Final Review Flashcards
What will a price ceiling that is not binding do:
It will have no effect on the market price
Because it is difficult for economists to use experiments to generate data, what must they generally do?
To use whatever data the world gives them
When would demand for a good tend to be more inelastic?
When there are fewer available substitutes
When evaluating differences between similarities between increase in supply and increase of quantity supplied, what do we know?
The former is a shift of the curve, and the ladder is a movement along the curve.
What can good assumptions do?
They can simplify the complex world and make it easier to understand.
What concept does economics primarily deal with?
Scarcity
What does efficiency mean?
Society is gaining the most it can from it’s scarce resources.
How do economists compute the price elasticity of demand?
The percentage change in the quantity demanded divided by the percentage change in price.
Why do both households and societies face many decisions.
Resources are scarce
Why do economists make assumptions?
To make the world easier to understand
What does the price elasticity of demand measure?
How responsive buyers are to a change in price
There are very few if any good substitutes for motor oil, what does this imply.
The demand for motor oil is price inelastic
When is demand said to be inelastic?
If the quantity demanded changes only slightly when the price of good changes.
What is the unique point of where the supply and demand curves intersect?
Equilibrium
Which of the following is one difficulty economists face that some other scientists do not?
Experiments are often difficult to conduct
Why is the use of theory and observation more difficult in economics than in other sciences?
Difficult to perform experiments in a economic system
What is a government imposed maximum price at which a good can be sold?
Price ceiling
What is another term for equilibrium price?
Market clearing price
Recent forest fires in the western provinces are expected to cause the price of lumber to rise in the next six months. As a result, what can we expect to happen to the supply of lumber?
It will fall now
What is one definition of equity?
Fairness
When is a good not scarce?
If all members of society can have all they want of that good
Which word comes from the greek word for “one who manages the household”?
Economy
What is the role of price controls in the market economy?
Used by governments to reallocate resources more equitably.
Monopolistic competition differs from monopoly because in monopolistic competition
Firms are free to enter and exit
What is an example of a good best described as being sold in a monopolistically competitive market?
e.g. Fast food
Which of the following does not occur in perfect competition?
a) there are many buyers
b) there are significant restrictions on entry into the market
c) sellers and buyers are well informed about prices
b) there are significant restrictions on entry into the market
The automobile industry is an example of ________
Oligopoly
According to the kinked demand curve theory of oligopoly, each firm believes that if it raises its price:
other firms will no raise theirs
If a perfectly competitive firm in the short run is able to pay its variable costs and part, but not all, of its fixed costs, then it is operating in the range on its marginal cost curve that is anywhere between the _________ and __________ points.
Shutdown; Break-even
The maximum loss a firm will experience in the short run equals:
its total fixed cost
Toronto has a large number of retail stores that sell clothes. Each store has its own characteristics which differ from the other stores. The clothing business in Toronto is an example of:
A Monopolistically competitive market
The market structure in which natural or legal barriers prevent the entry of new firms and a small number of firms compete is:
Oligopoly
Complete the following sentence: Marginal revenue is:
The change in total revenue that results from a one-unit increase in the quantity sold.
In monopolistic competition, firms compete on the basis of:
Price, quality and marketing
One factor that distinguishes a monopoly from monopolistic competition is that:
Close substitutes are available in monopolistic competition
“Every time Sparrow’s Donuts has a donut sale, so does Tim Horton’s”. This phrase best describes the _____________ model of oligopoly.
Kinked demand curve
A monopolistically competitive firm is able to influence the price of what it sells because of
product differentiation
If a profit-maximizing monopoly is producing an output at which marginal cost exceeds marginal revenue, it should:
should raise price and decrease output
Why might only a few firms dominate an oligopolistic industry?
A natural or legal barrier to entry exists.
True or False: In monopolistic competition, firms practice product differentiation
TRUE
If a firm faces a perfectly elastic demand for its product, then its ____________ curve is horizontal at the market price.
marginal revenue
In a perfect competitive market, the market demand curve is illustrated by a ______________ curve
Downward-sloping
A cartel is:
An arrangement among firms to reduce output and raise prices
A monopolist under rate of return regulation has an incentive to:
pad costs
TRUE OR FALSE: If a perfectly competitive firm is producing in the short run at an output where price is less than average total cost, the firm is incurring an economic loss, but will continue to operate as long as price is above minimum average fixed cost.
False; would be true if minimum average variable cost
What would be an optimal tax on pollution (a negative externality)
One for which producers internalize the cost of pollution
What is the effect of a negative externality?
It is an adverse impact on a bystander
What results when a good is not excludable?
The free rider problem prevents the private market from supplying the good.
Fish in the ocean are considered as what type of good.
Common resource good
What is an example of a negative externality?
e.g. College student, listening to his music at 2 am bothering people
What characteristic do public goods and common resources have in common
Both Non-excludable
Why does excessive fishing occur?
Each individual fisherman has little incentive to maintain the species for next year.
What will arise when negative externalities are present in a market
Social costs will be greater than private costs
When are externalities present in a market?
Whenever private costs differ from social costs.
If the use of a common resource is not regulated?
Overused
What is the greatest difficulty with cost benefit analysis of a public project.
Determining the value or benefit of the project.
A fertilizer plant omits a very foul odor during the production process. If the government forces the plant to internalize this negative externality what would result.
Supply curve for fertilizer would shift to the left (up)
Under what condition does a negative production externality occur?
The equilibrium quantity of output is greater than the socially optimal quantity.
In which of the following goods does the free-rider problem exist?
a) fire protection
b) knowledge
c) cable TV
d) congested toll roads
b) Knowledge
How can the government internalize a positive externality
By subsidizing production which would increase supply
When does an externality exist
When a person engages in a activity that influences the wellbeing of a by stander, and yet neither receives or pays for that effect
Why do elephants face the threat of extinction while cows do not?
Cattle are owned by ranchers, elephants are owned by no one
What goods would be considered both excludable and rival in consumption
Private goods
What will a positive externality cause a private market to produce.
Less than is socially desirable
Under what conditions is a market effected by a positive externality.
The optimum level of output is greater than the free market level of output and the optimum price is less than the free market price.
As with many public goods, determining the appropriate level of government support for the production of general knowledge is difficult. Why?
Benefits are hard to measure.
In recognition of the overfishing that resulted from unregulated access to the Atlantic cod fishery, what did Canada implement to initiate a quota system?
Implementing total allowable catch limits based on the concept of maximum sustainable yield
When does the Tragedy of the Commons result?
When a good is rival in consumption and not excludable.
