Microeconomics aint shit

MIDTERM 2

What is the equilibrium point in a market?

The equilibrium point is where quantity demanded equals quantity supplied.

How do you find equilibrium on a demand and supply graph?

Find the point where the demand curve and supply curve intersect.

If price is above equilibrium, what happens?

A surplus happens because quantity supplied is greater than quantity demanded.

If price is below equilibrium, what happens?

A shortage happens because quantity demanded is greater than quantity supplied.

What is the law of demand?

When price rises, quantity demanded falls, ceteris paribus.

What is the law of supply?

When price rises, quantity supplied rises, ceteris paribus.

What is the difference between demand and quantity demanded?

Demand is the whole curve; quantity demanded is one specific amount at one specific price.

What is the difference between supply and quantity supplied?

Supply is the whole curve; quantity supplied is one specific amount at one specific price.

What causes movement along a demand curve?

A change in the good’s own price.

What causes a shift in demand?

A non-price factor such as income, tastes, expectations, prices of related goods, or number of buyers.

What causes movement along a supply curve?

A change in the good’s own price.

What causes a shift in supply?

A non-price factor such as input costs, technology, taxes, subsidies, expectations, or number of sellers.

What are substitutes?

Substitutes are goods that can replace each other, so if the price of one rises, demand for the other rises.

What are complements?

Complements are goods used together, so if the price of one rises, demand for the other falls.

What happens to demand for a normal good when income rises?

Demand rises.

What happens to demand for an inferior good when income rises?

Demand falls.

What is market demand?

Market demand is the horizontal sum of all individual demand curves.

What is market supply?

Market supply is the horizontal sum of all individual supply curves.

What happens to equilibrium price and quantity when demand increases?

Equilibrium price rises and equilibrium quantity rises.

What happens to equilibrium price and quantity when demand decreases?

Equilibrium price falls and equilibrium quantity falls.

What happens to equilibrium price and quantity when supply increases?

Equilibrium price falls and equilibrium quantity rises.

What happens to equilibrium price and quantity when supply decreases?

Equilibrium price rises and equilibrium quantity falls.

What is consumer surplus?

Consumer surplus is the difference between what a buyer is willing to pay and what the buyer actually pays.

Where is consumer surplus on a graph?

It is the area below the demand curve and above the market price, up to the quantity sold.

What does price elasticity of demand measure?

It measures how much quantity demanded changes when price changes.

What is the formula for price elasticity of demand?

Price elasticity of demand = percent change in quantity demanded divided by percent change in price.

What does elastic demand mean?

Elastic demand means quantity demanded responds a lot to a change in price.

What does inelastic demand mean?

Inelastic demand means quantity demanded responds only a little to a change in price.

What does unit elastic mean?

Unit elastic means quantity demanded changes by the same percentage as price.

What usually makes demand more elastic?

More substitutes, more time to adjust, luxury goods, and narrowly defined markets.

What usually makes demand more inelastic?

Fewer substitutes, less time to adjust, necessities, and broadly defined markets.

What does cross-price elasticity measure?

It measures how demand for one good changes when the price of another good changes.

What does a positive cross-price elasticity mean?

The two goods are substitutes.

What does a negative cross-price elasticity mean?

The two goods are complements.

What does income elasticity of demand measure?

It measures how demand changes when income changes.

What does a positive income elasticity mean?

The good is a normal good.

What does a negative income elasticity mean?

The good is an inferior good.

What is the seller’s problem?

The seller’s problem is choosing the quantity of output that maximizes profit.

What is profit?

Profit equals total revenue minus total cost.

What is total revenue?

Total revenue equals price times quantity sold.

What is marginal revenue?

Marginal revenue is the extra revenue from selling one more unit.

What is marginal cost?

Marginal cost is the extra cost of producing one more unit.

What is the law of diminishing returns?

As more variable input is added to a fixed input, the additional output from each extra unit eventually falls.

What tends to happen to marginal cost when diminishing returns set in?

Marginal cost tends to rise.

What is the profit-maximizing rule for a competitive firm?

A competitive firm produces where marginal revenue equals marginal cost, and in perfect competition price equals marginal revenue.

How do you find the profit-maximizing quantity for a competitive firm on a graph?

Find where the marginal cost curve intersects marginal revenue or price.

When is a competitive firm earning profit?

When price is above average total cost at the profit-maximizing quantity.

When is a competitive firm breaking even?

When price equals average total cost at the profit-maximizing quantity.

When is a competitive firm taking a loss?

When price is below average total cost at the profit-maximizing quantity.

What is the profit formula on a graph?

Profit = (Price - ATC) x Quantity.

What is the loss formula on a graph?

Loss = (ATC - Price) x Quantity.

What is the shutdown rule in the short run?

A firm stays open if price is at least average variable cost and shuts down if price is below average variable cost.

Why would a firm stay open while losing money?

If price covers average variable cost, the firm can still cover variable costs and pay part of fixed costs.

What is producer surplus?

Producer surplus is the difference between the price sellers receive and the minimum they were willing to accept.

Where is producer surplus on a graph?

It is the area above the supply curve and below the market price, up to the quantity sold.

What happens in the long run if competitive firms earn profit?

New firms enter, supply increases, and price is pushed down.

What happens in the long run if competitive firms take losses?

Firms exit, supply decreases, and price is pushed up.

What is long-run competitive equilibrium?

It is the point where firms earn zero economic profit and price equals marginal cost and average total cost.

What is the allocation problem of scarce resources?

Resources are limited, so society must decide how to allocate them among competing uses.

How do prices help allocate scarce resources?

Prices signal scarcity and value, guiding buyers and sellers toward efficient resource use.

What is the invisible hand idea?

When individuals pursue their own interest in competitive markets, resources tend to be allocated in socially beneficial ways.

What is a price ceiling?

A price ceiling is a legal maximum price.

When is a price ceiling binding?

When it is set below the equilibrium price.

What does a binding price ceiling cause?

A shortage.

What is a price floor?

A price floor is a legal minimum price.

When is a price floor binding?

When it is set above the equilibrium price.

What does a binding price floor cause?

A surplus.

What is social surplus?

Social surplus is consumer surplus plus producer surplus.

What is deadweight loss?

Deadweight loss is the loss of total surplus when the market does not produce the efficient quantity.

What can cause deadweight loss?

Price ceilings, price floors, taxes, monopoly, and other distortions that reduce trade.

What is a monopoly?

A monopoly is a market with one seller, no close substitutes, and barriers to entry.

What are barriers to entry?

Barriers to entry are obstacles that keep new firms from entering a market.

What are examples of barriers to entry?

Patents, legal restrictions, control of key resources, large startup costs, and economies of scale.

Why does a monopoly face a downward-sloping demand curve?

Because the monopolist must lower price to sell more output.

What is the monopolist’s profit-maximizing rule?

Produce where marginal revenue equals marginal cost.

Why is marginal revenue less than price for a monopolist?

Because selling an extra unit usually requires lowering the price.

How do you find a monopoly’s profit-maximizing quantity and price on a graph?

Find where MR = MC for quantity, then go up to the demand curve to find price.

How do you calculate monopoly profit?

Profit = (Price - ATC) x Quantity.

Why is monopoly inefficient?

It produces less output and charges a higher price than perfect competition, creating deadweight loss.

What happens to consumer surplus under monopoly?

Consumer surplus falls.

What happens to total surplus under monopoly compared with perfect competition?

Total surplus is lower because monopoly creates deadweight loss.