Upgrade to remove ads
Microeconomics - Dickey - Final exam
Terms in this set (72)
1. Distinguish scarcity and shortage
scarcity is the concept that there is less of a good freely available than people would like (due to unlimited wants)
a shortage is when a good offered by producers is less than the amount demanded (at the current price)
Scarcity will always be with us but shortages can be fixed by raising the price of the good in order to reduce the demand for the product.
p. 4, 71
2. What are the central elements of the economic way of thinking?
1. Opportunity costs exist (scarce resources are costly, decisions makers must make trade-offs = opportunity cost results)
2. People are utility maximizers (they will try to get the most from their limited resources)
3. Incentives matter (monetary and non-monetary. changing incentives will change choices)
4. People make decisions at the margin
5. Information is costly
6. Secondary effects exist (unintended effects from a decision)
7. Value is subjective (different people value different things)
8. a theory is only as good as its predictions (must be tested against events in the real world)
3. Distinguish positive and normative economics.
Positive- what is
normative - what should be
4. What is the law of demand? The law of supply?
law of demand - there is an inverse relationship between price and quantity demanded
law of supply - there is a direct relationship between price and quantity supplied.
5. What causes a shift in demand? A shift in supply?
1. change in consumer income (they are able to purchase more)
2. change in # of consumers (the more consumers there are the more there are going to be buying a product)
3. changes in price of related good (increased demand for substitute good will decrease demand for other good and vice versa)
4. changes in expectations (optimism about economy)
5. demographic changes (and older generation consumes different things than a younger one)
6. consumer tastes
1. changes in resource prices (higher prices = lower supply)
2. changes in technology (new production techniques)
3. nature and political disruptions (natural disasters, policy changes)
4. changes in taxes (higher taxes = lower supply)
p. 48-50, 56-57
6. What is the long run?
a period of time in which all factors of production and costs are variable.
7. What results from a price floor set above equilibrium?
Demand will be too low and supply will be too high (a surplus)
example: minimum wage
8. Explain utility maximizing theory.
consumers will maximize the utility(satisfaction) they gain from their consumption. This theory is based off of
1. limited income necessitates choice
2. consumers make decisions purposefully
3. one good can be substituted for another
4. consumers must make decisions without perfect information, but knowledge and past experience will help
9. What is the law of diminishing marginal utility?
as the consumption of a product increases, the marginal utility derived from it will eventually decline
(the more you consume something, the less you are satisfied by it)
10. What is elasticity? Of demand? Of income?
elasticity is the responsiveness to price changes: elastic means very responsive; inelastic means not responsive
price elasticity of demand = how much more/less will people buy a product if the price changes?
formula: %change in q demanded/ %change in p
[(q0 - q1)/(q0+q1)] / [(p0 - p1)/(p0+p1)]
absolute value between 0 and 1 is inelastic; over 1 is elastic
Income elasticity = how much more/less people will consume if their income changes
formula: %change in q demanded/%change in income
11. What is the substitution effect? The income effect?
substitution effect: when a good is consumed more due to substitute prices going up (or visa versa)
income effect: when income goes up, consumption goes up
12. Distinguish implicit and explicit costs?
explicit: monetary payment to resource owners
implicit: opportunity costs/non-payment costs
13. Where does the marginal cost curve cross the average total cost curve?
at its minimum (due to diminishing marginal returns)
14. What kind of costs are irrelevant to decision makers?
sunk costs: costs that have already incurred as a result of past decisions
15. Why is the short run supply curve less elastic than the long run?
because in the short run, producers cannot vary their factors of production. In the long run, many factors of production can change (new technology, bigger workspace, etc)
16. What is a price taker (purely competitive) market?
sellers who must take whatever the market price is.
Because there are so many small firms in price taker markets, sellers cannot affect the market price
characteristics: identical product, large number of firms, no large firms, no barriers to entry
17. What is a competitive price taker (monopolistically competitive ) market?
market where demand curve is downward sloping and entry and exit within market is easy (they can choose a price)
characteristics: differentiated product, large number of firms, no large firms, no barriers to entry.
18. What is the profit maximizing rule?
MC = MR
19. At what point will a price taker close down?
when it can no longer cover variable costs (no longer covering the costs of operation)
if they can cover AVC, then they can run until the market price goes back up to cover their ATC
20. Why will neither price taker (purely competitive) firms nor competitive price taker
(monopolistically competitive) firms earn an economic profit?
because of the low barriers to entry, profits will attract new sellers which will spread the profit out. This will eventually thin the profits down to nothing and some businesses will be forced to leave the market. This will bring the market back to equilibrium.
21. What is a contestable market?
markets in which firms can enter and exit with minimal risk.
efficient production and zero economic profits occur in contestable markets. (because prices above costs and inefficient production invite in competition)
22. Distinguish the result of price taker markets and competitive price taker markets.
-both have strong incentives to serve interests of customers
-both cannot make economic profit
-both respond to demand changes similarly
- has horizontal demand curve
- MR = p
- has downward sloping demand curve
- MR < p
23. What is the strategy underlying price discrimination?
a seller charges different prices to different consumers for the same product (example: airlines, college tuition)
24. Define monopoly.
a market with
1. high barriers to entry
2. a single seller of a product
3. a product for which there are no good substitutes
25. What is the result of splitting a natural monopoly into many smaller firms likely to be?
natural monopoly = market situation where ATC will be lowest when a monopoly is present (ATC decline with increased output)
result of splitting it up: higher per-unit costs
26. Define a oligopoly market.
a market where there are
1. a few large firms
2. interdependence among firms
3. economies of scale
4. high barriers to entry
27. Describe three theories of price determination in oligopoly markets.
1. Collusion - all firms collude together to set prices (essentially a monopoly)
2. Price leadership (one leader sets the price and all competitors follow)
3. cost plus pricing (finding out the cost and adding in a margin of profit to create a price)
28. What is the motivation for government bureaucracies to run efficiently compared to
governments have special interests to satisfy and do not care about efficiency. Businesses have profits to worry about and need to be efficient to make them
29. Under what conditions will the demand curve for human resources be more elastic?
1. substitutes for resources (more substitutes = more elastic)
2. substitutes for product ( more elastic demand for product is, the more elastic demand for resource is)
3. time (demand for resource becomes more elastic with time)
30. What is a derived demand?
the demand for a resource: it stems from the demand for the final good the resource produces
31. What factors determine differential wages for jobs?
Differences in workers
- productivity/specialized skills
- worker preferences
Differences in jobs
- job location
- working conditions
- opportunity for training/skill-enhancement
immobility of resources
-temporary disequlilibrium from market changes (example: job market being flooded and wages decreasing temporarily as a result)
p. 522 (thumbnail sketch)
32. Why are wages higher in the US than low wage countries like Mexico?
output of US workers is greater than output of Mexican workers
33. Who pays for benefits mandated by the government?
workers through lower wages
34. Why do college graduates receive higher wages?
College graduates have invested in increasing their productivity and/or learning a specialized skill
35. What causes increases in the interest rate?
interest rates are changed by changes in supply and demand for loanable funds.
decreased saving (decreased supply) and increased demand will increase interest rates
36. Be able to calculate Net Present Value.
NPV = the current worth of future money
revenues in the future are valued less highly than revenues now
2nd year: R/(1+r)^2
37. What will cause the Net Present Value of a sum to be received in the future to decrease
NPV of a dollar will go down as interest rates go up and the longer in the future we are looking ahead
(inverse relationship between NPV and interest rate/time)
38. What is the relationship between investment and saving?
saving is the non-consumption of income, while investment refers to the use of unconsumed income to produce a capital resource.
In other words, savings is required for investing because investing uses the money that has been saved
39. Why is a competitive capital market important to society?
because capital (competitive) markets provide 2 sources of economic profit: uncertainty and entrepreneurship
also, the capital market encourages innovation.
uncertainty: because of the risk of uncertainty, people demand a higher return for uncertain investments (why stocks have higher returns than bonds)
entrepreneurship: entrepreneurs are required to find investment opportunities and the best entrepreneurs will be allocated more control over investment dollars (because they make more profit)
p. 542, 544-45
40. What is the difference between the motivation to invest in physical capital and human
there is none. Investing in human capital is just as beneficial (if not more beneficial) as investing in physical capital
41. What are the sources of profit from entrepreneurship?
see #39 answer
42. Describe in broad terms the inequality of income distribution in the US.
45% of income is earned by top 20%
4% of income is earned by bottom 20%
43. What are the distinguishing characteristics of low and high income families?
differing characteristics of high and low income families:
-education (college degree or more)
-family status (married)
-persons per family (over 3)
-earners per family (over 2/wife works)
-percentage of hours supplied (33%)
44. What is an implicit marginal tax?
the amount off the dollar earned that must be paid in taxes or reduced income supplements (like food stamps)
high implicit marginal taxes reduce incentives to work in the poor
45. What kinds of countries have the greatest income inequality?
developing countries with few economic freedoms
46. How is poverty calculated in the US?
poverty is determined by a threshold income level (absolute dollar value).
this threshold varies with family size and composition.
(example: family of 4 must be under $25,000 to be "poor")
47. What is the likely impact of restricted sale of foreign goods in the US?
prices of domestic goods would go up due to increased demand
48. What is the impact of increased sale of foreign goods in the US?
prices of domestic goods must go down in order to compete with foreign goods.
price of all goods would go down due to increased supply.
49. What is comparative advantage?
the ability to produce a good at a lower opportunity cost than others can produce it (not being able to produce it more cheaply than everyone else)
50. How does comparative advantage guide fruitful trade internationally?
it allows countries to specialize in the goods they have comparative advantages in production in (and trade these goods for those they cannot produce as efficiently)
51. What is NAFTA?
North American Free Trade Agreement: Trade agreement between the US, Canada, and Mexico where tariffs between the 3 countries are all but eliminated
after NAFTA, US trade with both countries increased rapidly
52. What is depreciation (appreciation) of a currency? What might cause it?
depreciation: reduction in the value of domestic currency in comparison to foreign currencies (makes foreign goods more expensive, but makes our goods cheaper to foreigners)
appreciation: increase in the value of domestic currency in comparison to foreign currencies (makes foreign goods cheaper to us and our goods cheaper to them)
53. What items are debits and credits in the US Balance of Trade?
merch Exports - credit , 1,564.1 bil
merch imports - debit , -2,299.4 bil
service exports - credit , 630.4 bil
service imports - debit, -434.6
income receipts of Americans from abroad - credit , 742 bil
income receipts of foreigners in US - debit , -543.4 bil
54. What has been the pattern of poverty in the US over time?
poverty rates decreased dramatically between 1947 and 1965.
the "war on poverty" reduced rates some, but they have remained about the same. Now poverty is just laid on the shoulders of different people
due to destruction of family structure
55. What are the serious economic arguments against government policies to reduce poverty?
1. samaritan's dilemma: transfer programs reduces the opportunity cost of choices that lead to poverty. (example: unmarried mothers giving birth for the welfare benefits)
2. Negative incentives: transfer programs reduce the incentives of low-income people to help themselves (implicit marginal tax rates)
summary: they increase incentives to do bad things and reduce incentives to to good things
56. What has happened to the poverty rate of children Elderly?
the poverty rate of children has gone up
the poverty rate of elderly has gone down
57. How do men's and women's wages compare across all jobs?
women earn 77 cents on men's 1 dollar
58. How different are men's and women's wages when unmarried men and women in the
same job and with the same experience and education are compared?
the gap between unmarried men and women is far less than the gap between married men and women. (94% vs 77%)
this is because married men are much more stable workers than both unmarried men and married/unmarried women
59. Other than discrimination, give two explanations of why are women's wages lower than
human capital theory: people are payed more based on contributions they make
-in this theory, men are payed more because they are more likely to stay long term at their job, work overtime, relocate, take a traveling job.
segregated occupation theory: women are more likely to choose low paying jobs (because they work better with their schedules among other reasons
60. What percentage of US workers are unionized?
61. What is the most unionized sector in the US?
62. How do unions increase wages? What impact have they had on union worker premiums
and worker wages in general?
1. supply restrictions (smaller supply = higher wage): licensing requirements, long apprenticeships, immigration barriers, high initiation fees, not allowing new members in union, prohibition of non-union workers
2. increased demand: appealing to customers to buy only union made products, restrict imports on same products as those in unions
3. bargaining power: bargain for wages, workers strike if they are not met
63. What happens to the elasticity of demand for resources in the long run?
demand for resources becomes more elastic as time goes on
producers and consumers take a while to respond to price changes at first (changing plant size/equipment for producers, identifying/buying substitutes for consumers)
64. What is an economic analysis of doomsday predictions about impending resource
Technology and the capital market will not allow resource depletion to occur.
new technology will allow us to use resources more efficiently
the market will push consumers to substitutes when the price for depleting resources becomes too high.
65. How does the market solve the problems of decreasing resources?
push innovation/new technology (due to entrepreneurship)
push consumers to substitutes
66. What are proven reserves?
specific resource deposits that have been shown by scientific examination and cost calculation to be extractable by current technology/market conditions
67. What happens to resource prices over time?
they go down
this is due to the resource becoming more and more obsolete due to substitutes
or it can be due to better technology
68. What are the negative impacts of publicly owned versus privately owned resources?
when resources are not privately owned and traded in open markets, it is impossible to see the flow of info and incentives of consumers that results in the price.
in addition, people don't take care of things as well that they do not own privately
69. How does the market protect water resources?
supply and demand will place it where it is most needed
70. Who was Malthus?
a doomsday predicter
71. How does technology affect pollution and resource use?
technology gives us ways to "mine" resources more efficiently as well as different ways to reduce pollution
72. What solutions to pollution does private property ownership offer?
in private ownership, owners become concerned about lawsuits or other externalities coming back to bite them. They can therefore keep a better eye on when pollution is becoming too much of a problem.
This set is often in folders with...
Macro Econ Final Exam (dickey)
Psychology Final Exam Dickey
Microeconomics - Test 2 - Dickey
Dr. Dickey Final Psychology
You might also like...
Other sets by this creator
TI 2 - midterm - richardson
advanced hab/rehab - test 4 - hangen
TI 2 - test 3 - richardson
advanced hab/rehab - test 3 - hangen
Other Quizlet sets
Midterm Quiz 7
PY 211- Test 1
Romeo and Juliet Test
Ancient Rome Chapter Test