Economics: Section II

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Microeconomics

microeconomics

The central topic of _______ is interaction of supply and demand in markets

market

A ____ is comprised of all of the buyers and sellers of a particular good or service.

price; quantity

The ____ and ____ sold of a product are determined by the combined actions of all the buyers and sellers in the market.

perfectly competitive market

1.) Good or service bought and sold is highly standardized.
2.) Number of buyers and sellers is large.
3.) All participants are well informed about market price.

demanded

The quantity ____ of any good is the amount of that good that buyers are willing and able to purchase.

influencing the market price

In a perfectly competitive market, buyers and sellers know they can buy or sell without

Law of Demand

If the price of a good is higher, buyers will demand less of that good, and vice versa; negative relationship

increases

As the price of a good increases, the opportunity cost of consuming that good

cost-benefit

The law of demand is a result of the ____-____ analysis that rational decision-makers use.

demand schedule

a table showing the relationship between the price of a good or service and the quantity demanded

demand curve

a graphical representation of the quantity of a good or service demanded as a function of the price

market demand schedule

To find the ____ ____ ____, we must add up the quantity that every consumer will purchase at each possible price.

horizontally

We add the total demand curves ____ to obtain the market demand.

market demand curve

depicts the relationship between the quantity demanded and its price, assuming that all other factors that might influence the quantity demanded remain unchanged

Factors that affect quantity demanded

Income, prices of related goods, tastes, expectations, and number of buyers.

positively

Demand is ____ related to income.

normal good

a good or service for which demand is positively related to the buyer's income

inferior good

a good for which the quantity demanded falls as buyers' income increases; ex: bus rides

substitutes

2 goods for which an increase in the price of one leads to an increase in the demand for the other.

complements

2 goods for which a rise in the price of one leads to a decline in the demand for the other.

benefits; opportunity costs

Quantity demanded reflects a comparison of the ____ of consumption with the ____ ____ of purchasing the good.

increase

If there are more consumers, then demand will ____.

quantity

The ____ supplied of any good is the amount that sellers of the good are willing and able to produce.

Law of Supply

Holding other things equal, the quantity supplied is positively related to the price.

cost-benefit

The positive relationship between price and quantity supplied reflects the ____-____ analysis of rational suppliers.

supply curve

a graphical representation of the quantity of a good or service supplied as a function of the price

horizontally

We obtain the market supply curve by adding the individual supply curves ____.

inputs

any of the things that suppliers have to purchase to supply a product

Factors that affect quantity supplied

Input prices, technology, expectations, and number of sellers.

equilibrium

A market is in ____ when no participant in the market has any reason to alter his or her behavior.

intersect

The market equilibrium occurs at the combination of price and quantity where the market supply and demand curves ____.

automatic

The market has an ____ tendency to gravitate toward market equilibrium price and quantity.

excess

When there is an ____ supply, suppliers have an incentive to lower their price a little bit.

demand

When there is an excess ____, buyers might be tempted to offer to pay a little bit extra to be sure to get what they want, and sellers will see that they can raise prices without sacrificing sales.

Competitive markets

____ ____ tend to gravitate toward the equilibrium quantity and price.

competitive market

a market with many buyers and sellers trading a homogenous good or service in which each buyer and seller is a price taker

allocating resources

Competitive markets are an extremely effective method of ____ ____.

maximize

Competitive markets ____ the benefits that buyers and sellers receive from exchange.

marginal buyer

the buyer who demands the market price at the height of the market demand curve (at each point) because he/she is indifferent between buying the good in question or not buying it

consumer surplus

the difference between the amount that a buyer would be willing to pay for a good or service and the price actually paid

height; horizontal; consumer surplus

The difference between the ____ of the demand curve and a ____ line drawn at the market price measures the ____ ____ for the marginal buyer at each quantity demanded.

total

We can use the total area below the demand curve and above the market price as a measure of ____ consumer surplus.

height

The ____ of the supply curve measures the opportunity cost to the marginal seller.

producer surplus

the difference between the price that producers receive for supplying a good and their marginal cost of producing it

total surplus

consumer surplus + producer surplus = ____

total surplus

measure of the total benefits that market participants receive from their transactions

Pareto efficiency

An outcome that maximizes total surplus satisfies the economist's criterion of ____ ____.

To achieve an efficient outcome, a market planner would need to know:

1.) the value that each consumer places on a good
2.) the cost of producing each unit of that good
3.) how much of the good should be produced
4.) who should produce the good
5.) who should get the good

externalities

subtle effects on the market caused by newly introduced factors; not immediately obvious from an analysis of the market that is immediately affected

elasticity

the percentage change in quantity demanded or supplied as a result of a one percent change in price

price elasticity of demand

(% change in quantity demanded)/(% change in price)

negative; absolute value

The price elasticity of demand ratio is always ____ because of the law of demand, so in practice, we use the ____ ____.

elastic demand

1% of change in price leads to >1% change in quantity demanded

inelastic demand

1% of change in price leads to <1% change in quantity demanded

unit elastic demand

1% of change in price leads to 1% change in quantity demanded

independent

Elasticity is ____ of the units of measurement.

Substitutes, necessities, market definition, and time horizon

Factors that influence the price elasticity of demand

flatter

If 2 demand curves pass through the same point, the curve that is ____ will have a higher elasticity.

elasticity of demand

(1/e)*(P/Q)

percent change

100[(P2-P1)/(0.5(P2+P1))]

falling

As we move down and right along a demand curve, elasticity is ____.

quantity

When demand is perfectly inelastic, the ____ demanded does not depend on price at all.

flat

The demand curve is completely ____ in a perfectly elastic case.

price elasticity of supply

(% change in quantity supplied)/(% change in price)

Factors that affect the price elasticity of supply

Ease of entry and exit, scarce resources, and time horizon

flatter

If 2 supply curves pass through the same point, the ____ curve will be the more elastic one.

price

In a perfectly inelastic supply curve, the quantity supplied will not change at all as the ____ changes.

total revenue

the total revenue received by a supplier

total revenue

equilibrium price x equilibrium quantity (P x Q)

increase

If demand is elastic, total revenue will ____ since the proportionate change in quantity will be greater than the proportionate increase in the price.

decrease

If demand in inelastic, then total revenue will ____ when prices fall.

Effects of rent control

1.) increased consumer surplus
2.) reduced producer surplus
3.) total surplus reduced
4.) disruptive effect on allocation of apartments

equilibrium

Taxes reduce the ____ quantity, lowering total surplus by preventing beneficial exchange.

price wedge; reduces

A tax creates a ____ ____ between the amount consumers pay and the amount suppliers receive; this ____ the market quantity, and both consumers and producers share the cost of the tax.

deadweight loss

the reduction in total surplus that results from a market distortion such as a tax

government

Taxes transfer revenue to the ____.

reduces

The revenue the gov't receives ____ the combined consumer and producer surplus by an amount equal to the income the tax produces for the gov't.

supply; demand

Distribution of the burden of a tax depends on the relative price elasticities of ____ and ____.

greater

For any given supply curve, the less elastic the demand is, the ____ the share of the tax paid by buyers.

specialization

Exchange encourages ____.

gains from trade

the benefits that both individuals or nations realize from mutually beneficial exchange

interdependence

Modern economies are characterized by a high degree of ____.

production possibility frontier (PPF)

a graphical depiction of the combinations of output that can be produced by an economy

absolute advantage

If Person A's PPF is above and to the right of Person B's PPF at every point, Person A has an ____ ____.

comparative advantage

the ability to produce a good or service at a lower opportunity cost than other producers

production

Collective economies can increase total ____.

specializing

So long as trading partners differ in their comparative advantage, they can improve their overall well-being by ____.

When a country becomes an exporter...

1.) consumer surplus falls
2.) producer surplus increases
3.) social welfare increases

When a country becomes an importer...

1.) social welfare increases
2.) consumers benefit
3.) producers suffer losses

firm

economic actors who are responsible for supplying goods and services in the economy

labor; capital equipment; raw materials

Firms combine ____, ____ ____, ____ ____, and other inputs to produce products.

profits

A firm's goal is to maximize ____.

profits

difference between the firm's total revenue and its total costs

total revenue

total quantity of output the firm produces for sale multiplied by the price it receives

economic costs

include the opportunity costs of all resources required for production

accounting costs

include only the actual monetary expenditures

economic profit

the difference between the revenue realized by a producer and the opportunity cost of production

fixed costs

costs of production that are independent of the quantity produced

variable costs

costs of production that depend on quantity produced

marginal cost

the increase in costs that occurs when producing an additional unit of output

costs; quantity

Marginal cost is calculated by dividing the increase in total ____ by the increase in the ____ produced.

diminishing returns to scale

the property whereby each additional increase in inputs results in a smaller increase in the quantity produced

opportunity cost

Marginal cost of production is the ____ ____ of supplying an additional unit of product.

rising; increases

So long as diminishing returns to scale apply, marginal costs will be ____ as a firm's output ____.

outward; equilibrium price

The addition of more producers has the effect of shifting the market supply curve ____; this is turn causes the ____ ____ to fall.

cease

Only when economic profits have reached 0 will entry of additional producers ____.

leave

If economic profits were to fall below 0 at some point, producers would begin to ____ the market.

zero

In a competitive market business owners earn ____ economic profits.

Functions of prices

1.) Ration scarce goods
2.) Allocate productive resources between different activities

imperfectly competitive

Markets with one or only a few suppliers are called ____ ____.

increase; lower

A firm in an imperfectly competitive market can no longer assume that its decision about how much to supply does not affect the price at which its products can be sold; if it chooses to ____ its supply, the price it receives will be ____.

market power

the situation in which a producer knows that changes in the quantity produced will alter the price at which the good or service can be sold

monopoly

the extreme situation of a single supplier in a market

barriers to entry

conditions that prevent firms from freely entering or exiting a market

Sources of barriers to entry

1.) The ownership of a key resource
2.) Government-created monopolies
3.) Natural monopolies

Profit-maximizing strategy for firm in competitive market

Increase supply until marginal cost equals marginal revenue

decline

Increasing supply beyond where marginal cost equals marginal revenue causes profits to begin to ____.

Effects of a monopoly on social welfare

1.) A transfer of consumer surplus to monopolizing firm
2.) A reduction of social well-being

legislation

The federal government seeks to use ____ to increase market competition.

Dealing with monopolies

1.) Government legislation
2.) Regulation
3.) Public ownership

price discrimination

when a business sells the same product to different buyers at different prices

greater

Price discrimination increases monopoly profits by allowing the monopoly to capture a ____ fraction of the benefits produced by each transaction.

increases

Price discrimination ____ social welfare.

oligopoly

a market in which there are just a few producers

interaction

In oligopoly markets, there is an opportunity for strategic ____ between the different suppliers in comparison to monopoly markets.

cartel

an agreement between suppliers to restrict production and raise prices; illegal under U.S. anti-trust law

OPEC, or Organization of Petroleum Exporting Countries

An example of a cartel is __ __ __ __ (acronym).

imperfect competition

the case of a market with a small number of sellers, so that sellers have market power

monopolistic competition

a market in which there is free entry or exit, but every producer supplies a differentiated product and faces a downward sloping demand curve

monopolistic competition

The most common form of imperfect competition is ____ ____.

perfectly; monopoly

Monopolistically competitive markets combine aspects of the ____ competitive and ____ models.

revenue; market price

Because monopolistically competitive markets' demand curve slopes downward, marginal ____ is less than price, so at this point the ____ ____ is greater than the marginal cost of production.

entry; similar

If firms are earning positive profits this will lead to the ____ of new firms supplying ____ goods or services.

Important points to note about monopolistically competitive markets

1.) Because price exceeds marginal cost, there is some social inefficiency
2.) The diversification of products creates benefits for consumers by increasing the range of choices available to them

barriers to entry; imperfect

When producers can create ____ __ ____, they can create situations of ____ competition in which they are able to earn economic profits.

innovation

One of the most important routes that firms take to establish market power is ____.

entrepreneurs

individuals who take on the risk of attempting to create new products or services, establish new markets, or develop new methods of production

barriers to entry

The existence of profits encourages efforts to invent around existing ____ __ ____.

Joseph Schumpeter

Described the impact of entrepreneurs as a type of "creative destruction." The esssential catalyst of creative destruction is the opportunity to earn economic profits.

market failures

conditions in which a competitive market fails to produce a socially efficient outcome

externality

arises when the actions of one person affect the well-being of someone else, but neither party pays nor is paid for these effects; there are positive and negative externalities

public goods

goods or services for which it is impossible to establish individual property rights

externalities; private property

Market failures arise because of ____ and when the institution of ____ ____ breaks down.

government

Addressing the problems of externalities and public goods is one of the most compelling roles for ____ in our economy.

zero; positive

The optimal level of a negative externality is not ____; rather, there is likely to be some ____ level of the externality that will be consistent with maximizing consumer and producer surplus.

internalize; single

An approach to dealing with externalities is to ____ them by combining the activities that produce the externality within a ____ company.

Coase Theorem

created by Ronald Coase; the proposition that if private parties can bargain without cost over the allocation of resources, then they can solve the problem of externalities on their own

initial; property rights

One of the important insights of the Coase Theorem is that the ____ distribution of rights does not affect the ability of the parties to come to an efficient agreement; so long as the ____ ____ are clearly defined, the parties will arrive at the efficient solution.

defined; nonexistent; high

In many cases property rights are poorly ____, or ____, and the costs of negotiating between the affected parties are prohibitively ____.

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