Chapter 2

Question 1

Market

Answer 1

The Market for a given good or service is the set of
all the consumers and suppliers who are willing to
buy and sell that good or service at a given price

Question 2

Market Equilibrium

Answer 2

Market Equilibrium occurs when the price and the
quantity sold of a given good is stable.
OR
Market
equilibrium occurs when the equilibrium price is
such that the quantity that consumers want today is
the same as the quantity that suppliers want to sell.

Question 3

Marginal Benefit

Answer 3

The Marginal Benefit of producing a certain unit
of a given good is the extra benefit accrued by
producing that unit.

Question 4

Marginal Cost

Answer 4

The Marginal Cost of producing a certain unit of
a given good is the extra cost of producing that
unit. (!!! The relevant cost is the “opportunity
cost” and not just the “absolute cost” of
producing the good.)

Question 5

Cost-Benefit Principle

Answer 5

The Cost-Benefit Principle states that an action
should be taken if the marginal benefit is greater
than the marginal cost.

Question 6

Economic Surplus

Answer 6

The Economic Surplus of a certain action is the
difference between the marginal benefit and the
marginal cost of taking that action.

Question 7

Quantity Supplied

Answer 7

The Quantity Supplied by a supplier represents

the quantity of a given good or service that maximizes the profit of the supplier.

Question 8

Supply Curve

Answer 8

The Supply Curve represents the relationship
between the price of a good or service and the
quantity supplied of that good or service.

Question 9

Law of Supply

Answer 9

The tendency for a producer to offer more of a
certain good or service when the price of that
good or service increases.

Question 10

Sunk Cost

Answer 10

A Sunk Cost is a cost that once paid cannot be

recovered.

Question 11

If a Factor of Production is Fixed…

Answer 11

then its cost

does not vary with the quantity produced.

Question 12

Fixed Cost

Answer 12

A Fixed Cost is a cost associated with a fixed

factor of production.

Question 13

If a Factor of Production is Variable…

Answer 13

then its cost

tends to vary with the quantity produced.

Question 14

Variable Cost

Answer 14

A Variable Cost is a cost associated with a

variable factor of production.

Question 15

Short Run supply curve

Answer 15

The Short Run is a period of time during which at

least of one factor of production is fixed

Question 16

Long Run supply curve

Answer 16

The Long Run is a period of time during which all

factors of production are variable.

Question 17

Profit

Answer 17

The Profit represents the difference between the
total revenues (TR) and the total costs (TC).

Question 18

Shut Down Condition (Short Run)

Answer 18

In the short run, the entrepreneur should shut down production if π production < - FC.
**Price below min(AVC)

Otherwise, she should hire the optimal number of
workers and continue operations

Question 19

Shut Down Condition (Long Run)

Answer 19

In the long run, the entrepreneur should exit the
industry if π production < 0.
**Price below min(ATC)

Otherwise, she should hire the optimal number of
workers and continue operations

Question 20

What shifts the supply curve to the right (5)

Answer 20

• Drop in the price of (variable) inputs
• Advancements in technology (via its impact
  on productivity)
• Expectations (on future prices/demand ^)
• Drop in the price/demand of other products
• ^ in the number of suppliers

Question 21

Price Elasticity of Supply

Answer 21

The Price Elasticity of Supply represents the
percentage change in the quantity supplied resulting
from a very small percentage change in price. It also
measures the responsiveness of the supply to
changes in price

Question 22

Law of Supply

Answer 22

Supply curves have the tendency of being

upward sloping.

Question 23

Elastic Supply

Answer 23

Supply is elastic when the price elasticity of supply is greater than 1

Question 24

Unit Elastic Supply

Answer 24

Supply is unit elastic when the price elasticity of supply is equal to 1.

Question 25

Inelastic Supply

Answer 25

Supply is inelastic when the price elasticity of supply is less than 1.

Question 26

What changes the elasticity of supply (4)

Answer 26

• Availability of raw materials
• Factors mobility
• Inventories / Excess capacity
• Time horizon

Question 27

Characteristics of a Perfectly Competitive Market (6)

Answer 27

• Consumers and Suppliers are Price-Takers
• Homogeneous Goods
• No Externality
• Goods are Excludable and Rival
• Full Information
• Free Entry and Exit

Question 28

Relation between marginal benefit (MB) and marginal cost (MC)

Answer 28

MB > or = MC (take action)

MB < MC (don’t take action

Question 29

Horizontal Interpretation (of the Supply Curve)

Answer 29

quantity indicates how many units the producer is willing to supply at that price.

Question 30

Vertical Interpretation (of the Supply Curve)

Answer 30

price found indicates the minimum amount of money the producer is willing to accept to offer the marginal unit