Econ 200 Exam 1

Marginal decision making/ thinking at the margin Correct answer- comparing additional benefits and costs of a choice marginal changes Correct answer- small incremental changes to a plan of action Marginal benefit and marginal costs Correct answer- benefit: additional revenue cost: additional cost -A rational decision maker continues to take action if and only if the marginal benefit of the action is at least as large as the marginal cost sunk cost Correct answer- a cost that has already been committed and cannot be recovered supply and demand curve Correct answer- supply: positive relationship (upward sloping) demand: negative relationship (downward sloping) Law of demand Correct answer- states that all else equal, quantity demanded rises as price falls increase in demand Correct answer- shifts graph to the right decrease in demand Correct answer- shifts graph to the left nonprice determinants of demand Correct answer- -consumer preferences -prices or related goods -incomes -expectations substitutes Correct answer- goods are substitutes if serve similar-enough purposes that a consumer might purchase one in place of the other -if two goods are substitutes then an increase in the price of one good leads to an increase in demand for the other good complements Correct answer- goods that are consumed together, so that purchasing one will make consumers more likely to consume the other normal goods Correct answer- goods for which demand increases as income increases inferior goods Correct answer- goods for which demand decreases as income increases nonprice determinants of supply Correct answer- -prices of related goods -technology -prices of inputs -expectations -number of sellers Equilibrium Correct answer- a situation in a market when the quantity supplied equals the quantity demanded equilibrium price Correct answer- the price at which quantity supplied equals the quantity demanded equilibrium quantity Correct answer- the quantity that is supplied and demanded at the equilibrium price surge pricing Correct answer- occurs when a company raises the price of its products if there is an increase in demand -has been around for a long time -recently has become more common has always been controversial increase in supply Correct answer- line shifts right equilibrium effect with increase in demand/ supply Correct answer- increase in demand: equilibrium price and quantity both rise increase in supply: equilibrium price falls while equilibrium quantity rises decrease in supply Correct answer- line shifts to the left total revenue Correct answer- total revenue= price x quantity price effect of price increase Correct answer- price effect of a price increase is an increase in total revenue that results from receiving a higher price for each unit sold quantity effect of a price increase Correct answer- quantity effect of a price increase is a decrease in total revenue that results from selling fewer units of the good impact of a price increase on total revenue Correct answer- inelastic = rises elastic = falls unit elastic = constant elasticity Correct answer- a measure of how much consumers and producers will respond to a change in market conditions midpoint method Correct answer- to find price elasticity of demand (Q2-Q1)/[(Q1+Q2)/2] ---------------------------- (P2-P1)/([P1+P2]/2) Perfectly elastic demand Correct answer- demand for which the demand curve is horizontal, in a way such that demand could be any quantity at the given price, but drops to zero if the price increases elastic Correct answer- demand that has an absolute value of elasticity greater than 1 inelastic Correct answer- demand that has an absolute value of elasticity less than 1 unit-elastic Correct answer- demand that has an absolute value of elasticity exactly equal to 1 price elasticity of supply Correct answer- the size of the change in the quantity supplied of a good or service when its price changes cross price elasticity of demand Correct answer- measure of how the quantity demanded of one good changes when the price of a different good changes cross-price elasticity of demand between A and B = %change in Q of A demanded -------------------------------- % change in price of B income elasticity of demand Correct answer- a measure of how much the quantity demanded changes in response to a change in consumers income Welfare economics Correct answer- the study of how the allocation of resources affects economic well-being willingness to pay (reservation price) Correct answer- the maximum price that a buyer would be willing to pay for a good or service willingness to pay=demand consumer surplus Correct answer- the net benefit that a consumer receives from purchasing a good or service -measured by the difference between willingness to pay and actual price -area below the demand curve and above price willingness to sell Correct answer- the minimum price that a seller is willing to accept in exchange for a good or service willingness to see=supply producer surplus Correct answer- the net benefit that a producer receives from the sale of a good or service -measured by the difference between willingness to sell and the actual price -area above the supply curve and below price total surplus Correct answer- a measure of the combined benefits that everyone receives from participating in an exchange of goods or services -sum of consumer surplus and producer surplus equilibrium in a perfectly competitive market Correct answer- equilibrium in a perfectly competitive, well functioning market maximizes total surplus deadweight loss Correct answer- a loss of total surplus that occurs because the quantity of a good that is bough and sold is below the equilibrium quantity can calculate by measuring are of triangle on graph or subtracting total surplus after market intervention from total surplus before market intervention Five types of intervention Correct answer- -price controls: price ceilings and price floors -quantity controls -taxes -subsidies tax incidence Correct answer- the difference between what consumers pay and what firms keep must be equal to the tax damanders and suppliers effect of tax Correct answer- demanders bear more of the burden of a tax when -demand is relatively inelastic -supply is relatively elastic suppliers bear more of the burden of a tax when -demand is relatively elastic -supply is relatively inelastic price ceilings Correct answer- a maximum legal price at which a good can be sold price floor Correct answer- a minimum legal price at which a good can be sold government tax revenue Correct answer- Tax x Qpost-tax deadweight loss for tax Correct answer- the cost of distortions introduced by a tax demand schedule Correct answer- a table that shows the relationship between price and quantity demanded