Text of the Economics Unit II Review
The law of demand states that as the price of a product decreases, quantity demanded __________.
Increases
And vice versa
The law of supply states that as the price of a product increases, quantity supplied __________.
Increases
And vice versa
What impact does increasing income have on demand?
it increases purchasing power which increases demand
What direction do the demand and supply curves move to show an increase in supply or demand?
They move to the right
What are two other factors that greatly impact overall demand?
market size (population), tastes and preferences, prices of related goods, consumer expectations
What is the substitution effect?
consumers will purchase a lower price substitute if its effective
What is the name for reduced satisfaction achieved from continued consumption of a particular good?
diminishing marginal return
What does elasticity of demand measure?
the impact on demand of a price change in a particular good
If demand for a good changes little with changes in price then demand is elastic or inelastic?
inelastic
What are three key factors that affect elasticity?
availability of substitutes, relative importance, need or want, how quickly price changes over time
What does a supply schedule measure?
the amount supplied at a given price
If producers are willing to produce a much larger quantity with a small increase in price supply is considered elastic or inelastic?
elastic
What are two factors that cause shifts in supply?
price of resources, technology, competition, price of related goods, government activity
What is a firm experiencing if it becomes more productive (and efficient) by adding workers?
increasing marginal returns
What are fixed production costs? Variable productions costs?
costs that don’t change with quantity produced (factory, equipment, office rental); variable costs change with quantity (workers, supplies, etc.)
What is the amount of additional cost required to produce one more unit?
marginal cost
What is the amount of additional revenue gained by producing one more unit?
marginal revenue
What will suppliers do when there is excess demand? Excess supply?
Raise their price to match equilibrium
Lower their price to match equilibrium
What is it called when a few major firms dominate a particular market?
an oligopoly
What is it called when an oligopoly colludes to set prices & ruin competition?
a cartel
What is it called when a monopolist charges different prices to different consumers? Examples?
price discrimination
kids stay free, discount for early purchase, etc.
What is a “price war”?
when members of an oligopoly stop colluding and try to undersell each other with increasingly lower prices
What is the name for a market place in which there are many buyers and sellers, no barriers to entry, and producers are “price takers”?
Perfect competition
Where is market equilibrium?
where the demand curve hits the supply curve
What is a shortage? a surplus?
a shortfall in the amount supplied, an excess of the amount supplied
Identify two causes of shortages.
Price ceilings, disasters, high prices of needed inputs, emergency that causes resources to be used elsewhere
What are two conditions that must be present for a monopoly to exist?
single seller, no substitutes, difficult market entry (significant barriers to entry)
Identify two examples of barriers to entry.
High start up costs, control of resources, patents/technology, gov’t granted monopoly
Name two different types of monopoly.
natural, geographic, technological, and government
What type of monopoly occurs when competition from any other firm would drive prices below per unit production costs?
Natural monopoly
Identify two factors that place price pressure on monopolies.
consumer demand, potential competition, & gov’t regulation
What system is used by consumers and producers to communicate?
the price system
What are two advantages of the price system?
flexibility, efficiency, choice, incentives
What are two limitations of the price system?
can’t include externalities, hard to price public goods, general instability
What is the name for officially limiting the supply of a particular good? When has this happened in United States history?
rationing, World War II & Energy Crisis
What is a vertical combination?
It’s when a trust is formed from companies that control all the various levels of production
Does the constitution guarantee the rights of all Americans to total economic freedom?
No – the constitution gives Congress the power to regulate commerce
What are two of the major criticisms of rationing? When is it used?
unfair, too expensive, creates black markets; when times are critical – major energy crisis or war
Does deregulation increase or decrease government control of business?
Decrease
What is a subsidy? What is it supposed to accomplish?
It’s when the government gives cash or tax breaks to produce more of a certain product. It’s supposed to increase production.
How does deregulation effect companies? Does it increase or decrease competition?
It decreases the amount of government restrictions on the business.
It increases competition
Selling a product below cost to drive competitors out of the market is:
Predatory Pricing
What are four Conditions of Monopolistic Competition?
Many firms, few artificial barriers to entry, slight control over price, differentiated products
What is the name for a situation in which many buyers and sellers compete under the laws of supply and demand?
perfect competition
What is product differentiation?
monopolies using small differences and marketing campaigns to set their products apart
What is the name for the practice of competition based on brand identity rather than price?
non-price competition
Give an example of economies of scale.
Hydroelectric plant and telephone service- high start up cost, cost per unit decreases as output rises.
Give an example of a price ceiling and a price floor.
ceiling: rent & war rationing; floor: subsidies, crop prices, minimum wage
Give two examples of how price controls can have negative side effects.
black markets, create shortages (e.g. rent control - housing)
What is the primary purpose of anti-trust legislation?
eliminate imperfect competition