
What is price elasticity?
A
A measure of the responsiveness of quantity demanded to changes in price. (Elasticity is not a slope, it changes depending on where you are on the demand curve EX. Change in gas price from $1 -> $2 is different than a change from $4 -> $5)
3
Q
What is the elasticity equation?
A
(Change in Quantity Demanded DIVIDED BY Average Quantity)
DIVIDED BY
(Change in Price DIVIDED BY Price Average)
4
Q
Inelastic means a LARGE change in quantity demanded with a small change in price. True or False?
A
False
5
Q
Inelastic means a SMALL change in quantity demanded with a small change in price. True or False?
A
True
6
Q
Elastic means a LARGE change in quantity demanded with a small change in price. True or False?
A
True
7
Q
Elastic means a SMALL change in quantity demanded with a small change in price. True or False?
A
False
8
Q
Price ELASTIC Demand
A
Percentage change in quantity demanded is GREATER THAN the percentage change in price.
Quantity demanded changes proportionately more than price changes.
9
Q
Price INELASTIC Demand
A
The percentage change in quantity demanded is LESS THAN the percentage change in price. Quantity demanded changes proportionately less than price changes.
10
Q
Perfectly Elastic Demand
A
A small change in price causes an extremely large change in quantity demanded (from buying all to buying nothing). Horizontal Demand curve
11
Q
Perfectly Inelastic Demand
A
Quantity demanded does not change as price changes Vertical Demand curve
12
Q
Unit Elastic
A
Quantity demanded changes proportionately to price change. 1% : 1%
13
Q
Total Revenue =
A
Price of a good x the quantity of the good sold P x Q
14
Q
At which point is Ed >, < and = 1?
A
A - Ed > 1
B - Ed = 1
C - Ed < 1
15
Q
What are the determinants of Price Elasticity?
A
- Number of Substitutes
- Necessities vs Luxuries
- % of ones budget spent on the good
- Time
16
Q
How does the ‘number of substitutes’ effect price elasticity?
A
The more substitutes for a good, the higher the price elasticity.
The fewer substitutes, the lower the price elasticity of demand.
DIRECT RELATIONSHIP
17
Q
How does ‘necessities vs luxuries’ effect price elasticity?
A
Generally, the more that a good is considered a luxury, rather than a necessity, the higher the price elasticity of demand.
18
Q
How does ‘% of ones budget spent on the good’ effect price elasticity?
A
The greater the % of one’s budget that goes to purchase a good, the higher the price elasticity of demand.
The lower the % of one’s budget that goes to the purchase of a good, the lower the price elasticity of demand.
DIRECT RELATIONSHIP
19
Q
How does ‘time’ effect price elasticity of demand?
A
The more time that passes (since the price change), the higher the price elasticity of demand for the good; the less time that passes, the lower the price elasticity of demand for the good.
DIRECT RELATIONSHIP
20
Q
Would HIGH Elasticity of Demand (Ed) be <, >, = to 1
High or low responsiveness to change?
A
Ed > 1
HIGH responsiveness to change
21
Q
What does Cross Elasticity of Demand measure?
A
The responsiveness in quantity demanded of one good to changes in the price of another good.
22
Q
If Ec is > 0 then…
If Ec is < 0 then…
A
> = goods are substitutes
< = goods are complements
23
Q
What does income elasticity of demand measure?
If Ey > 0 then…
If Ey < 0 then…
A
The responsiveness of quantity demanded to changes in income.
> 0 then Normal good
< 0 then Inferior good
24
Q
Definitions…
Income Elastic
Income Inelastic
Income Unit Elastic
A
Income Elastic - The percentage change in quantity demanded of a good is greater than the percentage change in income.
Income Inelastic - The percentage change in quantity demanded of a good is less than the percentage change in income.
Income Unit Elastic - The percentage change in quantity demanded of a good is equal to the percentage change in income
25
What does price elasticity of supply measure?
What is the equation?
Measures the responsiveness of quantity supplied to changes in price.
Es = Percentage change in quantity supplied divided by Percentage change in price.
26
Is elastic supply \> or \< 1 -- The % change in quantity supplied is greater than or less than the % change in price?
Is inelastic supply \> or \< 1 -- " "
Perfectly elastic is = (infinity sign) -- is the graph line verticle or horizontal?
Elastic -- Es \> 1 -- GREATER
Inelastic -- Es \< 1 -- LESS THAN
Perfect -- horizontal
27
What can you learn from this image?
The change from D1 to D2 is a change in demand. What do points B and C tell us?
We can learn that the prices in both B and C as compared to A have risen.
Importantly, we see that prices along the HIGHER elasticity line havve risen more.
28
What is Utility?
What is a "util"?
What is "total utility"?
What is "marginal utility"?
Utility is a measure of the satisfaction, happiness, or benefit that results from the consumption of a good.
A util is an artificial construct used to measure utility.
Total utility is the total satisfaction a person receives from consuming a particular quantity of a good.
Marginal utility is the additional utility a person receives from consuming an additional unit of a particular good.
29
What does this image show us?
Marginal utility - total utility is rising but marginal utility is declining.
30
How is marginal utility calculated?
The change in total utility divided by the change in the quantity consumed of the good.
31
What does the law of diminishing marginal utility assume?
If a good has a variety of uses but only 1 unit of the good is available, then the consumer will use the first unit to satisfy his most urgent want.
If 2 units are available, the consumer will use the second unit to satisfy a less urgent want after the first unit is used.
32
What does interpersonal utility compare?
Compares the utility one person recieves from a good, service or activity with the utility another person recieves from that same good, service or activity.
DO NOT ASSUME SOMEONE ELSE GETS THE SAME UTILITY YOU DO FOR ANYTHING.
33
Does the price of water and diamonds represent their total utility or marginal utility?
Why?
The prices reflect marginal utility.
Because the total utility of water is very high... but there is so much of it that the marginal utility is low... and therefore it costs less compared to diamonds.
34
What does "behavioral economics" argue?
Some human behavior does not fit neatly - at a minimum, easily - into the traditional economic framework.
35
What are the 3 identified behavioral economics behaviors that go against the utility theory?
(1) Individuals are willing to spend some money to lower the incomes of others even if it means their incomes will be lowered.
(2) Individuals don’t always treat $1 as $1; some dollars seem to be treated differently from other dollars.
(3) Individuals sometimes value a good more if it is theirs than if it isn’t theirs and they are seeking to acquire it (endowment effect).
36
What is "market coordination"?
The process in which individuals perform tasks, such as producing certain quantities of goods, based on changes in market forces, such as supply, demand and price.
37
What is "managerial coordination"?
The process in which managers direct employees to perform certain tasks.
38
Why do business firms arise in the first place?
Firms form when benefits can be obtained from individuals working as a team.
Sum of Team Production \> Sum of Individual Production
39
Problem: Shirking (what is it?)
What is the solution?
Problem: Shirking - The behavior of a worker who is putting forth less than the aggreed to effort.
Solution: Monitor - Person (manager) in a business firm who coordinates team production and reduces shirking.
40
Problem: Monitor shirking
What is the solution?
Make the monitor a "residual claimant" - A person who shares in the profits of a business firm.
41
Explicit Cost -
Implicit cost -
Explicity Cost - A cost incurred when an actual (monetary) payment is made.
Implicit Cost - A cost that represents the value of resources used in production for which no actual (monetary) payment is made (opportunity cost).
42
Accounting Profit -
Economic Profit -
Normal Profit -
Accounting Profit - The difference between total revenue and explicit costs.
Economic Profit - The difference between total revenue and total cost, including both explicit and implicit costs.
Normal Profit - = 0 economic profit. A firm that earns normal profit is earning revenue equal to its total costs (explicit plus implicit costs). This is the level of profit necessary to keep resources employed in that particular firm.
43
Fixed Input -
Variable input -
Fixed Input - An input whose quantity cannot be changed as output changes.
Variable Input - An input whose quantity can be changed as output changes.
44
Short Run cost -
Long Run cost -
Short Run - A period of time in which at least one input in the production process is fixed.
Long Run - A period of time in which all inputs in the productions process can be varied (no inputs are fixed).
45
What is "Marginal Physical Product (MPP)"
What is the equation?
The change in output that results from changing the variable input by one unit, hilding all other inputs fixed.
MPP = Change in Quantity divided by change in Labor
46
Law of Diminishing Marginal Returns
As ever-larger amounts of a variable input are combined with fixed inputs, eventually, the marginal physical product of the variable input will decline.
47
Relationship between cost and productivity (between Marginal Physical Product (MPP) and Marginal Cost (MC))
Equation...
Inverse
Wages divided by Marginal Physical Product = Marginal Cost
48
Describe what the...
1. Total Fixed Cost
2. Average Fixed Cost
3. Total Variable Cost
4. Average Variable Cost
... curves look like.
1. TFC - Horizontal Line
2. AFC - Down, Each additional unit is divided into the TFC. Fast decline then slower as units go up...
3. TVC - Looks like an S (-:
4. U shaped
49
Average-Marginal Rule
When the marginal magnitude is above the average magnitude, the average magnitude rises.... and vice versa
Marginal \< Average --\> Average goes Down
Marginal \> Average --\> Average goes Up
50
Study this
51
Sunk Cost
A cost incurred in the past that cannot be changed by current decisions and therefore cannot be recovered
Economists advise individuals to ignore sunk costs.
52
How many times does the Long Run Average Cost Curve touch EACH Short Run Cost Curve?
1 time for EACH curve
53
Economies of Scale exist when...
LRATC is...
Inputs are increased by some percentage and output increases by a greater percentage, causing unit cots to fall.
LRATC is falling
54
Constant Returns to Scale exist when...
LRATC is...
Inputs are increased by some percentage and output increases by an equal percentage, causing unit costs to remain constant.
LRATC is constant
55
Diseconomies of Scale exist when...
LRATC is...
Inputs are increased by some percentage and output increases by a smaller percentage, causing unit costs to rise.
LRATC is rising
56
Minimum efficient Scale is...
The lowest ouput level at which average total costs are minimized.
57
Why economies of scale? (2 main reasons)
1. Growing firms offer greater opportunities for employees to specialize
2. Growing firms can take advantage of highly efficient mass production techniques and equipment that ordinarily require large setup costs and thus are economical only if they can be spread over a large number of units.
58
Why diseconomies of scale?
In very large firms, managers often find it difficult to coordinate work activities , communicate their directives to the right persons in satisfactory time, and monitor personnel effectively.
59
A firm's cost curves will shift if there is a change in: (3 items)
1. Taxes
2. Input Prices
3. Technology
60
Derived Demand
(4 factors of production)
Derived Demand - Demand is derived from and directly related to the demand for the product that the recourses go to produce.
Factors: Land, Labor, Capital, Entrepreneurship
61
Marginal Revenue Product (MRP)
Equation
The additional revenue generated by employing an additional unit
MRP = Total Revenue/ Quantity
or
MRP = Marginal Revenue x Marginal Physical Product
62
Value Marginal Product (VMP)
Equation
A dollar measure of how much an additional unit of the factor will do for you.
VMP = P x MPP
63
Relationship between labor costs and total costs
The higher the ratio of labor cost to total cost, the higher the elasticity of demand for labor (i.e. the greater the cutback in labor for any given wage increase)
The lower the ratio of labor cost to total cost, the lower the elasticity of demand for labor (i.e. the less the cutback in labor for any given wage increase)
High ratio = high cutback in wage increase
Low ratio = low cutback in wage increase
64
Effect of substitutes on labor elasticity
The more substitutes there are for labor, the higher the elasticity of demand will be for it
65
Key Factors that Influence Whether your Labor is Demanded (3 items)
Referred to as...
Endowment has...
1. Skills - Your expertise
2. Knowledge - Your Experience
3. Abilities - Your proficiency
Referred to as "Human Capital"
Endowment has influence over your ability to acquire human capital
66
As wage rate goes up, what happens to quantity of labor supplied?
It goes up
67
Additional Factors that infuluence labor supply in the market (4 items)
1. Non-pecuniary Benefits (benefits besides money (wagy/ salary))
2. Availability of Additional Compensation (Over Time, Performance Bonus, Benefits, etc..)
3. Barriers to Entry
4. Availability of income if not working
68
Surplus is shown as the distance betwwen supply and demand _________ equilibrium. Shortage is the distance between the lines _________ equilibrium.
(Above or Below)
Above, Below
69
What is market failure
A situation in which the market does not provide the ideal or optimal amount of a particular good.
70
Asymmetric Information
When one person in a transaction has information that the other doesn't have.
71
Adverse Selection
A phenomenon that occurs when the parties on one side of the market, who have information not known to others, self-select in a way that adversely affects the parties on the other side of the market.
72
Moral Hazard
A condition that exists when one party to a transaction changes his/ her behavior in a way that is hidden from and costly to the other party.
73
What is an externality?
A side effect of an action that affects the well-being of third parties.
74
When negative OR positive externalities exist...
... the market output is different from the socially optimal output.
Negative = socially optimal output is less than market output
Positive = socially optimal output is greater than the market output
75
How can externalities be adjusted for? (5 items)
1. Persuasion
2. Assignment of proporty rights
3. Voluntary agreements
4. Taxes/ subsidiaries
5. Regulations
76
1. The sum of marginal private costs (MPC) and marginal external costs (MEC) =...
2. The sume of marginal private benefits (MPB) and marginal external benefits (MEB) =...
1. Marginal social costs (MSC)
2. Marginal social benefits (MSB)
77
If the percentage cheange in quantity demanded is greater than the percentage change in price for good X, then the demand for good X is...
a) inelastic
b) unit elastic
c) elastic
d) perfectly inelastic
C - Elastic
78
The longer the period of time consumers have to adjust to price changes, the _______ the _______ elasticity of demand.
a) lower, price
b) lower, income
c) higher, price
d) higher, income
C - Higher, Price
79
If Jack took one vacation to Hawaii last year when his income was $60,000 and he took two vacations to Hawaii this year when his income is $100,000, then his vacations to Hawaii for Jack are:
a) an inferior good
b) a normal good
c) a substitute good
d) a complementary good
e) there is not enough information to answer this question
b - a normal good
80
Which of the following statements is true?
a. When a firm lowers the price of its product, total revenue always falls.
b. When a firm raises the price of its product, total revenue always rises.
c. When a firm raises the price of its product, total revenue always falls.
d. When a firm lowers the price of its product, total revenue always rises.
e. none of the above
e - none of the above
81
To resolve the diamond-water paradox, it is important to note that under most circumstances,
a. the marginal utility of water is lower than the marginal utility of diamonds.
b. the marginal utilities of water and diamonds are about the same.
c. the marginal utility of water is higher than the marginal utility of diamonds.
d. the marginal utilities of water and diamonds are inversely related.
e. the marginal utilities of water and diamonds are directly related.
A - the marginal utility of water is lower than the marginal utility of diamonds.
82
If the average variable cost curve is falling,
a. the MC curve must be below it.
b. marginal cost is greater than average variable cost.
c. the MC curve is necessarily falling.
d. the MC curve is necessarily horizontal (neither rising nor falling).
e. the MC curve is necessarily rising.
a - the MC curve must be below it.
83
Refer to Exhibit 27-5. Marginal physical product of the fourth unit of labor
a. equals 60.
b. equals 40.
c. equals 24.
d. equals 310.
e. cannot be determined.
a - equals 60
84
Suppose a person with automobile collision insurance is more likely to try to drive on an icy road in the middle of winter than that person would be if he or she didn't have automobile collision. This is an example of
a. adverse selection.
b. moral hazard.
c. the free-rider effect.
d. asymmetric information before exchange.
e. none of the above
b - moral hazard
85
The lower the elasticity of demand for a product,
a. the higher the ratio of labor costs to total costs.
b. the lower the ratio of labor costs to total costs.
c. the lower the elasticity of demand for the labor that produces the product.
d. the higher the elasticity of demand for the labor that produces the product.
e. none of the above
c (not checked)
