Midterm 1

Question 1

Principles of Economics

Answer 1

1. people face trade-offs
2. the cost of something is what you give up to get it
3. rational people think at the margin
4. people respond to incentives
5. trade makes everyone better off
6. markets are usually a good way to organize economic activity

Question 2

trade-off

Answer 2

• have to give up something in order to get something

- ex. study one more hour or talk to a friend

Question 3

opportunity cost

Answer 3

-whatever must be given up to obtain an item

Question 4

thinking at the margin

Answer 4

• -rational people who do the best they can given their opportunities
• compare marginal benefits > marginal costs

Question 5

firms and consumers respond to incentives

Answer 5

• higher price: buyers consume less while sellers produce more
• change in public policy

Question 6

trade

Answer 6

• increases welfare
• allows people to specializes
• enjoy greater variety of goods and services

Question 7

markets organize economic activity

Answer 7

• government officials best position to allocate economy’s scarce resources
• guided by price and self interest

Question 8

government improves market outcomes

Answer 8

-government promotes efficiency and equality

Question 9

no gains from trade when

Answer 9

• opportunity cost is the same
• if one country as absolute advantage
• ratio is the same between the two x and y outputs

Question 10

absolute vs. comparative advantage

Answer 10

absolute: goes to producer that requires smaller input to produce good
comparative: ability of group to produce good at lower opportunity cost than another group

Question 11

equilibrium price

Answer 11

• where supply and demand intersect on graph

- quantity of goods demanded = quantity of goods supplied

Question 12

supply shifters

Answer 12

• change in technology
• input prices
• number of sellers

Question 13

demand shifters

Answer 13

• tastes
• income
• price of related goods
• expectations

Question 14

market demand

Answer 14

-sum of all individual demands

Question 15

elasticity

Answer 15

the degree to which individuals change their supply or demand in response to price or income changes

Question 16

inelastic

Answer 16

• necessities
• vertical demand
• more than 1
• y axis

Question 17

elastic

Answer 17

• luxuries
• goods with close substitutes
• horizontal demand
• less than 1
• x axis

Question 18

perfectly inelastic

Answer 18

no matter what price stays the same

Question 19

perfectly elastic

Answer 19

small change causes infinite cage in demand

Question 20

unit elastic

Answer 20

• curve equal to 1

- quantity supplied or demanded changes the same as the change in price

Question 21

price floor above equilibrium market price

Answer 21

results in surplus

Question 22

price ceiling set below equilibrium market price

Answer 22

results in shortage

Question 23

tax on buyers vs sellers

Answer 23

• buyers: shifts demand curve in

- sellers: shifts supply curve left

Question 24

burden of tax

Answer 24

shared by both consumers and sellers

Question 25

division of tax burden

Answer 25

depends on the relative elastic of supply and demand

Question 26

consumer surplus

Answer 26

- amount buyer is willing to pay minus amount buyer actually pays - demand curve

Question 27

producer surplus

Answer 27

amount seller is paid for a good minus the seller's cost of providing it -supply curve

Question 28

externality

Answer 28

- when a person does something that affects bystander - negative: bad impact of bystander, supply curve left - positive: good impact on bystander, demand curve left

Question 29

pigovian tax

Answer 29

- tax on market that generates a negative externality - corrects inefficient market outcome - ex. paying extra for bags at grocery stores

Question 30

chase theorem

Answer 30

- if private parties can bargain without cost over distributing resources, they can solve externality problems on their own - ex. offering someone money to get rid of their barking barking dog

Question 31

rival

Answer 31

- one person's consumption of a good reduces the amount of good available for others - private goods - common resources

Question 32

excludable

Answer 32

possible to prevent one person's consumption go a good if that person does not pay for the good - private goods - club goods

Question 33

public good

Answer 33

non-rival and non-excludable

Question 34

private good

Answer 34

rival and excludable

Question 35

diminishing marginal product

Answer 35

as quantity of input increases, the amount of output (marginal product) decreases

Question 36

total cost

Answer 36

fixed cost + variable cost

Question 37

marginal cost curve

Answer 37

- determines quantity of good firm is willing to supply at any time - intersects with average total cost at lowest point bc each new output lowers the ATC

Question 38

profit maximizing level of output

Answer 38

MC = MR

Question 39

firm should decrease output when

Answer 39

MC > MR

Question 40

firm should increase output when

Answer 40

MC < MR

Question 41

profits

Answer 41

- P= (P - ATC) x Q - pushed to zero for all firms in competitive market - profit needs to be > ATC

Question 42

competitive market

Answer 42

- firms earn zero profit - profit = ATC - hires amount of workers where equilibrium market wage = value marginal product of labor

Question 43

monopoly

Answer 43

- firms earn positive profit - profit > ATC - MR not constant price (depends on quantity) - impose dead weight loss on society - reduce consumer surplus - increase producer surplus

Question 44

P > ATC

Answer 44

firm making profit

Question 45

P < ATC

Answer 45

firm losing profit

Question 46

P = ATC

Answer 46

firm making zero profit

Question 47

equilibrium wage

Answer 47

were supply and demand curves intersect