Flashcards in Microeconomics Deck (62):
List the types of economic resources:
Acquire from individuals as:
1. Labor: human work, skills, and similar human effort;
2. Capital: financial resources (savings) and man-made resources;
3. Natural Resources: land, minerals, timber, water, etc.
In an economic context, what makes up compensation?
Payments to individuals as:
1. Wages, salaries, and profit sharing for labor;
2. Interest, dividends, rental and lease payments for capital;
3. Rental, lease and royalty payments for natural resources.
Describe the relationship between economic resources and compensation in a free-market economy
Business firms acquire economic resources from individuals (labor, capital, and natural resources), who receive compensation in return (wages/salaries, rents, interest, dividend); individuals use this compensation to acquire goods and services produced by businesses.
What determines "price"?
The supply of and demand for the commodity being priced.
List the characteristics of a free-market economy
1. Interdependent relationship between individuals and business firms;
2. Production depends on preferences of individuals with ability to pay for goods and services;
3. Production depends on availability of economic resources, level of technology, and how business firms choose to use them;
4. Production depends on sale price being at least equal to production cost.
Desire, willingness, and ability to acquire a commodity.
Define “individual demand”
The quantity of a commodity that will be demanded by an individual (or other entity) at various prices during a specified time, ceteris paribus.
Define “market demand”
The quantity of a commodity that will be demanded by all individuals (and other entities) in the market at various prices during a specified time, ceteris paribus.
Describe the income effect as it applies to individual demand
A given amount of income buys more units at a lower price.
Describe the substitution effect as it applies to individual demand
Lower-priced items will be purchased as substitutes for higher-priced items.
What are the factors that change market demand?
1. Size of market
2. Income or wealth of participants
3. Preferences of market participants
4. Change in prices of other goods and services
Distinguish between a change in quantity demanded and a change in demand
A change in quantity demanded is movement along a given demand curve as a result of change in price only. A change in demand is a shift in a demand curve as a result of changes in variables other than price.
The demand curve for a product reflects:
The impact that price has on the amount of product purchased.
Define an “individual supply schedule”
A schedule that shows the quantity of goods that an individual producer is willing to provide (supply) at various prices during a specified time.
Distinguish between a change in quantity supplied and a change in supply
A change in quantity supplied is movement along a given supply curve as a result of change in price only. A change in supply is a shift of a supply curve as a result of changes in variables other than price.
What are the variables that change aggregate supply?
1. Number of providers
2. Cost of inputs
3. Government taxation or subsidization
4. Technological advances
Describe the principle of increasing cost
Production costs increase in the short-run as the quantity produced increases, because new resources are not used as efficiently as the resources used previously.
What is the slope of a normal supply curve?
Positive slope: at a higher price, a greater the quantity will be supplied
Define “market supply schedule"
A schedule that shows the quantity of a commodity that will be supplied by all the providers in the market at various prices during a specified time.
Supply is the quantity of a commodity (good or service) that will be provided at alternative prices during a specified time.
If a change in market variables causes a supply curve to shift inward, what will occur?
In order for the same quantity to be provided after the shift as was provided before the shift, price will have to increase.
How can government directly influence market equilibrium?
1. Taxation increases the cost and shifts the market supply curve up and to the left; tax decreases have the opposite effect.
2. Subsidization decreases the cost and shifts the market supply curve down and to the right; decreases in subsidization have the opposite effect.
3. Rationing reduces demand, thus shifting the demand curve downward and to the left, thus lowering the equilibrium quantity and price.
Describe the results of a change in market supply (only) on equilibrium.
1. Increase in market supply = supply curve shifts down and to the right; decrease in market supply = supply curve shift up and to the right.
2. Increase in market supply w no change in in demand = decrease in EP and increase in EQ;
3. Decrease in market supply w no change in demand = increase in EP decrease in EQ.
Describe the results of a change in market demand (only) on equilibrium. DIRECT EFFECT
1. Increase in market demand = demand curve shifts up and to the right; decrease in market demand = demand curve shift down and to the left.
2. Increase in market demand w no change in supply = increase in both EP and EQ.
3. Decrease in market demand w no change in supply = decrease in both EP and EQ.
What causes a market surplus?
A market surplus in created when the actual price AP is more than EP; therefore, quantity supplied is more than quantity demanded (minimum wage).
What causes a market shortage?
A market shortage is created when actual price AP is less than the EP, therefore, quantity supplies is less than quantity demanded at AP. (rent controls)
Define market equilibrium price.
1. Price at which the quantity of a commodity supplied is equal to the quantity of that commodity demanded.
2. The intersection of the market demand and supply curves.
When the market demand and supply are in equilibrium;
There is no shortage or surplus of the commodity.
When the actual price (AP) is higher than equilibrium price (EP);
Supply>Demand; causing a surplus supplied.
Increase in market demand only:
Increase in both EP and EQ (think of curve)
Increase in market supply only:
Increase in EQ and Decrease in EP (think of curve)
Subsidies decrease cost;
Opposite of taxation
Taxation increases cost;
Increases prices and decreases supply and quantity
Define price ceiling:
A government mandated maximum price that can be charged for a good or service. Rent controls, for example, establish the maximum price that can be charged for rent. Since suppliers (landlords) are prevented from raising price to equilibrium, they will cease to invest in rentable space, causing a quantity shortage.
Define price floor:
A government mandated minimum price for a good or service. The minimum wage law, for example, establishes minimum wage that can be paid to employees. Price floors result in higher price, which result in supply>demand, thus a quantity surplus.
Identify 4 measures of elasticity
1. Elasticity of Demand;
2. Elasticity of Supply;
3. Income Elasticity of Demand;
4. Cross Elasticity of Demand (substitutes and complementary)
Define "elasticity of supply"
The % change in the quantity of a commodity supplied as a result of given % change in price of commodity.
Define "elasticity of demand"
The % change in quantity of commodity demanded as a result of given % change in price of commodity.
Define "elasticity" (as used in economics)
Measures the % change in a market factor as a result of a given % change in another market factor.
What does "demand is elastic" mean?
1. If demand is elastic, the % change in demand in GREATER than % change in price,
2. The elasticity coefficient is greater than 1; and
3. Total revenue will change in opposite direction as the change in price.
If total revenue remain unchanged following a change in price, demand is:
Define "cross elasticity"
Measures the relationship between the % of change in quantity demanded of one commodity as a result of a % change in the price of another commodity.
Major factors affecting demand elasticity:
1. Nature of goods/services: The more essential good, the less elastic demand because consumers will continue to buy even if price increases.
2. Availability of substitutes: the more substitutes, the more elastic demand will be because as price increases, consumers have alternative goods to which they can switch.
3. Income available: the more limited income available to spend on a good or service, the more elastic demand will be because demand will be more sensitive to price increases.
Define "income elasticity of demand"
Measures the % change in quantity of a commodity demanded as a result of a given % change in income.
Define "utility" as used in economics:
Satisfaction derived from the acquisition or use of a commodity.
Define "utils" as used in economics:
Hypothetical unit of measure used to measure satisfaction derived from a commodity.
Define "marginal utility"
1. The utility derived from each (additional) marginal unit. (i.e., from the last unit acquired).
2. It decreases with quantity acquired.
3. Negative slope curve.
Define "total utility"
1. The more of each commodity an individual acquires during a given time, the greater total utility (or utils) the individual derives.
2. Positive slope curve, it increases with quantity acquired.
What is represented by an indifference curve?
Various quantities of 2 commodities that give an individual the same total utility as plotted on a graph.
Define "law of diminishing marginal utility"
Decreasing utility (satisfaction) is derived from each additional (marginal) unit of a commodity acquired.
Utility is maximum when:
1. The marginal utility (MU) derived from the last dollar spent on each commodity acquired is the same.
2. Maximum TU = (MU of A)/(A price) = (MU of B)/(B price)
Give 3 examples of fixed cost:
1. Property taxes
2. Contracted rent
Give 3 examples of variable cost:
1. Raw materials
2. Most labor
Identify and describe the kinds (types) of cost that make up Total Cost:
1. Total Fixed Cost: costs which can't be changed regardless of level of output.
2. Total Variable Cost: costs for variable inputs which will vary directly w changes in levels of output
3. TC = FC+VC
What are the 3 major kinds (types) of cost used in short-run economic analysis:
1. Total Cost: FC+VC
2. Average Cost: cost per unit of commodity produced.
3. Marginal Cost: Cost of the last acquired unit of an input
Identify and describe the time periods of analysis used in economics:
1. Short-run time period: at least one input to the production process cannot be varied (at least one input is fixed).
2. Long-run time period: quantity of all inputs to production process can be varied.
Describe "law of diminishing returns"
The point at which the quantity of variable inputs begins to overwhelm fixed factors, resulting in inefficiencies and diminishing return on marginal units of variable inputs.
A law of economics stating that, as the number of new employees increases, the marginal product of an additional employee will at some point be less than the marginal product of the previous employee.
Example: Consider a factory that employs laborers to produce its product. If all other factors of production remain constant, at some point each additional laborer will provide less output than the previous laborer. At this point, each additional employee provides less and less return. If new employees are constantly added, the plant will eventually become so crowded that additional workers actually decrease the efficiency of the other workers, decreasing the production of the factory.
In the long run there are various returns to (or economics of) scale, the three outcomes are:
1. Economies of scale (increasing return to scale): The long-run average curve (LAC) is decreasing (downward slope), reflecting that the quantity of output is increasing in a GREATER proportion than increase in inputs, largely due to specialization of labor and equipment.
2. Neither economy nor diseconomy of (constant return to) scale: as shown at bottom of LAC curve, output increases in SAME PROPORTION as inputs.
3. Diseconomies of (or decreasing returns to) scale: Where LAC curve is increasing (upward slope), quantity of output increases in LESSER proportion than the increase in all inputs primarily due to problems (communication, coordination) of managing very large scale operations.
Which short-run average cost curves are "U" shaped?
1. Average variable cost
2. Average total cost
3. Marginal cost
Average fixed cost has continuously downward slope (not U shaped).
The marginal cost of an input commodity is computed as:
The difference between the variable cost of successive units of input.
Successive = one after another.
The marginal cost curve crosses the lowest points of which curves?
1. The average variable cost curve
2. The average total cost curve.