PubPol 330 Final Exam Questions & Answers.
cost-benefit principle - > An individual (or a firm or a society) should take an action if, and
only if, the extra benefits from taking the action are at least as great as the extra costs.
opportunity cost - > the true cost of something is the next best alternative you have to give
up to get it
-some out-of pocket costs are opportunity costs (not always)
-ignore sunk costs
scarcity - > Limited quantities of resources to meet unlimited wants
sunk costs - > costs that have already been incurred and cannot be recovered
-exists no matter which choice you make, ignore these
marginal principle - > decisions about quantities are best made incrementally; you should
break "how many" questions into a series of smaller, or marginal decisions, weighing
marginal benefits and marginal costs.
marginal benefit - > the extra benefit of adding one unit
marginal cost - > the cost of producing one more unit of a good
rational rule - > if something is worth doing, keep doing it until your marginal benefits equal
your marginal costs
interdependence principle - > your best choice depends on
- your other choices (you have a budget constraint, limited time, limited resources)
- the choices others make (competition in the market)
- developments in other markets (credit market, housing market)
- expectations about the future. when any of these factors changes, your best choice might
change.
,individual demand curve - > illustrates the relationship between quantity demanded and
price for an individual consumer
-also your marginal benefit curve
law of demand - > consumers buy more of a good when its price decreases and less when
its price increases
rational rule for buyers - > buy more of an item if its marginal benefit is greater than (or
equal to) the price
diminishing marginal benefit - > each additional item yields a smaller marginal benefit than
the previous item
market demand - > the demand by all the consumers of a given good or service
-add the quantity demanded by each individual at each price
movement along the demand curve - > a change in the quantity demanded of a good that is
the result of a change in that good's price
what shifts demand curve (6) - > 1. income
2. preferences
3. prices of related goods
4. expectations
5. congestion and network effects
6. number and type of buyers
how income shifts market demand - > normal good vs inferior good
normal good - > demand for good increases when your income is higher
inferior goods - > goods that consumers demand less of when their incomes rise
how the price of related goods shift market demand - > complementary goods vs substitute
goods
,complementary goods - > Goods that go together. Your demand for a good will decrease if
the price of a complementary good rises.
substitute goods - > Goods that replace each other. Your demand for a good will increase if
the price of a substitute good rises.
how expectations shift market demand - > if you expect future price to be lower--> you
demand less now
network effect - > When a good becomes more useful because other people use it. If more
people buy such a good, your demand for it will also increase.
congestion effect - > When a good becomes less valuable because other people use it. If
more people buy such a product, your demand for it will decrease.
individual supply curve - > illustrates the relationship between quantity supplied and price
for an individual producer
law of supply - > tendency of the quantity supplied to be higher when the price is higher
perfect competition - > 1. all firms in the market are selling an identical good
2. there are many sellers and many buyers, each of whom is small relative to the size of the
market
-perfectly competitive firms are price takers, following the market price
variable costs - > Those costs—like labor and raw materials—that vary with the quantity of
output you produce.
fixed costs - > Those costs that don't vary when you change the quantity of output you
produce.
-irrelevant to your marginal cost
rational rule for sellers in competitive markets - > sell one more item if the price is greater
than or equal to the marginal cost
-price=marginal cost
, why supply curve is upward sloping - > 1. diminishing marginal product
2. rising input costs
-rising input costs also lead to rising marginal costs
marginal product - > extra output you get from an additional unit of that input
diminishing marginal product - > marginal product of an input declines as the quantity of the
input increases
market supply curve - > a graph of the quantity supplied of a good by all suppliers at
different prices
movement along the supply curve - > a change in prices causes a change in the quantity
supplied
what shifts supply curves - > 1. input prices
2. productivity and technology
3. prices of related outputs
4. expectations
5. the type and number of sellers
input prices and supply - > increased input prices will shift supply to the left
productivity and technology and supply curve - > less efficient production shifts supply
curve to left
-increases marginal costs
price of related outputs and supply curve - > substitutes-in-production vs complements-in-
production
substitutes-in-production - > Alternative uses of your resources. Your supply of a good will
decrease if the price of a substitute-in-production rises.
cost-benefit principle - > An individual (or a firm or a society) should take an action if, and
only if, the extra benefits from taking the action are at least as great as the extra costs.
opportunity cost - > the true cost of something is the next best alternative you have to give
up to get it
-some out-of pocket costs are opportunity costs (not always)
-ignore sunk costs
scarcity - > Limited quantities of resources to meet unlimited wants
sunk costs - > costs that have already been incurred and cannot be recovered
-exists no matter which choice you make, ignore these
marginal principle - > decisions about quantities are best made incrementally; you should
break "how many" questions into a series of smaller, or marginal decisions, weighing
marginal benefits and marginal costs.
marginal benefit - > the extra benefit of adding one unit
marginal cost - > the cost of producing one more unit of a good
rational rule - > if something is worth doing, keep doing it until your marginal benefits equal
your marginal costs
interdependence principle - > your best choice depends on
- your other choices (you have a budget constraint, limited time, limited resources)
- the choices others make (competition in the market)
- developments in other markets (credit market, housing market)
- expectations about the future. when any of these factors changes, your best choice might
change.
,individual demand curve - > illustrates the relationship between quantity demanded and
price for an individual consumer
-also your marginal benefit curve
law of demand - > consumers buy more of a good when its price decreases and less when
its price increases
rational rule for buyers - > buy more of an item if its marginal benefit is greater than (or
equal to) the price
diminishing marginal benefit - > each additional item yields a smaller marginal benefit than
the previous item
market demand - > the demand by all the consumers of a given good or service
-add the quantity demanded by each individual at each price
movement along the demand curve - > a change in the quantity demanded of a good that is
the result of a change in that good's price
what shifts demand curve (6) - > 1. income
2. preferences
3. prices of related goods
4. expectations
5. congestion and network effects
6. number and type of buyers
how income shifts market demand - > normal good vs inferior good
normal good - > demand for good increases when your income is higher
inferior goods - > goods that consumers demand less of when their incomes rise
how the price of related goods shift market demand - > complementary goods vs substitute
goods
,complementary goods - > Goods that go together. Your demand for a good will decrease if
the price of a complementary good rises.
substitute goods - > Goods that replace each other. Your demand for a good will increase if
the price of a substitute good rises.
how expectations shift market demand - > if you expect future price to be lower--> you
demand less now
network effect - > When a good becomes more useful because other people use it. If more
people buy such a good, your demand for it will also increase.
congestion effect - > When a good becomes less valuable because other people use it. If
more people buy such a product, your demand for it will decrease.
individual supply curve - > illustrates the relationship between quantity supplied and price
for an individual producer
law of supply - > tendency of the quantity supplied to be higher when the price is higher
perfect competition - > 1. all firms in the market are selling an identical good
2. there are many sellers and many buyers, each of whom is small relative to the size of the
market
-perfectly competitive firms are price takers, following the market price
variable costs - > Those costs—like labor and raw materials—that vary with the quantity of
output you produce.
fixed costs - > Those costs that don't vary when you change the quantity of output you
produce.
-irrelevant to your marginal cost
rational rule for sellers in competitive markets - > sell one more item if the price is greater
than or equal to the marginal cost
-price=marginal cost
, why supply curve is upward sloping - > 1. diminishing marginal product
2. rising input costs
-rising input costs also lead to rising marginal costs
marginal product - > extra output you get from an additional unit of that input
diminishing marginal product - > marginal product of an input declines as the quantity of the
input increases
market supply curve - > a graph of the quantity supplied of a good by all suppliers at
different prices
movement along the supply curve - > a change in prices causes a change in the quantity
supplied
what shifts supply curves - > 1. input prices
2. productivity and technology
3. prices of related outputs
4. expectations
5. the type and number of sellers
input prices and supply - > increased input prices will shift supply to the left
productivity and technology and supply curve - > less efficient production shifts supply
curve to left
-increases marginal costs
price of related outputs and supply curve - > substitutes-in-production vs complements-in-
production
substitutes-in-production - > Alternative uses of your resources. Your supply of a good will
decrease if the price of a substitute-in-production rises.
