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Choices must be made in the use of resources..
because they are in finite supply.
The opportunity cost of building an additional parking lot at your school is..
the value of the property and resources used at their next-best alternative use.
Suppose you are considering going to the movies, and you place a $12 value on your anticipated enjoyment of the movie. The ticket price is $6 and you would be giving up two hours of work, where you earn $5 per hour. You would go to..
work; the opportunity cost of the movies exceeds the expected benefit.
A nation’s standard of living can be increased by..
improvements in technology and international trade.
In a market economy, the economic well being of society is the responsibility of..
no one; self-interested individuals bring about the well-being of society.
If there is a way to change a situation so that at least some people gain while no one in the economy loses, the situation is..
The Department of Justice recently brought a suit against Microsoft for..
creating excess market power for itself.
The inflation rate is the..
growth rate of the price level.
The long-run relationship between inflation and the growth rate of the money supply..
exists in a wide variety of countries throughout the world.
In a perfectly competitive market..
firms are price takers rather than price makers.
The amount of a good or service that buyers would be willing and able to purchase at a specific price is known as..
The demand curve for Beanie Baby dolls shows the quantity of dolls demanded..
at each possible price of Beanie Baby dolls.
IBM and Gateway personal computers
baseballs and baseball gloves
An increase in the number of tomato producers will..
increase market supply because market supply is the sum of all the individual tomato producers’
Suppose that the demand for apples increased more than the supply of apples increased. The net effect of these two changes would be a(n)..
increase in the equilibrium price and an increase in the equilibrium quantity.
When a market is in equilibrium..
quantity demanded will equal quantity supplied.
If price elasticity of demand is 2.0, this implies that consumers would..
buy 2 percent more of the good in response to a 1 percent cut in price.
If Weiskamp T-Shirt Co. lowers its price from $6 to $5 and finds that students increase their quantity demanded from 400 to 600 T-shirts, then the demand for Weiskamp T-shirts within this price range is..
The cross elasticity of demand for substitute goods must be..
greater than zero.
A 5 percent increase in the price of sugar reduces sugar consumption by about 10 percent. The increase causes households to..
spend less on sugar.
As a result of heavy spring rains in the Midwestern states, the corn crop declined sharply. If corn growers experienced an increase in sales revenue, the demand for corn must be..
Suppose that the elasticity of supply of lawn mowers is 1.5. If the price of lawn mowers rises 5 percent, the quantity supplied of lawn mowers would..
rise 7.5 percent.
A decrease in supply will raise the equilibrium price most when demand is..
In which of the markets listed below would you expect the least elastic response from suppliers?
_ d.Picasso paintings (CORRECT)
If the price elasticity of supply equals zero, this implies that..
the supply curve is perfectly vertical.
One response to increased oil prices that reflects long-run elasticity and not short-run elasticity is..
When comparing price elasticities of demand for gasoline in the long run to the short run, what can we say about the long-run elasticities?
Within every price range, the price elasticity of demand for gasoline is more elastic in the long
If the fines and jail time for dealing illegal drugs were reduced, we would expect..
an increased supply of illegal drugs, a lower price, and higher quantity traded.
If the equilibrium price of bread is $2 and the government imposes a $1.50 price ceiling on the price of bread..
there will be a shortage of bread.
Rent controls typically end up..
discouraging new housing construction.
A price ceiling might be an appropriate government response to a..
national security crisis leading to major shortages of essential goods.
Suppose that the government places a price ceiling in the fish market, and that the ration coupons it issues are bought and sold on a ration coupon market before they are used to purchase fish. The..
purpose of that price ceiling would be defeated.
Assume that the government sets a ceiling on the interest rate that banks charge on loans. If the ceiling is set below the market equilibrium interest rate, the result will be
a shortage of credit.
In a market where the government imposes a price ceiling, the excess demand created will be determined by the..
difference between quantity demanded and quantity supplied at the imposed price.
Which of the following best explains the source of consumer surplus for good A?
Many consumers would be willing to pay more than the market price for good A.
If you had been willing to pay $2.19 for the gallon of milk purchased at the supermarket but were required to pay only $1.89, you have gained..
a consumer surplus amounting to $.30.
The demand curve shows the..
highest price buyers would be willing and able to pay for each unit of the good or the amount
purchased at each price.
Consumer surplus tends to be small when..
demand is elastic.
The area underneath a demand curve down to the equilibrium price is..
The benefit to a producer of selling a good at the equilibrium price is called..
Producer surplus tends to be large when..
supply is inelastic.
Which of the following is an example of a positive externality?
a nice garden in front of your neighbor’s house
Market failure in the form of externalities arises when..
not all costs and benefits are included in the prices of goods.
is a measure of how much buyers and sellers respond to changes in market conditions
Price elasticity of demand
is the percentage change in quantity demanded given a percent change in the price.
The Main Determinants of the Price Elasticity of Demand:
-Availability of Close Substitutes
-Necessities versus Luxuries
-Definition of the Market
Demand tends to be more elastic :
-the larger the number of close substitutes
-if the good is a luxury.
-the more narrowly defined the market
-the longer the time period
-Quantity demanded does not respond strongly to price changes.
-Price elasticity of demand (its absolute value) is
-Quantity demanded responds strongly to changes in price.
-Price elasticity of demand (its absolute value) is greater than one.
The Variety of Demand Curves
Quantity demanded does not respond to price changes.
Quantity demanded changes infinitely with any change in price.
Quantity demanded changes by the same percentage as the price => Elasticity = 1
the amount paid by buyers and received by sellers of a good.
TR = P x Q
Normal goods have positive income elasticities.
Inferior goods have negative income elasticities.
Goods consumers regard as necessities tend to be income inelastic.
Goods consumers regard as luxuries tend to be income elastic.
Definition of cross-price elasticity of demand:
a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in the quantity demanded of the first good divided by the percentage change in the price of the second good.
Substitutes have positive cross-price elasticities
Complements have negative cross-price elasticities
Price elasticity of supply
is a measure of how much the quantity supplied of a good responds to a change in the price of that good.
Determinants of Elasticity of Supply
-Ability of sellers to change the amount of the good they produce.
income elasticity of demand
measures how much the quantity demanded responds to changes in consumers’ income.
cross-price elasticity of demand
measures how much the quantity demanded of one good responds to the price of another good.
price elasticity of supply
measures how much the quantity supplied responds to changes in the price.
In most markets, supply is more elastic in the long run than in the short run.
The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price.
In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities.
-Recall the trade-off between equity and efficiency
-While equilibrium conditions may be efficient, it may be true that not everyone is satisfied.
A legal maximum on the price at which a good can be sold
A legal minimum on the price at which a good can be sold.
-The price ceiling is not binding if set above the equilibrium price.
-The price ceiling is binding if set below the equilibrium price, leading to a shortage.
-The price floor is not binding if set below the equilibrium price.
Governments levy taxes..
to raise revenue for public projects.
-is the manner in which the burden of a tax is shared among participants in a market.
So, how is the burden of the tax divided?
The burden of a tax falls more
heavily on the side of the
market that is less elastic.
A tax on a good places a wedge between the price paid by buyers and the price received by sellers.
When the government levies a tax on a good, the equilibrium quantity of the good falls.
is the study of how the allocation of resources affects economic well-being
Consumer surplus measures economic welfare from the buyer’s side.
Producer surplus measures economic welfare from the seller’s side.
Willingness to pay
is the maximum amount that a buyer will pay for a good
is the buyer’s willingness to pay for a good minus the amount the buyer actually pays for it.
Consumer surplus measures..
-measures the benefit that buyers receive from a good as the buyers themselves perceive it.
-A measure of consumers’ wellbeing
-is the amount a seller is paid for a good minus the seller’s cost
-It measures the benefit to sellers participating in a market.
The area below the price and above the supply curve measures the producer surplus in a market.
Consumer Surplus =
Value to buyers – Amount paid by buyers
Producer Surplus =
Amount received by sellers – Cost to sellers
Total surplus =
Value to buyers – Cost to sellers
is the property of a resource allocation of maximizing the total surplus received by all members of society.
the fairness of the distribution of well-being among the various buyers and sellers.
This policy of leaving well enough alone
If a market system is not perfectly competitive, market power may result.
-Market power is the ability to influence prices.
-Market power can cause markets to be inefficient - because it keeps price and quantity from the
- equilibrium of supply and demand.
-created when a market outcome affects individuals other than buyers and sellers in that market.
-cause welfare in a market to depend on more than just the value to the buyers and cost to the sellers.
An allocation of resources that maximizes the sum of consumer and producer surplus is said to be efficient.
Policymakers are often concerned with the efficiency, as well as the equity, of economic outcomes.
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