EREC Chapter 4 - 7 for Exam #1

Question 1

Perfect Competition

Answer 1

a market structure characterized by many buyers and sellers, freedom of entry and exit, and no one buyer or seller is large enough to affect price
- Never happens

Question 2

Why might the market fail?

Answer 2

• Lack of competition
• Externalities (External to the market, good or bad)
• Public goods
• Common property ( being Nonexclusive/
  Rival )

Question 3

Public goods

Answer 3

goods such as national defense, that if consumed by one person are still available for consumption by other NONRIVAL and NON-EXCLUSIVE
- Ex. lighthouse

Question 4

potential Roles for Government

Answer 4

Efficiency
Equity
Stability

Question 5

Driving Peoples Decisions

Answer 5

1. Limited income (and time) necessitates choosing among alternatives
2. Choices are based on the amount of satisfaction each good gives you
3. One good can usually be substituted for another
4. Consumers make decisions based on imperfect information
5. The law of diminishing marginal returns applied in consumption

Question 6

2 types of utility

Answer 6

Cardinal Utility (numbers)
Ordinal Utility (ranking)

Question 7

Utility

Answer 7

measurement of how well off you are; content/happiness; maximize utility to make you well off within your constraints

Question 8

Marginal Utility (MU)

Answer 8

the change in total utility resulting from one additional unit of a commodity consumed, equal to:
(change in total utility)/(change in quantity consumed)

Question 9

Law of Diminishing Marginal Utility

Answer 9

when consuming any good or service, a point will be reached where additional units consumed will result in decreased marginal utility… even though MU(marginal utility) may rise at first, it must eventually fall

Question 10

Equilibrium principle

Answer 10

where market demand and market supply are equal to each other, which ultimately brings stability in the price levels

Question 11

Consumer surplus

Answer 11

the difference between the maximum amount a consumer would be willing to pay for a unit of a good and the payment that is actually paid
- Ex. paying less than what you’re willing to pay

Question 12

Demand curve shifters

Answer 12

Income
Tastes and preferences
Price of substitutes
Price of compliments
Uncertainty
population

Question 13

Own price elasticity of demand

Answer 13

percentage increase in quantity demanded that occurs as a result of a 1 percent reduction in price, ceteris paribus(other things being equal)

Question 14

To see if something is elastic or not

Answer 14

Ed > 1 (if its elastic), increasing-price decreases total revenue
Ed < 1 (inelastic) , increasing price increases total revenue
Ed = 1, increasing the price (a little) leaves total revenue unchanged

Question 15

Determinants of Relative Elasticity

Answer 15

1. Presence (absence) of good substitutes
2. % of income spent on good
3. Time

Question 16

Elasticity

Answer 16

a change in the behavior of buyers and sellers in response to a change in price for a good or service