PHS E2 - in progress

What are examples of highly organized markets?

NYSE and the Chicago Mercantile Exchange

How often are markets formal?

less

How competitive is the market for gasoline?

highly

What makes a market perfectly competitive?

if the good or service is highly standardized, the number of buyers and sellers is large, and all the participants are well-informed of the price

What is the most important factor of quantity demanded?

price

What is the law of demand?

the negative relationship between a good’s price and the quantity demanded

Market quantity demanded is the sum of what?

the quantity demanded of the individuals

Only what changes the quantity demanded?

price

What can shift the demand curve?

income, the price of related goods, tastes, expectation, and number of buyers

normal goods are what?

as income rises, demand rises

inferior goods are what?

as income rises, demand falls

What’s a substitute?

as price of one good declines, it causes an increase in demand for another

What’s a complement?

as price of one good declines, it causes a decline in demand for another

How much money is spent every year on marketing?

billions

What is the law of supply?

the positive relation between price and quantity supplied

What causes the supply curve to shfit?

input prices, technology, expectations, number of sellers

Equilibrium is a widely used concept in what kinds of sciences?

physical and social

What is excess supply?

more stuff than demanded

What is excess demand?

less stuff than demanded

Competitive markets tend to gravitate toward what?

the eq quantity and price

Competitive markets are extremely effective at doing what?

allocating resources

Competitive markets maximizes the benefits who receives from the exchange?

buyers and sellers

The height of the market demand curve at each point reveals what?

the marginal buyers willingness to pay

What is consumer surplus?

the combined benefit of money people “saved” when the thing they wanted to buy was cheaper than expected (girl math)

The height of the supply curve measures what?

the opportunity cost to the marginal seller

What is producer surplus?

Seller sells thing for more than they would have been happy with (difference between opportunity cost and market price for seller)

What is total surplus?

consumer plus producer surplus

One goal of a benevolent social planner is to do what?

maximize total surplus

Whose goal is it to maximize total surplus?

a social planner

The synthetic Bovine Growth Hormone allows dairy farmers to increase milk production by how much?

10 and 20%

What’s an externality?

subtle effects not immediately obvious from an analysis of the market that is immediately affected

What does price elasticity of demand measure?

how much the quantity demanded responds to a change in price?

Formula for price elasticity of demand.

% change in quantity demanded / % change in price

T/F The Price elasticity of demand will always be negative, but we usually ignore it

true

Demand is elastic when a one percent change in price results in what?

a greater than one percent change in quantity demanded

Demand is inelastic when a one percent change in price results in what?

a less than one percent change in quantity demanded

Elasticity provides a measure of the responsiveness of demand to price changes that is independent of what?

units of measurement

Goods with close substitutes tend to have what elasticity?

hugh price elasticity of demand

Necessities tend to have what elasticity?

low price elasticity of demand

The broader the market definition, the fewer substitutes there will be, and what kind of elasticity?

lower the elasticity of demand

How does the time horizon relate to elasticity?

over time, demand can change

What factors influence the price elasticity of demand?

substitutes, necessities, market definition, and time horizon

As we move down along a linear demand curve, what is happening to the elasticity?

it falls continously

a linear demand curve has a constant slope of what?

change in P/ change in Q

The elasticity of demand is equal to what?

1/e times P/Q

If demand is perfectly inelastic, the quantity demanded does what?

not depend on price at all

The formula for price elasticity of supply.

% change in quantity supplied/ % change in price

The elasticity of supply reflects the ease with which suppliers can alter what?

the quantity of production

What are factors influencing price elasticity of supply

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

If entry and exit into the market is easy, then the supply will tend to have what price elasticity of supply?

higher

How does time horizon affect price elasticity of supply?

over time, firms can train and get equipment

Total revenue formula.

eqP*eqQ

If the demand is elastic, total revenue will do what?

increase

Why will total revenue increase if demand is elastic?

since the proportionate change in quantity will be greater than the proportionate increase in the price

If demand is inelastic, what happens to total revenue?

it falls

In the econ resource, what is the demand elasticity of milk? (numerical value)

-.5

If using BGH reduces farm income, why do dairy farmers adopt this technology?

In a competitive market, they have no choice as they all adopt it to increase sales, which affects the total market as supply increases and prices drop

What happened in the farm sector over the past 200 years?

technological innovations allow farmers to produce greater quantities of crops, resulting in some leaving the market

For many years, U.S. policy established minimum prices of major food crops such as what?

corn and wheat

What city sought to control residential housing costs by establishing rent regulations that limits increase in the rates landlords can charge?

NY

When were Middle Eastern oil supplies interrupted and heating oil prices shot up?

1979

What did the federal government do when heating oil prices shot up in 1979?

impose a ceiling on prices in an effort to protect low-income families

What are the effects of rent control?

increase c surplus for some renters, reduce the p surplus of landlords, reduce total surplus, disruption in allocation of apartments, elascity effects

When a price floor is higher than the market equilibrium price, it is what?

binding

A tax creates a _________ between the amount consumers pay and the amount suppliers receive.

price wedge

The reduction in social welfare is called what?

deadweight loss

The revenue that the government gets from taxes reduces the total surplus from these transactions by an amount equal to what?

the income that the tax produces for the government

The less elastic the demand is, the greater the share of the tax paid by who?

buyers

The less elastic the supply and demand curves are, the smaller the effect of the tax on what?

eq quantity, and lower the deadweight loss

Exchange makes people better off by encouraging what?

specialization

Why is our modern economy characterized by a high degree od interdependence?

gains from trade

trade-offs can be drawn in what kind of diagram?

production possibility frontier

What’s an absolute advantage?

When one can produce more of a good than others given the same amount of resources

What’s a comparative advantage?

When someone has a lower opportunity cost to make a good

Trading partners can improve their overall well-being by specializing as long as they differi n what?

comparative advantages

Why would some citizens oppose freer trade despite gains exceeding losses?

Those citizens may feel those losses instead

When a market whose price is below world eq opens to trade, who benefits?

producers

When a market whose price is below world eq opens to trade, do they become an importer or exporter?

exporter

When a market whose price is above world eq opens to trade, why does consumer surplus fall?

prices rise to world eq

The difference between domestic consumption and the quantity supplied is what?

the exported stuff

Economists use the term “firm” to describe what?

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

Firms combine what to produce the products we consume?

labor, capital equipment, raw materials, and inputs

We assume a firm’s goal is to do what?

maximize profits

Profits are defined as the difference between what?

firm’s total revenue and total costs

Economic costs include what?

opportunity cost of all resources required for production

Accounting costs include what?

only actual monetary expenditures

Economic profit is what difference?

Total revenue - economic costs

What are fixed costs?

costs that cannot be changed in the short run

What are variable costs?

costs that can be changed in the short run

What is marginal cost?

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

The marginal cost of production is calculated by doing what?

dividing the increase in total costs by the increase in the quantity of bread produced

As you add more and more additional output, what increases?

marginal costs

What is diminishing returns to scale?

when each additional increase in inputs results in a smaller increase in the quantity produced

The additional revenue that one gets from producing an additional amount of output is what?

marginal revenue

When will entry into a market cease?

when economic profits reach 0

In a competitive market business, why will owners be content with zero economic profits?

they are earning the opportunity wage

Economists call markets with one or few suppliers what?

imperfectly competitive

What is the objective of firms in imperfectly competitive markets?

maximize economic profits

Unlike firms in perfectly competitive markets, a firm in an imperfectly competitive market cannot do what?

assume that its decision about how much to supply does not affect the price at which its products can be sold

Forms that posses market power have what kind of demand curve?

downward sloping