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COMM 220 > Midterm #1 > Flashcards

Midterm #1 Flashcards

1
Q

What is microeconomics?

A

study of the behaviour of individual economic units (consumers and workers) and the market that formed by these units

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2
Q

Microeconomics deals with limits

A

example-budgets, time, ability to produce

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3
Q

Trade-offs

A

workers, firms and consumers must make trade offs

ex) do I work or go on vacation?

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4
Q

Consumers

A

have limited incomes

ex) how to maximize well being

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5
Q

Workers

A

individuals decide when and if to enter the work-force

ex) how many hours do individuals choose to work?

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6
Q

Firms

A

ex) what types of products do firms produce?

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7
Q

Prices and markets

A

Based on prices faced by consumers and producers

  • workers made decisions based on prices for labour
  • firms make decisions based on prices for inputs and on prices for the goods they produce
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8
Q

How are prices determined?

A

1) centrally planned economies- governments controls prices

2) market economies- prices determined by interaction of market participants

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9
Q

Theory of the firm

  • assumption
  • prediction
A

1) assumes firms try to maximize their profits
2) reveals whether a firm’s output level will increase or decrease in response to an increase in wage rates or a decrease in the prices of raw materials

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10
Q

Models

A
  • mathematical representation to make predictions

ex) how much a firm’s output level will change as a result of percentage change drop in prices in raw materials

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11
Q

Validating a theory

A

determined by the quantity of its prediction, given the assumptions
-theories must be tested and refined

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12
Q

Factual statement

A

ex) what will happen?

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13
Q

Value judgement

A

ex) what is the best?

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14
Q

Positive analysis

A

explains facts, circumstances and the cause and effect relationships, and predict the probable outcomes
describes what it is

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15
Q

Normative analysis

A

involves ethics and value judgments, is used to prescribe alternative policy options
describes what it ought to be

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16
Q

Sellers

A

consumers sell labor

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17
Q

Buyers

A

consumer purchases goods

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18
Q

Arbitrage

A

practice of buying a product at a low price in one location and selling it for more in another location

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19
Q

Perfectly competitive markets

A

many buyers and sellers, no individual buyer or seller can influence the market price

  • acts as price takers
    ex) most agricultural markets
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20
Q

Noncompetitive markets

A

where individual producers can influence the price

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21
Q

Market price

A

price prevailing in a competitive market

ex) some markets only have one price- gold

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22
Q

Why is the market definition important?

A

1) in order to set price, make budgeting decisions, companies must know their competitors and product characteristics and geographic boundaries of the market
2) public policy decisions

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23
Q

Nominal price

A

absolute or current dollar price of a good or service when it is sold, not adjusted for inflation

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24
Q

Real price

A

price relative to an aggregate measure of prices or constant dollar price, adjusted for inflation

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25
Q

Consumer price index (CPI)

A

measure of aggregate prices

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26
Q

Supply and demand

A

why and how prices change

-economic conditions affect market price and production

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27
Q

The supply curve

A

relationship between the quantity of a good that producers are willing to sell and the price of the good, holding other supply-determining factors

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28
Q

The demand curve

A

relationship between the quantity of a good that consumers are willing to buy and the price of the good, holding other demand-determining factors constant

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29
Q

Demand Factors

Supply Factors

A

1) demand- income, weather and complementary goods

2) supply- wages, interest charges, raw materials

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30
Q

Market mechanism

A

in a free market for price to change until the market clears at the market-clearing equilibrium price

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31
Q

Market surplus

A

Quantity supplied > quantity demanded
Downward pressure on price
Quantity demanded increase and quantity supplied decreases

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32
Q

Market shortage

A

Quantity demand > quantity supplied
upward pressure on price
Quantity demand decrease and quantity supplied increases

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33
Q

Price elasticity of demand > 1

Price elasticity of demand < 1

A

1) the good price elastic

2) the good price inelastic

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34
Q

Completely inelastic demand

Infinitely elastic demand

A

1) vertical line (graph)

2) horizontal line

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35
Q

Cross price elasticity of demand
Elasticity < 0
Elasticity > 0

A

1) complementary goods ex) cars and tires- compliment each other
2) substitute goods ex) butter and margarine- they can replace each other

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36
Q

Price elasticity of supply
Elasticity > 1
Elasticity < 1

A

1) price is elastic

2) price inelastic

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37
Q

Point Vs Arc Elasticities

A

Point elasticity of demand- particular point on demand curve

Arc elasticity of demand- calculated over a range of prices

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38
Q

Effects of government intervention-price controls

A

-markets are rarely free of government intervention- imposed taxes and granted subsidies
price controls usually hold the price above or below the equilibrium price
excess demand- shortage
excess supply- surplus

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39
Q

Consumer surplus

A
  • measures the total benefit that consumers receive beyond what they pay for the good in a competitive market
  • demand curve shows how much of a good consumers are willing to buy as the price per unit changes
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40
Q

Producer surplus

A
  • measures the total profits that producers receive beyond what it cost to produce a good
  • supply curve shows the amount that producers are willing to take for a certain amount of a good
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41
Q

Welfare effects

A

gains and losses to producers and consumers

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42
Q

Price ceiling

A

the price of a good cannot go above that price

ex) rent control

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43
Q

Price control and surplus changes

-when the price is too low

A
  • causes quantity demand increases and quantity supply decreases
  • some consumers are worse off because they can no longer buy the good= decrease in consumer surplus
  • some consumers can buy it at a lower price- increase in consumer surplus
  • producers can sell less at a lower price- producer surplus decreases
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44
Q

Deadweight loss

A

inefficiency of the price controls- the total loss in surplus

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45
Q

Economic efficiency

A

maximization of aggregate consumer and producer surplus

46
Q

Two important types of market failures

A

1) Externalities- action taken by either a producer or a consumer which affects other producers or consumers but is not accounted for by the market price ex) pollution
2) Lack of info- about the quality or nature of a products prevents consumers from making utility-maximizing purchasing decisions

47
Q

Minimum prices

A

government policy seeks to raise prices above market-clearing levels

  • minimum wage law
  • agricultural policies
48
Q

Effects of minimum wage

A

1) decreased quantity of workers demanded
2) workers hired receive higher wages
3) unemployment

49
Q

Price supports

A

price set by government above free-market level and maintained by governmental purchases of excess supply

50
Q

Welfare effects of a price support policy

A
  • consumers must pay higher price for the good
  • producers gain since they are selling more at a higher price
  • government cost
51
Q

Production quotas

A

government can restrict supply either by imposing production quotas or by giving producers a financial incentive to reduce output

52
Q

Import quotas and tariffs

A

import quota- limit on the quantity of a good that can be imported
tariff- tax on imported good
-domestic producers to enjoy higher profits, but costs to consumers is high

53
Q

Impact of a tax or subsidy

A

burden of tax falls partly on the consumer and partly on the producer
-how it is split depends on the relative elastics of demand and supply

54
Q

Four conditions must be satisfied after the tax is in place

also used for subsidy

A

1) quantity sold and buyers price must be on the demand curve. buyers are only concerned with what they must pay.
2) quantity sold and sellers price must be on the supply curve. sellers are only concerned with what they receive
3) quantity demanded must equal quantity supplied
4) difference between Pb and Ps is the tax

55
Q

Tax burdens

A
  • if demand is relatively inelastic- will fall on buyers ex) cigarettes
  • if supply relatively inelastic- will fall on seller
56
Q

Effects of a subsidy

A
  • Payment reducing the buyer’s price below the seller’s price
  • treated as negative tax
  • sellers price exceeds the buyer’s price
57
Q

Benefit of subsidy

A

1) affects mostly buyers if Ed/Es is small

2) affects mostly to sellers if Ed/Es is large

58
Q

Labour market

A

allocates workers to jobs and coordinates employment decisions

59
Q

Supply of labour

Demand of labour

A
  • workers willing to supply their labour services

- employers looking to buy the labour services of workers

60
Q

Labour Market

Buyers and sellers

A

Buyer- worker

Seller- employees

61
Q

Labour force

A

employed and unemployed but actively seeking work or expecting a layoff
ex) new entrants and reentrants

62
Q

Not in labour force

A

unemployed and not looking for work, not waiting to be recalled from layoff
ex) retirements, dropouts

63
Q

Tight Market

A

low unemployment, hard to find employees, hard to find qualified workers
# of jobs > # of employees
less than 5%

64
Q

Loose Market

A

high unemployment, easy to find workers, hard to find jobs
# of employees > # of jobs
more than 5%

65
Q

The earnings of labour

1) wage rate
2) nominal wage
3) real wage

A

1) hourly wage
2) pay per hour in current dollars
3) nominal wage divided by some measure of price
used to compare purchasing power of a worker’s earnings over a period of time

66
Q

Labour market

Problem with consumer price index

A

used to measure change in worker’s purchasing power

1) consumers change the consumption bundle over time due to price changes
2) quality of goods and services changes over time

67
Q

Employee benefits

Deferred benefits

A

1) in kind ex) vacation and bonus

2) pension plan

68
Q

Unearned income

A

income you didn’t work for ex) dividends and interest

69
Q

How the labour market works

A

firms purchase inputs- labour (L) and capital (K) used in the production of goods and services from the labour market to the capital market

70
Q

Demand for labour can be analyzed on 3 levels

A

1) firm level
2) industry level
3) market level

71
Q

Long vs short run

LABOUR

A

Long
- responses to changes in wage or other forces affecting Ld are larger and more complete
Short
-employers find it difficult to substitute K(fixed) and L (variable)
-Quantity demanded may not change much in response to a price change

72
Q

Supply of Labour

A

to a particular market is positively related to the wage rate prevailing in that market, holding other wages constant

73
Q

Horizontal supply curve of a labour

A

going wage, a firm could get all the workers it needs

74
Q

Disequilibrium and non market influences

labour market

A
  • changing jobs often requires an employee to invest new skill
  • hiring workers can involve an initial investment
75
Q

Overpaid (Above equilibrium)

A
  • employers are paying more than necessary
  • more workers want jobs than they can find
  • wage is higher than equilibrium
76
Q

Underpaid (below equilibrium)

A
  • employers face labour shortage
  • difficult to find and keep workers
  • below equilibrium
77
Q

Economic rents

A

difference between the wage received and the worker’s reservation wage

78
Q

Reservation wage

A

wage below which the worker would refuse (or quit) the job in question
-giving up hours at work

79
Q

Unemployment and responses to tech changes across countries

A
  • strength of non market forces- government programs, laws, customs
  • acceleration of tech change led to a decline in demand for less skilled workers and their real wages
  • non-market forces causes the real wages of low paid workers to rise increased the unemployment rate for the less educated
80
Q

What affects demand?

A

income, season, weather, price of complements/substitutes and interest rates

81
Q

What affects supply?

A

cost of production, interest rate, tech and expectation

82
Q

Perfectly inelastic

A

when the demand for a product doesn’t change as much as the price.

83
Q

What causes the demand curve to shift?

A
  • decrease in price of a substitute

- decrease in income if a good is normal

84
Q

Complementary goods

A

1) when price increases, demand increases

(vice versa) ex) cars and gas

85
Q

Normal good

A

1) when income increases, demand increases ex) travel and clothing

86
Q

Inferior good

A

demand decreases when consumers income rises ex) public transit

87
Q

What would causes the supply curve to shift?

A

-input prices. price of raw material used in production of a product goes down then supply will increase

88
Q

Excess supply

Excess demand

A

1) producers accept lower prices

2) consumers accept higher prices

89
Q

Factors that affect elasticity

A

1) many substitutes
2) luxury
3) narrowly defined (specific)

90
Q

Factors that affect elasticity

inelastic

A

1) few substitutes
2) necessity
3) broadly defined industry
4) short run

91
Q

Perfectly inelastic demand

A

price doesn’t affect demand
vertical line on graph
ex) business can charge any price they want

92
Q

Perfectly elastic demand

A

quantity doesn’t change

  • horizontal line on graph
    ex) gas station
93
Q

If the gov wants to limit imports of a certain good. is import quota or tariff better?

A

producer and consumer surplus changes are the same.

tariffs are better since the gov can redistribute the tax revenue to offset the deadweight loss

94
Q

burden of tax- when will producers pay more tax?

A

if demand is relatively more elastic than supply

95
Q

What determines the share of a subsidy that benefits consumers?

A

demand is relatively less elastic than supply, consumers will benefit more from the subsidy than producers

96
Q

Why does tax create a deadweight loss? what determines the size of the loss?

A

1) tax raises price consumers pay and lowers the price producers receive
2) depends on elasticity of demand and supply, if the demand is relatively elastic,, loss will be larger

97
Q

profit-maximizing output will always occur where

A

marginal revenue equals marginal costs

98
Q

Marginal product of labour (MPL) represents

A

additional output generated by increasing labour by one unit

99
Q

Marginal income

A
  • from an additional unit of input

- profit maximizing decisions- questions whether, and how, to increase or decrease output

100
Q

The search for profit improving possibilities means that small (marginal) changes must be made daily

A

-major decisions ex) open new plant- rare decision
-trial and error process with small changes
-decide on optimal level of output :
Q is profit maximizing or loss minimizing when MR=MC

101
Q

Marginal expense

  • labour market competitive
  • capital market competitive
A

1) each worker is paid the same wage= horizontal supply curve
2) each additional unit of capital will have the same rental cost MEk= C

102
Q

when both product and labour markets are competitive we assume

A

1) all producers and sellers are price takers in the product market
2) all employers of labour are wage takers in the labour market

103
Q

Short run demand for labour when both product and labour markets are competitive

A

firm cannot vary its capital stock

only employment of labour can be adjusted

104
Q

Labour force in Canada is defined as

A

1) age 16and over
2) actively seeking work
3) expecting recall from a layoff

105
Q

how does the firm decide if they want to increase labour or capital?

A

1) income generated by employing one more unit exceeds the additional cost associated with that input-the firm should add one more input (one more worker)
(vise versa- do not add)
2) income generated by one more unit=additional cost of one more unit- optimal point

106
Q

Assumptions about the MPL and MPK

A

1) production function increases output when either capital or labour input increases
2) MPL and MPK have diminishing marginal returns

107
Q

Revenue maximization in the short run

A
  • assume k is fixed

- profit maximizing is when Marginal product times labour =wage

108
Q

income elasticity > 0

income elastic < 0

A
  • normal good

- inferior good

109
Q

Tax ALWAYS creates

A

deadweight loss

110
Q

Employing large amounts of labour, barely use any capital

L > K

A

MPK likely be very high

MPL and MPK have diminishing returns

COMM 220 (3 decks)

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