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The reasons to study economics

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To learn a way of thinking, to understand society and global affairs, and to examine the debate about the role of government.

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Marginalism

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The process of analyzing the additional costs or benefits arising from a decision.

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Economics

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The choices made by people faced with scarcity.

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Microeconomics

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The study of the choices made by individual households, firms, and governments.

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Macroeconomics

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The study of the nation's economy as a whole.

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Descriptive Economics

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The compilation of data that describe phenomena and facts.

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Opportunity Cost

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The cost involved when choosing between alternates.

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Positive Economics

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EX) A study of costs and benefits of purchasing carbon offsets to global warming, because global warming is causing permanent damage to the global environment.

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Equity

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EX) Salary caps are imposed when league officials believe some football team owners are taking advantage of their deep pockets and buying more quality players than the other owners can afford to buy.

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An efficient market

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Is characterized by the fact that profit opportunities are eliminated almost instantaneously.

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Normative Statement

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EX) "People should pollute as little as possible".

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Empirical Economics

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Collection and use of data to test economic theories.

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An efficient economy is an economy that produces what _______ demand and does so at the _______ possible cost.

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Consumers; least

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If the slope of a straight line is -2 and if X decreases by 8, then Y will

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Increase by 16

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The slope of a horizontal line is

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Zero

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The slope of a vertical line is

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Infinite

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Production

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The process by which resources are transformed into useful forms.

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Money

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Is not a term used by economists.

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According to the theory of comparative advantage, specialization and free trade will benefit

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All trading parties, even when some are absolutely more efficient producers than others.

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In economics, investment always refers to

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The creation of capital.

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Saving

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Forgoing present benefits in order to receive future benefits.

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In terms of the production possibility frontier, an increase in productivity attributable to new technology would best be shown by

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The production possibility frontier shifting outward, away from the origin.

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Command Economy

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An economy in which central authority draws up a plan that establishes what will be produced and when, sets up production goals, and makes rules for distribution.

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Laissez-Faire Economy

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An economy in which individual people firms pursue their own self interest without any central direction or regulation.

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Methods of Non-Price Rationing

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Waiting in line, coupons, and favored costumers.

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Complements

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Demand for one item goes down as the price of another item goes up.

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Income

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Is held constant along demand curves .

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Why do firms engage in the activity of production?

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To acquire profits.

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When supply is fixed or fixed or the product is unique, the price is

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Demand determined.

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Economics is the study of

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How society uses limited resources.

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Sunk Costs

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Costs that cannot be avoided, because they have already been incurred.

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Opportunity Cost

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What we give up to get something else.

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The common way of expressing the efficient market concept is

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"There is no such thing as a free lunch."

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What is microeconomics question?

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Is it sensible for a government to subsidize tobacco production?

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Normative Economics

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Answers the question "What ought to be?"

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Production is the process by which

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Resources are transformed into useful forms.

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According to the theory of comparative advantage, trade and specialization _______ productivity by _______ opportunity costs.

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Raise; lowering

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Saving is an example of

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Trading present benefits for future benefits.

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Economic growth will most likely occur when

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A society acquires new resources.

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In a command economy, ________ establishes what will be produced and when, sets production goals, and makes rules for distribution.

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A centralized authority

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Income _______ along the demand curve

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Is held constant

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The law of _______ implies that as prices fall _______.

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Demand; quantity demanded increases

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When the increase in the price of one good causes the demand for another good to decrease, the goods are

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Complements

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Substitutes

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Demand for one item goes down when the price of another item goes down.

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The price system

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Automatically distributes scarce goods.

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In a "black market"

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Illegal trading at market prices takes place.

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Methods of non-price rationing are

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favored customers, waiting in line, and coupons.

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Producer Surplus

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The difference between current market price and full costs of production for the firm.

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Consumer Surplus

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The difference between the maximum a person is willing to pay and current market price.

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The market price of a basketball is $35 and the full cost of producing it is $20, the a basketball producing firm gets producer surplus of

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$15

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The total of consumer plus producer surplus is greatest

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At market equilibrium.

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When there is overproduction in a market,

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There is a dead weight.

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When the price of fish increases 10%, quantity demanded decreases 5%. The price elasticity of demand for fresh fish is _____ and total revenue from fresh fish slaves will ______.

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Inelastic; increase

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The ABC Computer Company wants to increase the quantity of computers it sells by 5%. If the price elasticity of demand is -2.5, the company must

answer

Decrease price by 2.0%.

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When there are more substitutes for a product, the ______ for the product is _______.

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Demand; more price elastic

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If the supply of oranges is unit elastic, the price elastic of supply of oranges is

answer

1.0.

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If income increases by 10% and, in response, the quantity of housing demanded increases by 7%, the income elasticity of demand for housing is

answer

0.7.

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If the quantity of tea demanded increases by 2% when the price of coffee increases by 6%, the cross-price elasticity of demand between tea and coffee is

answer

0.33.

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If the quantity of peanut butter demanded increases by 4% when the price of jelly decrease by 2%, the cross-price elasticity of demand between peanut butter and jelly is

answer

-2.

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Jane has $500 a week to spend on clothing and food. The price of clothing is $35 and the price of food is $10. The clothing and food pairs in Jane's choice set include ______ units of clothing and ______ units of food.

answer

8; 30

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Jane has $500 a week to spend on clothing (c) and food (f). The price of clothing is $25 and the price of food is $10. What is the equation for Jane's budget constraint?

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$25 x Clothing + $10 x Food= $500

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Kathy eats five slices of pizza on a Saturday night but admits each slice of pizza doesn't taste as good as the previous one. This suggests that for Kathy the

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Marginal utility of a slice is positive but decreasing.

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If MUx/Px < MUy/Py, then

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Spending a dollar less on X and a dollar more on Y increases utility.

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For normal goods, the substitution and income effects of a price decrease will

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Both increase the quantity of the good demanded.

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A price change would have the largest income effect on a

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Car.

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Assume letters is an inferior good instead of a normal good. The income effect of a wage increase will lead to a _____ demand for leisure and a ______ labor supply.

answer

Lower; higher

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In a "black market"

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Illegal trading at market prices takes place.

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The adjustment of _____ is the rationing mechanism in market economies.

answer

Price

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A price floor is

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A minimum price set by government that sellers must charge for a good.

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Producer surplus is

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The difference between current market price and full cost of production for the firm.

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If the most someone is willing to pay for ticket to see their favorite team is $100 and the market price of the ticket $35, then this buyer will get consumers surplus of

answer

$65.

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When the price of fresh fish increase 10%, quantity demanded decrease 5%. The price elasticity of demand for fresh fish is ______ and total revenue from fresh fish sales will ______.

answer

Inelastic; increase

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A government wants to reduce electricity consumption by 10%. The price elasticity of demand for electricity is -5. The government must ______ the price of electricity by ______.

answer

Raise; 2.0%

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When there are more substitutes for a product, the ______ for the product is ______.

answer

Demand; more price elastic

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If the cross-price elasticity of demand between fish and chicken is 2, then a 2% increase in the price of fish will result in a _____ in the quantity chicken demanded.

answer

4% increase

question

Jane has $500 a week to spend on clothing and food. The price of clothing is $25 and the price of food is $10. The clothing and food pairs in Jane's choice set include _____ units of clothing and ______ units of food.

answer

8; 30

question

Jon is consuming X and Y so that he is spending his entire income and MUx/Px= 8 and MUy/Py= 4. To maximize utility, he should consume

answer

More X and less Y

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A rise in the price of Pepsi that causes a household to shift its purchasing pattern toward Coke and away from Pepsi is the _____ effect of a price change.

answer

Substitution.

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For inferior good, the substitution and income effects of a price increase will

answer

both decrease the quantity of the good demanded.

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A consumers satisfies the condition _____ when her indifference curve is just tangent to her budget constraint.

answer

MUx/Px = MUy/Py

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We derive the demand curve for X from indifference curves and a budget constraint by changing the

answer

Price of X

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If a household's income doubles, it budget constraint will

answer

Shift out parallel to the old one.

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The Wax Works sells 400 candles at a price of $10 per candle. The Wax Works' total costs for producing 400 candles are $500. The Wax Works' economic profit

answer

$3,500.

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Costs of production are determined

answer

By the technologies that are available and by input prices.

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Isoquant

answer

A graph showing all the combinations of capital and labor that can be used to produce a given amount of output.

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Fixed costs

answer

Do NOT exist in the long run.

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If a firm is producing where MR>MC

answer

the revenue gained by producing one more unit of output exceeds the cost incurred by doing so.

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Firms that are "breaking even" are

answer

Earning zero economic profits

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Economic profit is

answer

(P-ATC)q

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A firm will shut down in short run if

answer

Variable costs exceed revenues.

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As long as price is sufficient to cover _____, the firm is better off by operating rather than by shutting down.

answer

Average variable cost

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When decrease in the scale, a(n) ______ in a firm's scale of production leads to ______ average total cost.

answer

Decrease; no change in

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The smallest size plant size at which the long run average cost curve is at its minimum is called the

answer

Minimum efficient scale.

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Industries in which firms are suffering losses are likely to _____ in the long-run.

answer

Contract

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The set of conditions necessary for long-run equilibrium for a perfectly competitive firm?

answer

P= SRMC = SRAC = LRAC

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In the long run firms will expand as long there are more ____ and new firms will enter the industry as long as they earn _____.

answer

Economies of scale; positive economic profits

question

In long-run equilibrium for a perfectly competitive industry, firms earn ____ economic profits and produce ____.

answer

Zero; efficiently

question

As long as economic profits are being earned in an industry, firms will ____ the industry and the supply curve will shift to the _____.

answer

Enter; right

question

The Wax Works sells 400 candles at a price of $10 per candle. The Wax Works' total costs for producing 400 candles are $500. The Wax Works' economic profit is

answer

$3,500.

question

If economic profit is zero, a firm

answer

Earns exactly a normal rate of return.

question

Isoquant

answer

A graph showing all the combinations of capital and labor that can be used to produce a given amount of output.

question

The slope of the isoquant is

answer

Negative, -MPl/MPk, and the marginal rate of technical substitution.

question

Wilbur's Widgets, a widget company, produces 100 widgets. Its average fixed cost is $5 and its total variable cost is $300. What is the total cost of producing 100 widgets?

answer

$800

question

Average fixed costs

answer

Fall as output rises.

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The main decision for a profit maximizing perfectly competitive firm is not what ____ but what ____.

answer

Price to charge; level of output to produce

question

Assume firms break in an industry. New firms ____ attracted to the industry and current ones ____ exiting it.

answer

Are not; are not

question

For economies of scale, a(n) ____ in a firm's scale of production leads to _____ average total cost.

answer

Increase; lower

question

When an increase in the scale of production leads to higher average costs, the industry exhibits

answer

Decreasing returns to scale.

question

Which of the following is set of conditions necessary for long-run equilibrium for a perfectly competitive firm?

answer

P= SRMC = SRAC = LRAC

question

In long-run equilibrium for a perfectly competitive industry, firms earn _____ economic profits and produce _____.

answer

Zero; efficiently

question

In imperfectly competitive markets,

answer

Some competition may exist in the markets.

question

In an imperfectly competitive industry

answer

A single firm has some control over the price of its output.

question

A coffee manufacturer raises the price of its coffee by 10%, and the quantity demanded of its coffee falls by only 12%. The firm has

answer

Some market power.

question

In a monopolistic industry there is(are) _____ firm(s) and ____.

answer

A single; entry of new firms is blocked

question

Suppose we know that a monopolist is maximizing its profits. The monopolist has

answer

Equated marginal revenue and marginal cost.

question

A monopolist's supply of a good is

answer

Dependent on the monopolist's demand curve and it's marginal cost curve.

question

In the long run, a monopoly

answer

May earn positive economic profits due to entry barriers.

question

A barrier to entry that grants exclusive use of an invented product or process to the inventor is called ____.

answer

A pantent

question

A monopolist

answer

Is protected from competition by barriers to entry.

question

Government failure

answer

Leads to a less efficient allocation of resources

question

A false statement regarding perfect price discrimination is

answer

Perfect price discrimination yields the same market price and output result as perfect competition.

question

Why do price discriminating firms often lower their prices to children and elderly?

answer

They have a lower willingness to pay than other consumers.

question

What declared monopoly and trade restraints illegal?

answer

The Sherman Act

question

What made tying contracts illegal and banned price discrimination with the intent to monopolize?

answer

The Clayton Act

question

Relative to a monopolized industry, a competitively organized industry is more likely to produce

answer

More output, charges lower prices, and earns only a normal profit.

question

Relative to a competitively organized industry is more likely to produce

answer

Less output, charges higher price, and earns economic profits.

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