Microeconomics - Midterm 1 - Study Guide

Front 1

How is the market defined?

Back 1

The process by which buyers and sellers determine what they are willing to buy and sell and on what terms. It is the process by which buyers and sellers decide the prices and quantities of goods that are to be bought and sold.

Front 2

Who is the entrepreneur?

Back 2

An enterprising person who discovers potentially profitable opportunities and organizes, directs, and manages productive ventures.

Front 3

How is society defined?

Back 3

households, firms, government, and the rest of the world

Front 4

What is the economic problem?

Back 4

Satisfying unlimited wants with limited (scarce) resources

Front 5

What is economics?

Back 5

A method of thinking founded on the study of how people cope with the pressing choice problems associated with scarcity, with all effort directed toward satsifying as many wants as possible.

Front 6

What's involved in making decisions? In how we interact.

Back 6

There is a tradeoff, and an opportunity cost associated with each tradeoff

Front 7

What is opportunity cost?

Back 7

The value of the most highly preferred alternative not taken at the time the choice is made.

Front 8

What is the difference between microeconomics and macroeconomics?

Back 8

The difference between micro and macro economics is simple. Microeconomics is the study of economics at an individual, group or company level. Macroeconomics, on the other hand, is the study of a national economy as a whole. Microeconomics focuses on issues that affect individuals and companies.

Front 9

What are property rights?

Back 9

Pertain to the permissible use of resources, goods, and services; they define the limits of social beahvior - what can and cannot be done by individuals in society. They also specify whether resources, goods, and services are to be used privately or collectively by the state or some smaller group.

Front 10

What is the point/purpose of property rights?

Back 10

Ensuring the efficient allocation of scarce resources

Front 11

Rational behavior

Back 11

Consistent behavior that maximizes an individual's satisfaction through comparisons of the costs and benefits of alternative courses of action

Front 12

What does rational behavior NOT mean?

Back 12

1. People do many things that do not work out to their benefit.2. Rational behavior implies that a person is totally self-centered, doing only things that are of direct personal benefit.3. People’s behavior is subject to psychological quirks, hang-ups, habits, and impulses.4. People do not necessarily maximize their satisfaction.5. People do not always pursue their narrow self-interest. They often have the interests of others at stake.

Front 13

What is market competition?

Back 13

In pursuit of their own interests, buyers and sellers try to out-do each other… and try not to be out-done

Front 14

What are some characteristics of the perfectly competitive market?

Back 14

• Many buyers and many sellers• Each buyers and/or seller has a negligible impact on the market outcome• Identical product (good or service)• No barriers to entry – any one can enter• Easy entry and exit

Front 15

What is the difference between price and nonprice competition?

Back 15

Price competition exists when marketers complete on the basis of price. In price competition, the marketers develop different price strategies to beat the competition. Nonprice competition focuses on the factors other than the price of the product. In non-price competition, customers cannot be easily lured by lower prices as their preferences are focused on various factors, such as features, quality, service, and promotion.

Front 16

Demand

Back 16

The inverse relationship between the price of a product and the quantity consumers are willing and able to purchase during a given time period (quantity demanded), ceteris paribus (all other things held constant)

Front 17

Law of demand

Back 17

A microeconomic law that states, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa

Front 18

Why is there a negative relationship between price and quantity supplied?

Back 18

Substitution effect: the economic understanding that as prices rise — or income decreases — consumers will replace more expensive items with less costly alternatives. ; income effect (real income): as price of a good increases, the purchasing power of consumer incomes falls

Front 19

Supply

Back 19

Supply is the assumed relationship between the quantity of a good producers are willing to offer during a given period and the price, everythinge lse held constant. Generally, because additional costs tend to rise with expanded production, this relationship is presumed to be positive.

Front 20

Law of supply

Back 20

a fundamental principle of economic theory which states that, all else equal, an increase in price results in an increase in quantity supplied

Front 21

Why is there a positive relationship between price and quantity supplied?

Back 21

Marginal cost (the additional cost incurred by producing one additional unit of a good, activity, or service) increases with quantity produced and supplied

Front 22

Changes in price lead to what along the demand and supply curves?

Back 22

Movement along these curves

Front 23

What is the difference between supply and quantity supplied?

Back 23

Supply deals with the whole supply curve, covering the entire relationship between price and the quantity supplied at each of these prices. Quantity supplied is a specific point on the curve and refers to the quantity supplied at one specific price.

Front 24

What is the difference between demand and quantity demanded?

Back 24

A change in quantity demanded represents a movement along the current demand curve, while a change in demand represents a shift in the entire demand curve. By understanding this difference, a producer can better respond to market changes.

Front 25

Change in demand leads to what on the demand curve?

Back 25

A shifting of the demand curve to the right for an increase and to the left for a decrease.

Front 26

Change in supply leads to what on the supply curve?

Back 26

A shifting of the supply curve to the right for an increase and to the left for a decrease.

Front 27

What are some factors that shift the demand curve?

Back 27

• The prices of related goods• Expected future prices• Income• Expected future income• Population (number of consumers)• Tastes and preferences

Front 28

What are some factors that shift the supply curve?

Back 28

• The price of productive resources• Change in the profitability of other goods• Change in technology

Front 29

What is the equilibrium price?

Back 29

The equilibrium price is the price toward which a competitive market will move, and at which it will remain once there, everything else held constant. It is the price at which the market "clears" - that is, at which the quantity demanded by consumers is matched exactly by the qauntity offered by the producers. At the equilbrium price, the quantity sellers are willing to supply and the qauntity buyers want to consume are equal. This is the equilibrium quantity.

Front 30

What is the equilibrium quantity?

Back 30

The output (or sales) level toward which the market will move, and at which it will remain once there, everything else held constant

Front 31

Solve for equilibrium price and quantity given the following demand and supply equations: Demand: Q = 2000 - 200P, Supply: Q = -400 + 200P

Back 31

Set the two equations against each other and solve for P. Equilibrium price P is equal to $6. Plug 6 into the demand or supply equation to solve for Q. Equilibrium quatnity is 800.

Front 32

Solve for equilibrium price and equilibrium quantity given the following demand and supply equations: Demand: Q = 10,000 - 80p, Supply: 20p

Back 32

Set the two equations against each other and solve for P. Equilibrium price P is equal to $100. Plug 100 into the demand or supply equation to solve for Q. Equilibrium quantity is 2,000.

Front 33

What happens if the market price is not equal to the equilibrium price?

Back 33

You will have a surplus or a shortage.

Front 34

Is a surplus or shortage temporary?

Back 34

Yes, the market will move back to the equilibrium price.

Front 35

Does the demand or supply curve shift due to a market surplus or shortage?

Back 35

No

Front 36

Can an event affect both demand and supply?

Back 36

No

Front 37

Can an event affect supply or demand more than once?

Back 37

No

Front 38

Excise tax

Back 38

A tax imposed on the producer (ex: retail sales tax, use tax)

Front 39

Subsidy

Back 39

Subsidies work in the opposite direction as taxes - supply shifts to the right, consumers and producers benefit (ex: agricultural products, education)

Front 40

Price ceiling

Back 40

A government determined maximum price at which the good or service can be traded; - restricts an upward movement of the market price; - effective when below the competitive equilibrium price; -creates a shortage (ex: gasoline price control, rent control)

Front 41

Price floor

Back 41

a government-determined price (or wage) below which a specified good (labor) cannot be sold

Front 42

If consumers are less responsive to a price change when compared to producers…

Back 42

… the tax burden is mostly on the consumers (additional points: demand curve would be steeper, demand is inelastic, supply is elastic)

Front 43

What is the likely market outcome of a price ceiling?

Back 43

The quantity supplied is less than the quantity demanded, results in a SHORTAGE

Front 44

What is the likely market outcome of a price floor?

Back 44

The quantity supplied is greater than the quantity demanded, results in SURPLUS

Front 45

What are some issues with price controls and how may firms respond?

Back 45

the effective price may rise above the controlled market price (effective price would include "search" costs); firms may engage in non-competitive market behavior (bundling a controlled good with an uncontrolled good)

Front 46

What is a fringe benefit?

Back 46

A variant in how workers are paid: - health insurance, paid vacation days; - firms provide a fringe benefit as long as it is profitable to do so

Front 47

What is the likely market outcome if a firm offers a fringe benefit?

Back 47

supply of labor increases (wage rate falls and the quantity of labor increases); demand for labor decreases (wage rate falls and the quantity of labor decreases)

Front 48

Consider the following events: Scientists reveal that eating oranges decreases the risk of diabetes, and at the same time, farmers use a new fertilizer that makes orange trees produce more oranges. Explain what effect these changes have on the equilibrium price and quantity of oranges.

Back 48

Equilibrium price change is ambiguous and the equilibrium quantity increases (event 1 - equilibrium price increases and equilibrium quantity increases; event 2 - equilibrium price decreases and equilibrium quantity increases)

Front 49

Because both bagels and cream cheese are often eaten together, they are complements. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of bagels have risen. What could be responsible for this pattern - a fall in the price of flour or a fall in the price of milk?

Back 49

A fall in the price of flour rather than a fall in the price of milk could be resposnible for this pattern. (fall in price of bagel leads to an increase in demand for cream cheese (complements))

Front 50

Comparative advantage

Back 50

The ability to produce a good at a lower opportunity cost than another producer; leads to specialization and trade

Front 51

US - Soybeans: 20, Bananas :15. Mexico - Soybeans: 5, Bananas: 10. Who has an absolute advantage in the production of soybeans and banans?

Back 51

The US

Front 52

US - Soybeans: 20, Bananas :15. Mexico - Soybeans: 5, Bananas: 10. Who has a comparative advantage in the production of soybeans?

Back 52

The US

Front 53

US - Soybeans: 20, Bananas :15. Mexico - Soybeans: 5, Bananas: 10. Who has a comparative advantage in the production of bananas?

Back 53

Mexico

Front 54

US - Soybeans: 20, Bananas :15. Mexico - Soybeans: 5, Bananas: 10. What is a mutually beneficial exchange rate between the USA and Mexico?

Back 54

1 S = 3/4 < B < 2

Front 55

Terms of trade

Back 55

Ratio at which one commodity can be traded or exchanged for another commodity; ratio of the price of exports to the price of imports

Front 56

When will the firms in a domestic country export?

Back 56

If the foreign price is greater than the domestic price

Front 57

When will firms in a domestic country import?

Back 57

If the foreign price is less than the domestic price

Front 58

Without restrictions, producers are _____ in a country that exports. Cosumers are _____

Back 58

Producers are better off in a country that exports, consumers are worse off

Front 59

Without restrictions, producers are _____ in a country that imports. Consumers are _____

Back 59

Producers are worse off in a country that imports, consumers are better off

Front 60

With restrictions, producers are _____ in the country that imports. Consumers are _____

Back 60

Producers are still worse off in a country that imports, consumers are better off

Front 61

Exchange rate

Back 61

The price of one national currency state in terms of another

Front 62

Depreciation

Back 62

A reduction in a currency's exchange value (purchasing power)

Front 63

How does depreciation affect trade in the domestic country (the country with the depreciation)?

Back 63

Depreciation of the dollar discourages imports (can't afford it) and encourages exports (country's goods are cheaper)

Front 64

Is a tax on margarine "efficient" in the economic sense of the term?

Back 64

No. It leads to a decrease in the quantity bought/sold. Without a tax, a greater quantity of margarine would be traded. This suggests that resources are not being efficiently allocated.

Front 65

Why would margarine producers prefer to have an excise tax imposed on both butter and margarine?

Back 65

If the tax is on margarine only, consumers may switch to butter (it would be relatively cheaper to consumers). The demand for margarine would decrease and this would decrease the price. With supply decreasing because of tax and demand decreasing because of the 'switch', firms may feel a 'bigger' loss due to the ambiguous (uncertain price). So... margarine producers would prefer the tax on both.

Front 66

Would a tax imposed on both butter and margarine be more or less efficient than a tax on margarine alone?

Back 66

Such a tax would be more efficient… competition

Front 67

If a tariff is imposed on imported autos and the domestic demand for autors rises, what would happen to auto imports?

Back 67

If a tariff is imposed, the supply of imports decrease. If the domestic demand for auto rises, this would increase the price for domestic autors. The demand for imports would increase. The quantity of auto imports would increase.

Front 68

If a quota is imposed on imported autos and the deamnd for auto increases, what would happen to auto imports?

Back 68

If a quota is imposed and the demand for auto increases, the price of imports would increase. Remember that with a quota, quantity is fixed.

Front 69

Consider the following production capabilities of France and Italy for cheese and bread for a given use of inputs. Which nation will export cheese to the other? What might be a mutually beneficial exchange rate for cheese and bread? France - Cheese: 40, Bread: 60. Italy - Cheese: 10, Bread: 5.

Back 69

Italy will export cheese to France. A mutually beneficial exchange rate for cheese and bread would be: 1 B for 1 C (for example; 1/2 B < exchange rate for 1 cheese < 3/2B)

Front 70

Price per Frisbee ($) Quantity Demanded (million Frisbees) Quantity Supplied (million Frisbees)11 1 1510 2 129 4 98 6 67 8 36 10 1What are the equilibrium price and quantity of Frisbees?

Back 70

equilibrium price, P = $10, equilibrium quantity, Q = 6 million Frisbees

Front 71

Price per Frisbee ($) Quantity Demanded (million Frisbees) Quantity Supplied (million Frisbees)11 1 1510 2 129 4 98 6 67 8 36 10 1Frisbee manufacturers persuade the government that Frisbee production improves scientists' understanding of aerodynamics and thus is important for national security. A concerned congress votes to impose a price floor $2 above the equilibrium price. What is the new market price? How many Frisbees are sold?

Back 71

Market price, p: $10; quantity sold Q = 2 million frisbees

Front 72

Irate college students march on Washington and demand a reduction in the price of Frisbees. An even more concerned Congress votes to provide a $1 subsidy to buyers. Briefly describe what happens in the market for Frisbees. What is the new market price? How many Frisbees are sold?

Back 72

Demand increases. The subsidy gives the effect of willingness to pay more. Demand would shift to the right by $1. On the table, it would be increasing the price buyers are willing to pay by $1. So… market price = $10, quantity sold = 4