ECON 101 Exam Review: Supply and Demand, Elasticity, Costs and Market Structures

Terms in this set (35)

1. What is opportunity cost?The value of the next best alternative you give up when you make a choice. The opportunity cost of a year of university includes the wages you could have earned working, not just tuition.
2. What does a production possibilities frontier (PPF) that bows outward imply?Increasing opportunity cost: resources are not equally suited to every good, so each extra unit of one good costs more and more units of the other. Points inside the PPF are inefficient and points outside are unattainable.
3. Absolute advantage vs comparative advantageAbsolute advantage: producing more output with the same resources. Comparative advantage: producing at a lower opportunity cost. Trade gains come from comparative advantage, even when one side has an absolute advantage in everything.
4. A worker in A can make 10 wheat or 5 cloth; a worker in B can make 6 wheat or 6 cloth. Who has the comparative advantage in cloth?B. One cloth costs A 2 wheat but costs B only 1 wheat. A has the comparative advantage in wheat (1 wheat costs A 0.5 cloth vs 1 cloth for B).
5. Change in quantity demanded vs change in demandA change in the good's own price causes a movement along the demand curve (a change in quantity demanded). A change in any other factor shifts the whole demand curve (a change in demand).
6. What shifts the demand curve?Income, prices of related goods (substitutes and complements), tastes, expectations about future prices or income, and the number of buyers.
7. Normal good vs inferior goodDemand for a normal good rises when income rises. Demand for an inferior good falls when income rises (for example instant noodles or bus rides as people switch to alternatives).
8. Substitutes vs complementsSubstitutes: a higher price of one raises demand for the other (coffee and tea). Complements: a higher price of one lowers demand for the other (printers and ink).
9. What shifts the supply curve?Input prices, technology, prices of other goods the firm could produce, expectations, the number of sellers, and taxes or subsidies on production.
10. What happens when the price is above or below equilibrium?Above equilibrium, quantity supplied exceeds quantity demanded (a surplus) and the price tends to fall. Below equilibrium there is a shortage and the price tends to rise.
11. Demand and supply both increase. What happens to equilibrium price and quantity?Quantity definitely rises. The price change is ambiguous: it depends on which curve shifts more.
12. Midpoint formula for price elasticity of demandEd = [(Q2 - Q1)/((Q1 + Q2)/2)] / [(P2 - P1)/((P1 + P2)/2)]. It is usually reported as an absolute value: above 1 is elastic, below 1 is inelastic, exactly 1 is unit elastic.
13. Price rises from $4 to $6 and quantity demanded falls from 120 to 80. Find the elasticity (midpoint method).%ΔQ = -40/100 = -40% and %ΔP = 2/5 = +40%, so |Ed| = 1. Demand is unit elastic over this range.
14. How does a price increase affect total revenue?If demand is elastic, total revenue falls. If demand is inelastic, total revenue rises. If demand is unit elastic, total revenue is unchanged.
15. What makes demand more price elastic?Many close substitutes, a narrowly defined market, a large share of the budget, the good being a luxury, and a longer time to adjust.
16. Signs of income elasticity and cross-price elasticityIncome elasticity is positive for normal goods and negative for inferior goods (above 1 means a luxury). Cross-price elasticity is positive for substitutes and negative for complements.
17. Consumer surplus vs producer surplusConsumer surplus is willingness to pay minus price paid: the area below demand and above price. Producer surplus is price received minus cost: the area above supply and below price.
18. Effect of a binding price ceiling (for example rent control)It is set below equilibrium, so quantity demanded exceeds quantity supplied, causing a shortage. Other effects include deadweight loss, waiting lists and lower quality.
19. Effect of a binding price floor (for example a minimum wage)It is set above equilibrium, so quantity supplied exceeds quantity demanded, causing a surplus. In the labour market that surplus is unemployment. It also creates deadweight loss.
20. Who bears the burden of a per-unit tax?Whichever side of the market is less elastic (more inelastic) bears more of the burden, no matter who legally pays. The tax shrinks the quantity traded and creates deadweight loss.
21. Utility-maximizing rule for two goodsSpend your budget so that MUx/Px = MUy/Py: the last dollar spent on each good gives the same marginal utility.
22. Short run vs long run in productionIn the short run at least one input (usually capital) is fixed. In the long run all inputs are variable and firms can enter or exit the industry.
23. Law of diminishing marginal returnsIn the short run, as more of a variable input is added to a fixed input, the marginal product of the variable input eventually falls.
24. Define TC, ATC, AVC and MC.TC = TFC + TVC. ATC = TC/Q. AVC = TVC/Q. MC = ΔTC/ΔQ, the cost of producing one more unit.
25. Where does the MC curve cross the ATC and AVC curves?At their minimum points. When MC is below the average, it pulls the average down; when MC is above the average, it pulls it up.
26. Accounting profit vs economic profitAccounting profit = revenue - explicit costs. Economic profit = revenue - explicit costs - implicit costs (opportunity costs). Zero economic profit means the firm earns a normal return.
27. What are the features of perfect competition?Many buyers and sellers, identical products, free entry and exit, and full information. Each firm is a price taker, so P = MR and the firm's demand curve is horizontal.
28. Profit-maximizing rule and shutdown rule in the short runProduce where MR = MC. In the short run, shut down if P is below minimum AVC, because operating would lose more than the fixed costs.
29. Long-run equilibrium in perfect competitionEntry and exit drive economic profit to zero, so P = MC = minimum ATC. This outcome is both allocatively and productively efficient.
30. How does a monopoly choose price and quantity?Because MR is below price, it produces where MR = MC and then charges the highest price the demand curve allows at that quantity. Output is lower and price higher than under competition, which creates deadweight loss.
31. What conditions are needed for price discrimination?The firm must have market power, be able to identify or separate groups with different price elasticities, and prevent resale between groups.
32. Long-run outcome in monopolistic competitionFree entry drives economic profit to zero, but P = ATC above minimum ATC, so firms have excess capacity and P > MC.
33. What is the prisoner's dilemma, and why does it matter for oligopoly?Each player has a dominant strategy (for example, cheating on a collusive agreement) that leads to a Nash equilibrium worse for both than cooperating. It explains why cartels are unstable.
34. Negative externality: market outcome and policy fixWhen there are external costs such as pollution, the market overproduces because private cost is below social cost. A Pigouvian tax equal to the marginal external cost can restore the efficient quantity.
35. What makes something a public good, and what is the free-rider problem?A public good is non-rival and non-excludable (for example national defence). People can benefit without paying, so private markets underprovide it.

More ECON 101 flashcards

• ECON 10130 terms ECON 101 Final Review: Consumer Choice, Market Equilibrium, Welfare and Market PowerUniversity of British Columbia · by @studyboardWhat is opportunity cost? · Movement along a demand curve vs a shift of the curve · List the main factors…
• ECON 10130 terms ECON 101 Final Review: Consumer Choice, Market Structures, Labor, Inequality and Market FailuresUniversity of Michigan - Ann Arbor · by @studyboardWhat is diminishing marginal utility? · State the utility-maximizing rule for two goods. · What is the slope…

See all ECON 101 flashcards