Exam 1 Review 1

Question 0

Transaction Costs

Answer 0

The opportunity costs of using productive resources in making trades rather than producing. “Anything that will lower the costs of transacting will increase the output available for other users.” If transaction coast increase, you’re less willing to pay for the good (to accommodate the shift in the real cost), which shifts the demand curve to the left.

Question 1

Gains from Exchange

Answer 1

A Way of coordinating competing interests, allows the market to be driven by the invisible hand

Question 2

“Common Property”

Answer 2

(Fish) A problem occurs when overuse of a resource occurs when additional users of that resource cannot be excluded, either because the cost of doing so are high or because ownership rights are not clearly specified.

Question 3

Property Rights

Answer 3

Without the knowledge that you can use whatever you are purchasing/making in the future, you won’t have any incentive to take care of it or do anything to improve it, property rights give you an investment in the future of the good.

Question 4

Rules Governing Contracting

Answer 4

Government makes people keep their promises and stop opportunistic behavior

Question 5

Marginal Unit

Answer 5

The last or additional unit Ex. The last ice cream cone eaten

Question 6

Marginal Benefit (MB)

Answer 6

How much benefit, satisfaction, or utility is gained from one additional unit

Question 7

Marginal Cost (MC)

Answer 7

How much it costs to produce/consume the last unit

Question 8

Equi-marginal Rule

Answer 8

Maximization is reached when MB1/MC1 = MB2/MC2. When comparing how much should be consumed or produced of two products

Question 9

Short Run Equilibrium

Answer 9

the price where the amount demanders are willing to purchase just equals the amount that suppliers are willing to provide to see

Question 10

Long run Equilibrium

Answer 10

The price at which economic profits are equal to zero

Question 11

Supply Elasticity

Answer 11

Percentage change in quantity supplied when the market price changes by a small percentage amount

Question 12

Long run Equilibrium

Answer 12

When profits = 0, and when there are no incentives for firms to enter or to leave the market. When entering firms expect the profits to be 0

Question 13

Efficiency (Static or Allocative)

Answer 13

If firms are price takers (i.e. the market is perfectly cometitive) and if there are no consumption or production externalities then the market equilibrium is efficient because the amount demanders are willing to pay for additional output is just equal to the cost of producing additional output *That is, “one dollar’s worth of scarce resources is used to produce output that individuals are willing to pay exactly one dollar for”

Question 14

When is Efficiency achieved?

Answer 14

1) Maximizing demanders choose Q so that p* = MWTP
2) Maximizing suppliers choose Q so that p* = MC
Therefore MWTP = p* = MC
Therefore MWTP = MC

Question 15

What is the role of prices?

Answer 15

• Allocate commodities among competing demanders
• Provide incentives for suppliers to use capital more (or less) intensively
• Provide incentives for demanders to substitute
• Convey information: Among suppliers/demanders, between suppliers and demanders
• “Shock Absorbers”

Question 16

What is the role of Profits?

Answer 16

• Encourages exit and entry within a market (entry can either mean new firms entering or existing firms expanding)
• Allocate capital across different markets
• Provide incentives for capital to move to markets where economic profits are positive
• Provide incentives for capital to move from markets where economic profits are negetive

Question 17

Complements

Answer 17

If the price of one commodity increases, the demand for the other decreases

Question 18

Short-Run

Answer 18

Period of time over which a firm’s capital stock is fixed; a firm can increase its output only by employing more labor and other resources together with the same amount of capital.

Question 19

Long-Run

Answer 19

Firm is free to acquire or sell its fixed resource: Capital; output can be increased by either using capital more intensively or by acquiring additional capital

Question 20

Increasing Returns to Scale/Scale Economics

Answer 20

When a firm increases all inputs, the increase in output is proportionally greater than the increase in inputs; decreased long-run average costs

Question 21

Constant Returns to Scale

Answer 21

Output changes in proportion to any change in inputs; no efficiency gains from becoming larger; average costs at their minimum will be the same for a large or smaller firm

Question 22

Decreasing Returns to Scale

Answer 22

When a firm increases all inputs, the increase in output is proportionally less than the increase in inputs; increased long-run average costs