Manecon Economics Final Reviewer

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Questions and Answers

Which type of good experiences a decrease in demand when income rises?

Luxury goods

Normal goods

Inferior goods (correct)

Giffen goods

What is the relationship between the price of substitute goods and the demand for a commodity?

Directly related (correct)

Complementarily related

Inversely related

Unaffected

If a good has a price elasticity of demand greater than 1, how is it classified?

Perfectly elastic

Unit elastic

Elastic (correct)

Inelastic

What typically causes a rightward shift in the demand curve?

Increase in population Signup and view all the answers

What occurs when the quantity demanded is equal to the quantity supplied in the market?

Market equilibrium Signup and view all the answers

What effect does an increase in consumer taste and preference have on demand?

Increases demand Signup and view all the answers

If consumers expect future prices to rise, what is the likely change in current demand?

Increase in current demand Signup and view all the answers

What characterizes normal goods in relation to income elasticity of demand?

Positive income elasticity Signup and view all the answers

What characterizes a monopoly in terms of pricing power?

They can dictate prices as the sole producers. Signup and view all the answers

Which of the following is a factor that makes it difficult to enter a monopolistic industry?

Significant capital investment required. Signup and view all the answers

Which type of goods is primarily focused on when calculating gross domestic product (GDP)?

Final goods and services produced in the current year. Signup and view all the answers

How is the term 'final good or service' defined?

End products purchased by consumers. Signup and view all the answers

In terms of non-price competition, how do monopolies operate uniquely?

They do not need to advertise as they have no competition. Signup and view all the answers

What is a common characteristic of the industries classified as monopolies?

They often face strict government regulations. Signup and view all the answers

Which aspect of GDP includes unpaid services provided by government bodies?

Both marketed and non-marketed services. Signup and view all the answers

Which of the following statements is true regarding profit levels in monopolistic firms?

They can dictate prices, leading to very high profit levels. Signup and view all the answers

What is the likely outcome of diseconomies of scale on long-run average total cost (ATC)?

ATC rises as output increases Signup and view all the answers

In a perfectly competitive market, how do firms determine the price of their products?

By allowing the market to dictate the price Signup and view all the answers

Which characteristic is NOT associated with perfect competition?

High barriers to entry Signup and view all the answers

What is the primary distinction between monopolistic competition and perfect competition?

Products in monopolistic competition are similar but not identical Signup and view all the answers

Which of the following best describes the concept of price elasticity of demand?

The sensitivity of quantity demanded to price changes Signup and view all the answers

If the demand curve shifts to the right, what does this indicate?

An increase in the quantity demanded at all price levels Signup and view all the answers

Which statement accurately reflects the relationship between equilibrium price and market forces?

Equilibrium price is achieved when quantity demanded equals quantity supplied Signup and view all the answers

How is income elasticity of demand defined?

The percentage change in quantity demanded divided by the percentage change in consumer income Signup and view all the answers

Study Notes

Manecon Reviewer for Finals

Economics is the study of how society manages its resources. It focuses on efficient and effective allocation of resources.
Efficiency is maximizing output with minimal input.
Effectiveness is achieving the desired outcome.
Scarcity is a condition where wants and needs exceed available resources.
Shortage is a temporary state where demand exceeds supply for a commodity or service.
Households are the basic consumption units in an economy.
Markets are arrangements for buyers and sellers to exchange goods and services.
Opportunity Cost The value of the best alternative given up when making a choice.
Equilibrium is when market demand equals market supply.
Utility is the pleasure or satisfaction from consumption.
Production Possibilities Frontier (PPF) represents the maximum output combinations an economy can produce using its resources.
Rational Behavior refers to making decisions to attain personal well being.
Marginal Analysis compares the extra or marginal cost to marginal benefits.
Microeconomics focuses on individual decision making.
Macroeconomics analyzes aggregate economic behavior.
Positive Economics describes how the economy works.
Normative Economics describes how the economy should work.

Basic Circular Flow

A model illustrating the continuous flow of money and goods between households and firms in an economy.
Firms produce goods and services for households.
Households provide resources to firms.

Market for Goods and Services

Buyers (Households): determine market demand.
Sellers (Firms): determine market supply.

Law of Demand

As price increases, quantity demanded decreases (ceteris paribus)

Other Factors Affecting Demand

Income - Higher income increases demand for normal goods
Prices of related goods - Substitute goods (increase in price of one increases demand for the other)
Complementary goods (increase in price of one decreases demand for the other).
Tastes and preferences - Increase in preference increases demand
Expectations - Future price expectations influence current demand.
Population - Increasing population increases the demand.

Law of Supply

As price increases, quantity supplied increases (ceteris paribus)

Other Factors Affecting Supply

Input prices - Higher input prices reduce supply.
Prices of related goods - Substitute goods (increase in price of one increases supply of the other).
Expectations - Future price expectations influence current supply.
Technology - Better technology increases supply
Government Regulations - More regulations reduce supply
Number of suppliers - More suppliers increase supply.
Unexpected calamites or Natural Disasters will reduce supply.

Elasticity

Price Elasticity of Demand (PED) : measures responsiveness of quantity demanded to price changes.
Inelastic Demand (PED < 1) : Quantity demanded changes less than proportionally to a price change.
Elastic Demand (PED > 1) : Quantity demanded changes more than proportionally to a price change.
Unit Elastic Demand (PED = 1) : Quantity demanded changes proportionally to a price change.
Perfectly Inelastic Demand (PED = 0) : Quantity demanded does not change with a price change.
Perfectly Elastic Demand (PED = ∞) : Quantity demanded changes infinitely with a small price change.

Income Elasticity of Demand (IED)

Measures how quantity demanded changes with changes in consumer income.
Normal Goods (IED > 0) : Demand increases with income.
Inferior Goods (IED < 0) : Demand decreases with income.

Cross-Price Elasticity of Demand (CPED)

Measures responsiveness of quantity demanded for one good to changes in the price of another good.
Substitute Goods (CPED > 0) Demand for one good increases as the price of another increases.
Complementary Goods (CPED < 0): Demand for one good decreases as the price of another increases.

Price Elasticity of Supply (PES)

Measures responsiveness of quantity supplied to price changes.
Elasticity of Supply is analogous to Elasticity of Demand.

Consumer Theory

Individuals make consumption choices to maximize satisfaction (utility).
Indifference Curves represent combinations of goods that yield the same level of satisfaction.
Marginal Rate of Substitution (MRS) shows the rate at which a consumer can trade one good for another while maintaining the same level of utility.
Budget Line shows all possible affordable combinations of goods, given a budget constraint.

Law of Diminishing Marginal Utility and Marginal Rate of Substitution

As consumption of a good increases, the marginal utility derived from each additional unit decreases, leading to less trade-off for additional units.

Market Structures

Perfect Competition: many sellers, homogenous products, no influence on the price.
Monopolistic Competition: many sellers, similar but differentiated products, some influence on price.
Oligopoly: few sellers, significant interdependence between firms, products may be homogenous or differentiated, substantial entry barriers.
Monopoly: single seller, unique product, significant control over price, high entry barriers.

Measuring National Income (GDP, GNP)

Gross Domestic Product (GDP): total market value of final goods and services produced within a country.
Components: Consumption, Investment, Government Purchases, Net Exports.
Gross National Product (GNP): total market value of final goods and services produced by a country's citizens whether domestically or abroad.

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Description

Prepare for your finals with this comprehensive reviewer on key economic concepts. Cover essential topics such as scarcity, utility, and production possibilities. Test your understanding of how markets function and the principles of efficiency and effectiveness in economics.