Download Honors Economics Unit 2 Study Guide

Microeconomics Study Guide WITH ANSWERS
The study guide needs to be completed on another sheet of paper.
1. What is demand? (79) Desire for something and the ability to pay for it
2. What does the law of demand state? (79)
If price of a good decreases, demand increases. If price increases, demand decreases.
3. What is the difference between a change in quantity demanded (along the demand curve) and a shift in the demand
curve? (82-83) A change in quantity demanded mean a change in price – moves along the demand curve.
A shift in the demand curve comes from a change in the non-price determinants (income, related goods, etc.)
4. What economic system is the United States economy based on? (79) Market
5. What are the determinants of demand? How do each affect demand?(86-88) (Know all five)
a. Income – Less income, less demand. More income, more demand.
b. Price of related goods (substitutes & complements) Change in a sub or comp, can increase/decrease demand.
c. Consumer Expectations – Knowing a change in price in the future (increase in price, increases demand now –
decrease in price in future – decrease demand now), Gov’t announcements such as salmonella, etc. can
decrease demand.
d. Consumer Tastes & Advertising – New fads can cause an increase in demand, Intelligent advertising can cause
an increase….and vice versa.
e. Population – Increase in population in an area, increases demand. Decrease in population, decreases demand.
6. How are inferior and normal goods different?(86-87) Inferior goods are the ones we don’t want when we make
more money, while normal goods are the ones we buy more of when our income increases.
What is diminishing marginal utility? The more you utilize of a good, the less satisfaction you get from it.
What is the substitution effect? The price increase of one good causes you to buy another, cheaper good in its place.
7. Study and be able to interpret demand schedules, curves, supply schedules and curves and market equilibrium.
Remember: Demand/Supply schedules are the lists showing quantity demanded/supplied at each price while the curve is the
GRAPH. Market equilibrium is when the quantity demanded meets the quantity supplied.
Draw an example of a supply and demand curve and label the following:
Price, Quantity, Equilibrium (125-126), Supply(105), Demand (82-83), Shortage(136), Surplus(134) Price Ceiling(128-130)Price
Floor(130-131)
8. What is supply? (101) Amount available of goods available.
9. What does the law of supply state?(101) Price increases, supply increases. Price decreases, supply decreases.
10. What is the difference between a change in quantity supplied and a shift in the supply curve? (117)
A change in quantity supplied mean a change in price – moves along the supply curve.
A shift in the supply curve comes from a change in the non-price determinants (Price of related products, New technology,etc)
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11. What are the determinants of supply? How do each affect supply?(86-88) (Know all six) (116-120)
a. Price of related products: If price increases for tomatoes, then supply of ketchup will decrease. Etc.
b. Technology: New technology will increase supply. Poor, damaged technology will decrease supply b/c money is spent
replacing or fixing it.
c. Government Tools: Subsidies (usually increase supply), Regulation (decrease supply b/c often costly), Taxes
d. Change in number of sellers: Increased competition or sellers means more supply in the market, decreased number
of sellers means less supply.
e. Producer Expectations
f. Costs of factors of production: Increase costs decreases supply while decrease in cost increases supply.
12. What are fixed costs? Examples?(111) Costs that do not change, no matter how much is produced.
Examples: Rent, lease payments
13. What are variable costs? Examples(111) Cost that change with the amount produced Ex. Raw materials, etc.
14. What are the characteristics of a good with elastic demand? Inelastic demand?
Elastic Demand: many available substitutes, luxury products take more out of your budget
Inelastic Demand: no or few substitutes, necessities, cheaper products as a price change will not hurt your budget
15. What are examples of goods with elastic demand? (93)Inelastic demand?(93)
Elastic: BMWs, Starbucks coffee, etc.
Inelastic: Heart medication, Toothpaste, etc.
16. How is time related to the elasticity and inelasticity of supply?(104-106)
The more time passes, the more inelastic a product becomes as people adjust to the price change.
17. What are two ways that the government can have an influence on supply?(117-118)
Regulations and Subsidies
18. What are the characteristics of a good with elastic supply? Inelastic supply?
Elastic supply: Inexpensive/Cheap factors of production (materials, labor), easily change quantity supplied
Inelastic supply: Expensive or highly skilled factors of production, cannot easily change quantity supplied
19. What are examples of goods with elastic supply? (104-106) Inelastic supply?(104-106)
Elastic: haircuts, toothpaste, etc.
Inelastic: Oranges, Mona Lisa
20. On what type of goods does the government generally place price ceilings?(128-130) Price floors?(130-131)
Price Ceiling: Essential goods –Rent
Price Floor: Minimum wage
21. Define rent control. (129) Maximum amount allowed to charge for rent
22. Define minimum wage. (130) Minimum price an employer pays for labor
What happens if the government sets wages above the equilibrium level?(130) Decrease in employment
23. What happens at market equilibrium?(125) Balance b/w quantity demanded & quantity supplied
24. What happens to a market in equilibrium when there is an increase in supply?(126) Excess supply which leads
to a surplus
25. What will happen to the equilibrium price and quantity if the demand for a product increases?(126-127) Excess demand
Which leads to a shortage
26. What is a shortage? (136) Good or service is unavailable
What is a surplus?(134) Quantity supplied is greater than quantity demanded
27. What is monopolistic competition?(166) Market structure in which there are many firms with similar products
What are examples of goods sold in a monopolistically competitive market?(167) Jeans, soft drinks, fast food
28. What are the four forms of nonprice competition?(167-168) Physical characteristics, location, service level, image
29. What will happen if an extremely high price is charged in a monopolistically competitive market?(168-169)
Consumers will go to the competitors and buy the cheaper product
30. Why does the government issue patents?(159) Guarantees the company profits, therefore encouraging them to continue
to research & develop new products that benefit us all
31. What are the conditions of perfect competition?(151) Many firms, identical product, well-informed, easy entry
What are some examples? Tomatoes, wheat, etc. Notebook paper
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32. Define and describe oligopoly.(169-171) Few large sellers – similar products, many barriers to entry
What are some examples? Airlines, cereal, automotives, movie studios
33. What is a barrier to entry? (153) Difficulties for a new firm to enter a market
What is an example of this situation?(153-154) High start up costs, high degree of technological know how
34. Why do companies practice price discrimination?(163) Maximize profits – know that certain groups will pay more or
Pay less
35. What are marginal costs?(111) Cost of producing one additional unit of good.
36. Define and describe characteristics and list the advantages and disadvantages of each:
A. Sole Proprietorship(185-188) Owned & managed by a single individual
Advantages: easy start up, few regulations, keep all profit, full control, easy to stop
Disadvantages: Unlimited liability, limited access to resources, lack of permanence
B. Partnership(191-193) 2 or more persons divide responsibility & profit
Advantages: Easy start up, share decisions & can specialize, larger pool of capital, taxation
Disadvantages: Unlimited liability, potential conflict
C. Corporation(195-198) Legal entity owned by stockholders
Advantages: Limited liability and Flexibility for stockholders, Easy to raise capital, longevity & hire experts for Corp.
37. Which type of business organization has the greatest number of firms? (185) Sole proprietorship
38. What is the Circular Flow Model and what is the difference between the Product and Factor Markets?
(Know what firms & households provide and receive in each market, as well as the
government’s involvement.)
Fill in the chart below.(151-171)
Most
competitive
Type of Market
A. Pure Comp.
Structure
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Least Competitive
B. Monopolistic
Comp
C. Oligopoly
D. Monopoly