Old questions Flashcards
(145 cards)
1
Q
What can cause a shift in a demand curve?
A
Number of buyers, buyer’s preferences, income, costumer expectations, price
2
Q
What can cause a shift in a supply curve?
A
Technology, competitlon, resource prlces, taxes, producer expectations
3
Q
What are the two types of price control?
A
Price ceilings, price floors.
4
Q
What is a price ceiling?
A
A maximum price (mandated by the government) a seiler can charge. E.g.wage and price controls
5
Q
What is a price floor?
A
A minimum price (mandated by the government) a seller can charge. E.g. agricultural price support
6
Q
Why do we have price ceilings and floors?
A
Because of failures in the free market
7
Q
What is market failure?
A
A situation where the price system creates a problem for society; market equilibrium results in too many/ too few resources being used in the production of goods. Can happen if there is lack of competition, income inequality etc.
8
Q
What happens when competition is lacking?
A
Market failure results.
9
Q
What is an externality?
A
A cost or benefit imposed on people other than the consumers and producers. An external effect; often unforeseen or unintended.
10
Q
What is a negative externality?
A
An externality that is damaging to third parties. E.g.pollution.
11
Q
What is a positive externality?
A
An externality that is beneficial to third parties. E.g.vaccination (too few resources are used to produce the product responsible for the slower spread of
the disease).
12
Q
What is a public good?
A
Goods that are consumed byeveryone regardless of whether they pay or not.
Provided by the government E.g.national defense, public education, roads, prisons etc.
13
Q
Factors influencing demand sensitivity?
A
Availability of substitutes (lignende varer), budget spent on production, adjustment of price changes over time.
E.g.Medicines: few substitutes, it is always necessary independent of the price.
Candy: many substitutes, low price can cause higher demand.
14
Q
What is cross-elasticity of demand?
A
The ratio of the percentage change in quantity demanded of a good to a given percentage change in price of another good
15
Q
What is tax incidence?
A
The share of a tax, paid by buyers or sellers. The more elastic the demand, the more the corporation pays. The less elastic the demand, the more the consumers pay. E.g.increase in gasoline tax~ decrease in supply-s consumers bear full
burden of tax.
16
Q
What is elastic demand?
A
A condition in which the percentage change in quantity demanded is greater than the percentage change in price,
17
Q
What is total revenue?
A
Income; earnings of a form from sale of goods or service
18
Q
What is inelastic demand?
A
A change of less than one percent in quantity demanded in response to a one percent change in price.
19
Q
What is unitary elastic demand?
A
A one percent change in quantity demanded in response to a one percent change in price. (Elasticity coefficient equals one and total revenue remains constant as the price changes).
20
Q
What is perfectly elastic demand?
A
A decline in quantity demanded to zero for even the slightest rise or fall in price.
21
Q
What is perfectly inelastic demand?
A
No change in quantity demanded when price changes.
22
Q
What is util?
A
Unit used to measure how much utility a person obtains from consuming a good
23
Q
What is utility?
A
Usefulness. The satisfaction or pleasure that people receive from consuming a good or service.
24
Q
What is total utility?
A
The amount ofsatisfaction received from all the units of a good or service consumed.
25
What is marginal utility?
The change in total utility from one additional unit of a good or service consumed.
26
What is the law of diminishing marginal utility?
Marginal utility of a good or service declines as consumption increases. Extra satisfaction declines as people consume more in a given period. (e.g. water provides a greater utility than diarnonds, but diamonds are more expensive because the marginal utility of water is low.
27
When is total utility maximized?
When the marginal utility per last dollar on each good is equal and the entire budget is spent
28
What is consumer equilibriurn?
A condition in which total utility cannot increase by spending more of a given budget on one good, and spending less on another good. E.g.if price of Big Mac
falls to $1, the consumers spends more on Big Macs to restore equilibrium.
29
What are two alternative explanations of demand?
1. Income effect 2. Substitution effect
30
What is the income effect?
The change in quantity demanded, caused by a change in real income (purchasing power).
31
What is the substitution effect?
Demand of the cheapest good increase
32
What does the substitution and income effect prove?
The law of demand (as the price of a good declines) consumers will buy more units of the good. And vice versa.
33
What is a normal good?
A good that consurners will buy more of as their income increase
34
What is an inferior good?
A good that consumers will buy less of as their income increase.
35
What is a basic assumption in economics?
The motivation for business decisions is profit maximization.
36
What are explicit costs?
Payments to non-owners of a firm for their resources.
37
What are implicit costs?
The opportunity costs of using resources owned by the firm
38
How is accounting profit defined?
Total revenue minus total explicit costs.
39
What are total opportunity costs?
Explicit costs + implicit costs.
40
What is economic profit?
Total revenue minus total opportunity costs
41
What is normal profit?
The minimum profit necessary to keep a firm in operation.
42
When economists use the term "profit", which profit do they mean?
Economic profit, which, unlike accounting profit, includes implicit costs
43
What is a fixed Input?
Any resource for which the quantity cannot change during the period of time under consideration.
44
What is the short run?
A period of time so short that there is at least one fixed input, such as factory size.
45
What is the long run?
A period of time so long that all the inputs are variable
46
What is a variable input?
Any resource for which the quantity CAN change during the period of time under consideration
47
What is marginal product?
The change in total output produced by adding one unit of a variable input, such as the number of workers hired, with all other inputs used held constant.
48
What is the Law of diminishing returns?
The principle that beyond some point the marginal product decreases as additional units of a variable resource are added to a fixed factor.
49
What is total fixed cost?
Costs that do not vary as output varies and that must be paid even if output is zero, such as rent for office space.
50
What is total variable cost?
Costs that are zero when output is zero and vary as output varies, such as wages.
51
What is total cost?
The sum of total fixed cost and total variable cost at each level of output
52
What is average fixed cost?
Total fixed cost divided by the quantity of output produced.
53
What is average variable cost?
Total variable cost divided by the quantity of output produced.
54
What is average total cost?
Total cost divided by the quantity of output produced.
55
What is marginal cost?
The change in total cost when one unit of output is produced.
56
What are economies of scale?
A situation in which the long- run average cost curve declines as the firm increases output:
• Division of labor and use of specialization
• Efficiency of capital
57
What are diseconomies of scale?
A situation in which the long-run average cost curve rises as the firm increases output
58
What is perfect competition?
1) Many small firms
2) Homogeneous product
3) Very easy entry and exit
4) Price taker
59
What is a price taker?
A seller that has no control over the price of the product it sells.
60
What determines price?
Supply and demand.
61
What determines the individual firm's demand curve?
A horizontal line at the market price.
62
Why does the firm have no incentive to charge less than the market price?
It can sell everything it brings to market at the market price.
63
Using the marginal revenue and marginal cost method, where should a firm produce?
Where marginal revenue equals marginal costs.
64
Why does MR= P in perfect competition?
Each additional unit sold is adding the market price to TR and TR divided by P =AR.
65
What is a normal profit?
The minimum profit necessary to keep a firm in operation
66
In the long-run, what happens when economic profits are made?
When firms make more than a normal profit, firms enter the industry, as supply increases, a downward pressure is put on prices
67
In the long-run, what happens when losses are made?
When firms make less than a normal profit, firms leave the industry, as supply decreases, an upward pressure is put on prices.
68
In the long-run, where is equilibrium?
At the market price that enables firms to make a normal profit.
69
What different types of industries can exist in the long-run?
* Constant-cost (new competition does not influence the firm's cost curves)
* Decreasing-cost ( "decreases firm's cost curves)
* Increasing-cost ( " increases firm's cost curves)
70
What is a monopoly?
* Single seller
* Unique product
* Impossible entry into the market (e.g. posten, vinmonopolet).
71
What is a natural monopoly?
An industry in which the long-run ave rage cost of production declines throughout the entire market
72
What is unique about a natural monopoly?
Because of economies of scale a single firm will produce output at a lower per unit cost than two or more firms in the industry.
73
What is a price maker?
A firm that faces a downward-sloping demand curve. It therefore searches its demand curve to find the price-output combination that maximizes its profit and minimizes its loss.
74
What is the difference between monopoly and perfect competition?
The demand and marginal revenue curves of the monopolist are downward sloping; in perfect competition they are horizontal.
75
Why is MR(marginal revenue)
To sell additional units, the price has to be lowered; this price-cut applies to all units, not just the last unit
76
Where does a monopolist produce to maximize profit or minimize losses?
Where marginal revenue equals marginal costs
77
Can a monopolist make a profit in the long- run?
If the positions of a monopolist's demand and cost curves give it a profit and nothing disturbs these curves, it can make a profit in the long-run.
78
What is price discrimination?
The practice of a seller charging different prices for the same product not justified by cost differences.
79
How does monopoIy harm consumers?
It charges a higher price and produces a lower quantity than would be the case in a perfectly competitive situation.
80
What is arbitrage?
The practice of earning a profit by buying a good at a low price and reselling the good at a higher price.
81
What is imperfect competition?
A market structure between the extremes of perfect competition and monopoly. Monopolistic competition and oligopoly belong to the imperfect competition
category.
82
What is monopolistic competition?
```
• Many small sellers
• Differentiated product
« Easy entry and exit
e.g. hair salons, gas stations, grocery store, video rent
stores, restaurants
```
83
What is product differentiation?
The process of creating real or apparent differences between goods and services.
Product differentiation is a key characteristic of monopolistic competition.
84
What is non-price competition?
A firm competes using advertising. packaging, product development, better service, rather than lower prices.
85
Why is a monopoIistic competitive firm a price maker?
Product differentiation gives the firm some control over its price.
86
How does a firm decide what price to charge and how many units to produce?
Marginal revenue = marginal costs
87
Why is a normal profit made in the long-run?
The combination of the leftward shift in the firm's demand curve and the upward shift in the LRACcurve.
88
How efficient is monopolistic competition?
Comparing monopolistic competition with perfect competition, we find that the monopolistic competitive firm does not achieve allocative efficiency, charges a
higher price, restricts output, and does not produce where average costs are at a minimum
89
What is oligopoly?
* few sellers
* either homogeneous or a differential product
* difficult market entry
90
What is the distinguishing feature of oligopoly?
Mutual interdependence
91
What does a kinked demand curve show?
It explains why prices may be rigid in an oligopoly. It shows that rivals will match a firm's price decrease, but ignore a price increase.
92
How do oligopolists determine price?
They play the game "follow the leader" that economists call price leadership
93
What is a cartel?
A group of firms formally agreeing to control the price and output of a product(quotas). The goal is to maximize profits, but firms have an incentive to cheat, which is a constant threat to a cartel.
94
What is Gross Domestic Product?
GDPis the most widely used measure of a nation's economic performance.
95
What do es GDP measure?
The market value of all final goods and services produced in a nation during a period of time, usually a year, regardless of who owns the factors of production.
96
What is an advantage of using GDP?
GDP measures value using dollars, rather than a list of the number of goods and services.
97
Does GDP measure the whole economy?
Yes, GDP consists of many puzzle pieces to fit together, including markets for products, resources, consumers, workers, and businesses.
98
What are the two approaches we use to measure GDP?
Expenditure and Income.
99
What is the expenditure approach?
The national income accounting method that measures GDPby adding all the spending for final goods and services during a period of time
100
What are the four sectors of GDP?
* Consumption (C)
* Investment (I)
* Government (G)
* Foreign - Net exports (XM)
101
What is the income approach?
The method that measures GDP by adding all incomes.
102
What are the income components of GDP?
GDP= Compensation of employees + rents + profits + net interest+ non-income adjustments.
103
What are non-income adjustments?
* Capital consumption allowances
| * Indirect business taxes
104
What are short comings of GDP?
* Nonmarket transactions
* Distribution, kind, & quality of products
* Neglect of leisure time
* Underground economy
* Economic bads
105
What is Net Domestic Product?
NDPis GDPminus depreciation of the capital worn out in producing output
106
What is national income?
NI is the total income earned by resource owners, including wages, rents, interest, and profits, and is calculated as NDP minus indirect business taxes.
107
What is personal income?
PI is the total income received by households that is available for consumption, saving, and payment of personal taxes.
108
What is disposable personal income?
DI is the amount of income that households have to spend or save after payment of personal taxes
109
What is nominal GDP?
The value of all final goods based on the prices existing during the time period of
production.
110
What is real GDP?
The value of all final goods produced during a given time period based on the prices existing in a selected base year.
111
What is the chain price index?
A measure that compares changes in the prices of all final goods during a given year to the prices of those goods in a base year. The GOP chain price index is a
broad price index used to convert nominal GOP to real GOP.
112
What is a business cycle?
Alternating periods of economic growth and contraction, which can be measured by changes in real GOP. Vary greatly.
113
What are the phases of a business cycle?
- Peak (real GOP reaches maximum after rising during a recovery)
- Recession (down turn in the business, declining GOP)
- Trough (turning point between recess ion and recovery)
- Recovery (rising business, expansion)
114
How long before a downturn is a recession?
At the last two consecutive quarters of real GOP decline.
115
What are the types of economic indicators?
- Leading (change before GOP)
- Coincident (changes at the same time as GOP)
- Lagging (change after GOP)
116
What causes unemployment?
When total spending falls, businesses will find it profitable to produce a lower volume of goods and avoid unsold inventory.
117
Who is considered employed?
Employees, self-employed people.
118
Who is considered unemployed?
New entrants, re-entrants, people who lost their jobs or quit their jobs, laid off people.
119
What is the unemployment rate?
The percentage of people in the labor force who are without jobs and are actively seeking jobs
120
What is the civilian labor force?
People 18years or older who are either employed or unemployed (excluding armed forces, household workers, students, retirees, persons with disabilities etc.)
121
Who is a discouraged worker?
A person who wants to work, but has given up searching for jobs.
122
What is underemployment?
People working at jobs below their level of skills.
123
What are the types of unemployment?
- Seasonal (caused by change in weather conditions etc.)
- Frictional (caused by normal search time workers needs to use finding new jobs)
- Structural (caused by mismatch of worker skills, e.g. lack of skills, technological change etc.)
- Cyclical (caused by lack of jobs during recess ion)
124
What is full unemployment?
The sum of seasonal, frictional and structural unemployment
125
What percent unemployment is considered full employment?
About5 %
126
What is the cost of unemployment?
The GOP gap. (difference between full employment real GOP and real GOP.)
127
What is inflation?
An increase in the general (average) price level of goods and services in the economy (and not an increase in the price of any specific product).
128
What is the Consumer Price Index?
The CPI is an index that measures changes in the average prices of consumer goods and services
129
Which goods and services are included in the CPI?
The average prices for a "market basket" of different items purchased by the typical urban family are recorded.
130
How is the CPI computed?
Current year prices are compared to prices of a similar basket of goods and services in a base year.
131
What is a base year?
A year chosen as a reference point for comparison with some earlier or later year.
132
How is inflation rate computed?
The annual inflation rate is computed as the percentage change in the official CPI from one year to the next.
133
What is disinflation?
A reduction in the rate of inflation. This does not mean that prices were falling, but only that the Inflation rate fell
134
What does Inflation do to people's income?
A general rise in prices will shrink people's income.
135
What is nominal income?
The actual number of Euros, dollars received over a period of time. Nominal income is income measured in actual money amounts.
136
What is real income?
The actual number of Euros, dollars reeeived (nominal income) adjusted for changes in the CPI
137
What is wealth?
The value of the stock of assets owned at some point in time.
138
How is wealth affected by inflation?
Inflation can benefit holders of wealth because the value of their assets tends to increase as prices rise.
139
How does inflation affect borrowers and savers?
They can win or lose depending on the rate of inflation.
140
What are the two basic types of inflation?
Demand-pull and Cost-push
141
What is demand-pull inflation?
A rise in the general price level resulting from an excess of total spending(demand). It is caused by pressure on prices originating from the buyers side of the market.
142
What is cost-push inflation?
A rise in the general price level resulting from an increase in the cost of production. It is caused by pressure on prices originating from the seller's side of the market.
143
Do people's expectations affect inflation?
Yes, expectations can influence both demand- pull and cost-push inflation.
144
What is hyperinflation?
An extremely rapid rise in the general price level. Hyperinflation can seriously
disrupt an economy by causing inflation psychosis, credit market collapses, a wage-price spiral, and speculation.
145
How does the U.S inflation rate compare with other countries?
Its low compared to other countries. US:3,4% Norway:16,3% Turkey:54,9%
