Chapter 1-5 Flashcards
A person who directs resources to achieve a stated goal
Manager
True or false.
The firm’s goal of maximizing profits is necessarily bad for society.
False. This is a common misconception.
What is total revenue minus total cost?
Accounting profits
The science of making decisions in the presence of scarce resources
Economics
The cost of explicit and implicit resources that is forgone when a decision is made
Opportunity cost
This implies that by making a choice, you give up another
Scarcity
An increase in price of good A will decrease the demand of good B. What do you call these goods?
Complements
What is the first step in making sound decisions?
Have well-defined goals
The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal
Managerial Economics
This curve describes how many goods the consumer is willing to buy at a certain price
Demand curve
It is the consumer’s desire or willingness to pay a prices for a good or service
Demand
What are the 4 factors that affect quantity demanded?
Price of the good
Price of other goods (substitute, complements)
Income
Preferences/tastes
The fundamental economic principle which states that price and quantity demanded are inversely related (ceteris paribus)
Law of Demand
These are used to produce a good or service
Resources
Why is it that buyers are willing to purchase less of a good at a higher price?
Because they attach a higher level of satisfaction when consuming a relatively scarce good
What is an indicator the resources are scarce?
Price
What is total revenue minus opportunity cost?
Economic profits
It is one of the scarcest resources of all
Time
What do you call the variables other than the price of a good that influence demand?
Demand Shifters
What is the supply function? (use Q, P, and x)
Q = x + P
These are an artifact of scarcity
Contraints
The explicit cost of resources needed to produce goods or services
Accounting cost
A movement along a supply/demand curve is called?
Change in quantity supplied/demanded
The quantity of a good all consumers will buy at different prices
Market demand
What is the slope of a perfectly inelastic demand curve? Is it a vertical or a horizontal line?
Slope = undefined
Vertical
This shows how many goods the producer is willing to supply at a certain price
Supply curve
True or false.
Accounting profits understate economic profits.
False. Accounting profits OVERSTATE economic profits
A rightward or leftward shift of a supply/demand curve is called?
Change in supply/demand
It refers to the total loss of producer and consumer surplus from underproduction and overproduction
Deadweight losses
This refers to the excess utility derived by an individual when he/she consumes a good or service
Consumer surplus
What do you call the good whose demand decreases when consumer’s income reduces?
Inferior good
What do you mean by implicit cost?
It is the value of what you are giving up
This discipline describes methods useful for directing everything from the resources of a household to maximize household welfare to the resources of a firm to maximize profits
Managerial Economics
There is overproduction when there are subsidies because?
The buyer pays less and the seller receives more
A good is said to be ____ if its QDemanded is very sensitive to change.
Elastic
The difference between the maximum price the consumer is willing to pay and the actual price he/she paid for the good/service (market price)
Consumer surplus
What is the demand function? (use Q, P, and x)
Q = x - P
An increase in price of good A will increase the demand of good B. What do you call these goods?
Substitutes
If |ℇ| < 1 then %△QD ___ %△P and it is ____. (elastic, inelastic, unitary elastic)
<
inelastic
Why is it that buyers are willing to purchase more of a good at a lower price?
Because they attach a lower level of satisfaction when consuming a relatively abundant good
The fundamental economic principle which states that price and quantity supplied are inversely related (ceteris paribus)
Law of Supply
It is the consumer’s willingness to pay decreases as quantity increases
Marginal utility
Limitation on price leads to ______. (overproduction or underproduction)
Underproduction
Why is it that quantity supplied increases when the price of the good is high?
Producers are encouraged to supply because they will earn more profit
This refers to a firm that is the sole provider of a good or service
Monopoly
This elasticity refers to the responsiveness of QDemanded to a change in price of another good; either positive or negative
Cross-price elasticity
What is the inverse demand function? (use Q, P, and x)
P = x - Q
It is a table of Qsupplied of a good at different price levels
Supply schedule
What do you call the good whose demand increases when consumer’s income rises?
Normal good
What are the 5 factors that affect quantity supplied?
Price Price of inputs Technology Number of firms in the market World events
If income and quantity demanded are inversely proportional to each other, then the product is a _____ good.
Inferior
It is the agreement between buyers and sellers in the price and the amount of goods or services traded
Market equilibrium
Point elasticity is defined as _____.
ℇ = [(Q2-Q1) / (P2-P1)] x (P1 / Q1) x 100
It is the difference between the actual price the producer was paid in producing the good or service (current market price) and the full cost of production for the firm
Producer Surplus
There is underproduction when taxes are imposed because?
The buyer pays more and the seller receives less
Unitary total revenue is if demand is perfectly _____ and when managers increase price, consumers still purchase.
Inelastic
If |ℇ| < 1, and price increases, what happens to total revenue?
Increases
It refers to the sensitivity of consumers to a change in price of a good, price of other goods or income
Elasticity of Demand
This elasticity refers to the responsiveness of QDemanded to a change in its own price
Own-price elasticity
A monopoly sets ____ price and produces ____ quantity.
High; Low
underproduction
Limitation on the amount a firm is allowed to produce leads to ______. (overproduction or underproduction)
Underproduction
What will happen if Mux > Muy?
Consumers will give up more units of y to have more units of x because they are happier with x
Arc elasticity is defined as _____.
ℇ = [(Q2-Q1) / (Q1+Q2)] x [(P1+P2) / (P2-P1)] x 100
If |ℇ| = 1 then %△QD ___ %△P and it is ____. (elastic, inelastic, unitary elastic)
=
Unitary elastic
This elasticity is nearly always negative because of the relationship between Qdemanded and P
Own-price elasticity
The own-price elasticity of demand for good X, denoted ℇx is defined as _____.
ℇx = %△QD / %△P
The opportunity cost of using a resource include what (2) costs?
Explicit or accounting cost and implicit cost
If |ℇ| > 1 and price increases, what happens to total revenue?
Decreases
If MR < MC, then there is marginal _____. (profit/loss)
Loss.
An additional unit produce will incur loss (should produce less)
A good is said to be ____ if its QDemanded is not sensitive to change.
Inelastic
If the own-price elasticity of demand for a product is -2, a 10% increase in the product’s price will have what effect on the QDemanded?
20% decline in the QDemanded.
-2 = %△QD/10% %△QD = -20%
Why is it that quantity supplied decreases when the price of the good is low?
Produces are discouraged to supply since they will not earn as much
It is the elasticity at a particular point on a curve between 2 points
Point elasticity
It is the elasticity at the midpoint between 2 selected points
Arc elasticity (recommended)
What is the formula for marginal profit?
Marginal revenue - marginal cost = marginal profit
What is the inverse supply function? (use Q, P, and x)
P = Q - x
It is the intersection between the demand and supply curve
Market equilibrium
This refers to a set of goods or services sold in an economy
Market basket
Why is it that when MR = MC, the production rate should be held constant?
Because producing an extra unit (or more) beyond this would lead to MC > MR which means that the company is incurring loss.
Cross-price elasticity is defined as _____.
ℇxy = %△QDy / %△Px
If Px and QDy are directly proportional, then good x and good y are _____.
Substitutes (+)
As we increase quantity, marginal cost _____ because _______
Increases; diminishing marginal productivity/returns
This elasticity refers to the responsiveness of QDemanded to changes in income; either positive or negative
Income elasticity
It refers to the feeling of producers when they make a profit
Producer Surplus
If income and quantity demanded are directly proportional to each other, then the product is a _____ good.
Normal
Unitary total revenue is if demand is perfectly _____ and when managers increase price, consumers do not purchase.
Elastic
True or false.
Ordinal ranking gives enough info because consumers have no natural measure of the amount of pleasure derived from the baskets.
True.
If |ℇ| = 1 and price increases, what happens to total revenue?
Total revenue will start decreasing because the total revenue is already maximized when |ℇ| = 1
If |ℇ| > 1 then %△QD ___ %△P and it is ____. (elastic, inelastic, unitary elastic)
>
elastic
It is the unit for utility
Utils
What is the slope of a perfectly elastic demand curve? Is it a vertical or a horizontal line?
Slope = 0
Horizontal
In an indifference curve, Mux (△x) ___ Muy (△y)
Mux (△x) = Muy (△y)
If Px and QDy are inversely proportional, then good x and y are _____.
Complements (-)
If MR > MC, then there is a marginal _____. (profit/loss)
Profit.
Revenue will be generated for an additional unit produced (should produce more)
What is the relationship between the slope of the indifference curve and the marginal utility of good x and good y? (Formula)
Mux / Muy = - (△y / △x)
Profit is maximized and there is marginal profit if marginal ____ = marginal ____
Marginal Revenue = Marginal Cost
As we increase quantity, marginal revenue _____ because _______
Decreases; diminishing marginal utility
It is a measure of happiness
Utility
Under the “transitive” assumption, if A>B and B>C, then A __ C
A>C
This is responsible for the convexity of the indifference curve
Marginal Rate of Substitution (MRS)
It is the process that tries to transform inputs into output (preference -> happiness; good/service -> satisfaction)
Utility function
An increase in consumption in a given period causes a decrease in satisfaction with each additional good or service. What law states this?
Diminishing Marginal Utility Law
A utility function is defined as _____.
u = (coefficient)x + (coefficient)y
This is an assumption that a consumer is able to rank any 2 baskets
Complete
This is an assumption that a consumer makes consistent choices
Transitive
It is based on preferences of the consumer; determines choices and demand
Utility
This is an assumption that a consumer has unlimited wants and needs; more is better because people are greedy
Non-satiation
It is the mathematical expression for happiness or utility
Utility function
This ranking indicates whether a consumer prefers one basket to another but does not contain quantitative information about the intensity of that preference
Ordinal
What are the 4 properties of an indifference curve?
Negative slope (consumer likes both goods x and y)
Convex
Lies on 1 and only 1 indifference curve
Not thick
It refers to the additional satisfaction gained by the consumption or use of one more unit of a good or service (either positive or negative)
Marginal utility
It is the rate at which the consumer willingly substitute one good for another while maintaining the same level of utility
Marginal Rate of Substitution (MRS)
It refers to the satisfaction a person receives in consuming different goods and services
Utility
Marginal utility is defined as ______.
Mu = △TU / △Q
= change in total utility / change in quantity consumed or used
Under the “complete” assumption, if A>B and B>A, then A __ B
A≈B
This ranking is a quantitative measure of intensity of a preference of a basket over another
Cardinal
Locus of points that represent different consumption of market baskets that give the same level of utility
Indifference curve
It is the absolute value of the slope of an indifference curve
Marginal Rate of Substitution (MRS)
