Key Ideas of Microeconomics
Economics is defined as __ and is often referred to as ___.
the study of how society manages scarce resources; dismal science
True or False: If Andrew can do 2 assignments in one hour while Joel can do 1, we can say that Andrew has a comparative advantage.
False, this is an absolute advantage.
True or False: Law of Demand states that when the price of a good rises, the quantity demanded of a good falls, all else equal.
True or False: Law of Supply states that when the price of the good rises, supply of a good rises, all else equal.
True, False (quantity supplied)
On a demand and supply graph, at what position is the equilibrium point?
At the intersection point of the demand and supply curve.
Price elasticity is higher for ____ than for ____.
Price elasticity is higher for goods with close substitutes than ones withouts. (cereal vs. sunscreen)
Price elasticity is higher for luxuries than necessities.
Price elasticity is higher for narrowly defined goods than broadly defined ones. (blue jeans vs. clothing)
Price elasticity is higher for long-run than short-run.
Price elasticity is higher for large budget share than lower budget share.
Positive or Normative: It is wrong for the government to not increase minimum wage.
Normative
A PPF can be a straight line or bow-shaped. What causes the PPF to be bow-shaped?
Different workers have different skills and opportunity costs. If a worker skilled in good A works on good B, he likely will produce less than the skilled good A workers.
Suppose when the price of cereal falls, the demand for milk rises. What kind of curve shifter is this? Be specific.
Price of Related Goods: Complements.
If the demand curve and the supply curve both shift to the right, what will happen to the equilibrium price and equilibrium quantity?
The equilibrium quantity will increase, but we can't determine how the equilibrium price will change.
Write down the formulas below:
1. Price elasticity of demand
2. Price elasticity of demand for a specific point on the curve
3. Total revenue
4. Midpoint Formula
5. Income Elasticity of Demand
6. Cross-Price Elasticity of Demand for good1
1. Percentage change in Qd / Percentage change in P
2. (P/Qd)/slope, where slope=change in P/ change in Qd
3. TR=P*Q
4. (end value - start value)/midpoint, using to calculate percentage change
5. Percent Change in Qd / Percent Change in Income
6. Percent Change in Qd for good 1 / Percent Change in P for good 2
What are the causes of market failure?
Externalities (i.e. Pollution)
Market Power (i.e. Monopoly)
Public Goods (i.e. National Defense)
Asymmetric Information (i.e. Insurance Markets)
If in 24 hours, Khloe can either knit 1 bag in 3 hours or knit a sweater for 6 hours, what is the opportunity cost of knitting a bag? How about a sweater?
Opportunity Cost of Bag: 1/2 sweater
Opportunity Cost of Sweater: 2 bags
Suppose when the price of a certain bag rises, buyers in that market tend to buy more of that good. What can we assume from that?
An effective price floor should be placed ___ the equilibrium point.
An effective price ceiling shoulD be placed ___ the equilibrium point.
An effective price floor should be placed above the equilibrium point.
An effective price ceiling shoulD be placed below the equilibrium point.
When the demand curve is relatively flat, the price elasticity of demand is _____. Draw a graph to explain.
When the demand curve is relatively flat, the price elasticity of demand is high.
After graduating highschool you lay out your possible options:
1. Going to college for a bachelor's degree will cost $37,500 per year for tuition, books, and dorms. (4 years)
2. A paid internship with a bank will make you $30,000 per year.
3. Working as a Starbucks barista for $20,000 per year
You decide to go to college. Suppose after college you make $80,000 a year. What is the least amount of years you would have to work in order to make up for the opportunity cost? Round up to the nearest whole number.
$37,500 + $30,000 = $67,500
$67,500 * 4 = $270,000
$80,000 - $30,000 = $50,000
$270,000/$50,000 = 5.4
You would need to work at least 6 years.
Suppose South Korea has 40,000 labor hours a month. They can produce 1 smartphone in 250 hours, and 1 bushel of corn in 80 hours.
China on the other hand has 70,000 labor hours a month and they can produce 1 smartphone in 140 hours and 1 bushel of corn in 50 hours.
a) Draw their monthly PPF on the same graph with smartphones on the x-axis and corn on the y-axis. Be sure the label your graph along with the slope.
b) Who has the absolute advantage in producing smartphones? How about corn?
c) Who has the comparative advantage in producing smartphones? How about corn?
A) South Korea- smartphones: 160 units; corn: 500 units; slope = -25/8
China- smartphones: 500 units; corn: 1400; slope = -14/5
B) China has an absolute advantage in producing both products.
C) China has a comparative advantage in producing smartphones, while South Korea has a comparative advantage in producing corn. (Corn: .35 for China, .32 for South Korea)
Suppose we are in the market for wedding cakes. Flower bouquets see a rise in prices. How will the supply curve shift?
No change, it affects the demand curve.
Consider the market for bacon. Suppose there is an increase in the price of pig feed. Draw a diagram (on your scratch paper) that illustrates the likely effect on the market for bacon (supply, demand, equilibrium price and quantity).
a)What is the likely effect on supply?
b)What is the likely effect on demand?
c)What is the likely effect on equilibrium price?
d)What is the likely effect on equilibrium quantity?
a)decrease in supply
b)no effect
c)increase
d)decrease
Let's say the demand is elastic (>1). A price increase will cause the revenue to ____. Draw a graph to explain.
Let's say the demand is elastic (>1). A price increase will cause the revenue to fall.
Draw and explain the Circular-Flow Diagram
PICTURE: shows how dollars flow through markets among households and firms
Lp = Labor Hours for portal gun, Lw= Labor hours for wheat, P= number of portal guns produced, W= tons of wheat produced.
Suppose the Citadel of Ricks has 60,000 hours of labor a month. They can produce 1 portal gun in 250 hours and a ton of wheat in 100 hours.
Planet Squanch has 30,000 hours of labor a month. They can produce a portal gun in 400 hours and a ton of wheat in 250 hours.
a) Solve the PPF for Citadel and Squanch algebraically. Present your answer in slope intercept form. (Portal guns are the y-axis)
b) Suppose with a new leader, the Citadel of Ricks now has 40,000 hours of labor and their technological relationship is represented by P =√L and W = √L. Show how their PPF will change algebraically.
Squanch: P = -5/8+75
B) P2+W2=40,000
Name all the demand curve shifters and the supply curve shifters.
Demand: Income, Price of Related Goods, Tastes, Expectations, # of buyers
Supply: Input Prices, Technology, # of Sellers, Expectations
Suppose in the market of coffee. D=9-4P, S=3+2P.
a)calculate the equilibrium price and quantity.
b)if the government want to place a price ceiling for the market, where should it place?
c)Is a price ceiling at 6 dollar an effective one?
d)If the government place a price ceiling at 0.5, is there a surplus or shortage? How mush is the surplus or shortage?
a) 9-4P=3+2P -> P*=1, Q*=5
b) should be placed at any price lower than 1
c) no, 6>1
d)There will be an shortage as Qd>Qs,
Qd at 0.5dollars is 9-0.5*4=7
Qs at 0.5 dollars is 0.5*2+3=4
Shortage is 7-4=3
Suppose that when the market price of bacon increases from $1 to $1.10, the quantity
demanded of bacon increases from 100,000 pounds to 105,000 pounds, and the quantity
demanded of eggs decreases by 2 percent.
a)What is the price elasticity of demand for bacon?
b)At the current price level (i.e. before the price change), is demand for bacon elastic or inelastic?
c)Give one reason why the demand for bacon might be elastic / inelastic and explain in this context.
d)will the price change increase or decrease total revenue in the bacon
market?
e)Are bacon and eggs complements or substitutes? Briefly explain your reasoning.
a) Price elasticity of demand = %ΔQ/%ΔP = [5000/100000]/[.1/1] = [5/100]/[.1] = ½
b) Inelastic (1/2<1)
c) Not many substitutes – other breakfast foods are not substitutable with bacon
[other answers may be possible – e.g. time horizon, large share of budget, but might be harder to
explain in this context]
d) Total revenue will increase
e) Cross-price elasticity = [-2% / 10%] <0 → Complements