Download Name Date Period _____ Unit 2: Microeconomics Review Part 1

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Date ________________
Period _____
Unit 2: Microeconomics Review Part 1:
1.
What is Microeconomics?
The study of how individuals make decisions.
2.
What does scarcity really mean with respect to economics? (think deep)
Everything in the world is scarce. Scarcity does not just mean limited natural resources. It means that the Earth and
human beings are limited in all resources. Essentially, a resource is pretty much everything economically. Thus, the
human race is limited in information, technology, intelligence, and natural resources at some point. Everything on
Earth is limited. Our abilities as humans are limited. Technology is increasing exponentially but at some point it is
still considered scarce. Since all things are limited, scarcity illustrates the imperfections of human life. We are
imperfect people in an imperfect world. There is no perfect system to satisfy human wants because of the flaws of
mankind. Economics is the study of these imperfections. Economics is the study of how humans have structured
life. It is the study of choice. It is the study how humans allocate scarce resources with respect to insatiable wants.
Are some systems of economics better than others? This type of question is a matter of opinion. It is up to you
decide? Which system do you favor? Communism? Socialism? Capitalism?
3.
What does the intersection of the supply and demand curve really mean? In other words, what does it tell us about a
product’s price ---be detailed in your response and make sure to describe what both suppliers and demanders truly
want.
The intersection of the supply and demand curves describes where the market will set the price of a product with
no government intervention. Suppliers want high prices and consumers want low prices. The two wants work
themselves out naturally as a supply curve and a demand curve. The 2 curves naturally come to a meeting place
that we call the equilibrium. The equilibrium or intersection of the 2 curves illustrate where a product’s price will
naturally be set.
4.
What are the laws of demand and supply?
Law of Demand: Prices increase, quantity demanded decreases and vice versa
Law of Supply: Prices increase, quantity supplied increases and vice versa
5.
What usually happens to the price level of a good when more suppliers enter a market?
More suppliers naturally lower the price of a product. Supply curve shift to the right
6.
What would happen to the price of a good when the demand curve shifts to the right? Explain why this happens.
The price of a good will increase because when people have a strong demand for a product; the business selling
that product will realize they can raise their price and not hurt the quantity demanded for that product.
7.
Draw the supply and demand market for oil. What would happen to price and quantity if the United States
government decided to stop subsidizing oil producers?
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Date ________________
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If the gov’t stopped subsidizing oil producers, the supply curve would shift to the left. This would result in a price
increase for oil and quantity decrease. Be sure to draw the graph
8.
Draw the supply and demand market for In-n-Out Burger. What would happen to price and quantity if a newspaper
article highlighted that In-n-Out Burger had E. Coli in their beef.
The demand curve would shift to the left in this situation. The price of burgers would drop because nobody wants
to buy them and the quantity would also decrease. Be sure to draw the graph.
9.
Apple has announced that their new I-Phone 5 will go on sale in a few months. Draw the supply and demand curve for
the I-phone 4s during the present time and shift the demand curve relative to the I-Phone 5. Explain the economic
intuition.
The demand curve for the 4s would shift to the left. Thus, the price and quantity would both go down in the
present. Everyone will wait to buy the new I-phone 5 so Apple will lower the price of the 4s to sell as many as they
can while they still can. Be sure to draw the graph.
10. What is a market failure?
When the free market fails to meet society’s wants.
11. The free market (free-enterprise which naturally inches closer to capitalism) works; however, at times it doesn’t, what
are the 3 major market failures?
-Public Goods
-Monopolies
-Unequal Income Distribution
12. When saying something is a public good, it must meet 2 criteria, non-rivalrous and non-excludable.
Describe non-rivalrous: each person can benefit from it without diminishing anyone else’s enjoyment (National
Defense)
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Describe non-excludable: it is very difficult to prevent people from gaining access to the good (Building a Dam to
protect citizens from floods)
13. Who is a free rider?
Someone who over-consumes or over-harvests a public good because they have no incentive to take care of it 
they don’t own the good so why not use as much as I can at somebody else’s expense
14. What is the tragedy of the commons?
It’s the actual occurrence when free riders deplete or destroy a resource. An example would be when buffaloes
went extinct in Arizona. There was an abundance of buffaloes in the state; however, they were not owned by
anyone so hunters took advantage of them and killed them off for their own good.
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Date ________________
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15. What do we mean in economics by property rights?
Property rights are a human right. Property rights refer to the right to own resources. Humans have the right to
own things. The idea can be complicated because it is about limiting the government but also having a strong
government at the same time. The government should not own everything. People should have the right to own
their own business, land, house, and other goods. However, the government must be strong enough to let people
own these things. People should have the right to have legal titles to their cars and businesses. The government
must enforce laws to protect property rights but at the same time limit itself to not take away from people’s
property rights. The wealthiest nations in the world have property rights. When you own your house you will take
care of your house. When you own your own business you will expand that business. Property rights refer to the
right to own resources while the government does not take over the ownership but enforces that ownership. Most
poor nations cannot come up with the proper property rights system and are hurting economically because of it.
16. What are negative externalities? How does the government try to combat negative externalities?
Negative Externalities refer to unintended consequences that harm a third party. For example, pollution is a
negative externality. You may not be a part of the power plant company that pollutes the air but you still have to
breathe the same air as everyone else. The government tries to limit negative externalities by increasing taxes on
those producers. For example, the government taxes tobacco companies at higher percentages.
17. What are positive externalities? How does the government try to promote positive externalities?
Positive externalities refer to unintended consequences that benefit third parties. For example, the government
subsidizes farmers. They do this to increase incentives for farmers to produce more food. When the supply
increases, then prices stay low. I’m not a farmer but I still benefit from the subsidies that the government
implements because I’m able to buy cheaper food at the grocery store.
18. Pollution is a problem that the government must take into account because private enterprise ignores it for the most
part. One way to decrease pollution is for companies to endorse a system of “Individual Tradable Quotas.” How
would a tradable pollution permit work?
The government would find the optimal amount of pollution that they want permitted for a given year. Let’s say
you had 2 companies: Company A and Company B. Let’s say each company was limited to only producing 30 units
of pollution. Let’s say company A is doing really well financially and only produces 10 units of pollution. However,
company B is struggling to make money and needs to generate more pollution to make some money. Company B
has already produced there maximum 30 units of pollution but if they don’t produce more pollution then they
won’t make any money making their product. Company B will buy the remaining 20 units of pollution from
Company A so they can make more pollution and produce more of their product. In the long run, all parties benefit.
Company A makes extra money from company B. Company B is able to make more money and stay in business.
Mankind benefits because both companies altogether did not produce over 60 units of pollution, which was the
limit.