MICROECONOMICS END OF COURSE REVIEW
Part 1 – Ch. 2 through Ch. 12
1. ________ is the social science that studies how resources are used and is often concerned with
how resources can be used to their fullest potential.
2. ________ is concerned with the economic problems faced by individual units within the overall
economy (families, individuals, firms).
3. _________ involves economic problems encountered by the nation as a whole.
4. ______ _______ is based on the scientific method and uses formulated hypotheses that are
tested with experiments. In class, we described such statements as “how the world is.”
5. ______ _______ involve value judgments and opinions or “how the world ought to or should
be.”
6. The factors of production are _______, _______ & ______.
7. Households are buyers in the ______ ______ and sellers in the ______ _____. Households
supply ____, ____ & _____ in the factor market in exchange for ______, ____ & _____.
8. A ____ ___ ____ shows the combinations of two goods that can be produced if the economy
uses all of its resources fully and efficiently. If the curve is linear (ie. – a downward sloping
straight line), this means that the opportunity costs between the two goods is/are __________.
With a bowed curve, the tradeoff between the two goods is best described as one where there
are __________ ________ _______. In other words, in order to get one additional unit of good
x, you must give up an even greater amount of good y as you move down the curve.
9. Any point lying outside a PPF is said to be _______. Any point on the curve is said to be
________, while any point inside the curve is said to be ______.
10. What can cause a PPF to shift outwards?
11. The basic economic problem is _________.
12. Trade makes everyone better off and is based on ________ _________, with each country or
trading partner producing the product where they have the lowest ______ ______. While some
industries and workers will be hurt be trade, those workers will be retrained in other industries
where the country has a comparative advantage and will soon be back to work.
13. _____ _____ is the ability to produce something more efficiently, thus allowing one party to
produce more output than that of their trading partner.
14. T/F – It is possible to have an absolute advantage in both products and a comparative advantage
in both products.
15. ____________ leads to increased output and through trade, a country can ___________ beyond
its __________ ________ ___________.
16. If you are given a trade problem that provides the number of hours that it takes each country to
produce one unit of a product, the first thing that you should do is to find the ____ _____ ___.
Also, when you write your matrix for the problem, the __________ should appear on the left
while the ________ should appear at the top.
17. The 3 Basic Economic Questions are _________________________, ____________________, &
_________________________.
18. 2 approaches for answering the 3 basic economic questions are either through __________ or a
___________ ________. In the former, ________ are used as the rationing mechanism the
coordinates economic activity while in the latter, the ___________ determines how goods and
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
services are distributed based on __________. __________ and _________ are examples of the
latter.
A _____ _______ is one that is a blend of government controls and capitalism.
________ __________ occurs when resources are being deployed to produce just the right
amount of each product to satisfy society’s wants.
______ ________ means “all other things remaining unchanged.”
A ______ ______ is one in which no single firm or group of firms can’t significantly alter the
terms or exchange or transaction terms (the price). As a result, firms are said to be ____ ____.
The _____ __ ______ claims that, ceteris paribus, the quantity demanded of a good falls when
the price of the good rises and vice versa.
The Market Demand Curve is simple a _______________________.
The determinants of demand that can shift the demand curve either to the right (+) or to the left
(-) are T_________, R__________, I__________, B___________ & E__________. Any change in
any of these determinants will cause what? _____________________.
As consumer income increases, demand for the ______ goods increases.
With __________ goods, consumption decreases as income increases and rises when income
falls.
A movement along a demand curve can only be caused by a change in ____________ and is
referred to as a ____ _ _____ _____.
The positive relationship that exists between price and quantity is called the ____ __ _____.
Because there is a greater incentive for producers, at higher prices, producers will produce a
greater quantity of output, while at lower prices, there is less incentive on the part of producers
to produce.
A Change in Quantity Supplied can only be caused by a change in _______. A Change in Supply
can be caused by changes in R__________, O__________, T_________, T_________, E________
& N______________.
A __________ occurs when the quantity demanded exceeds the quantity supplied while a
__________ happens when the quantity demanded is less than the quantity supplied.
When both the supply curve AND the demand curve shift, either price or quantity will be
_______________.
The ____ _____ __ ______ measures how much the quantity demanded responds to a change in
price. It is measured in ________ _______ and if the coefficient is > 1, demand is ______. If the
coefficient = 1, demand is ____ ____, while if the coefficient is < 1, demand is _______. The
formula is:
= Change in Q demanded / Change in P
= Q2 – Q1 / Q2+Q1/2
/ P2 – P1 / P2+P1/2
34. The Determinants of Elasticity are:
a. _______ of _______ ____________
i. Yes – Elastic
ii. No – Inelastic
b. ______________ vs ______________
i. Demand for the first is ___________
ii. Demand for the latter is __________
c. __________ of the __________
i. Broad Market = _____________ demand
ii. Narrow Market = ____________ demand
d. ____________ ____________
i. Longer period = ______________ demand
ii. Shorter period = _____________ demand
35. If a company seeks to raise revenues and faces elastic demand, it should _____ prices. However,
if its customers have a demand that is inelastic, they should _____ prices.
36. The Formula for the Income Elasticity of Demand is found by calculating the % Change in Q d / %
Change in Income. The specific formula is:
Q2-Q1 / Q2+Q1 / 2 / I2-I1 / I2+I1 / 2
If the Income Elasticity Coefficient is positive, then the good is ______________. If the
coefficient is negative, the good is ___________.
37. The Cross Price Elasticity is found by dividing the % Change in Quantity Demanded for Good 1
when there is a price change in Good 2. If the Elasticity Coefficient is positive, then good is a
______________ good. If the coefficient is negative, the good is a ___________ good.
38. Computing the Price Elasticity of Supply is found by calculating the % Change in Q s / % Change
in P. The formula is:
Q2-Q1/ Q2+Q1 / 2 / P2-P1 / P2+P1 / 2
If you notice, it’s the same formula as the Price Elasticity of Demand with the one exception that you are
focusing on Quantity of __________ in the numerator instead of the Quantity of __________. If the
coefficient is > 1, supply is ______. If the coefficient = 1, supply is ____ ____, while if the coefficient is <
1, supply is _______. The coefficient is expressed in absolute terms.
39. A _____ _____ ______ is one where the government imposes a maximum price that can be
charged in the market. The price will be set below the current _______ ______. If the price is set
above the market equilibrium, then it is said to be a _______ _____ _____.
40. A _______ ________ _____ is one where the government sets a minimum price that can be
charged in the market; a price that is above the current market price. If the price is set below
the market equilibrium price, then it is said to be a ______ ____ _____.
41. A Binding Price Ceiling creates a market _______ while Binding Price Floors create a market
______.
42. ______ ________ is the manner in which the burden of a tax is shared among participants in the
market. Unless either the buyer’s demand curve is __________ ________ or the seller’s supply
curve is __________ ________, the tax will always be shared.
43. The party (either the supplier or buyer) that is more ____________ will shoulder the greater
amount of the tax, regardless of who the tax was placed on.
44. Taxes create a ______ ______ which shrinks the market and reduces the quantity away from the
socially optimal level of output.
45. The ______ ______ represents each individual’s maximum willingness to pay while the supply
curve represents each firm’s _________ ______ that they will accept; a price that represents the
firm’s cost to produce an additional unit.
46. The difference between the maximum price that a customer would pay for a product and the
actual market price is referred to as __________ __________. It can be found by locating the
area below the demand curve and above the market price.
47. The difference between the actual market price and the minimum price that a firm would
accept to produce a product is referred to as _____ ________. It can be found by locating the
area above the supply curve and below the market price.
48. Allocative Efficiency implies that there is no _______ ______ and that total surplus in the market
is ___________. This quantity is said to be the Socially Optimal Level of Output.
49. Producers will continue to generate output so long as the _________ ___ _________ exceeds
the costs to sellers. Once the MC of producing the next unit exceeds the Marginal Benefit
derived by the customer, producers will cease production activities.
50. T/F - Taxes create a deadweight loss since the tax revenues generated by the government are
less than the combined total loss of consumer and producer surplus in the market.
51. T/F – Taxes create a deadweight loss because they prevent buyers and sellers from realizing
some of the gains from trade.
52. The _______ ______ is used to represent to idea that at a lower tax rate, tax revenue will
increase and continue to rise as the tax rates in a country are increased. However, at some
point, an additional increase in the tax rate will begin to cause tax revenues to fall.
53. As the size of the tax rate ___________, the deadweight loss __________.
54. ______ ________ gain when the domestic price is less than the world price.
55. ______ ________ gain when the world price is below the domestic price.
56. If the World Price is below the Domestic Price, the country is said to be an _______ nation.
When this occurs, domestic producer surplus _______ while domestic consumer surplus
_________.
57. “Trade makes everyone better off” because it __________ ________ _________.
58. When the country is an export nation, domestic producer surplus _______ while domestic
consumer surplus ______ as the domestic price is increased to the higher world price.
59. Which is the better government control to reduce imports, a tariff or a quota?
60. T/F – Both a tariffs and quotas create deadweight loss because the higher price leads to a loss of
surplus in the market.
61. The arguments for trade restrictions include:
a. The ___ _____
b. The ____ ____ _____
c. The ___ ____ ____
d. The ____-____ ____
e. The _____-__-__-______-____ _____
62. The functions of the ________ ____ __________ are to administer trade agreements, provide a
forum for negotiations, and handle disputes that arise from member countries.
63. When the Marginal Social Benefit is > than the Marginal Private Benefit, the market is
experiencing a ________ __________. To encourage the producer to increase output, the
government should provide them with a ____ ____ _____.
64. ____ ____ _____ encourage producers to increase output because they reduce the producer’s
_____ ____ _____.
65. T/F - A Lump Sum Subsidy lowers the firm’s marginal cost curve and provides the firm the
incentive to increase output. A Per Unit Subsidy is a one-time subsidy that doesn’t lower the
firm’s marginal cost curve and is essentially a one-time profit for the firm.
66. T/F – When you draw an externality graph, you should ALWAYS label the demand curve MPB
and the supply curve MPC.
67. T/F – When you draw an externality, if it’s a negative externality, you will have 2 demand curves
labeled MPB & MSB and one supply curve labeled both MPC & MSC.
68. T/F – a positive externality has an associated deadweight loss because the current output is less
than optimal.
69. A ____ ___ _____ is the best way to reduce the spillover costs to society associated with a
________ _______.
70. When a negative externality is present, the ______ _____ _____ is greater than the _____
_____ _____ at the current market quantity.
71. T/F – Even though a per unit tax is known to shrink the market and create a deadweight loss, in
the case of a negative externality, such a tax actually increases market efficiency and total
surplus by causing the producer to internalize the costs of production.
72. _______ _____ are both rival and excludable.
73. ______ _____ are rival but not excludable.
74. ______ _____ are neither rival nor excludable.
75. ______ _____ are not rival but are excludable.
76. T/F - Excludability is based on the ability to prevent someone from using the product by charging
a price while rivalness means that if someone else is using the product, then another person is
prevented from using that same product.
77. _____ ______ is a person who receives the benefit of a good but avoids paying for it.
78. The parable of the Tragedy of the Common highlights the fact that no one party had an
incentive to take care of the town common because on one had _______ _____ _____ to the
land.
79. In the United States, the IRS tax code is said to be a _____________ tax structure because it
assesses higher taxes to those with higher incomes.
80. A __________ ________ structure is one in which high-income taxpayers pay a smaller fraction
of their income than do low-income taxpayers.
81. A __________ ________ structure is one in which high-income taxpayers pay the same fraction
of their income in taxes as low-income taxpayers.
Answers:
Part 1:
1.
2.
3.
4.
5.
6.
7.
8.
Economics
Microeconomics
Macroeconomics
Positive Economics or Positive Statements
Normative Economics or Normative Statements
Land, labor & Capital
Product Market, Factor Market, Land, Labor & Capital, Wages, Rent & Profit.
Production Possibilities Frontier (Curve), constant, increasing opportunity costs
9. Unobtainable, efficient, inefficient
10. A new discovery of natural resources or an advancement in technology that allows the country
to produce additional units of both goods while using the same level of resources.
11. Scarcity
12. Comparative Advantage, Opportunity Costs
13. Absolute Advantage - Trade can be mutually advantageous to both countries even if one country
has the absolute advantage in all products.
14. False – you can only have a comparative advantage in one of the products, while you can have
an absolute advantage in both products.
15. Specialization, Consume, Production Possibilities Frontier
16. Least Common Multiple (so that you can determine how many units can be generated within
the least common multiple of hours. This will allow you to then calculate the opportunity costs.),
Countries, Products.
17. What will be produced? How much will be produced? & For whom will it be produced?
18. Capitalism, Command Economy, Prices, Government, Equality, Communism, Socialism
19. Mixed Economy
20. Allocative Efficiency
21. Ceteris Paribus
22. Competitive Market, Price Takers
23. Law of Demand
24. A horizontal summation of each individual’s demand curve.
25. Tastes & Preferences of Buyers, Related Goods (substitutes & complements), Income of Buyers,
# of Buyers and Expectations of Buyers. A shift of the demand curve or a shift in demand.
26. Normal
27. Inferior
28. Price, a Change in Quantity Demanded.
29. Law of Supply
30. Prices, Resource Costs, Other Goods (substitutes & complements), Taxes & Subsidies,
Technology, Expectations of Sellers & Number of Sellers.
31. Shortage, Surplus
32. Indeterminate or Ambiguous – remember to draw the shifts in each curve by the same distance
from the original demand and supply curves.
33. Price Elasticity of Demand, Absolute Terms, Elastic, Unit Elastic, Inelastic
34. a. Availability of Close Substitutes
b. Necessities vs Luxuries, Inelastic, Elastic
c. Definition of the Market, Elastic, Inelastic
d. Time Horizon, Inelastic, Elastic
35. Raise, Lower
36. Normal Good, Inferior Good
37. Substitute, Complementary
38. Supply, Demand, Elastic, Unit Elastic, Inelastic
39. Binding Price Ceiling, Market Price, Nonbinding Price Ceiling
40. Binding Price Floor, Nonbinding Price Floor
41. Surplus, Shortage
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
Tax Incidence, Perfectly Inelastic, Perfectly Inelastic
Inelastic
Deadweight Loss
Demand Curve, Minimum Price
Consumer Surplus
Producer Surplus
Deadweight Loss, Maximized
Value to Buyers
True
True
Laffer Curve
Increases, Increases
Domestic Producers
Domestic Consumers
Import, Falls, Increases
Increases Total Surplus
Increases, Falls
While both create a deadweight loss, a tariff generates tax revenue for the government, part of
which is shifted from consumer surplus while with a quota, this loss of consumer surplus is
shifted out of the country to import license holders in foreign countries.
True
a. The Jobs Argument
b. The National Security Argument
c. The Infant-Industry Argument
d. The Unfair-Competition Argument
e. The Protection-as-a-Bargaining-Chip Argument
World Trade Organization
Positive Externality, Per Unit Subsidy
Per Unit Subsidies, Marginal Cost Curve
False
True
False
True
Per Unit Tax (because such a tax raises the firm’s marginal cost curve while a lump-sum tax
doesn’t affect the firm’s marginal cost curve), Negative Externality.
Marginal Social Cost, Marginal Private Cost
True
Private Good
Common Resource
Public Good
Natural Monopoly
True
Free Rider
Private Property Rights
79. Progressive
80. Regressive Tax
81. Proportional Tax