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Questions and Answers
What is the primary reason for the downward slope of a demand curve?
What is the primary reason for the downward slope of a demand curve?
What would cause a rightward shift of the demand curve?
What would cause a rightward shift of the demand curve?
Which of the following represents a movement along the supply curve?
Which of the following represents a movement along the supply curve?
How is a 'change in quantity demanded' best illustrated?
How is a 'change in quantity demanded' best illustrated?
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What happens to the equilibrium price if both demand and supply curves shift to the right?
What happens to the equilibrium price if both demand and supply curves shift to the right?
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Which are the determinants of supply that can cause a shift of the supply curve?
Which are the determinants of supply that can cause a shift of the supply curve?
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What is the result of a surplus in the market?
What is the result of a surplus in the market?
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How do you calculate the elasticity of demand using the midpoint method?
How do you calculate the elasticity of demand using the midpoint method?
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What is the result of a perfectly competitive firm maximizing its profit?
What is the result of a perfectly competitive firm maximizing its profit?
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Which factor is NOT a determinant of elasticity of demand?
Which factor is NOT a determinant of elasticity of demand?
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In the case of a monopoly, why is Marginal Revenue always less than Price?
In the case of a monopoly, why is Marginal Revenue always less than Price?
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What characterizes a negative externality in production?
What characterizes a negative externality in production?
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Which public policy is designed to correct a negative externality?
Which public policy is designed to correct a negative externality?
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What is a characteristic of a public good?
What is a characteristic of a public good?
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What typically leads to economic profit falling to zero in a perfectly competitive market in the long run?
What typically leads to economic profit falling to zero in a perfectly competitive market in the long run?
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Which type of cost is defined as the sum of fixed and variable costs?
Which type of cost is defined as the sum of fixed and variable costs?
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Which of the following is NOT an example of a common resource problem?
Which of the following is NOT an example of a common resource problem?
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Which of the following best describes explicit costs?
Which of the following best describes explicit costs?
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Study Notes
Supply and Demand
- Demand vs. Quantity Demanded: Demand is the entire relationship between price and quantity demanded, while quantity demanded is a specific point on the demand curve. Demand is a schedule and quantity demanded is a particular quantity.
- Market Demand Curve: Created by summing individual demand curves horizontally.
- Law of Demand: As price increases, quantity demanded decreases, and vice-versa (inverse relationship).
- Downward Sloping Demand Curve: Due to the law of diminishing marginal utility; consumers buy more at lower prices.
- Movement Along vs. Shift of Demand Curve: Movement along is a change in quantity demanded due to price change; a shift is a change in demand due to a non-price factor.
- Change in Demand vs. Change in Quantity Demanded: Change in demand shifts the entire curve, while change in quantity demanded is a movement along the same curve.
- Factors Causing Movement Along Demand Curve: A change in the product's price.
- Factors Causing Shift of Demand Curve: Changes in consumer income, tastes and preferences, prices of related goods (substitutes/complements), expectations, and number of buyers.
- Determinants of Demand: Consumer income, tastes and preferences, prices of related goods, expectations, and number of buyers, all shift the demand curve.
- Normal vs. Inferior Goods: Normal goods have a positive relationship between income and demand (increase in income increases demand); inferior goods have an inverse relationship.
- Substitutes vs. Complements: Substitutes are goods that can be used in place of each other (increase in price of one increases demand for the other); complements are goods that are used together (increase in price of one decreases demand for the other).
- Supply vs. Quantity Supplied: Supply is the entire relationship between price and quantity supplied; quantity supplied is a specific point.
- Market Supply Curve: Created by summing individual supply curves horizontally.
- Law of Supply: As price increases, quantity supplied increases, and vice-versa (direct relationship).
- Upward Sloping Supply Curve: Due to increasing marginal costs of production; producers supply more at higher prices.
- Movement Along vs. Shift of Supply Curve: Movement along is a change in quantity supplied due to price change, shift is a change in supply due to non-price factors.
- Change in Supply vs. Change in Quantity Supplied: Change in supply shifts the entire curve, while change in quantity supplied is a movement along the same curve.
- Factors Causing Movement Along Supply Curve: A change in the product's price.
- Factors Causing Shift of Supply Curve: Changes in input prices, technology, expectations, number of sellers, and natural disasters.
- Determinants of Supply: Input prices, technology, expectations, number of sellers, and natural disasters, all shift the supply curve.
- Equilibrium: The point where supply and demand curves intersect, where quantity supplied equals quantity demanded.
- Equilibrium Price and Quantity: Determined graphically at the intersection of the supply and demand curves; can be calculated mathematically by setting supply equal to demand.
- Shortage vs. Surplus: Shortage occurs when quantity demanded exceeds quantity supplied; surplus occurs when quantity supplied exceeds quantity demanded.
Elasticity
- Calculating Elasticity of Demand: Using the midpoint method ( (Q2-Q1)/((Q1+Q2)/2) / (P2-P1)/((P1+P2)/2) ).
- Types of Elasticity: Elastic (Ep > 1), inelastic (Ep < 1), unit elastic (Ep = 1), perfectly elastic (Ep = ∞), perfectly inelastic (Ep = 0).
- Elasticity and Total Revenue: Elastic demand: price decrease leads to increased total revenue; inelastic demand: price decrease leads to decreased total revenue; unit elastic demand: price change has no effect on total revenue.
- Determinants of Elasticity: Availability of substitutes, proportion of income spent on the good, time horizon.
Production and Costs
- Marginal Product of Labor (MPL): The additional output produced by adding one more unit of labor.
- Diminishing MPL: Eventually, adding more labor will lead to smaller increases in output.
- Costs: Fixed Costs (FC), Variable Costs (VC), Total Costs (TC), Average Fixed Costs (AFC), Average Variable Costs (AVC), Average Total Costs (ATC), Marginal Costs (MC).
- Explicit vs. Implicit Costs: Explicit costs are out-of-pocket payments; implicit costs are opportunity costs of using resources.
- Economic vs. Accounting Profit: Economic profit is total revenue minus all costs (including implicit costs); accounting profit is total revenue minus explicit costs.
- Short Run vs. Long Run: Short run: some inputs are fixed; long run: all inputs are variable.
Perfect Competition
- Characteristics: Many buyers and sellers, homogeneous products, free entry and exit, perfect information.
- Marginal Revenue: The revenue gained from selling one more unit.
- Price = MR: In perfect competition, the market price equals the marginal revenue for each firm.
- Profit Maximization: Firms maximize profit where price equals marginal cost.
- Short-Run & Long-Run Conditions: Stay open (price ≥ AVC), shut-down (price < AVC), exit (price < ATC).
- Zero Economic Profit in Long Run: Entry and exit drive economic profit to zero in the long run.
Monopoly
- Characteristics: Single seller, unique product, significant barriers to entry.
- Barriers to Entry: Ownership of resources, government restrictions, economies of scale.
- Price & Output Decisions: Monopolies set price above marginal cost, restricting output to maximize profit.
- MR < Price: A monopoly's marginal revenue is always less than its price.
- Economic Profit in Long Run: Monopolies can sustain economic profit due to barriers to entry.
Externalities
- Externality: Unintended consequence on a third party.
- Market Failure: Externalities cause markets to produce either too little or too much of a good.
- Positive vs. Negative Externalities: Positive externality benefits third parties (education); negative externality harms third parties (pollution).
- Private vs. Social Costs/Benefits: Private costs and benefits reflect the direct costs and benefits to the individuals involved; social costs and benefits reflect the total costs and benefits to society (including third party effects).
- Internalizing Externalities: Making the parties who create the externalities take into account the external costs or benefits.
- Policies: Command-and-control policies: direct limits on pollution; market-based policies: encouraging internalization (Pigouvian tax).
- Coase Theorem: Under specific conditions, private bargaining can lead to efficient solutions for externalities.
Public Goods & Common Resources
- Rival vs. Non-rival: Rivalrous goods can only be consumed by one person at a time; non-rival goods can be consumed by many at once.
- Excludable vs. Non-excludable: Excludable goods prevent people from consuming them if they don't pay for them; non-excludable goods are impossible to prevent people from consuming them.
- Types of Goods: Private goods (rival and excludable), public goods (non-rival and non-excludable), common resources (rival and non-excludable), club goods (non-rival and excludable).
- Free Rider Problem: People can consume a good without paying for it if it's not excludable.
- Tragedy of the Commons: Overuse of common resources due to individual incentives outweighing social consequences.
Additional Exam Topics
- Graphical Problems: Solving problems graphically for a perfectly competitive firm, a monopoly, and tax graphs.
- Mathematical Calculations: Determining equilibrium, price ceilings/floors, tax revenue, tax incidence.
- Absolute and Comparative Advantage: Evaluating comparative advantage to determine efficiency.
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Description
Explore the fundamentals of supply and demand with this quiz. Understand the difference between demand and quantity demanded, the market demand curve, and the law of demand. Test your knowledge on how various factors affect demand and the movement along the demand curve.
