Man Ec: #2 Flashcards by Jeff Hadds

What does microeconomic analysis contribute to understanding?

1) conceptualizes what markets are and how they function
2) how individuals and firms can optimize their efforts and decisions
3) introduces study of organization of the firm as well as the industry as a whole

discussion material

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define optimization

the process of finding a maximum of some desired criterion (or minimum of undesired criterion). “getting the most out of an activity”

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What are “substantive propositions”?

They are propositions that are empirically (by experince or experiment) testable

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How is market defined in the reading?

the interaction of one or more buyers with one or more sellers.

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In a competitive market it is _______ that limits and guides the _____ of market participants and forms the basis of _________ on which the whole economy rests

competition; behavior; efficiency

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How does the government fit into the “competitive model” . What is the motive that keeps the market moving in this model?

The government is not really part of it. They shouldn’t interfere . The motivation is self interest.

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In a world of perfect competition is it the public officials or private firms that wield economic power?

neither of them do

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What is the scientific method defined as?

it is a way to think about problems and formulate a solution/explanation of them.

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What are the steps in the scientific method? (6)

1) Observe Phenomena
2) Consult Existing knowledge (research)
3) Construct theory/model (hypothesis)
4) Empirical validation (test your hypothesis)
5) Reject/ Accept
6) Continue testing

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What are examples of hard sciences? of soft sciences? What are the big differences? (2)

Hard: chemistry, physics, engineering
Soft: psychology, sociology, economics

The big differences come from:

1) hard sciences have controlled experiment, soft do not (green and yellow chemicals make blue)
2) in hard sciences random component is often small and identifiable, soft it is not. (people act different with same stimuli)

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The method of “inquiry” for economists is called logical positivism. What is this?

This suggests that the basic axioms (assumptions) of the theory are not subject to independent empirical verification. (this means that you have to trust the theory, however, you still test the hypothesis).

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The study of managerial economics and organizations deals with both positive and normative economics. What are positive and normative questions defined as?

positive: have to do with explanations and predictions of what is or is expected to be (what it probably is in reality)
normative: entail some moral or ethical basis within the issues to be addressed, dealing with what ought to or should be. (how it should be ideally)

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The basic model of the economy has three assumptions. They are…?

assumptions about

1) how firms behave
2) how consumers behave
3) the market in which firms and consumers interact

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Underlying much of economic analysis is the basic assumption of rationality. What does “rationality” suggest?

This is an assumption that individuals and firms will act in a consistent manner, and with a reasonable idea of what they want and how to get it

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In the basic competitive model each firm is a price taker. what does this mean?

This means they accept the prices of the market. Consumers also accept this price as given.

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how is “demand” defined?

This is the quantity of a good or service that a customer is willing and able to purchase over a period of time

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There are two factors that determine individual demand. what are they?

1) the value associated with using the good or service
2) the ability to acquire it

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What is direct demand?

the concept of analyzing the demand for goods and services that directly satisfy buyer desires

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What is derived demand?

Demand that is derived from the demand for the products or services (such as engineers, natural resources, etc) that are not for direct consumption, but help them get to final consumption.

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When the demand relationship is made explicit and defined over a range of prices it is called a…

demand function

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What is the relationship between price and quantity in a demand function according to . what is an example of a demand function?

Price determines quanity. There is an inverse relationship between price and quantity.

ex. q=f(p)

The book states that the quantity demanded is a function of price in the …. short run? or the long run?

short run

what is a change in the quantity demanded?

this means that price changed and so you move along the demand curve to the amount demanded at the new price.

A demand schedule (table of numbers) and demand curve (graph) are always stated with the assumption of ceterius paribus which means?

all thin things being constant

A change in demand, which shifts the demand curve out and therefore changes the quantity and demand relationship can be caused by several things. Name a few.

income, price of other goods, consumer tastes, population, advertising, etc. ex. reducing import taxes on mexico increases the population that will buy which will shift the demand curve to the right because more consumers will demand goods at the lower prices (with no taxes)

There are nonprice determinants for a demand curve these are felt in two ways? what are they?

1) change in willingness/ability to buy | 2) change in number of soncumers

How is supply defined in economic terms?

the relationship between the amounts of a commodity a seller will make available and the prices for that during a given period. 43

The law of supply explains that there is a relationship between price and quantity for supply. What is the relationship?

it is direct, not inverse like demand

Is there always a supply function? If not, when is there one?

When there is competition. If there was only one seller in the market they can sell the item for whatever the consumer is willing to bear.

When does a supply shift take place?

When there is a change in one of the non-price determinants of supply. this is a movement of the line.

Change in quantity supplied is...

movement along the line. This is movement along a fixed line.

What example is given for why a demand curve may shift up or down?

the price paid for an input (ex. raw materials). If it costs you more to make something you charge others more to buy it.

When is a market in equilibrium?

When the quantity of a good or service demanded and the quantity supplied are in perfect balance as some price governing exchanges.

What is comparative statistics?

the theory is static rather than dynamic

what is static theory concerned with?

determining the direction in which economic variables move in response to other variables

With equations how do you find the equilibrium of a supply curve and a demand curve?

By setting them equal to each other... yo. 48

Which of the following causes a movement along a market demand curve but not a shift of the demand curve? A change in technology the price of the product the number of buyers in the market the price of other related goods

According to the textbook, we call economics a hard science because there is a random component to economic behavior. true false

false

Assuming that coffee is a substitute commodity for tea, how will an increase in the price of tea affect the demand for coffee? Only the quantity of coffee demanded will increase. The demand for coffee will increase. The demand for coffee will decrease. The demand for coffee will not change.

Markets exist to promote fairness between buyers and sellers provide a clearing house for products and services determine how to organize firms facilitate transactions between buyers and sellers

The scientific method can be applied to economics, but that often requires working with statistical models. true false

true

Consider the market segment for cars that contains the Ford Taurus and the Honda Accord. Explain what you expect to happen to the price of the Ford Taurus if the exchange rate between the dollar and yen changes substantially. Suppose that the dollar becomes much weaker relative to the yen. ----------------------------------- With more people buying the Ford Taurus, the demand curve will shift to the right. true false

true At any given Ford Taurus price, the quantity demanded will be greater because the price of its substitute, the Honda Accord, has gone up. The price of imports from Japan will increase. The quantity demanded of Honda Accords will decrease and the demand for the Ford Taurus will increase. This is shown in a diagram simply as an increase in demand, with D1 shifting out and upward to D2 on the same supply curve.

Consider the market segment for cars that contains the Ford Taurus and the Honda Accord. Explain what you expect to happen to the price of the Ford Taurus if the exchange rate between the dollar and yen changes substantially. Suppose that the dollar becomes much weaker relative to the yen. ---------------------------------------------- If the Honda Accord is more expensive, people will tend to buy a smaller number of the Ford Taurus. true false

false These two kinds of cars are substitutes. If the Honda Accord is more expensive, Americans will be more attracted to the Ford Taurus as an alternative.

Consider the market segment for cars that contains the Ford Taurus and the Honda Accord. Explain what you expect to happen to the price of the Ford Taurus if the exchange rate between the dollar and yen changes substantially. Suppose that the dollar becomes much weaker relative to the yen. -------------------------------------------- If the dollar declines in value, Japanese imports will become more expensive. true false

true If importers have to pay more dollars to buy yen, everything produced in Japan becomes more expensive to Americans.

Consider the market segment for cars that contains the Ford Taurus and the Honda Accord. Explain what you expect to happen to the price of the Ford Taurus if the exchange rate between the dollar and yen changes substantially. Suppose that the dollar becomes much weaker relative to the yen. --------------------------------------------- The equilibrium price will be higher, but the quantity will increase after the tax. true false

false The higher supply curve will intersect with the old demand curve at a point of higher price and smaller quantity bought and sold.

Show the effects in the market for cigarettes if President Clinton’s health plan is passed, imposing a tax on packages of cigarettes approximately equal to their current price. ----------------------------------------------- If you tax cigarettes, as suggested in the second case, consumers will pay the same amount as always, but producers must now pay the tax. true false

false The tax will have to be passed along to the consumer unless cigarette manufacturers have unlimited surplus wealth and love for their customers. Consumers must pay not only the old, pre-tax price for any quantity of cigarettes, but they must pay the additional amount of the tax.

Show the effects in the market for "lunch" in the area near a local university if a new restaurant featuring cheap fast food opens near the university. ---------------------------------------------- With the greater supply of fast food available, the quantity sold will increase even though the number of people eating lunch in the area may remain the same. true false

true Some people will switch from brown bags to the patronage of the new firm. Perhaps a few people will even travel to the new restaurant from outside the area. That's why the question said the number eating lunch in the area may remain the same.

Show the effects in the market for "lunch" in the area near a local university if a new restaurant featuring cheap fast food opens near the university. ------------------------------------------------ The shift in the supply curve will result in an increase in price. true false

false Entry into the market would result in an increase of supply in the lunch market near your university. Such an increase in supply would be shown in a diagram as a shift from an S1 to an S2 to the right of and below S1, and the equilibrium price decreases.

Show the effects in the market for cigarettes if President Clinton’s health plan is passed, imposing a tax on packages of cigarettes approximately equal to their current price. ------------------------------------------------ The higher price for all possible quantities of cigarette packs (old production cost plus new tax) will cause the supply curve to shift to the left. true false

true That simply says that suppliers will offer each pack for the old price PLUS the amount of the tax.

Show the effects in the market for "lunch" in the area near a local university if a new restaurant featuring cheap fast food opens near the university. ------------------------------------------------ A new restaurant would increase the supply of fast food, shifting the supply curve left. true false

false An increase in supply shifts the supply curve to the right. A shift in the supply of cigarettes means that any quantity available before the imposition of the tax is now available after the tax at a price equal to the old price plus the amount of the tax. This is shown in a diagram as a shift (decrease) in the supply function from an S1 to an S2 above and to the left of S1 on the same demand curve. The price increases, and the quantity decreases.

Consider the market segment for cars that contains the Ford Taurus and the Honda Accord. Explain what you expect to happen to the price of the Ford Taurus if the exchange rate between the dollar and yen changes substantially. Suppose that the dollar becomes much weaker relative to the yen. ------------------------------------------------ If the dollar becomes weaker relative to the yen, as suggested in the first case above, it will take more dollars to purchase any given amount of yen. true false

true A currency that grows "weaker" in international exchange markets can be bought with fewer units of other currencies and can buy smaller amounts of other currencies. This would occur if the dollar in one month can buy 1.5 DM (German Marks) but can only buy 1.3 DM in a later month.