Study Unit 2

Question 1

Law of Demand

Answer 1

price and quantity are inversely related
downward sloping curve
changes in price & quantity cause movement along the curve

Question 2

Factors other than price

Answer 2

changes in determinants of demand cause the entire demand curve to shift left or right

Question 3

Determinants of demand

Answer 3

consumer income
consumer taste & preference
Prices of related goods
consumer expectations
number of consumers
since demand curve is based on customer changes that affect consumer behavior affect the demand curve

Question 4

Consumer incomes

Answer 4

wealthier population shifts curve to right
normal goods- positively related to income (shift right as income rise)
inferiror goods - demand is negatively related to income (shift to left as income rises)

Question 5

consumer taste & preference

Answer 5

popular products produce shifts to right

Question 6

Price of related goods

Answer 6

price increase in A increases demand for B (substitutes)

price increase in A results in decrease in demand for B (complements)

Question 7

Consumer expectations

Answer 7

expectations of events (hurricanes) increased demand of items shifts to right

Question 8

Supply

Answer 8

schedule of goods producers willing to offer @ various prices
positive (upward sloping)

Question 9

Law of supply

Answer 9

price positively related to quantity supplied

Question 10

Determinants of supply

Answer 10

Costs of inputs
Change in efficiency of the production process (newer tech)
expectations about price changes
Taxes & subsidies

Question 11

Costs of inputs

Answer 11

increase of inputs (wages, RM) shift curve to left

decreases shift curve to right

Question 12

Change in efficiency

Answer 12

improves production process shift supply curve to right

Question 13

Expectations about price changes

Answer 13

expect products price to decrease, increase supply to sell as much as possible and decrease production when prices fall

curve shifts to right

Question 14

Taxes & Subsidies

Answer 14

increase in taxes or decrease in subsidies shift curve to left
decrease in taxes or increase in subsidies shift curve to right

Question 15

Surplus

Answer 15

market price exceeds equilibrium price
quantity > demand
competition to eliminate excess causes price cuts & lower production
price lowers, more buyers enter market. price settles
govt intervention can create

Question 16

Shortage

Answer 16

market price lower than equilibrium
consumers compete for scare goods, prices increase
prices rise, new suppliers enter, price settle, shortage eliminates
govt intervention- price ceiling (price set low allows high demand w/o many suppliers @ price)

Question 17

Elasticity of Demand

Answer 17

Sensitivity of quantity demanded of product to a change in its price

Question 18

Point Method

Answer 18

price elasticity of demand for a specific change

Change in Q/Change in P

Question 19

Midpoint Method

Answer 19

change in Q= (Q1-Q2)/(Q1+Q2)
change in P= (P1-P2)/(P1+P2)
E(D)=change in Q/change in P

Question 20

relatively elastic

Answer 20

E(D) or E(S)>1

change in Q> change in P

Question 21

unitary elastic

Answer 21

E(D) or E(S)=1

change in Q=change in P

Question 22

relatively inelastic

Answer 22

E(D) or E(S)

Question 23

perfectly elastic

Answer 23

infinite demand or supply
horizontal line (price constant, quant changes)
pure competition lots of firms means 1 firms can’t impact market

Question 24

perfectly inelastic

Answer 24

E(D)=0
vertical line
need for product means pay any price
# consumers limited, ant desired is constant

Question 25

substitutes affect on Price elasticity

Answer 25

more subs, demand more elastic, small price increase cause decrease in quant demanded

fewer subs, demand becomes more inelastic

Question 26

Price Ceiling

Answer 26

price set @ less than market equilibrium, creates shortage b/c market won’t meet artificial price

Question 27

Price floor

Answer 27

price set above equilibrium, surplus created b/c artificial price generates more than market will buy

Question 28

Explicit vs implicit costs

Answer 28

explicit- cash pmts

implicit- opportunity costs (economic/normal/total costs)

Question 29

Short run vs long run

Answer 29

short- time pd so brief cannot vary its fixed costs

long- pd long enough that all inputs, including FC, can be varied

Question 30

Marginal analysis

total vs marginal product

Answer 30

marginal analysis- econ decisions based on projections on various levels of resource consumption & output production
total- entire production of good/service over pd of time
marginal-addtl output by adding 1 extra unit of input

Question 31

Law of diminishing returns

Answer 31

pt at which increase of input creates decrease in output

efficiency compromised

Question 32

Marginal revenue

Answer 32

adtl (incremental) revenue produced from 1 adtl unit of output

• if sold in competitive market, seller cuts price to sell
• total rev increases, but increases at smaller amnt

Question 33

Marginal Cost

Answer 33

adtl cost assoc w/ generating 1 adtl unit of output
(diff in total cost at each level of output)
-unit cost decreases due to efficiency; at certain pt become less efficient & unit cost increases

Question 34

Profit Maximization

Answer 34

marginal rev data must be compared with marginal cost to find profit max pt (MR=MC)

beyond this pt, increased production causes total profit to decreases

Question 35

Total Cost (TC) equals

MCost curve

Answer 35

TC= FC+VC
ATC=AFC+AVC
AFC=FC/Q
AVC=VC/Q

MC intersects ATC & AVC @ minimum

Question 36

LRATC

Answer 36

extrapolated from all its possible SRATC curves
represents lowest ATC for any level of output can be produced
derives shape from eos & dos

Question 37

economies of scale

increasing returns to scale

Answer 37

production increases, avg costs of production decline bc of

• specialization & division of labor
• better use & mgt specialization
• more efficient machinery & eqt

Question 38

Constant returns to scale

Answer 38

increase in production results in no change in avg costs

Question 39

dis economies of scale

decreasing returns to scale

Answer 39

expand output, costs increase

Question 40

Pure competition

Answer 40

large # of buyers and sellers act independently
homogeneous product, substitution occurs, price competition
no firm dominates, no power to influence market price
no barriers to entry/exit
every firm has perfect info

Question 41

Pure competition

Industry Demand vs Firm Demand

Answer 41

for normal good, demand curve for industry is downward, but each seller has a horizontal line (perfectly elastic)
each seller can satisfy small part, must accept market price
firms= price takers
MR for pure competition is constant (pure elastic)

Question 42

Short run profit in pure comp

Answer 42

continue to operate when earn profit or loss

Question 43

Long run equilibrium in pure comp

Answer 43

firms earn normal profit attracting new entrants
entry pushes supply curve to right b/c consumers won’t buy unless price is low
if have high cost structure, lower price makes firms leave, shifting supply curve to left reestablishing equilibrium

surviving firms have lowest ATC. Price; quantity settle when MR=MC

Question 44

Monopoly

Answer 44

1 firm
no close subs
firm influences price b/c only supplier
entry by firms blocked

LTAC of meeting demand minimized w/ 1 firm when eos is great (large ops needed to get low price & costs)

Question 45

Monopoly pricing power

Answer 45

price maker- sets price as high b/c lack of competition

price search- doesn’t set prices high, seeks price to max its profits

Question 46

Industry Demand

Monopoly

Answer 46

Industry Demand= Firm demand
demand curve is downward b/c sell more by price decrease
price cut affects all units, not adtl units sold b/c of price cut; MR is below demand curve
monopolistic firm’s demand curve= industry demand curve
MR decreases wrt increased output, when MR=0 total revenue decrease

Question 47

Profit maximization

Answer 47

power to set output @ level= profit max MR=MC
economic profit in long run
MR

Question 48

Monopolistic competition

Answer 48

many firms, less than in pure comp, great enough firms can’t act together to restrict output & fix price
product differentiated (quality, brand, style, etc.); advertising important
few barriers to entry/exit
great eos don’t exist (firms not too large), cost of product differentiation is biggest barrier to entry
profit max MR=MC, price equals this point
profit max price > minimum ATC, earns economic proft in short run
progit max price

Question 49

Oligopoly

Answer 49

few firms, mutually aware & independent
price, advertising decisions depend on actions of other firms
differentiate or std products
each firm set price & production level after consideration of interdependence w/ other industry firms
barriers to entry
price rigidity – kinked demand curve (firms follow price decrease not increase)
increase prices move firm into elastic part of demand curve (decline in quantity, lose market share)
cut price, incease sales (inelastic partion)
discontinuous MR means MR decreases w/ small price cut, competitors follow to not lose market share

Question 50

Cartel

Answer 50

group of oligopoly firms agree to set prices (illegal except internationally)

• economic effects similar ot monopoly, firm restrics output, increses price, earns max profit
• each firm becomes monopoly, b/c of collusion
• cohesion maintained if members follow agreed upon price/production; fails when 1 member cuts price

Question 51

resource planning
resource markets
derived demand

Answer 51

resource planning- profit max requires optimal ouput at least cost; resources in production process are acquired in markets
resource markets- pure comp, monopoly, mono comp, oligopoly
derived demand- demand for inputs (factors)to production process derived from the demand for output of process (finished goods)

Question 52

factors affecting demand for resources

Answer 52

demand for final produt- change results in new product price (affects demand)
productivity of resource- productivity of input increases, demand increases b/c
-proportion of come of resource w/ other resources shift
-tech improvement made in combining resources
-tech improvements made in resource itself
price of resouces than can sub for another resource falls, demand for second resource falls (substitution effect)
(price decrease of pens affects pencils demand curve shifts left)
complements, decrease in price of one causes increase in demand for the other

Question 53

elasticity of resource demand

Answer 53

movements along curve
directly related to –elasticity of demand for final product (chocolate more elastic, cocoa more elastic), availability of subs, proportion of total production cost represente by the resource (sugar is large prop of TPC for choc, increase in sugar price spikes mfg TC, demand for sugar more elastic)

Question 54

Wages

Answer 54

nominal wages- amnt paid/rec’d
real wages- actual purchasing power (goods/services) of nominal wages
level of wages determined by productivity of labor (output/hours worked)
-increased productivity increases demnd for labor

Question 55

Labor supply & demand in competitive market

Answer 55

firms compet for skilled workers; neigher firms nor workers can affect market rate for labor (both are price takers)
market demand fo labor= total of indiv firms demand curves (marginal revenue product curves)
mkt supply curve has positive slope (little unemployment, firms must raise wages to hire, match opp costs)
wage rate & employment level determined by intersection of mkt labor demand curve & suppy curve
each firm accepts mkt wage rate as determined by pt of labor mkt equilibrium
-suppy curve (labor) is perfectly elastic, MRC same for all labor hired

Question 56

labor supply demand in monopsony

Answer 56

workers have option of single employer (i.e. town)
all sellers sell to single buyer
MRC> current rate for resource; given upwd supply curve, get adtl units of resource from paying more
-firm in perfect comp pays constant amnt per unit b/c can’t influence rate
1st worker =10/hr 2nd 2=$11, MRC is 11+1=12
max profits, buyer of resources uses resources unti MRP=MRC (determines equilibrium)
MRP determines equil quant
-pay lower price, buy less, produce less than pure comp, results in higher resource rate and greater quantity demanded