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Micro Economic

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No 3. What is inflation and what causes it?
= Inflation is an increase in the overall level of prices in the economy. Inflation happen because culprit is growth in the quantity o money when a government creates larges quantities of the nation’s money, the value of the money. No 5. Explain the two main causes of market failure and give an example of each!

= Externality, is the impact of one person’s action on the well being of a bystander
Example: pollution.
= Market power, is the ability of a single economic actor (or small group of acors) to have a substantial influence on market prices.
Example : if everyone in town needs water but there is only one well, the owner of the well is not subject to the rigorous competition with which the invisible hand normally keeps self interest in check.

2. Principles of economics-mankiew
CHAPTER 2 –question for review (38)
No. 1. Why do economists sometimes offer conflicting advice to policymakers?
= economist who advise policymakers offer conflicting advise either because of differences in scientific judgements or because of differences in values. At other times, economist are united in the advice they offer, but policymakers may choose to ignore it. No. 7. What are the subfields into which economics is divided? Explain what each subfield studies.

= microeconomics and macroeconomics.
Microeconomics is the study of how households and firms are make decisions and how they interact in makers.
Macroeconomics is the study of economi wide phenomena, including inflation, unemployment, and economic growth.

No 2. Give an example in which one person has an absolute advantage in doing something but another person has a comparative advantage.
= example of absolute advantage: in this case, time is the only input. So we can determine absolute advantage by looking at how much each type of production takes. The rancher has an absolute advantage both in producing meat and in producing potatoes because she requires less time than the farmer to produce a unit of either good. The rancher needs to input only 20 minutes to produce an ounce of meat, whereas the farmer needs 60 minutes. Similiarly, the rancher need only 10 minutes to produce an ounce of potatoes, whereas the farmer needs 15 minutes. Based on this information, we conclude that the rancher has the lower cost of producing potatoes, if we measure cost by the quantity of inputs.

=example of comparative advantage: the farmer has a lower opportunity cost of producing potatoes than the rancher. An ounce of potatoes cost the farmer only 14 ounce of meat, but it cost the rancher 12 ounce of meat. Conversely, the rancher has a lower opportunity cost of producing meat than the farmer: an ounce of meat costs the rancher 2 ounce of potatoes, but it cost the farmer 4 ounce of potatoes. Thus the farmer has a comparative advantage in growing potatoes, and the rancher has a comparative advantage in producing meat. No 4. Explain how absolute advantage and comparative advantage differ!

=the people who can produce good with the smaller quantity of inputs is said to have an absolute advantages in producing good. The person who has the smaller opportunity cost of producing the good is said to have a comparative advantage.

No. 6. Define the equilibrium of the market. Describe the forces that move a market toward its equilibrium
= Equilibrium is a situation in which the market price has reached the level at which quantity supplied equals quantity demanded. The behavior of buyers and sellers naturally drives markets toward their equilibrium. The activities of the many buyers and sellers automatically push the market price toward the equilibrium price. Once the market reaches its equilibrium, all buyers and sellers are satisfied, and there is no upward or downward pressure on the price. In most free markets, surpluses and shortages are only temporary because prices eventually move toward their equilibrium levels. No. 9. What is a competitive market? Briefly describe a type of market that is not perfectly competitive.

= competitive market is a market in which there are many buyers and many sellers so that each has a negligible impact on the market price. * Monopolistic competition = market characterized by numerous buyers and relatively numerous sellers trying to differentiate their product from those of competitors. * Oligopoly = market characterized by a handful of (generally large)sellers with the power to influence the prices of their products. * Monopoly = market in which there is only one producer that can therefor set the prices of its products 5. PRINCIPLES OF ECONOMICS-MANKIEW

No. 5. If the elasticity is grearter than 1, is demand elastic or inelastic? If the elasticity equals 0, is demand perfectly elastic or perfectly inelastic?
= If the elasticity is greater than 1, and demand is elastic.if the elasticity yequals 0, demand is perfectly inelastic No 9. List and explainthe four determinantsof the price elasticity of demand discussed in the chapter. * Availability of close substitutes

Goods with close substitutes tend to have more elastic demand because it is easier for consumer s to switch from that goods to others. * Necessities versus luxuries
Necessities tend to have inelastic demands, whereas luxuries have elastic demands. * Definition of the market
The elasticity of demand in any market depends on how we draw the boundaries of the market. * Time horizon
Goods tend to have more elastic demand over longer time horizons.

No. 2. What determines how the burden of the tax is divided between buyers and sellers? Why?
= tax incidence. Tax incidence is the manner in which the burden of the tax is shared among participants in a market. The term tax incidence refers to how the burden of the tax is distributed among the various people who make up the economy. As we will see, some surprising lessons about tax incidence can be learned by applying the tools of supply and demand. No. 7. Give an example of a price ceiling and an example of a price floor

= price ceiling is a legal maximum on the price of a good or service. An example is rent control. If the price ceiling is below the equilibrium price, the quantity demanded exceeds the quantity supplied. Because of the resulting shortage, sellers must in some way ration the good or service among buyers.

=a price floor is a legal minimum on the price of good or service. An example is the minimum wage. If the price floor is above the equilibrium price, the quantity supplied exceeds the quantity demanded. Because of the resulting surplus, buyer’s demands for the good or service must in some way in rationed among sellers.

No. 1. Name two types of market failure. Explain why each may cause market outcomes to be inefficient. 1. Market power. It can cauase markets to be inefficients because it keeps the price and quantity away from the equilibrium of supply and demand. 2. Externalities, cause welfare in a market to depend on more than just the vaue to the buyers and the cost to the sellers. Bacause buyers and sellers do not consider these side effects when deciding how much to consume and produce, the equilibrium in a market can be inefficient from the standpoint of society as a whole. No. 2. In a supply-and-demand diagram, show producer and consumer surplus in the market equilibrium.

No. 3. Draw a supply-and-deand diaram with a tax on the sale of the good. Show the deadweightloss. Show the tax revenue

No. 4. What happen to deadweight loss and tax revenue when a tax is increased?
= when the size of tax increase,it disorts incentives more, and its deadweight loss quickly gets larger.
But,firstly tax revenue rises with the size of the tax, as the tax get larger enough, the tax revenue starts to fall (after reach the maximum point)

No. 4. When does a country become an exporter of a good? An importer? = a low domestic price indicates that the country has a comparative advantage in producing the good and that the country will become an exporter. A high domestic price indicates that the rest of the world has a comparative advantages in producing the good and that the country will become an importer. No. 5. Describe what a tariff and its economics effect

= tariff is a tax on goods produced abbroad and sold domestically. The effects, the tariff reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade.

No. 1. Define economies of scale and explain why they might arise. = economies of scale, is the property whereby long-run average total cost falls as the quantity of output increases Economies of sclae often arise because higher production levels allow specialization among workers, which permits each worker to become better at a specific task. No. 4. What is marginal product, and what does it mean if it is diminishing?

=marginal product is the increase in output that arises from an additional unit of input.
Diminishing marginal product mean the property whereby the marginal product of an input declines as the quantity of the input increases.

No 1. A consumer has income of $3000. Wine cost $3 per glass, nd cheese cost $6 per pound. Draw the consumer’s budget constraint. What is the slope of this budget constraint? No. 2. Draw a consumer’s indifference cuvers for wine and cheee. Describe and explain four properties of these indifference curves.

Answer no. 2
Four properties of indifference curve:
1. Higher indifference curvves are preferred to lower ones. People usually prefer to consume more goods rather than less. 2. Indifference curves are downward sloping. The slope of indifference curve reflects the rate at which the consumer is willing to substitute one good for the other. In most cases, the consumer likes both goods. Therefore, if the quantity of one good is reduced, the quantity of the other good must increase for the consumer to be equally happy. For this reason, most indifference curves slope downward. 3. Indifference curves do not cross. The consumers always prefers more of both goods to less. 4. Indifference curves are bowed inward. The slope of indifference curves is the marginal rate of substitution-the rate of which the consumer is willing to trade off one good for the other. The marginal rate of substitution (MRS) usually depends on the amount of each good the consumer is currently consuming. In particular, because people are more willing to trade away goods that they have in abundance and less willing to trade away goods of which they have little, the indifference curves are bowed inward.

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