1. Define “scarcity”.

A scarcity is the limit or shortage of goods, resources. People have unlimited needs and wants,
but unfortanetly they will always be faced with limited resources, and they will need to make
some choices over their wants and needs.

2. Define a surplus.
Having a higher supply than there is a demand for, meaning that there are too many products
that are not being consumed.

3. What is the name of the book that is credited as the first systematic study of Economics?

An Enquiry into the Nature and Causes of Wealth of Nations

4. DVD players and DVDs are what?

complementary goods

5. The person who organizes a business enterprise is called a(n) what?

entrepreneur
6. Draw a Supply and Demand Graph. Now draw a dashed line vertically down through the
equilibrium price at the equilibrium quantity. Which portion of the supply curve will participate in
sales? Which portion of the demand curve will participate in purchases?

the left side for both

Correct for one extra credit point!

Answer to 6. The points that make up the two curves represent the prices at which buyers and
sellers are willing and able to trade.

The upper portion of the demand curve (that is to the left of the equilibrium and the line I asked
you to draw) represents those buyers willing and able to pay the equilibrium price or higher so
they will participate in sales.

The lower portion of the supply curve (that is to the left of the equilibrium and the line I asked
you to draw) represents those sellers willing and able to sell at the equilibrium price or less so
they will participate in sales.

Example: If the equilibrium price for a Coke is 60 cents then all buyers who are willing and able
to pay 60 cents or more will participate, and all sellers willing and able to sell for 60 cents or less
will participate.

7. Who is/was the most respected economist of the post World War II era? (This is not in your
Text --you’ll have to hunt for this answer!)

Milton Friedman is correct for one extra credit point

8. A demand curve will appear on a graph in what shape?

Downward sloping is correct for one extra credit point!

Consultant

9. What is the definition of demand? Of supply?

Correct for one extra credit point! (Though I prefer, Demand is the willingness and ability to buy;
Supply is the willingness and ability to sell.)
10. Goods which buyers buy more of when their income rises are known as what?

Normal or Superior Goods is correct for one extra credit point!

11. A production possibilities curve implies what?

opportunity cost

12. In an exchange, one party gains while the other party does what?

any free exchange gains

13. Economic growth is depicted on a Production Possibilities Curve as a shift in which direction?

Outward

14. Define a “black market”.

Illegal trade

15. A decrease in the price of product B resulted in an increase in the demand for product C. This
indicates that products B and C are what?

Complements

16. An increase in the price of product B resulted in an increase in the demand for product C.
This indicates that products B and C are what?

Substatute goods

17. A price ceiling today of $1.50 on a gallon of gasoline would cause what?

a shortage of gasoline

18. Define positive economics.

making a fact based statement without involving your personal value or feelings.

19. Define normative economics.

What we "ought to do" economically. Study of economics that attempts to determine desirability,
or undesirability, of different economic conditions, programs, or situations by asking, "what
should or ought to be."

20. What is the effect on the supply curve of a government subsidy to the producers of the
good?

it would shift the curve rightward.

21. What does the Latin term “ceteris paribus” mean?

All things being equal or the same

22. Increases in resources or improvements in technology will tend to cause a society's

production-possibilities curve to shift which way?

outward and to the right

23. The most fundamental concept in economics is what?

Scarcity
24. The basic problem of economics is how to make best use of _____ resources to satisfy
______ wants.

scarce , unlimited

25. What is the Law of Supply?

At higher prices, producers are willing to offer more products for sale than at lower prices

26. What is the Law of Demand?

All other factors being equal, as the price of a good or service increases, consumer demand for
the good or service will decrease and vice versa

27. Apartment shortages in NYC are an example of what?

Shortage due to a price control

28. A price floor today of $4.50 on a gallon of gasoline would cause what?

Surplus of gasoline

29. Define price elasticity of demand.

Measure of the sensitivity of quantity demanded to changes in price.

30. A perfectly elastic demand curve will appear how on a graph?

Straigh across left to right or horizontal

31. A perfectly inelastic demand curve will appear how on a graph?

A vertical line

32. Define Income Elasticity of demand.

responsiveness of quantity demand to income changes

33. Define Cross Elasticity of demand.

I prefer the responsiveness of demand to the price change of another good

34. Define a Util.

The standard unit of measurement utility is called the util. Utility is how much a product pleases
people.

35. Define diminishing marginal utility.

Is an economic law stating that as we consume more of an item, that satisfaction from each
extra unit gets less and less

36. Define the substitution effect.

One of the two effects caused by a price change (the other is income effect), it induces a
consumer (whose income has remained the same) to buy more of a relatively lower-priced good
and less of a higher-priced one. Substitution effect is always negative: consumers always switch
from spending on higher-priced goods to lower-priced ones as they struggle to maintain their
living standards in face of rising prices. It is not confined only to consumer goods, but manifests
in other areas as well such as demand for labor and capital.

37. Define the income effect.

Change in the demand of a good or service, induced by a change in the consumers' discretionary
income caused by an increase of decrease in the price of the item
38. Define economic rent.

Economic rent is what firms are willing to pay for an input less the minimum amount necessary
to obtain (to buy) it. Economic rent is often positive even though profit is zero.

39. Which will be more elastic, demand for a higher priced good or a lower priced good?

Higher priced goods have a more elastic demand is correct for one extra credit point!

Goods themselves do not have inherent elasticities--elasticity is a comparison of two prices for
the same good, therefore all goods have zones of elasticity and zones of inelasticity. At two
rather high prices for the same good we will find a highly elastic demand; at rather low prices for
the same good we will find highly inelastic demand.

As an example for a new car at very high prices people get price senstive that is demand is
highly elastic; at very low prices people don't care about price that much. So for a new car priced
at $1 or $2 dollar which is a 100% price difference people would buy the car without hesitation;
at prices of $20,000 and $20,200 which is a price diffenced of only 1% people would care more
about the price.

40. Which type of firm is a price taker?

Perfectly competitive

41. Define an explicit cost.

Cash outlay… Explicit Cost: an expense that is contractual in nature and is exact in an amount.
Example: rent, salary, bills. These cost are usually consistant. This cost also is represented by
lost oppourtunity in a cash payment.

42. The increase in total output from the employment of an additional worker is known as what?

Marginal physical product

43. Define marginal cost.

The change in the total costs due to a one-unit change in production rate.

44. Define diseconomies of scale.

The forces that cause larger firms to produce goods and services at increased per-unit costs

45. What cost figure does NOT vary with output?

fixed costs

46. Profit maximization is found by equating what two variables?

Is it marginal revenue and marginal cost

47. A firm should shut down in the short run when average revenue is less than what?

If price is less than average variable cost.

48. In the long run competitive equilibrium economic profits will be how much?

There will be a zero economic profit.

49. Define marginal product.

Marginal product is the output produced by one more unit of a given input.
50. Define Average Fixed Cost.

it is total fixed costs divided by the number of units produced

51. Name two implicit costs of a firm.

The firms use of it's own capital and a firm's use of it's owners time and/pr financial resources.

52. Economic profits are determined by subtracting what from what?

total revenues-total opportunity cost of all inputs used

or
total revenues- (explicit+implicit costs)

TR - TC (which includes opportunity costs and specifically normal profits)

53. What is the summary complaint against a monopolist (two items here)?

54. An industry comprised of a very large number of sellers producing a standardized product is
known as what?

Perfect Competition

55. What is the basic shape of a Long Run Average Cost Curve?

U and bathtub

56. What is the principle for a consumer to maximize utility?

57. The law of diminishing marginal returns describes the relationship between which two
variables?

relationship between satisfaction and consumption

58. A perfect competitor faces what kind of demand curve?

the firm faces a horizontal demand curve...which is the most elastic

59. A monopolist maximizes profit by equating marginal revenue and what?

Marginal costs
60. In Perfect Competition the firm’s supply curve is the same as what?

MC above AVC

61. If a firm in Perfect Competition sells 20 units of output at a market price of $8 per unit, its
marginal revenue is what?

$8

62. True or False? In order to maximize profits a firm should produce that output at which total
revenue is the greatest.

False Maximizing revenue is not the same as maximizing profist which is a matter of revenue
minus costs.

63. The monopolist’s demand curve is also its what?

Average Revenue Curve (and its price).

64. What are the three requirements for successful price discrimination?

The firm must face a downward-sloping demand curve, must be able to readily (and cheaply)
identify buyers or groups with predictable different elasticities of demand, and must be able to
prevent resale of the product or service.

65. The type of firm that faces a falling demand curve is a what?

Monopoly

66. Define a natural monopoly.

A natural monopoly is one which develops from the specific production characteristics of an
individual industry. This usually occurs when there is a large economy of scale in relation to the
demand of the industry. In other words, when a huge firm can decrease costs dramatically by
producing large numbers of the product.

67. Define marginal revenue.

Marginal revenue is the change in total revenues resulting from a one-unit change in output (and
sale) of the product in question.

68. How does a perfectly inelastic demand curve look on a graph?

A vertical line

69. A firm could lower price and still increase revenue if demand is what?

a firm could lower price and still increase revenue if demand is elastic.

70. How many firms are there in a monopolistically competitive industry?

Many, no limited number

71. A monopolistic competitor faces what kind of demand curve?

downward sloping

72. To maximize profits a monopolistically competitive firm will equate what two variables?

Marginal Revenue and Marginal cost

73. Define derived demand.

Input factor demand derived from demand for the final product being produced.

74. Name three features of an oligopolistic industry.

1. an industry dominated by a small number of large firms

2. firms sell either indentical or differentiated products
3. the industry has significant barriers to entry

75. Define asymmetric information.

Asymmetric information is a market transaction between two parties where one of the party has
much more information and then the other party.

76. Strategic behavior and game theory are features of which market model?

Strategic behavior and game theory are features of Oligopoly market

77. Define the term credence good.

a good whose utility impact is difficult or impossible for the consumer to ascertain.
78. Define the term experience good.

An experience good is a product that must be consumed before the quality of the product can be
established.

79. We define a situation wherein one party’s gain is exactly offset by another party’s loss as
what?

A zero sum game.

80. A game in which players as a group lose at the end of the game is called what?

A negative sum game.

81. Define the term cartel.

Cartel: an international syndicate, combine, or trust formed especially to regulate prices and
output in some field of business./ Group Monopoly

82. Why do cartels normally break down?

Cartels normally break down due to a downturns in the overall economic activity and if monopoly
profits attract new entrants to the industry, plus falling prices/ Cheating by members

83. What is meant by the term network effect?

A situaton in which a consumer's willingness to purchase a good or service is influenced by how

many others also buy or have bought the item. (popularity)

84. In which market model is advertising most significant?

Monopolistic Competition

85. An association of producers that fixes common prices and output quotas is known as a what?

Cartels

86. A consumer’s willingness to buy a good influenced by the number of others who have
purchased that good is known as a what?

Network Effects

87. What are the two basic types of government regulation?

Economic - initially aimed at contolling prices that natural monopolies were allowed to charge.
Social - applies to all firms in the economy which aims to improve the quality of live through
improved products.

88. What is the capture hypothesis?

A theory of regulatory behavior that predicts that regulators will eventually be captured by
special interests of the industry being regulated.

89. Government policy aimed a preventing collusion is known as what?

Anti-trust legislation

90. What is the additional revenue earned from hiring one more worker called?

marginal revenue product of labor

91. How will the market demand for labor curve appear on a graph?

downward-sloping
92. In a perfectly competitive labor market, the industry demand curve is _______ and the
industry supply curve is _______.

demand curve is falling and the supply curve is rising

93. If the MRP exceeds the MFC, the firm should do what?

Hire more workers.

94. A situation in which a benefit or cost spills over to 3rd parties is called what?

Externality

95. What is depicted on a Lorenz Curve?

Income distribution

96. A consumer will buy less when a product’s price is higher; this is known as the _____ effect.

real-income effect

97. Other things equal goes by what Latin phrase?

ceteris paribus

98. Give an example of complementary goods.

an example of complementary would be a matches for cigars. you need matches or a lighter or
light a cigar.

99. The basic economic problem is deciding how to make the best use of ________ resources to
satisfy ________ wants.

Limited resources to satisfy unlimited wants

100. The market is in equilibrium where the ______ curve and the _______ curve intersect.

The market is in equilibrium when the supply curve and demand curve intersect

101. There is too little of a good thing when its marginal benefit exceeds its _______ _______ .

marginal cost

102. Taxes reduce disposable income is what kind of economic statement?

A positive economic statement

103. Taxes should be cut is what kind of economic statement?

Normative

104. Price floors result in what?

Surplus

105. Price ceilings result in what?

Shortages

106. The theory of an income that increases with age, peaks, then falls as retirement approaches
goes by what name? Age-earnings cycle

107. What economic principle accounts for why people typically take only one newspaper from a
vending machine?

The law of diminishing marginal utility.

108. For a product to have utility it must do what?

Give some level of satisfaction to the one purchasing the product

109. Consumer behavior theory assumes that consumers attempt to maximize what?

marginal utility

110. If a regulatory commission forces a natural monopoly to charge a price equal to its average
total cost the firm will be earning what?

normal profit

111. Higher savings rates ultimately lead to what?

Higher growth