69 Cards in this Set
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Production Possibilities Frontier (PPF)
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A model that shows the different combinations of goods that a fully employed economy can produce, given its available resources and current technology.
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Comparative Advantage
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When one country can produce a good at a lower opportunity cost than another country.
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Absolute Advantage
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When one country can produce more of some good than another
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Change in demand
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"A change in demand is caused by any determinant and shifts the whole curve. Determinants of demand are:
Tastes in preferences
Income (up, normal goods demand up; up inferior goods demand down)
Price of substitute (up, demand up)
Price of complement (Demand down)
Number of buyers
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Change in quantity demanded
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Change along the demand curve due to price
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Change in supply
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"Shift of entire supply curve due to:
Production tech (up, supply up)
Cost of resources (up, supply down)
Price of other commodities (up, supply of other thing goes down because you can't do two things at once)
Price expectations (up, supply down)
Number of sellers (up, supply up)
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Change in quantity supplied
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Change along the supply curve due to a change in price of the product being made
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Equilibrium
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The price at which the quantity supplied is equal to the quantity demanded.
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Supply shortage
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When demand is higher than supply
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Supply surplus
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When supply is larger than demand
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Consumer surplus
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The difference between a person'as willingness to pay and the price paid. It is the area between the demand curve and the market price.
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Producer Surplus
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The difference between the price a seller receives and its marginal cost. It's the area between the market price and the supply curve
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Total surplus
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The sum of consumer and producer surplus in a market. Maximized at equilibrium.
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Price ceiling
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Maximum price for a good. Binding price ceiling is below equilibrium and causes a shortage.
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Price floor
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Minimum price for a good and a binding price floor appears above equilibrium and causes a surplus.
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Lena and Jess are roommates. Lena hates to clean the bathroom. Jess will agree to clean the bathroom only if Lena vacuums the living room. This statement best represents this economic concept:
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a. People usually exploit opportunities to make themselves better off.
b. "How much" is a decision at the margin.
c. The real cost of something is what you must give up to get it.
d. There are gains from trade.
(D)
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The best measure of the opportunity cost of any choice is:
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the next best alternative you have given up to make that choice, even if no monetary costs are involved.
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If an economy has to sacrifice only one unit of good X for each unit of good Y produced throughout the relevant range, then its production possibility frontier has:
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A constant, negative slope.
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Roommates Sarah and Zoe are hosting a Halloween party and have to make food for their guests and costumes for themselves. To finish both tasks as quickly as possible, Sarah and Zoe know that each of them should focus on just one task, but they don't know who should do what. To decide whic…
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a. can complete the cooking in the least amount of time.
b. has the comparative advantage in cooking.
c. has the absolute advantage in cooking.
d. has the largest production possibility frontier in cooking.
(B)
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22.Which of the following will cause a decrease in demand?
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a. an increase in the price of a complementary good
b. an increase in the price of the product
c. an increase in the price of a substitute good
d. a decrease in income for an inferior good
(A)
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1) When the price of wine decreases, the demand for wine:
2) When the price of wine increases, the quantity of wine demanded:
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a. Stays the same
b. We can't say
c. Decrease
d. Increase
(A)
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Which is the most likely effect of a decrease in the price of tablet computers upon the market for laptop computers?
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a. decreased equilibrium price and decreased equilibrium quantity
b. increased equilibrium price and decreased equilibrium quantity
c. decreased equilibrium price and increased equilibrium quantity
d. increased equilibrium price and increased equilibrium quantity
(A)
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A demand schedule is:
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a table showing how much of a good consumers will buy at different prices.
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If there is a shortage of parking spaces in the downtown business district, ________.
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a. the price of parking downtown is above its equilibrium price.
b. the price of parking downtown is below its equilibrium price.
c. downtown merchants are not aware of the need for parking spaces .
d. people drive too much.
(B)
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In the market for tacos, you observe that the equilibrium price and quantity have increased. This can be caused only by:
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A. an increase in the incomes of people who eat tacos.
B. fewer taco shops.
C. an increase in the price of beef.
D. an increase in the wages of taco shop workers.
(A)
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Oil is an input in the production of gasoline, and gasoline and cars are complements. An increase in the price of oil will _________ the producer surplus in the market for cars.
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a. not change
b. decrease
c. increase
d. first increase and then decrease
(B)
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Rubber is an input in the production of tires, and tires and cars are complements. An increase in the price of rubber will _________ the total surplus in the market for cars (assume that neither curve is perfectly inelastic).
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a. increase
b. not change
c. first increase and then decrease
d. decrease
(D)
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Firm
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An economic institution that transforms resources (factors of production) into outputs (Pg. 164).
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Sole Proprietorship
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A type of business structure composed of a single owner who supervises & manages the business and is subject to unlimited liability (Pg. 166).
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Parternership
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Similar to a sole proprietorship, but involves more than one owner who share the management of the business. Partnerships are also subject to unlimited liability (Pg. 166).
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Corporation
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A business structure that has most of the legal rights of individuals, & in addition, can issue stock to raise capital. Stockholders' liability is limited to the value of their stock (Pg. 166).
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Profit
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Equal to the difference between total revenue & total cost (Pg. 168).
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Total Revenue
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Equal to price per unit times quantity sold (Pg. 168).
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Total Cost
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The sum of all the costs to run a business. To an economist, this includes out-of-pocket expenses and opportunity costs (Pg. 168).
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Economic Costs
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The sum of explicit (out-of-pocket) & implicit (opportunity) costs (Pg. 168).
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Explicit Costs
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Those expenses paid directly to another economic entity, including wages, lease payments, taxes, & utilities (Pg. 168).
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Implicit Costs
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The opportunity costs of using resources that belong to the firm, including depreciation, depletion of business assets, and the opportunity cost of the firm's capital employed in the business (Pg. 168).
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Sunk Costs
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Those costs that have been incurred & cannot be recovered, including, for example, funds spent on existing technology that has become obsolete & past advertising that has run in the media (Pg. 168).
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Accounting Profit
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The difference between total revenue & explicit costs. These are the profits that are taxed by the government (Pg. 169).
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Economic Profit
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Profit in excess of normal profits. These are profits in excess of both explicit & implicit costs (Pg. 169).
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Normal Profits
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The return on capital necessary to keep investors satisfied & keep capital in the business over the long run (Pg. 169).
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Normal Profits
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Equal to zero economic profits; where P = ATC (Pg. 198).
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Short Run
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A period of time over which at least one factor of production (resource) is fixed, or cannot be changed (Pg. 169).
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Long Run
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A period of time sufficient for firms to adjust all factors of production, including plant capacity (Pg. 169).
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Production
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The process of turning inputs into outputs (Pg. 171).
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Marginal Product
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The change in output that results from a change in labor [Total quantity divided by total labor] (Pg. 172).
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Average Product
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Output per worker, found by dividing total output by the number of workers employed to produce that output [quantity divided by labor] (Pg. 173).
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Increasing Marginal Returns
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A new worker hired adds more to total output than the previous worker hired, so that both average & marginal products are rising (Pg. 173).
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Diminishing Marginal Returns
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An additional worker adds to total output, but at a diminishing rate (Pg. 173).
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Fixed Costs
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Costs that do not change as a firm's output expands or contracts, often called overhead. These include items such as lease payments, administrative expenses, property taxes, & insurance premiums (Pg. 174).
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Variable Costs
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Costs that vary with output fluctuations, including expenses such as labor & material costs (Pg. 174).
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Marginal Cost
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The change in total costs arising from the production of additional units of output [total cost divided by quantity]. Because fixed costs do not change with output, marginal costs are the change in variable costs associated with additional production [change in variable cost divided by qu…
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Average Fixed Cost
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Equal to total fixed cost divided by output [fixed cost divided by quantity] (Pg. 176).
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Average Variable Cost
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Equal to total variable cost divided by output [vc divided by quantity] (Pg. 176).
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Average Total Cost
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Equal to total cost divided by output. Also equal to AFC + AVC (Pg. 176).
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Long-Run Average Total Cost (LRATC)
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In the long run, firms can adjust their plant sizes so that LRATC is the lowest unit cost at which any particular output can be produced in the long run (Pg. 179).
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Economies of Scale
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As a firm's output increases, its LRATC tends to decline. This results from specialization of labor and management, and potentially a better use of capital and complementary production techniques (Pg. 179).
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Constant Returns to Scale
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A range of output where average total costs are relatively constant. Examples = the expansion of fast-food restaurant franchises and movie theaters, which are essentially replications of existing franchises & theaters reflect this ideal (Pg. 180).
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Diseconomies of Scale
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A range of output where average total costs tend to increase. Firms often become so big that management becomes bureaucratic & unable to control its operations efficiently (Pg. 180).
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Economies of Scope
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By producing a number of products that are interdependent, firms are able to produce & market these goods at lower costs (Pg. 180).
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Perfect Competition
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Many small buyers & sellers who take the price as given, standardized products, full info to buyers & sellers, and no barriers to entry/exit (Pg. 193).
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Price Taker
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a buyer or seller that is unable to affect the market price (Pg. 193).
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Marginal Revenue
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Change in total revenue that results from the sale of one additional unit of product. Change in total revenue divided by the change in quantity sold (Pg. 195).
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Profit Maximizing Rule
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Firms maximize profit by producing output where MR = MC. No other levels of output produces higher profits (Pg. 196).
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Shutdown Point
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When price in the short run falls below the minimum point on the AVC curve, the firm will minimize losses by closing its doors & stopping production. Because P<AVC, the firm's variable costs are not covered, therefore by shutting the plant, losses are reduced to fixed costs only (Pg. 201)…
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Short-run Supply Curve
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The marginal cost curve above the minimum point on the average variable cost curve (Pg. 201).
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Increasing Cost Industry
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An industry that, in the long run, faces higher prices & costs as industry output expands. Industry expansion puts upward pressure on resources (inputs), causing higher costs in the long run (Pg. 205).
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Decreasing Cost Industry
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An industry that, in the long run, faces lower prices and costs as industry output expands. Some industries enjoy economies of scale as they expand in the long run, typically the result of technological advances (Pg. 207).
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Constant Cost Industry
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An industry that, in the long run, faces roughly the same prices and costs as industry output expands. Some industries can virtually close their operations in other areas w/o putting undue pressure on resource prices, resulting in constant operating costs as they expand in the long run
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Final Study Guide