Midterm review

Question 1

The study of how people, firms, and societies use their scarce productive resources to best satisfy their unlimited material wants.

Answer 1

Economics

Question 2

Called factors of production, these are commonly grouped into the four categories of labor, physical capital, land or natural resources, and entrepreneurial ability.

Answer 2

Resources

Question 3

The imbalance between limited productive resources and unlimited human wants. Because economic resources are scare, the goods and services a society can produce are also scarce.

Answer 3

Scarcity

Question 4

Scarce resources imply that individuals, firms, and governments are constantly faced with difficult choices that involve benefits and costs

Answer 4

Trade-offs

Question 5

The value of the sacrifice made to pursue a course of action

Answer 5

Opportunity cost

Question 6

The next unit or increment of an action

Answer 6

Marginal

Question 7

The addition benefit received form the consumption of the next unit of a good or service

Answer 7

Marginal Benefit (MB)

Question 8

The addition cost incurred form the consumption of the next unit of a good or service

Answer 8

Marginal cost (MC)

Question 9

Making decisions based upon weighing the marginal benefits and costs of that actin. The rational decision maker chooses an action if the MB > MC

Answer 9

Marginal Analysis

Question 10

Different quantities of goods that an economy can produce with a given amount of scarece resources. Graphically, the trade-off between the productions of two goods is portrayed as a production possibility curve or frontier (PPC, PPF)

Answer 10

Production Possibilities

Question 11

A graphical illustration that shows the maximum quantity of one good that can be produced, given the quantity of the other good being produced

Answer 11

Production possibility curve (PPC), Production possibility frontier (PPF)

Question 12

The more of a goof that is produced, the greater the opportunity cost of production the next unit of that good.

Answer 12

Law of increasing costs

Question 13

The exists if a producer can produce more of a good than all other producers

Answer 13

Absolute advantage

Question 14

A producer has comparative advantage if he can produce a good at lower opportunity cost than all other producers.

Answer 14

Comparative advantage

Question 15

When firms focus their resources on production of goods for which they have comparative advantage, they are said to be specializing

Answer 15

Specialization

Question 16

Production of maximum output for a given level of technology and resources. All points on the PPF are productively efficient

Answer 16

Productive efficiency

Question 17

Production of the combination of goods and services that provides the most net benefit to society. The optimal quantity of a good is achieved when the MB = MC of the next unit. This only occurs at one point on the PPF.

Answer 17

Allocative efficiency

Question 18

This occurs when an economy’s production possibilities increase. It can be a result of more resources, better resources, or improvements in technology.

Answer 18

Economic growth

Question 19

An economic system based upon the fundamentals of private property, freedom, self-interest, and prices

Answer 19

Market economy

Question 20

Holding all else equal, when the price of a good rises, consumers decrease their quantity demanded for taht good

Answer 20

Law of demand

Question 21

To predict how a change in one variable affects a sound, we hold all other variables constant. This is also referred to as the ceteris paribus assumption.

Answer 21

All Else Equal

Question 22

The price of a good measured in units of currency

Answer 22

Absolute prices

Question 23

The number of units of any other good Y that must be sacrificed to acquires the first good X. Only relative prices matter.

Answer 23

Relative prices

Question 24

The change in quantity demanded resulting from a change in the price of one good relative to the price of other goods.

Answer 24

Substitution effect

Question 25

The change in quantity demanded resulting from a change in he consumer's purchasing power (real income)

Answer 25

Income effect

Question 26

A table showing quantity demanded for a good at various prices

Answer 26

Demand schedule

Question 27

A graphical depiction of the demand schedule. The curve is downward sloping, reflecting the law of demand.

Answer 27

Demand curve

Question 28

A good for which higher income increases demand

Answer 28

Normal Goods

Question 29

A goof for which higher income decreases demand

Answer 29

Inferior good

Question 30

The external factors that shift demand to the left or right

Answer 30

Determinants of demand

Question 31

Two goods are consumer substitues if they provide essentially the same utility to the consumer.

Answer 31

Substitute Goods

Question 32

Two goods that provide more utility when consumed together than when consumed separately

Answer 32

Complementary goods

Question 33

Holding all else equal, when the price of a good rises, suppliers increase their quantity supplied for that good

Answer 33

Law of supply

Question 34

A table showing quantity supplied for a good at various prices

Answer 34

Supply schedule

Question 35

A graphical depiction of the supply schedule. Upward sloping, reflecting the law of supply

Answer 35

Supply curve

Question 36

One of the external factors that influences supply. When these variables change, the entire supply curve shifts to the left or the right.

Answer 36

Determinants of supply

Question 37

Exists at the only price where the quantity supplied equals the quantity demanded.

Answer 37

Market equillibrium

Question 38

Also known as excess demand, exists a market price when the quantity demanded exceeds the quantity supplied. The price rises to eliminate it.

Answer 38

Shortage

Question 39

Any price where quantity demanded is not equal to quantity supplied

Answer 39

Disequillibrim

Question 40

Also known as excess supple, exists at a market price when the quantity supplied exceeds the quantity demanded.

Answer 40

Surplus

Question 41

The sum of consumer surplus and producer surplus. The free market equilibrium provides maximum combined gain to society

Answer 41

Total welfare

Question 42

The difference between your willingness to pay and the price you actually pay. It is the area below the demand curve and above the price

Answer 42

Consumer surplus

Question 43

The difference between the price received and the marginal cost of producing the good. It is the area above the supply curve and under the price.

Answer 43

Producer surplus

Question 44

Measures the sensitivity, or responsiveness, of a choice to a change in an external factor.

Answer 44

Elasticity

Question 45

Measures the sensitivity of consumer quantity demanded for good X when the price of good X changes

Answer 45

Price elasticity of demand

Question 46

E d = (%∆Q d )/(%∆P)

Answer 46

Price elasticity formula

Question 47

E d > 1 or the (%∆Q d ) > (%∆P )

Answer 47

Price elastic demand

Question 48

E d < 1 or the (%∆Q d ) < (%∆P).

Answer 48

Price inelastic demand

Question 49

E d = 1 meaning the (%∆Q d ) = (%∆P).

Answer 49

Unit elastic demand

Question 50

E d = 0. In this special case, the demand curve is vertical and there is absolutely no response to a price change.

Answer 50

Perfectly inelastic

Question 51

E d = ∞. In this special case, the deamdn curve is horizontal meaning consumers have an instantaneous and infinite response to a price change

Answer 51

Perfectly elastic

Question 52

In general, the more vertical a good's demand curve, the more inelastic the demand for that good. The more horizontal a good's demand curve, the more elastic the demand for that good.

Answer 52

Slope and elasticity

Question 53

If a good has more readily available substitutes, it is likely that consumers are more price elastic for that good. If a high proportion of a consumer's income in devoted to a particular good, consumers are generally more price elastic for that good. When consumers have more time to adjust to a price change, their response is usually more elastic.

Answer 53

Determinants of elasticity

Question 54

TR = P x Q d

Answer 54

Total revenue formula

Question 55

Total revenue rises with a price increase if a demand is price inelastic and falls with a price increase if demand is price elastic.

Answer 55

Total revenue test

Question 56

At the midpoint of a linear deamdn curve, E d = 1. Above the midpoint demand is elastic and below the midpoint demand is inelastic

Answer 56

Elasticity and demand curves

Question 57

A measure of how sensitive consumption of good X is to a change in the consumer's income.

Answer 57

Income elasticity

Question 58

E I = (%∆Q d good X )/(% ∆ income)

Answer 58

Income elasticity formula

Question 59

A good for which the income elasticity is greater than one

Answer 59

luxury

Question 60

A good for which the income elasticity is above zero but less than one

Answer 60

Necessity

Question 61

If E1 > 1, the good is normal and a luxury. If 1 > E1 > 0, the good is normal and income inelastic (necessity). If E1 < 0 the good is inferior

Answer 61

Values of income elasticity

Question 62

A measure of how sensitive consumption of good X is to a change in the price of good Y.

Answer 62

Cross-price elasticity of demand

Question 63

E x,y = (%∆Q d good X)/(% ∆ price Y)

Answer 63

Cross-price elasticity formula

Question 64

If E x,y > 0, goods X and Y are substitutes. If E x,y < 0, goods X and Y are complementary.

Answer 64

Values of cross-price elasticity of demand

Question 65

Measures the sensitivity of quantity supplied for good X when the price of good X changes.

Answer 65

Price elasticity of supply

Question 66

E s = (%∆Q s )/(%∆ P )

Answer 66

Price elasticity of supply formula

Question 67

A per unit tax on production results in a vertical shift upward in the supply curve by the amount of the tax

Answer 67

Excise tax

Question 68

The proportion of the tax paid by consumers in the form of higher price for the taxed good is greater if demand for the good is inelastic and supply is elastic

Answer 68

Incidence of tax

Question 69

The plost net benefit to society caused by a movement away from the competitive market equilibrium. Polices like excise taxes create lost welfare to society.

Answer 69

Deadweight loss

Question 70

Has the opposite effect of an excise tax, as it has the effect of lowering the MC of production, resulting in a downward vertical shift in the supply curve for good X

Answer 70

Subsidy

Question 71

A legal minimum price below which the product cannot be sold. If a floor is installed at some level above the equilibrium price, it creates a permanent surplus.

Answer 71

Price floor

Question 72

A legal maximum price above which the product cannot be sold. If a ceiling is installed at a level below the equilibrium price, it creates a permanent shortage.

Answer 72

Price ceiling

Question 73

Happiness, benefit, satisfaction, or enjoyment gained from consumption

Answer 73

Utility

Question 74

Total happiness received from consumption of a number of units of a good

Answer 74

Total utility

Question 75

The incremental happiness received, or lost, when the consumer increases consumption of a good by one unit

Answer 75

Marginal utility

Question 76

A unit of measurement often used to quantify utility.

Answer 76

Utils

Question 77

In a given time period, the marginal utility from consumption of more and more of that item falls.

Answer 77

Law of diminishing marginal utility

Question 78

For a one-good case. Constrained by prices and income, a consumer stops consuming a good when the price paid for the next unit is equal to the marginal benefit received.

Answer 78

Constrained utility maximalization

Question 79

The consumer maximizes utility when they choose amounts of goods X and Y, with their limited income, so that the marginal utility per dollar spent is equal for both goods.

Answer 79

Utility maximizing rule

Question 80

An organization that employs factors of production to produce a good or service that it hopes to profitably sell.

Answer 80

Firm

Question 81

The difference between TR and Total expllicit costs

Answer 81

Accounting profit

Question 82

The difference between TR and total explicit and implicit costs

Answer 82

Economic profit

Question 83

Direct, purchased, out of pocket costs paid to resource suppliers outside the firm

Answer 83

Explicit costs

Question 84

Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneaur

Answer 84

Implicit costs

Question 85

A period of time too short to change the size of the plant, but many other, more variable resources can be adjusted to meet demand

Answer 85

Short run

Question 86

A period of time long enough to alter the plant size. New firms can enter the industry and existing frims can liquidate and exit

Answer 86

Long run

Question 87

The mechanism for combining production resources, with existing technology, into finished goods and services. Inputs are turned into outputs.

Answer 87

Production function

Question 88

Production inputs that cannot be changed in the short run. Usually this is the plant size or capital

Answer 88

Fixed inputs

Question 89

Production inputs that the firm can adjust in the short run to meet changes in demand for their output. Often this is labor and/or raw materials.

Answer 89

Variable inputs

Question 90

The total quantity, or total output, of a good produced at each quantity of labor emplyed.

Answer 90

Total Product of Labor (TPL)

Question 91

The change in total product resulting from a change in the labor input. Input. MPL = ∆TPL/∆L, or the slope of total product.

Answer 91

Marginal Product of Labor (MPL)

Question 92

Total product divided by labor employed: APL = TPL/L

Answer 92

Average product of labor (APL)

Question 93

As successive units of a variable resource are added to a fixed resource, beyond some point the marginal product declines.

Answer 93

Law of diminishing marginal returns

Question 94

Costs that do not vary with changes in short-run output. They must be paid even when output is zero.

Answer 94

Total fixed costs (TFC)

Question 95

Costs that change with the level of output. If output is zero, so are these

Answer 95

Total Variable Cost (TVC)

Question 96

The sum of total fixed cost and total variable costs at each level of output: TC = TVC + TFC

Answer 96

Total cost (TC)

Question 97

The additional cost of producing one more unit of output.

Answer 97

Marginal Cost

Question 98

Total fixed cost / output

Answer 98

Average fixed cost (AFC)

Question 99

Total variable cost / output

Answer 99

Average variable cost (AVC)

Question 100

Total cost / output

Answer 100

Average total cost (ATC)

Question 101

If labor is the variable input being paid a fixed wage, MC and MPL are inverses of each other.

Answer 101

Relationship between MPL and MC

Question 102

In the simplified case where labor is the variable input being paid a fixed wage. AVC and APL are inverses of each other.

Answer 102

Relationship between APL and AVC

Question 103

The downward part of the LRAC curve where LRAC falls as plant size increases. This is the result of specialization, lower costs of inputs, or other efficiencies from larger scale.

Answer 103

Economies of scale

Question 104

Occurs when LRAC is constant over a variety of plant sizes

Answer 104

Constant returns to scale

Question 105

The upward part of LRAC curve where LRAC rises as plant size increases. This is usually the result of the increased difficulty of managing larger firms, which results in lost efficiency and rising per unit costs

Answer 105

Diseconomies of scale

Question 106

The most competitive market structure, characterized by many small price-taking firms producing a standardized product in an industry in which there are no barriers to entry or exit.

Answer 106

Perfect Competition

Question 107

All firms maximize profit by producing where MR = MC

Answer 107

Profit maximizing rule

Question 108

The output in perfect competition where ATC is minimized and economic profit is zero.

Answer 108

Breakeven point

Question 109

The output where AVC is minimized. If the price falls below this point, the firm chooses to shut down or produce zero units in the short run.

Answer 109

Shutdown point

Question 110

Occurs when there is no more incentive for firms to enter or exit

Answer 110

Perfectly competitive long-ruin equilibrium

Question 111

Another way of saying that firms are earning zero economic profits or a fair rate of return on invested resources

Answer 111

Normal profit

Question 112

Entry (or exit) of firms does not shift the cost curves of firms in the industry

Answer 112

Constant cost industry

Question 113

Entry of new firms shifts the cost curves for all firms upward

Answer 113

Increasing cost industry

Question 114

Entry of new firms shifts the cost curves for all firms downward

Answer 114

Decreasing cost industry

Question 115

The least competitive market structure; it is characterized by a single producer, with no close substitutes, barriers to entry, and price-making power.

Answer 115

Monopoly

Question 116

The ability to set the price above the perfectly competitive level

Answer 116

Market power

Question 117

The case where economies of scale are so extensive that it is less costly for one firm to supply the entire range of demand.

Answer 117

natural monopoly

Question 118

Pm > MR = MC, which is not allocatively efficient and deadweight loss exists. Pm > ATC, which is not productively efficient. π π m > 0 so consumer surplus is transferred to the monopolist as profit.

Answer 118

Monopoly long-run equilibrium

Question 119

The practice of selling essentially the same good to different groups of consumers at different prices

Answer 119

Price discrimination

Question 120

A market structure characterized by a few small firms producing a differentiated product with easy entry into the market

Answer 120

Monopolistic competition

Question 121

Pmc > MR = MC and Pmc > min ATC, so the outcome is not efficient, but π π mc = 0.

Answer 121

Monopolistic competition long-run equilibrium

Question 122

The difference between the monopolistic competition output Qmc and the output at minimum ATC. Excess capacity is underused plant and equipment

Answer 122

Excess capacity

Question 123

A very diverse market structure characterized by a small number of interdependent large firms, producing a standardized or differentiated product in a market with a barrier to entry

Answer 123

Oligopoly

Question 124

A measure of industry market power. If the combined market share of the four largest firms is above 40%, it is a good indicator of oligopoly

Answer 124

Four-firm concentration ratio

Question 125

Models where firms are competitive rivals seeking to gain at the expense of their rivals.

Answer 125

Non-collusice oligopoly

Question 126

A game where the two rivals achieve a less desirable outcome because they are unable to coordinate their strategies

Answer 126

Prisoners' dilemma

Question 127

A strategy that is always the best strategy to pursue, regardless of what a rival is doing

Answer 127

Dominant strategy

Question 128

Models where firms agree to mutually improve their situation

Answer 128

Collusive oligopoly

Question 129

A group of firms that agree not to compete with each other on the basis of price, production, or other competitive dimensions. Members operate as a monopolist to maximize their joint profits.

Answer 129

Cartel