Chapters 1-4: Exam 1

If demand is elastic

- A price increase will reduce total expenditure - Price reduction will increase total expenditure

What does microeconomics consider?

-cost of production -demand -exchange rates

What factors change demand

-desire -income -prices of related goods/substitutes -expectations of future prices -number of consumers in the market

What is the Cost-Benefit Principle?

-if costs of an action increase, the action is less likely. -if benefits of an action increase, the action is more likely

What does macroeconomics consider?

-monetary policy -deficits -tax

What affects the change of choices in over time?

-more resources -improvements in technology -increased knowledge

What are some sources of comparative advantage?

-talent -natural resources -culture and societal norms

If a society is on its production possibilities frontier, and decides to produce more health care, a. the cost of producing an additional unit of health care will rise b. it must employ some previously unemployed resources c. its standard of living will rise d. some kind of inefficiency will occur e. the cost of producing an additional unit of some other good will rise

A

If the demand for new automobiles falls when income falls, automobiles are said to be normal goods. a. True b. False

A

The law of demand says that as the price of a good rises, the quantity demanded of the good tends to fall. a. True b. False

A

The opportunity cost of any activity can be measured by the a. value of the best alternative to that activity b. price (or monetary costs) of the activity c. level of technology d. time needed to select among various alternatives e. fringe benefits associated with the activity

A

If demand is inelastic

A price increase will increase total expenditure, a price reduction will reduce total expenditure

Define demand

A relationship between quantity demanded (Qd) of goods and the market price (P) buyers are willing to pay

What is an economic model?

Abstract representation of key relationships

Combinations of goods on the production possibilities curve a. are unattainable without additional resources b. can be produced using currently available resources and technology c. reflect minimum normative value allocations d. will meet society's needs but not its wants e. are attainable only through international trade

B

The system of resource allocation in the United States is a a. pure market system b. market system with elements of tradition and command c. market system with elements of tradition, but not command d. traditional system with elements of market, but not command e. pure tradition system

B

When individuals come together to buy and sell goods and services, they form a(n) a. economy b. market c. production possibilities frontier d. supply curve e. demand curve

B

What is the income effect?

Buyers overall purchasing power goes down

What is the substitution effect?

Buyers switch to substitutes when price goes up

An increase in the number of buyers in the market causes a. a decrease in equilibrium quantity b. a decrease in equilibrium price c. an increase in demand d. a decrease in production e. an increase in supply

C

Assume that U.S. agricultural land is used either to raise cattle for beef or to grow wheat. Figure 2-3 represents the production possibility frontier for beef and wheat. Between points F and G, the opportunity cost of one bushel of wheat equals a. 0.25 million pounds of beef b. 1.75 million pounds of beef c. 0.125 pounds of beef d. 8.0 pounds of beef e. 0.5 pounds of beef

C

Economics is the study of choice under conditions of a. demand b. supply c. scarcity d. opportunity e. abundance

C

Figure 3-4, the equilibrium price is a. $5 b. $4 c. $3 d. $1 e. $0

C

High-income people will sometimes pay higher prices at convenience stores for goods that are available at discount stores. They do this because a. they are irrational b. their opportunity cost of time is low c. crowded and understaffed discount stores impose higher time costs d. they like to be seen paying more money e. they do not mind wasting time

C

In a perfectly competitive market, a. there can be few or many buyers and sellers b. the price is driven upward when suppliers hold back on goods and services c. each participant is too small to affect the market price d. government intervention is needed to ensure that prices are fair for consumers e. resources are allocated by a central authority

C

The concave shape of the production possibilities frontier reflects a. the law of comparative advantage b. the law of absolute advantage c. the law of increasing opportunity cost d. the simplifying assumption of scarce resources e. productive inefficiency

C

What have negative cross-price elasticity?

Complements

A professional basketball players' union negotiates a contract that dramatically increases all players' salaries. How would this influence the opportunity cost for a player who was considering giving up basketball to pursue a career in broadcasting? a. It would not affect the opportunity cost of playing basketball or of broadcasting. b. It would increase the opportunity cost of continuing to play professional basketball. c. It would cause the production possibilities frontier to become convex. d. It would increase the opportunity cost of becoming a broadcaster. e. It should have no bearing on the player's decision from an economic standpoint.

D

A shift in the production possibilities frontier from DC to EC in Figure 2-7 could be due to a a. technological improvement in the production of ice cream b. reduction in the rate of unemployment c. rise in the rate of unemployment d. technological improvement in the production of frozen yogurt e. fall in the demand for frozen yogurt

D

Due to a scarcity of resources, a. every society must undertake central planning b. the government must decide how to allocate available resources c. some members of each society must live in poverty d. every society must choose among competing uses of available resources e. resource availability exceeds the possible uses for available resources

D

Each point along the market demand curve shows a. the quantity of the good that firms would be willing and able to supply at a specific price b. the relationship between the price of the good and total quantity demanded at a series of prices c. the opportunity cost of supplying a given quantity of goods to the market d. the quantity of the good that consumers would be willing and able to purchase at a specific price e. how population changes affect the quantity demanded at a specific price

D

In a market economy, most of what we consume is obtained by a. a command system b. greed c. altruism d. exchange e. central planning

D

Molly needs 30 minutes to wash the car and 45 minutes to mow the lawn. Renee needs 1 hour to wash the car and 2 hours to mow the lawn. Which of the following statements is correct? a. Molly should specialize in both tasks. b. Renee should specialize in both tasks. c. Each woman should specialize in the task in which she has the absolute advantage. d. Absolute advantage is not an appropriate guide for determining specialization. e. Neither woman should specialize.

D

hich of the following could explain a movement from point F to point G in Figure 3-2? Assume that the good represented is an inferior good. a. all of the following are correct b. an increase in buyers' incomes c. a decrease in the expected future price of the good d. an increase in the price of the good e. an increase in the price of a complement

D

Which production possibilities frontier(s) in Figure 2-5 depict(s) a situation in which all resources are perfect substitutes in production? a. both C and E b. both D and E c. C d. D e. E

D A straight line

Define central planning

Decisions made by individuals or small groups Sets prices and goals for the group

Carl is considering attending a concert with a ticket price of $35. He estimates that the cost of driving to the concert and parking there will total an additional $20. In order to attend the concert, Carl will have to take time off from his part-time job. He estimates that he will lose 5 hours at work, at a wage of $6 per hour. Carl's opportunity cost of attending the concert equals a. $35 b. $55 c. $30 d. $65 e. $85

E

In examining consumer behavior, one of the constraints faced by consumers is a. utility b. quantities consumed c. tastes and preferences d. entrepreneurial ability e. income

E

Sven has a comparative advantage over Alice in cooking but not in doing the laundry. Which of the following must be true? a. Sven must have an absolute advantage in both cooking and doing the laundry. b. Sven has a lower opportunity cost in doing the laundry. c. Sven has an absolute advantage in doing the laundry. d. Alice must have an absolute advantage in cooking. e. Sven must have a lower opportunity cost than Alice for cooking.

E

The amount of a commodity that buyers in the market would like to purchase at a particular price is a. equilibrium b. quantity supplied c. quantity produced d. infinite e. quantity demanded

E

The money we pay for a good or service a. generally exceeds its opportunity cost b. generally equals its opportunity cost c. has no part in determining its opportunity cost d. generally equals two-thirds of its opportunity cost e. generally is only part of its opportunity cost

E

The principle of specialization and exchange implies that a. total production is highest when individuals specialize according to their absolute advantages b. productive inefficiency increases as producers in society specialize c. exchange can only occur when there is specialization in the economy d. gains from specialization will only occur when society is operating at a point along its production possibilities frontier e. total production is highest when individuals specialize according to their comparative advantages

E

Which of the following is a characteristic of entrepreneurship? a. the ability to navigate bodies of water b. it is produced using physical capital c. it is used up quickly in the production process d. it is a pre-existing "gift of nature" e. it is associated with risk taking and innovation

E

What is the Principle of Comparative Advantage?

Everyone does best when each party concentrates on the activities for which their opportunity cost is the lowest

Describe the change in demand.

If income increases, the curve shifts to the right, and if income decreases, it shifts to the left

What is the Production Possibilities Curve? (PPC)

Illustrates the combinations of two goods that can be produced with given resources

What is the Incentive Principle?

Incentives are central to people's choices

Time*

Long run, more elastic*

Price elasticity of supply

Percent change in quantity supplied from a 1% change in price

Define outsourcing

Service work performed overseas by low wage workers

What 2 topics increase the total value of output?

Specialization and trade

What does the cost benefit principle mean?

Take action if the extra benefits are at least as great as the extra costs

What does the market consist of?

The buyers and sellers

What is the market

The goods and services on the same market must share certain common characteristics Buyers and sellers signal wants and costs

What is the buyer's reservation price?

The highest price an individual is willing to pay for a good

Define supply

The quantity of something that producers have available for sale at certain market prices over a period of time

What does market price balance?

The value buyers derive from the good and the cost to produce it

What is a demand curve?

a curve that shows the relationship between the price of a product and the quantity of the product demanded Negative slope Reflects the entire market

What is price elasticity of demand?

a measure of the responsiveness of quantity demanded to a change in price the percentage change in quantity demanded from a 1% change in price

produce substitute inputs

alternative inputs easy to find, more elastic

price ceiling often creates a. a surplus b. a shortage c. artificial abundance of the good d. additional incentive to produce the good

b

Suppose a 10% increase in the price of coffee causes the quantity demanded to fall 20%; the price elasticity of demand for coffee is a. -0.5 b. 10 c. -2 d. 200%

c

Demand is elastic when?

elasticity is greater than 1 percentage change in quantity is greater than percentage change in price demand is responsive to price

What makes an economic surplus?

equal to its benefits minus the costs. Surplus = Total Benefits-Total Costs

what is the opportunity cost formula?

explicit costs + implicit costs

define pitfall #3

failure to think at the margin sunk costs cannot be recovered

Demand is unit elastic when

if price elasticity is 1 the percentage change in price and quantity demanded are the same

define pitfall #2

ignoring implicit costs - consider your alternatives

Perfectly elastic demand

infinite price elasticity of demand horizontal line

Perfectly Elastic Supply

infinite price elasticity of supply sell all you can at a fixed price Horizontal line

Budget share

large share, more elastic

Time

long time to adjust, more elastic

define Pitfall #1

measuring cost and benefits as proportions instead of absolute amounts

Substitution options

more options, more elastic

What elasticity is an inferior good?

negative income elasticity

When should you do a job yourself instead of hiring someone else?

only when the opportunity cost is less than the hired cost

What elasticity is a normal good?

positive income elasticity

What is positive economics?

predicts how people will actually behave

Why is the price elasticity of demand almost always a negative number?

price changes are always in the opposite direction from changes in quantity demanded

Price elasticity pattern

price elasticity changes systematically as price goes down - High P, Low Q = elastic - Midpoint = unit elastic - Low P, High Q = inelastic

Demand is inelastic when

price elasticity is less than 1 percentage change in quantity is less than percentage change in price qanitity demanded is not very responsive to price

Mobility of inputs

resources move where needed, more elastic

What defines Normative economics?

says how people SHOULD behave

Define microeconomics.

studies choice and its implications for price and quantity in individual markets

Define macroeconomics.

studies the performance of natural economics and the policies that governments use to try to improve that performance

What has positive cross price elasticity?

substitutes

income elasticity of demand

the percentage change in quantity demanded from a 1% change in income

cross-price elasticity of demand

the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good

What is the sellers reservation price?

the smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost

Define Economics

the study of how people makes choices under scarcity and the results of these choices for society

Define Opportunity Cost

the value of what must be foregone in order to undertake an activity

total expenditure =

total revenue

input flexibility

uses adaptable inputs, more elastic

Define the Scarcity Principle

we have endless wants but limited resources. Having more of one thing usually means having less of another

What makes specialization easier?

when the population, markets and government support it (slide 28)

what is absolute advantage?

when you can perform a task in fewer hours compared to someone else

What is comparative advantage?

when your opportunity cost is lower than someone elses

What else does comparative advantage consider?

your skill at a task compared to your skill at other tasks

perfectly inelastic demand

zero price elasticity of demand vertical line

Perfectly inelastic supply

zero price elasticity of supply No response to change in price Vertical Line