The central topic of _______ is interaction of supply and demand in markets
A ____ is comprised of all of the buyers and sellers of a particular good or service.
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.
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
As the price of a good increases, the opportunity cost of consuming that good
The law of demand is a result of the ____-____ analysis that rational decision-makers use.
a table showing the relationship between the price of a good or service and the quantity demanded
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.
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.
Demand is ____ related to income.
a good or service for which demand is positively related to the buyer's income
a good for which the quantity demanded falls as buyers' income increases; ex: bus rides
2 goods for which an increase in the price of one leads to an increase in the demand for the other.
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.
If there are more consumers, then demand will ____.
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.
The positive relationship between price and quantity supplied reflects the ____-____ analysis of rational suppliers.
a graphical representation of the quantity of a good or service supplied as a function of the price
We obtain the market supply curve by adding the individual supply curves ____.
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.
A market is in ____ when no participant in the market has any reason to alter his or her behavior.
The market equilibrium occurs at the combination of price and quantity where the market supply and demand curves ____.
The market has an ____ tendency to gravitate toward market equilibrium price and quantity.
When there is an ____ supply, suppliers have an incentive to lower their price a little bit.
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.
____ ____ tend to gravitate toward the equilibrium quantity and price.
a market with many buyers and sellers trading a homogenous good or service in which each buyer and seller is a price taker
Competitive markets are an extremely effective method of ____ ____.
Competitive markets ____ the benefits that buyers and sellers receive from exchange.
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
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.
We can use the total area below the demand curve and above the market price as a measure of ____ consumer surplus.
The ____ of the supply curve measures the opportunity cost to the marginal seller.
the difference between the price that producers receive for supplying a good and their marginal cost of producing it
consumer surplus + producer surplus = ____
measure of the total benefits that market participants receive from their transactions
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
subtle effects on the market caused by newly introduced factors; not immediately obvious from an analysis of the market that is immediately affected
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 ____ ____.
1% of change in price leads to >1% change in quantity demanded
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
Elasticity is ____ of the units of measurement.
Substitutes, necessities, market definition, and time horizon
Factors that influence the price elasticity of demand
If 2 demand curves pass through the same point, the curve that is ____ will have a higher elasticity.
elasticity of demand
As we move down and right along a demand curve, elasticity is ____.
When demand is perfectly inelastic, the ____ demanded does not depend on price at all.
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
If 2 supply curves pass through the same point, the ____ curve will be the more elastic one.
In a perfectly inelastic supply curve, the quantity supplied will not change at all as the ____ changes.
the total revenue received by a supplier
equilibrium price x equilibrium quantity (P x Q)
If demand is elastic, total revenue will ____ since the proportionate change in quantity will be greater than the proportionate increase in the price.
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
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.
the reduction in total surplus that results from a market distortion such as a tax
Taxes transfer revenue to the ____.
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.
Distribution of the burden of a tax depends on the relative price elasticities of ____ and ____.
For any given supply curve, the less elastic the demand is, the ____ the share of the tax paid by buyers.
Exchange encourages ____.
gains from trade
the benefits that both individuals or nations realize from mutually beneficial exchange
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
If Person A's PPF is above and to the right of Person B's PPF at every point, Person A has an ____ ____.
the ability to produce a good or service at a lower opportunity cost than other producers
Collective economies can increase total ____.
So long as trading partners differ in their comparative advantage, they can improve their overall well-being by ____.
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.
A firm's goal is to maximize ____.
difference between the firm's total revenue and its total costs
total quantity of output the firm produces for sale multiplied by the price it receives
include the opportunity costs of all resources required for production
include only the actual monetary expenditures
the difference between the revenue realized by a producer and the opportunity cost of production
costs of production that are independent of the quantity produced
costs of production that depend on quantity produced
the increase in costs that occurs when producing an additional unit of output
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
Marginal cost of production is the ____ ____ of supplying an additional unit of product.
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.
Only when economic profits have reached 0 will entry of additional producers ____.
If economic profits were to fall below 0 at some point, producers would begin to ____ the market.
In a competitive market business owners earn ____ economic profits.
Functions of prices
1.) Ration scarce goods 2.) Allocate productive resources between different activities
Markets with one or only a few suppliers are called ____ ____.
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 ____.
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
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
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
The federal government seeks to use ____ to increase market competition.
Dealing with monopolies
1.) Government legislation 2.) Regulation 3.) Public ownership
when a business sells the same product to different buyers at different prices
Price discrimination increases monopoly profits by allowing the monopoly to capture a ____ fraction of the benefits produced by each transaction.
Price discrimination ____ social welfare.
a market in which there are just a few producers
In oligopoly markets, there is an opportunity for strategic ____ between the different suppliers in comparison to monopoly markets.
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).
the case of a market with a small number of sellers, so that sellers have market power
a market in which there is free entry or exit, but every producer supplies a differentiated product and faces a downward sloping demand curve
The most common form of imperfect competition is ____ ____.
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.
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.
One of the most important routes that firms take to establish market power is ____.
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 ____ __ ____.
Described the impact of entrepreneurs as a type of "creative destruction." The esssential catalyst of creative destruction is the opportunity to earn economic profits.
conditions in which a competitive market fails to produce a socially efficient outcome
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
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.
Addressing the problems of externalities and public goods is one of the most compelling roles for ____ in our economy.
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.
An approach to dealing with externalities is to ____ them by combining the activities that produce the externality within a ____ company.
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 ____.
Using ____ or ____ can correct externalities.
The institution of property rights is a ____ ____.
A group of individuals can do better when they decide ____ because they can internalize the ____.
tragedy of the commons
the depletion of a common resource due to overuse
A simple solution to tragedy of the commons is to create ____ ____ of the resource affected.
rivalry in consumption
one person's consumption of a good reduces the amount available for others
ability to control who consumes a particular good
high degree of rivalry in consumption high degree of excludability
high degree of rivalry in consumption low degree of excludability (tend to be overutilized)
low degree of rivalry in consumption high degree of excludability (often natural monopolies)
low degree of rivalry in consumption low degree of excludability (supported by gov't, advertising, and/or public donations)
formal and informal rules that structure human interaction
help to organize human interaction, but do so through formal rules and structures
An important limitation constraining institutions and organizations is the need for ____ ____.
Two distinctive powers of government
1.) Ability to tax its citizens 2.) Legal monopoly on the legitimate use of force
Government enforces ____ ____, supporting a broad range of voluntary cooperation.
pork barrel politics
proclivity of elected officials to introduce projects that steer money to their communities
Projects that are the result of pork barrel politics ____ the cost of government.
the practice of elected officials trading votes
Logrolling accounts for a certain amount of ____ government spending.
The gains from many government programs are ____, while the costs are spread ____.
Even when the overall benefits of projects exceed their ____, they may generate ____ resource allocation.
using political influence to increase one's economic profits at the expense of others