Fundamentals of Economics

Question 1

Define Buyers and Sellers (Market Participants)

Answer 1

Refers to who is included and who is excluded from a particular market

Question 2

What do Market Participants do?

Answer 2

Households, Firms, or Government that…

Provide Demand - Those who buy Goods and Services

Provide Supply - Those who sell goods and services

Question 3

What is Demand

Answer 3

How much people want to buy.

Question 4

What are the “determinates of demand”

Answer 4

Price
Tastes (preference)
Income
Related goods (Substitute Items)
Future Price Expectation

Question 5

What makes up the Demand Function?
(Qd - function(Pi, Y, T, Ps, Pc, Pe)

Answer 5

Quantity = the function of (Price of an item, Income, Tastes (preferences), price of substitutions, price of compliment items, price expected)

Question 6

What is Quantity Demanded

Answer 6

The amount of a good or service that people are willing and able to buy at various prices, (centers paribus)

Question 7

What is the Law of Demand

Answer 7

Price and Quantity demanded are negatively related, centers parades

as prices rise, quantity demanded drops and visa versa.

Question 8

Market Demand Curve

Answer 8

Will be a downscoping line that is the Sum of all individual demand curves at each price

Question 9

What defines an increase in demand

Answer 9

Any change in the world (Other than price) that will cause people to want to buy more of the good or service)

(Same line slope shifts to the right)

Question 10

What defines a decrease in demand

Answer 10

Any change in the world (other than price) that will cause people to want to buy less of the good or service

(Same line slops shifts to the left)

Question 11

What is Elasticity

Answer 11

Measure of the responsiveness of one variable to changes in another variable.

The Sensitivity of one variable when related to variable changes value

Specifically, it measures the % change in one variable when another variable changes by 1%

Question 12

What is Own Price Elasticity?

Answer 12

The % Change in Qd (demand) in response to a 1% Change in price of the product

Question 13

What is Cross Price Elasticity

Answer 13

The % Change in Qd (demand) in response to a 1% Change in the Price of a related good

Question 14

What is Income Elasticity

Answer 14

The % change in Qd(demand) in response to a 1% Change in income

Question 15

What is Price Elasticity of Demand (Ed)

Answer 15

The responsiveness of Qd (demand) to changes in P (Price)

Ed = ((%change Qd) / (%change P))

Question 16

What are the three possible relationships between Qd (demand) and P (price)

Answer 16

Elastic - Responsive
Inelastic - Unresponsive
Unit Elastic - Change is the same percentage

Question 17

Calculating Elasticity

Answer 17

Arc Method

Ed = %change Q / %change P

%change Q = (Change in Qd / Average Qd) x 100

%change P = (Change P / Average P) x 100

Question 18

What does price elasticity of demand mean for me and my business?

Answer 18

What will happen to my total revenue if I change price?

Question 19

Revenue Formula

Answer 19

Revenue = Price * Quantity

Question 20

What is Supply

Answer 20

How many units you want to produce

Question 21

What are the determinants of supply?

Answer 21

Price
Technology of production
prices of inputs
Expected future price of the good

Question 22

What makes up the supply Function?
Qs = function(Pi, A, Pinputs, Pe)

Answer 22

Quantity of Supply
Price of the item
Technology (A)
Price of Inputs
Expected future Price

Question 23

What is quantity supplied

Answer 23

the amount of a good or service that sellers are willing and able to produce(sell) at various prices, ceteris paribus

Question 24

What is the Law of Supply?

Answer 24

Price and quantity supplied are positively related

as prices rise, quantity rises and visa versa

Question 25

What is the Market Supply Curve?

Answer 25

an upscoping line that is the sum of all the individual supply curves we find in the market

Question 26

What is Market Equilibrium

Answer 26

Where the supply and demand curves cross. there are no forces changing the price. Sellers can sell as much as they want and buyers can buy as much as they want.

Question 27

Why do we use a supply and demand model?

Answer 27

Explain how prices of things are determined Explain how quantities of things are determined Explain how we allocate those things

Question 28

What is a market

Answer 28

a collection of buyers and sellers that determine the price and amount of goods/services/resources

Question 29

What is a "Competitive Market"

Answer 29

Many buyers competing to buy the good many sellers competing to sell the good nearly identical products or services relatively inexpensive to enter/exit the market

Question 30

What are the four types of markets

Answer 30

Output markets - goods and services Input markets - factors of production Financial markets - credit markets foreign exchange markets illegal markets

Question 31

What is "market definition"?

Answer 31

Who is included and excluded from a particular market. How broad or narrow a market is? ex. automobiles, new auto mobiles, new cars, new sedans, entry level luxury sedans, etc...

Question 32

How do markets find equilibrium

Answer 32

They find their way through surpluses and shortages

Question 33

who pushes price toward equilibrium

Answer 33

naturally, through forces

Question 34

which side of the market has the most power over the price?

Answer 34

.. that depends

Question 35

What drives sales demand?

Answer 35

Price. but also income, change in taste, change in complimentary goods, changes in substitutes

Question 36

What drives sales supply

Answer 36

Price. but also price of inputs, technology of production, worker productivity

Question 37

What are explicit costs?

Answer 37

Costs the require an actual outlay of money

Question 38

what are implicit costs

Answer 38

costs that do not require an actual money outlay (Opportunity costs)

Question 39

What are accounting costs

Answer 39

explicit costs

Question 40

what are economic costs

Answer 40

explicit costs + implicit costs

Question 41

What is "Production Function"

Answer 41

a relationship between the quantity of inputs and the quantity of outputs

Question 42

What are the parts of the production function? Q - Af(L,K)

Answer 42

Quantity of output Current level of Technology (A) Amount of Labor Amount of physical Capitol (K)

Question 43

What is a short run

Answer 43

The amount of time such that at least one input is held fixed (usually easier to change Labor)

Question 44

what is long run

Answer 44

the amount of time such that all inputs are free to vary (no inputs fixed)

Question 45

What is the marginal production function

Answer 45

shows the additional amount of output generated from increasing 1 input by 1 unit and holding the other inputs fixed

Question 46

What is the marginal produce of labor

Answer 46

the short run relationship between output and labor, holding other inputs fixed. one increase in output if labor is increased by 1 unit, holding other inputs fixed

Question 47

What are diminishing returns?

Answer 47

the inputs stay the same, but the output gets less

Question 48

What are the short run costs?

Answer 48

Fixed costs - costs that don't change with output changes Variable costs - costs that do change with output changes Total Costs - fixed plus variable costs

Question 49

What is marginal cost?

Answer 49

the additional cost from producing 1 more unit of output MC = (change TC) / (change Quantity)

Question 50

What is the short run "big idea"

Answer 50

to increase production, you have to hire more workers. eventually those workers becomes less productive. That causes each unit progressively more expensive and it costs you more over time

Question 51

What are long run costs?

Answer 51

all inputs are variables - none are fixed One total cost One Average Cost

Question 52

what is Long Run Average Cost

Answer 52

Traces of the lowest possible short run cost curves

Question 53

What is Increasing returns to scale (IRS)

Answer 53

if you double output, total costs are declining

Question 54

what is constant returns of scale (CRS)

Answer 54

if you double output, total casts are constant

Question 55

What is decreasing returns of scale (DRS)

Answer 55

if you double output, total costs are increasing