Economics is a social science that

studies how
1 individuals,
2 governments,
3 firms and
4 nations

allocating scarce resources to

satisfy their unlimited wants.

STUDY BEHAVIOR
Foundations:
1 Marginal Analysis
2 Opportunity Costs
3 Efficient Markets
SCARCITY->OPTIMIZATION->MARGINAL
ANALYSIS-> EXAMPLE IS MAKE OR BUY DECISION

INCREMENTAL ANALYSIS/DIFFERENTIAL
ANALYSIS/RELEVANT COSTING

M.A.S USES ACCOUNTING DATA BUT RELIES ON

ECONOMIC THEORY TO MAKE DECISIONS

MAKE
SCARCITY->OPTIMIZATION->MARGINAL ANALYSIS->

BUY
1. No. Its income would fall by $30,000.
Make Buy
Purchase price $ 0 $310,000
Materials 40,000
Direct labor 90,000
Variable overhead 80,000
Avoidable fixed overhead 50,000
Foregone rent 20,000
Net cost $280,000 $310,000

The $20,000 rent, an opportunity cost, could be subtracted from the cost
of buying. The $180,000 total fixed overhead could be shown under the make
decision, with $130,000 ($180,000 - $50,000) shown under the buy decision as
cost that the company would not avoid by buying. Any such manipulations
still show that the advantage to making is $30,000.
39. The measurement of the
benefit lost by using
resources for a given purpose
is
a. Economic efficiency.
b. Opportunity cost.
c. Comparative advantage.
d. Absolute advantage
39. (b) opportunity cost is the
benefit given up from not using
the resource for another
purpose. Answer (a) is incorrect
because economic efficiency is a
comparison among uses of
resources. Answers (c) and (d)
are incorrect because they involve
comparisons across
countries.
Economics can generally be
broken down into:
1 Macroeconomics, which
concentrates on the
behavior of the aggregate
economy; and

2 Microeconomics, which
focuses on individual
consumers.
Examples of Microeconomic and Macroeconomic Concerns

Divisions
of Economics Production Prices Income Employment
Production/output Price of individual Distribution of Employment by
Microeco in individual industries
goods and services income and individual
  wealth businesses
nomics and businesses
 
and industries
Price of medical care Wages in the auto
How much steel
Price of gasoline industry Jobs in the steel
How much office
Food prices Minimum wage industry
space
Apartment rents Executive salaries Number of
How many cars
Poverty employees
in a firm
Number of
accountants

National Aggregate price level National income Employment and

Macroec production/output   unemployment in
  the economy
onomics
Total industrial output Consumer prices Total wages and Total number of jobs
Gross domestic Producer prices salaries   Unemployment
Rate of Total corporate
product profits
rate
Growth of output inflation
8 of 34
OUTPUT -> EMPOLYMENT ->
INFLATION

SPENDING ->OUTPUT ->

EMPOLYMENT -> INFLATION

DELATION->CONTRACTION-
>UNEMPLOYMENT->ECONOMIC
DOWNTURN->POVERTY

RULE OF 70 = 70/AVEG. GDP

GROWTH 70/3.3% =21.21
Coverage of the Discussion
Microeconomics
A. Focus
B. Demand
C. Supply
D. Market Equilibrium
E. Costs of Production
F. Production
G. Market Structure
Macroeconomics
A. Focus
B. Aggregate Demand and Supply
C. Business Cycles
D. Economic Measures
E. Monetary Policy
F. Fiscal Policy
G. Economic Theories
H. The Global Economy and International Trade
I. Foreign Exchange Rates
J. Foreign Investment
The Effects of the Global Economic Environment on Strategy
A. General Environment
B. Industry Environment
C. Industry Analysis
D. Strategic Planning
E. Estimating the Effects of Economic Change
Microeconomics
A. Focus
B. Demand
C. Supply
D. Market Equilibrium
E. Costs of Production
F. Production
G. Market Structure
Macroeconomics
A. Focus
B. Aggregate Demand and Supply
C. Business Cycles
D. Economic Measures
E. Monetary Policy
F. Fiscal Policy
G. Economic Theories
H. The Global Economy and
International Trade
I. Foreign Exchange Rates
J. Foreign Investment
The Effects of the Global
Economic Environment on
Strategy
A. General Environment
B. Industry Environment
C. Industry Analysis
D. Strategic Planning
E. Estimating the Effects
Microeconomics
A. Focus
B. Demand
C. Supply
D. Market Equilibrium
E. Costs of Production
F. Production
G. Market Structure
Microeconomics focuses on the
behavior and purchasing
decisions of individuals and firms.
In a market economy goods and
services are distributed through a
system of prices. Goods and
services are sold to those willing
and able to pay the market price.
The market price is determined
based on demand and supply.
Microeconomics
A. Focus
B. Demand
C. Supply
D. Market Equilibrium
E. Costs of Production
F. Production
G. Market Structure
Demand is the quantity of a good or service
that consumers are willing and able to
purchase at a range of prices at a particular
time. Market demand for a product can be
recorded in a schedule or a graph.

The Law on Demand states that an

inverse relationship exists between the
price and quantity demanded
That is, fewer products are demanded at
higher prices this is based on the behavior
of a consumer.
Graphically a demand curve shows a
downward sloping curve.
Consumer demand and utility
a. The demand curve for a particular good is
downward sloping. Because as the price of
the good declines, consumers will purchase
more because of

The substitution effect refers to the fact that

as the price of a good falls, consumers will
use it to replace similar goods. Example, as
the price of pork falls, consumers will
purchase more pork than other types of
meat.

The income effect refers to the fact that as

the price of a good falls, consumers can
purchase more with a given level of income.
When price for X is $60 QUANTITY
DEMANDED is 2,500 . When price
increases to $70 QUANTITY
DEMANDED DECREASE to 2,000 , on
the other hand when price decrease to
$50 QUANTITY DEMANDED INCREASE
to 3,000

THEREFORE, FOR QUANTITY

DEMANDED INCREASING OR
DECREASING ONLY PRICE IS THE
CAUSE THE MOVEMENT IN THE GRAPH
IS ISOLATED TO A SINGLE DEMAND
CURVE
A demand curve shifts when
demand variables other than
price change. For example.
SUBSTITUTE GOODS
Demand Shifts
Shift of Demand versus Movement Along a Demand Curve

Shifts versus Movement Along a Demand Curve

23 of 49
27.X and Y are substitute
products. If the price of product Y
increases, the immediate impact
on product X is
a. Price will increase.
b. Quantity demanded will
increase. SHOULD BE DEMAND
c. Quantity supplied will increase.
d. Price, quantity demanded, and
supply will increase.
27. (b) The demand and
price of substitute
products are directly
related. If the price of a
good increases, the
demand for its substitute
will also increase.
CORRECTION IN THE
ANSWER CHOICE
Substitute Goods
9.A decrease in the price of a
complementary good will
a. Shift the demand curve of the joint
commodity to the left.
b. Increase the price paid for a
substitute good.
c. Shift the supply curve of the joint
commodity to the left.
d. Shift the demand curve of the joint
commodity to the right. SHOULD BE
THE COMPLEMENTARY GOOD
9. (d) If the price of a
complementary good decreases,
demand for the joint commodity
will increase. This is due to the
fact that the total cost of using
the two products decreases. If
demand for a product increases
the demand curve will shift to the
right. SHOULD BE
COMPLEMENTARY
Complementary Goods
Normal and Inferior Goods
Supply
A supply curve shows the amount
of a product that would be
supplied at various prices.
Graphically a supply curve
shows a direct relationship
between price and quantity sold.
The higher the price the more
products that would be
supplied. A supply schedule and
supply curve for Product X are
presented below.
2.A supply curve illustrates the
relationship between
a. Price and quantity supplied.
b. Price and consumer tastes.
c. Price and quantity demanded.
d. Supply and demand.
2. (a) The requirement is to
describe the relationship
shown by a supply curve. A supply
curve illustrates the
quantity supplied at varying prices
at a point in time.
Therefore, the correct answer is
(a). Answers (b) and (c)
are incorrect because they deal
with demand. Answer (d) is
incorrect because it deals with
demand-supply equilibrium
Supply curve shift.A supply curve
shift occurs when supply variables
other than price change. As an
example, if the costs to produce
the product increase, the supply
curve would shift upward and to
the left. A shift in the supply
curve is illustrated below.
Supply Shifts
16.Which of the following will
cause a shift in the supply
curve of a product?
a. Changes in the price of the
product.
b. Changes in production
taxes.
c. Changes in consumer tastes.
d. Changes in the number of
buyers in the market.
16. (b) A shift in the supply curve may
result from (1) changes in production
technology,
(2) changes or expected changes in
resource prices,
(3) changes in the prices of other goods, (4)
changes in taxes or subsidies,
(5) changes in the number of sellers in the
market,
(6) expectations about the future price of
the product.
(a) is incorrect because a change in the
price of the product involves movement
along the existing supply curve, not a shift
in the supply curve. Answers (c) and (d) are
result in a shift in the demand curve.
7.An improvement in technology that
in turn leads to improved worker
productivity would mostlikely result in
a. A shift to the right in the supply
curve and a lowering of the price of
the output.
b. A shift to the left in the supply curve
and a lowering of the price of the
output.
c. An increase in the price of the
output if demand is unchanged.
d. Wage increases.
Market Equilibrium
A product’s equilibrium price is determined
by demand and supply; it is the price at
which quantity demanded =quantity supplied
Market Equilibrium

Excess Demand

At a price of $1.75 per

bushel, quantity demanded
exceeds quantity supplied.
When excess demand
exists, there is a tendency
for price to rise.
When quantity demanded
equals quantity supplied,
excess demand is
eliminated and the market is
in equilibrium. Here the
equilibrium price is $2.50
and the equilibrium quantity
is 35,000 bushels.

When quantity demanded exceeds quantity supplied, price tends

to rise. When the price in a market rises, quantity demanded falls
and quantity supplied rises until an equilibrium is reached at which
quantity demanded and quantity supplied are equal.
43 of 49
Market Equilibrium

Excess Supply

At a price of $3.00, quantity

supplied exceeds quantity
demanded by 20,000
bushels.
This excess supply will
cause the price to fall.

When quantity supplied exceeds quantity demanded at the

current price, the price tends to fall. When price falls, quantity
supplied is likely to decrease and quantity demanded is likely to
increase until an equilibrium price is reached where quantity
supplied and quantity demanded are equal.
44 of 49
Market Equilibrium

Changes In Equilibrium

When supply and demand curves shift, the equilibrium price

and quantity change.

Before the freeze, the coffee

market was in equilibrium at
a price of $1.20 per pound.
At that price, quantity
demanded equaled quantity
supplied.
The freeze shifted the
supply curve to the left (from
S0 to S1), increasing the
equilibrium price to $2.40.

45 of 49
Items 4 and 5are based on the following
information:Assume that demand for a
particular product changed as shown below
from D1 to D2.
4. Which of the following could
cause the change shown in the
graph?
a.A decrease in the price of the
product.
b. An increase in supply of the
product.
c. A change in consumer tastes.
d. A decrease in the price of a
substitute for the product.
4. (c) because a shift in demand
could result from a change in
consumer tastes. Answer (a) is
incorrect because this would
result in movement along the
existing demand curve. Answer
(b) is incorrect because change in
supply would not affect the
demand function. Answer (d) is
incorrect because a decrease in
price of a substitute would result
in a shift of the curve to the left.
5. What will be the result
on the equilibrium price
for the product?
a. Increase.
b. Decrease.
c. Remain the same.
d. Cannot be determined.
5. (a) because the shift (increase)
in demand will increase the price
of the product. Answer (b) is
incorrect because a shift of the
demand curve to the left would
have to occur to decrease price.
Answers (c) and (d) are incorrect
because the effect on price will
not be to remain the same and it
can be determined.
6.Which one of the
following has an inverse
relationship with the
demand for money?
a. Aggregate income.
b. Price levels.
c. Interest rates.
d. Flow of funds.
6. (c) because as interest rates
increase the demand for
money decreases because the
opportunity cost of holding on
to money becomes higher it
becomes costly to hold on to
money. This encourages
people to deposit their money
in the bank.
19.In a competitive market for
labor in which demand is stable, if
workers try to increase their wage
a. Employment must fall.
b. Government must set a
maximum wage below the
equilibrium wage.
c. Firms in the industry must
become smaller.
d. Product supply must decrease.
19. (a) like any other good or
service, if price is increased for
labor, the demand will fall and
employment will fall. Answer (b) is
incorrect because setting a
maximum wage will not allow
workers to increase wages. Answer
(c) is incorrect because firms may or
may not change in size. Answer (d)
is incorrect because supply will only
decrease if the price of the product
decreases.
Price elasticity of demand.The elasticity of demand
measures the sensitivity of demand to a change in
price. It is calculated as follows:
To make results the same regardless of whether
there is an increase or decrease in price, the
amount is usually calculated using the arc method
as shown below.
Interpretation of the demand elasticity
coefficient.

1. ED is greater than 1, demand is elastic

(sensitive to price changes).
2. ED is equal to 1, demand is unitary (not
sensitive or insensitive to price changes).
3. If ED is less than 1, demand is inelastic
(not sensitive to price changes).
4. If ED is 0, demand is pfectly inelastic (not
sensitive to price changes).

The price elasticity of demand coefficient

allows management to calculate the effect
of a price change on demand for the
product.
 Hypothetical Demand Elasticities for Four Products
% Change
% In Quantity
Change Demanded Elasticity
Product In Price (% QD) (% QD ÷ %P)
(% P)
Insulin +10% 0% .0 Perfectly
inelastic
Basic +10% -1% -.1 Inelastic
telephone
service
Beef +10% -10% -1.0 Unitarily
elastic
Bananas +10% -30% -3.0 Elastic
perfectly inelastic demand Demand in which quantity
58 of 31
demanded does not respond at all to a change in price.
The elasticity of demand is
greater for a product when
there are
1. more substitutes for the good,
2. a larger proportion of income is
spent on the good, or
3. a longer period of time is
considered.

NOTE:The demand for luxury

goods tends to be more elastic
than for necessities.
29. As the price for a particular product changes,
the quantity of the product demanded changes
according to the following schedule:
Total quantity demanded Price per unit
100 $50
150 45
200 40
225 35
230 30
232 25
Using the arc method, the price elasticity of
demand for this product when the price decreases
from $50 to $45 is
a. 0.20
b. 10.00
c. 0.10
d. 3.80
29. (d) Using the arc method is calculated
by dividing the percentage change in
quantity demanded by the percentage
change in price, using the average
changes.
(150 – 100) ÷ [(150 + 100) ÷ 2]
___________________________ = 3.8
($50 – $45) ÷ [($50 + $45) ÷ 2]

Elastic
29. (d) Using the traditional method is
calculated by dividing the percentage
change in quantity demanded by the
percentage change in price, not using the
average
changes.
(150 – 100) ÷ 100) x 100% 50%
_______________________=____ = -5
($45 – $50) ÷ $50) x 100% - 10%

Elastic
30.As the price for a particular product changes, the
quantity of the product demanded changes according to
the following schedule:
Total quantity demanded Price per unit
100 $50
150 45
200 40
225 35
230 30
232 25
Using the arc method, the price elasticity of demand for
this product when the price decreases from $40 to $35 is
a. 0.20
b. 0.88
c. 10.00
d. 5.00
30. (b) formula for price elasticity is
equal to the percentage change in
quantity demanded divided by the
percentage change in price.

(225 – 200) ÷ [(225 + 200) ÷ 2]

___________________________= .088
($40 – $35) ÷ [($40 + $35) ÷ 2]

Inelastic
Relationship between price elasticity
and total revenue.
Price elasticity is an important concept
because if demand is elastic an
increase in sales price results in a
decrease in total revenue for all
producers.

When demand is inelastic the firm can

increase its price with less of a
negative impact.
QUANTITY
DEMANDED PRICE REVENUE ΔD
1,000 100.00 100,000 ORIGINAL DATA ΔP

1,000 +/-0% 110.00 +10% 110,000 PERFECTLY INELASTIC -

990 -1% 110.00 +10% 108,900 INELASTIC -0.1

900 -10% 110.00 +10% 99,000 UNITARILY -1

700 -30% 110.00 +10% 77,000 ELASTIC -3

1,000 +/-0% 90.00 -10% 90,000 PERFECTLY INELASTIC -

1,010 +1% 90.00 -10% 90,900 INELASTIC -0.1

1,100 +10% 90.00 -10% 99,000 UNITARILY -1

1,300 +30% 90.00 -10% 117,000 ELASTIC -3

3. As a business owner you have
determined that the demand for your
product is inelastic. Based upon this
assessment you understand that
a. Increasing the price of your product
will increase total revenue.
b. Decreasing the price of your product
will increase total revenue.
c. Increasing the price of your product
will have no effect on total revenue.
d. Increasing the price of your product
will increase competition.
3. (a) If demand is inelastic an
increase in price will increase total
revenue. Answer (b) is incorrect
because if demand is inelastic the
quantity demanded will not be
affected significantly by a change in
price. Answer (c) is incorrect because
if the quantity demanded is not
significantly affected by an increase in
price, total revenue will increase.
Answer (d) is incorrect because an
increase in price may, or may not,
increase competition.
36.In the pharmaceutical industry
where a diabetic must have insulin
no matter the cost and where there is
no other substitute, the diabetic’s
demand curve is bestdescribed as
a. Perfectly elastic.
b. Perfectly inelastic.
c. Elastic.
d. Inelastic.
36. (b) The requirement is to
identify the price elasticity of an
essential product with no
substitutes. The correct answer is
(b). Demand for the product is
perfectly inelastic because the
diabetic will purchase the product
regardless of the price.
Consumer demand and utility
An individual demands a particular good
because of the utility (satisfaction) he or
she receives from consuming it. The more
goods an individual consumes the more
total utility the individual receives.
However, the marginal (additional) utility
from consuming each additional unit
decreases. This is referred to as the law of
diminishing marginal utility.
35.The law of diminishing marginal
utility states that
a. Marginal utility will decline as a
consumer acquires additional units of
a specific product.
b. Total utility will decline as a
consumer acquires
additional units of a specific product.
c. Declining utilities causes the
demand curve to slope upward.
d. Consumers’ wants will diminish
with the passage of time.
35. (a) The law states that
marginal utility declines as
consumers acquire more of a
good. Therefore, answer (a)
is correct. Answer (b) is
incorrect because total utility
will not decline as more of a
good is acquired. Answer (c) is
incorrect because the demand
curve slopes downward
The marginal propensity to save (MPS)is the
percentage of additional income that is
saved. Since a consumer can either spend or
save money, the marginal propensity to
consume plus the marginal propensity to
save is equal to one as shown
MPC+MPS =1
h. Certain nonincome factors may also affect
consumption, including
(1) Expectations about future prices of
goods
(2) Quantity of consumer liquid assets
(3) Amount of consumer debt
(4) Stock of consumer durable goods
(5) Attitudes about saving money
(6) Interest rates
13.An individual receives an
income of $3,000 per month, and
spends $2,500. An increase in
income of $500 per month
occurs, and the individual spends
$2,800. The individual’s marginal
propensity to save is
a. 0.2
b. 0.4
c. 0.6
d. 0.8
13. (b)marginal propensity to save is
the change in savings divided by the
change in income
[($500-$2,800-$2,500= 200)/($3,500
– $3,000 = $500) = .4].
$200/$500 = .4
(c) is incorrect this is the marginal
propensity to consume is the change
in spending divided by the change in
income [($2,800 – $2,500)/($3,500
– $3,000) = .6].
$300/$500 = .6
Note : .4 + .6 = 1
MPS + MPC = MARGINAL INCOME
15.Given the following data, what
is the marginal pronspensity to
consume
Level of
Disposable income Consumption
$40,000 $38,000
48,000 44,000
a. 1.33
b. 1.16
c. 0.95
d. 0.75
15. (d) marginal propensity to
consume.
=the change in consumption
________________________
the change in disposable income.
=[($44,000 – $38,000)/ = .75
___________________
($48,000 – $40,000)]
Disposable Income = Income –
Tax
Disposable Income Increase =
Conumption Increase
15. Average propensity to
consume
consumption
disposable income.
= $38,000 = .95
$40,000
Average propensity to save
savings
disposable income.
= $40,000 - $38,000 = .05
$40,000
APC + APS = 1 .95 + .05 = 1
1.If both the supply and the
demand for a good increase,
the market price will
a. Rise only in the case of an
inelastic supply function.
b. Fall only in the case of an
inelastic supply function.
c. Not be predictable with only
these facts.
d. Rise only in the case of an
inelastic demand function.
1. (c) The requirement is to predict the
market price based on an increase in
both supply and demand. The correct
answer is (c) because without
additional information about the
extent of the change, the effect on
price is not determinable.
Answers (a), (b), and (d) are incorrect
because the price elasticity of the
demand or supply function does not
provide enough information to
determine the effect.
14.In any competitive market,
an equal increase in both
demand and supply can be
expected to always
a. Increase both price and
market-clearing quantity.
b. Decrease both price and
market-clearing quantity.
c. Increase market-clearing
quantity.
d. Increase price.
14. (c) If there is an equal
increase in both demand and
supply, the equilibrium price may
increase, decrease, or remain the
same. However, there will be
more units sold and, therefore,
answer (c) is correct. Answers
(a), (b), and (d) are incorrect
because the equilibrium price may
increase, decrease, or remain the
same.
8. Which of the following
market features is likely to
cause a surplus for a particular
product
a. A monopoly.
b. A price floor.
c. A price ceiling.
d. A perfect market.
8. (b) is correct because a price floor,
if it is above the equilibrium price, will
cause excess production and a surplus.
Answer (a) is incorrect because a
monopoly market is likely to be
characterized by underproduction of
the product. Answer (c) is incorrect
because a price ceiling, if it is below
the equilibrium price, will cause
underproduction and shortages.
Answer (d) is incorrect because in a
perfect market with no intervention
demand and supply will be equal.
21.If the government
regulates a product or service
in a competitive market by
setting a maximum price
below the equilibrium price
what is the long run effect
a. A surplus.
b. A shortage.
c. A decrease in demand.
d. No effect on the market.
21. (b) If the government
mandates a maximum price below
the equilibrium price, the product
will be selling at an artificially low
price resulting in shortages. (a) is
incorrect because price floors
result in surpluses. Answer (c) is
incorrect because price ceilings
would probably result in more
demand. Answer (d) is incorrect
because the market would be
affected.
Microeconomics
A. Focus
B. Demand
C. Supply
D. Market Equilibrium
E. Costs of Production
F. Production
G. Market Structure
Average fixed cost (AFC)—Fixed cost per
unit of production. It goes down
consistently as more units are produced.
Average variable cost (AVC)—Total variable
costs divided by the number of units
produced. It initially stays constant until the
inefficiencies of producing in a fixed-size
facility cause variable costs to begin to rise.
Marginal cost (MC)—The added cost of
producing one extra unit. It initially
decreases but then begins to increase due
to inefficiencies.
Average total cost (ATC)—Total costs
divided by the number of units produced. Its
behavior depends on the makeup of fixed
and variable costs.
The cause of the inefficiencies
described above is referred to
as the law of diminishing
returns. This law states
that as we try to produce more
and more output with a fixed
productive capacity, marginal
productivity will decline. The
graph below illustrates the
relationships between various
short-run costs.
In many industries, especially
those that are capital intensive,
increasing returns to scale occur
up to a point, generally as a result
of division of labor and
specialization in production.
However, beyond a certain size,
management has problems
controlling production and
decreasing returns to scale arise.
The following graph illustrates
this.
.
37.Because of the existence of
economies of scale, business firms
may find that
a. Each additional unit of labor is less
efficient than the previous unit.
b. As more labor is added to a factory,
increases in output will diminish in the
short run.
c. Increasing the size of a factory will
result in lower average costs.
d. Increasing the size of a factory will
result in lower total costs.
37. (c) The requirement is to define the
implications of economies of scale. In the
long run firms may experience increasing
returns because they operate more
efficiently. With growth comes
specialization of labor and related
production efficiencies related to the law of
diminishing returns. This phenomenon is
called economies of scale. Answer (c) is
correct because it accurately describes this
concept. Answers (a) and (b) are incorrect
because they describe inefficiencies.
Answer (d) is incorrect because total costs
do not decline but average costs do.
38.In the long run, a firm may
experience increasing returns
due to
a. Law of diminishing returns.
b. Opportunity costs.
c. Comparative advantage.
d. Economies of scale.
38. (d) The requirement is to identify the
reason for increasing returns. In the long
run firms may experience increasing
returns because they operate more
efficiently. With growth comes
specialization of labor and related
production efficiencies. This phenomenon
is called economies of scale and, therefore,
answer (d) is correct. Answer (a) is
incorrect because the law of diminishing
returns states that at some point firms get
too large and diminishing returns occur.
Profits.Economists refer to two
different types of profit.
a. Normal profit—The amount of profit
necessary to compensate the owners
for their capital and/or managerial
skills. It is just enough profit to keep
the firm in business in the long run.
b. Economic profit—The amount of
profit in excess of normal profit. In a
perfectly competitive market,
economic profit cannot be experienced
in the long run.
Microeconomics
A. Focus
B. Demand
C. Supply
D. Market Equilibrium
E. Costs of Production
F. Production
G. Market Structure
Market Structure
1. Industries are classified by
their market structure as
a.perfect competition,
b.pure monopoly,
c. monopolistic competition,
and
d.oligopoly.
 Characteristics of Different Market Organizations 102 of 18
Market and Individual Firm Demand Curves
in a Perfectly Competitive Market
Comparing Demand Curves: Perfect Competition Versus Monopoly
The Kinked Demand Curve
52.Economic markets that are
characterized by monopolistic
competition have all of the
following characteristics except
a. One seller of the product.
b. Economies or diseconomies of
scale.
c. Advertising.
d. Heterogeneous products.
52. (a) because monopolistic
competition is a market
that has numerous sellers of
similar but differentiated
products.
Answers (b), (c), and (d) are
incorrect because they are all
characteristic of monopolistic
competition.
53. Which type of economic
market structure is
characterized by a few large
sellers of a product or service,
engaging primarily in nonprice
competition
a. Monopoly.
b. Oligopoly.
c. Perfect competition.
d. Monopolistic competition.
53. (b) is the definition of an
oligopoly. A(a) is incorrect because a
monopoly has a single seller of a
product or service for which there are
no close substitutes. (c) is incorrect
because perfect competition is
characterized by many firms selling an
identical product or service. Answer
(d) is incorrect because monopolistic
competition is characterized by many
firms selling a differentiated product
or service.
.
54. Which type of economic
market structure is composed of
a large number of sellers, each
producing an identical product,
and with no significant barriers to
entry or exit
a. Monopoly.
b. Oligopoly.
c. Perfect competition
d. Monopolistic competition.
54. (c) it is the definition of perfect
competition. Answer (a) is
incorrect because a monopoly has
a single seller of a product or
service for which there are no close
substitutes. (b) is incorrect
because an oligopoly is a form of
market in which there are few
large sellers of the product. (d) is
incorrect because monopolistic
competition is characterized by
many firms selling a differentiated
55.A natural monopoly exists
because
a. The firm owns natural
resources.
b. The firms holds patents.
c. Economic and technical
conditions permit only one
efficient supplier.
d. The government is the only
supplier
55. (c) because a natural
monopoly exists when, because of
economic or technical conditions,
only one firm can efficiently
supply the product.
(a) is incorrect because while owning
natural resources may contribute to the
establishment of a natural monopoly, the
firm would still have to be the best possible
producer of the product. (b) is incorrect
because a patent establishes a government-
created monopoly. (d) is incorrect because
if the govt is the only provider, the market is
a govt created monopoly.
58.An oligopolist faces a “kinked” demand curve.
This terminology indicates that
a. When an oligopolist lowers its price, the other
firms in the oligopoly will match the price reduction,
but if the oligopolist raises its price, the other firms
will ignore the price change.
b. An oligopolist faces a nonlinear demand for its
product, and price changes will have little effect on
demand for that product.
c. An oligopolist can sell its product at any price, but
after the “saturation point” another oligopolist will
lower its price and, therefore, shift the demand
curve to the left.
d. Consumers have no effect on the demand curve,
and an oligopolist can shape the curve to optimize
its own efficiency.
58. (a) The requirement is to describe the
reason for the kinked demand curve in an
oligopolist market. An oligopolist faces a
kinked demand curve because competitors
will often match price decreases but are
hesitant to match price increases.
Therefore, answer (a) is correct. Answer (b)
is incorrect because an oligopolist does not
face a nonlinear demand for its product.
Answer (c) is incorrect because an
oligopolist cannot sell its product for any
price. Answer (d) is incorrect because
consumer demand determines the demand
curve in all markets.
1. c __ __ 27. b __ __ 53. b __ __ 79. d __ __ 105.
a __ __
2. a __ __ 28. d __ __ 54. c __ __ 80. c __ __ 106.
d __ __
3. a __ __ 29. d __ __ 55. c __ __ 81. a __ __ 107.
c __ __
4. c __ __ 30. b __ __ 56. c __ __ 82. a __ __ 108.
c __ __
5. a __ __ 31. b __ __ 57. d __ __ 83. a __ __ 109.
b __ __
6. c __ __ 32. c __ __ 58. a __ __ 84. c __ __ 110.
c __ __
7. a __ __ 33. d __ __ 59. a __ __ 85. a __ __ 111.
c __ __
8. b __ __ 34. a __ __ 60. a __ __ 86. a __ __ 112.
d __ __
14. c __ __ 40. c __ __ 66. d __ __ 92. a __ __
118. a __ __
15. d __ __ 41. c __ __ 67. d __ __ 93. b __ __
119. d __ __
16. b __ __ 42. a __ __ 68. c __ __ 94. a __ __
120. a __ __
17. d __ __ 43. c __ __ 69. a __ __ 95. c __ __
121. d __ __
18. a __ __ 44. c __ __ 70. d __ __ 96. c __ __
122. c __ __
19. a __ __ 45. c __ __ 71. d __ __ 97. c __ __
123. b __ __
20. a __ __ 46. d __ __ 72. d __ __ 98. b __ __
124. c __ __
21. b __ __ 47. d __ __ 73. c __ __ 99. c __ __
125. a __ __