ECON 102 Chapter 1 (Economics: Foundations and Models)

When the federal government crafts environmental policies that make it less expensive for firms to follow green​ initiatives,

the policies are consistent with economic incentives.

Three Key Economic Ideas:

1. People are rational. 2. People respond to economic incentives. 3. Optimal decisions are made at the margin.

Economic growth

The ability of an economy to produce increasing quantities of goods and services.

Equity

The fair distribution of economic benefits.

Centrally planned economy

An economy in which the government decides how economic resources will be allocated.

Imports

Goods and services bought domestically but produced in other countries.

Which of the following statements about microeconomics is correct?

Microeconomics involves the study of how households and firms make choices.

Which of the following statements about normative analysis is correct?

Normative analysis is concerned with what ought to be.

Today, which of the following countries has a centrally planned economy?

North Korea

When does productive efficiency occur?

Productive efficiency occurs when a good or service is produced at the lowest possible cost.

Indicate whether each of the following is primarily a microeconomic issue or a macroeconomic issue. a. The effect of higher cigarette taxes on the quantity of cigarettes sold. b. The effect of higher income taxes on the total amount of consumer spending. c. The reasons for the economies of East Asian countries growing faster than the economies of sub-Saharan African countries. d. The reasons for low rates of profit in the airline industry.

a. Microeconomic issue b. Macroeconomic issue c. Macroeconomic issue d. Microeconomic issue

Macroeconomics is the study of

the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Economists believe that an activity should be continued up to the point where

the marginal benefit from the activity is equal to the marginal cost.

Examples of microeconomic issues

- How consumers react to changes in product prices. - How firms decide what prices to charge for the products they sell. - Which government policy would most efficiently reduce obesity. - The costs and benefits of approving the sale of a new prescription drug. - The most efficient way to reduce air pollution.

People Are Rational:

- This assumption does not mean that economists believe everyone knows everything or always make the "best" decision. - It means that economists assume that consumers and firms use all available information as they act to achieve their goals. - They weigh the benefits and costs of each action, and they choose an action only if the benefits outweigh the costs.

Examples of macroeconomic issues

- Why economies experience periods of recession and increasing unemployment. - Why, over the long run, some economies have grown much faster than others. - What determines the inflation rate. - What determines the value of the U.S. dollar. - Whether government intervention can reduce the severity of recessions.

Many universities and corporations offer a health wellness program that helps their employees improve or maintain their health and get paid (a relatively small amount) for doing so. The programs vary, but typically consist of employees completing a health assessment, receiving a healthy living program, and monitoring their monthly health activities. Corporations and universities are willing to pay employees to take care to themselves because a healthier workforce

- performs more efficiently, thereby improving overall productivity in the workplace. - translates into lower costs, in part by reducing illness-related absenteeism and premature retirements. - A and B only.

Societies organize their economies in two main ways to answer the three questions of​ what, how, and who.

1. In a centrally planned economy 2. In a market economy

Market economies tend to be more efficient than centrally planned economies. There are two types of efficiency:

1. Productive efficiency 2. Allocative efficiency

Trade-offs force society to make choices when answering the following three fundamental questions:

1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will receive the goods and services produced?

A market

A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

Which of the following statements about a hypothesis is correct?

A hypothesis is a statement that could in principle turn out to be incorrect.

Economic model

A simplified version of reality used to analyze real-world economic situations. Ex. An engineer may use a computer model for a bridge to help test whether it will withstand high winds. Ex. A biologist may make a physical model of a nucleic acid to better understand its properties. Ex. An economist uses the model of demand and supply, a simplified version of how the prices of products are determined by the interactions among buyers and sellers in markets.

Voluntary exchange

A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction.

Allocative efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.

When does allocative efficiency occur?

Allocative efficiency occurs when production is in accordance with consumer preferences.

Which of the following statements about economic variable is correct?

An economic variable is something measurable that can have different values.

Normative analysis

Analysis concerned with what ought to be.

Marginal analysis

Analysis that involves comparing marginal benefits and marginal costs.

Why are models based on assumptions?

Because models have to be simplified to be useful.

In a market system, how does society decide what goods and services will be produced?

Consumers, firms, and the government determine what goods and services will be produced by the choices they make.

Which of the following statements about economics as a social science is correct?

Economics studies the actions of individuals.

Why might studying economics be particularly good preparation for being the top manager of a corporation or a leader in​ government?

Economics teaches us how to look at the tradeoffs involved in every decision.

Economists assume that the only reason people take the actions they do is in response to economic incentives.

False

In a market system, what determines how goods and services will be produced?

Firms determine how goods and services will be produced.

Which of the following is a correct statement about a mixed economy?

In a mixed economy, most economic decisions are made in markets but the government plays a significant role in the allocation of resources.

Suppose Apple is currently selling 2,000,000 iPods per year. However, managers at Apple are considering whether to increase production by 200,000 iPods. One manager explains that after increasing production by this amount, total profit would be $100 million. Given this information, should Apple increase production by 200,000 iPods?

Information about the additional revenue earned and the additional cost incurred from producing 200,000 additional iPods is required to answer this question.

Which of the following areas of economics studies issues such as whether government intervention is capable of reducing the severity of recessions?

Macroeconomics

Which of the following statements about macroeconomics is correct?

Macroeconomics is the study of the economy as a whole.

Which of the following statements about positive analysis is correct?

Positive analysis is concerned with what is.

Economic variable

Something measurable that can have different values, such as the incomes of doctors.

Opportunity cost

The highest-valued alternative that must be given up to engage in an activity.

Which of the following statements about the idea that people are rational is correct?

The idea assumes that consumers and firms use all available information as they act to achieve their goals.

Trade-off

The idea that, because of scarcity, producing more of one good or service means producing less of another good or service.

Microeconomics

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Economics

The study of the choices people make to attain their goals, given their scarce resources.

Macroeconomics

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Which of the following best describes scarcity?

Unlimited wants exceed the limited resources available.

The three economic questions that every society must answer are

What goods will be​ produced, how will they be​ produced, and who will receive the​ goods?

In a market system, how does society decide who will receive the goods and services produced?

Who receives the goods and services produced depends largely on how income is distributed.

Productive efficiency means that

a good or service is produced at the lowest possible cost.

Alberto Chong of Georgia State University and several colleagues conducted an experiment to test the efficiency of government postal services around the world. They mailed letters to nonexistent businesses in 159 countries and kept track of how many of the letters were returned. Was this test most relevant to evaluating the productive efficiency or the allocative efficiency of these postal​ services? This test that Albert Chong and his colleagues carried out was most relevant for evaluating the

allocative efficiency of these postal services because the test was designed to measure how often and how quickly the letters sent were returned.

A market is a group of __________________________ of a good or service and the institution or arrangement by which they come together to trade.

buyers and sellers

A news story on declining attendance at college football games noted that schools in the central time zone had particular problems with attendance at games that started at 11 a.m. The athletic director at the University of Illinois was quoted as saying, "I'm a big fan of evening games." Playing games in the late afternoon or evening, rather than in the morning, would

change the opportunity cost for students whose alternative activities vary throughout the day.

Scarcity is central to the study of economics because it implies that

every choice involves an opportunity cost.

Allocative efficiency means that

every good or service is produced up to the point where marginal benefit is equal to marginal cost.

What do economists mean by the word "marginal"?

extra or additional

Centrally planned economies allocate resources based on decisions by _________________, while market economies answer these questions through decisions made by _______________________.

government, households and firms

Microeconomics is the study of

how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Scarcity implies that every society and every individual face​ trade-offs because scarcity means that

human wants are greater than what available resources can produce.

The level of total investment by firms in new machinery and equipment helps to determine how rapidly the economy grows. This is a ____________________ issue. However, to understand how much new machinery and equipment firms decide to purchase, one must analyze the incentive individual firms face, which is a _______________________ issue.

macroeconomic, microeconomic

The Food and Drug Administration (FDA) is part of federal government's Department of Health and Human Services. Among its other functions, the FDA evaluates the safety and effectiveness of drugs and medical devices. FDA approval had to be granted before OraSure was allowed to market its home HIV test. In a centrally planned economy, the government decides how resources will be allocated. In a market economy, the decisions of households and firms interacting in markets allocate resources. The regulation of the production and sale of drugs and medical devices in the United States is an example of how resources are allocated in a

market economy because the drug development, and the resources allocated to the development, occurs in the market.

Efficiency means that goods are distributed in a way that ___________________________, while equity means that goods are distributed in a way that __________________________.

maximizes benefits to society, is fair

A firm operating in a market economy has a strong incentive to be productively efficient and allocatively efficient because the former enables it to ______________________ while the latter ensures it of _____________________. If a firm is productively and allocatively efficient, it earns __________________; if it is not, it ____________________.

minimize production costs, ample revenue a profit, suffers a loss

The incentive of employees to improve or maintain their health once they obtain health insurance may be _______________ impacted. When an employer offers a wellness program to its employees, the health insurance premiums the employer pays on behalf of the employees are likely to _______________.

negatively; decrease

When economists develop models designed to explain the choices people make, they generally assume that

people are rational.

Under the Affordable Care Act, low-income people receive subsidies to help them pay for health insurance. These subsidies decline as income increases, which may result in some low-income workers supplying fewer hours to keep their income from increasing and their subsidies from declining. This outcome is an example of which key economic idea?

people respond to economic incentives

Economists assume that people are rational in the sense that

they use all available information as they take actions intended to achieve their goals.

People Respond to Economic Incentives:

- Human beings act from a variety of motives, including envy, compassion, and religious belief. - While not ignoring other motives, economists emphasize that consumers and firms consistently respond to economic incentives. - Ex. It is less costly to put with bank robberies than to take additional security measures/FBI agents are surprised.

Productive efficiency

A situation in which a good or service is produced at the lowest possible cost.

Positive analysis

Analysis concerned with what is. Ex. Economics is about this analysis, which measures the costs and benefits of different courses of action.

Economics assumes people and firms:

are rational, respond to incentives, and make decisions by comparing marginal benefits with marginal costs.

Optimal Decisions Are Made at the Margin:

- Some decisions are "all or nothing." - Economists use the word marginal to mean "extra" or "additional." - Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost - that is, to the point where MB = MC.

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Mixed economy

An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources. Ex. United States, Canada, Japan, and Western Europe

Market economy

An economy in which the decisions of households and firms interacting in markets allocate economic resources.

According to the FBI Bank Crime​ Statistics, there were nearly​ 4,000 bank robberies in the United States in 2014. The FBI claims that banks have made themselves easy targets by refusing to install clear acrylic​ partitions, called bandit barriers​, that separate bank tellers from the public. According to a special agent with the​ FBI, ​"Bandit barriers are a great deterrent.​ We've talked to guys who rob​ banks, and as soon as they see a bandit​ barrier, they go find another​ bank." ​ Despite this​ finding, many banks have been reluctant to install these barriers.​ Wouldn't banks have a strong incentive to install bandit barriers to deter​ robberies? Why,​ then, do so many banks not do​ so?

Banks have no economic incentive to install the barriers.

Which of the following areas of economic studies issues such as ways to reduce teenage smoking?

Microeconomics

A primary difference between macroeconomic and microeconomic is

Microeconomics examines individual market while macroeconomics examines the economy as a whole.

Indicate which of the following statements represent positive analysis and which represent normative analysis. a. A 50-cent-per-pack tax on cigarettes will reduce smoking by teenagers by 12 percent. b. The federal government should spend more on AIDS research. c. Rising paper prices will increase textbook prices. d. The price of coffee at Starbucks is too high.

a. Positive analysis b. Normative analysis c. Positive analysis d. Normative analysis

a. Is it necessary for all economic systems to limit services such as health care? b. A market system prevents people from getting as many goods and services as they want due to which of the following?

a. Yes b. Their income.

According to Forbes magazine, in 2017 Bill Gates was the world's richest person with wealth of $86 billion. a. Does Bill Gates face scarcity? b. Which of the following statements is true?

a. Yes, because even though billionaires' financial resources enable them to afford a much greater array of goods and services than those less wealthy, their financial resources are not infinite. b. All individuals face a scarcity of time and need to make choices how to allocate it.

McDonald's typically serves breakfast until only 10:30 a.m. on weekdays and 11:00 a.m. on weekends. In 2015, the company began to experiment with serving breakfast all day at various locations in San Diego. Several owners of McDonald's restaurants, however, point out that offering breakfast 24 hours a day presents two logistical problems: (1) Burgers and other meats need to be cooked at a higher temperature than eggs, so it would be difficult for employees to set the grill at the right temperature for both foods; and (2) scrambled eggs require employees to continually stir, while hamburgers don't require this attention. In addition, some customers might buy the cheaper breakfast than the more expensive lunch or dinner meals. a. From an economics perspective, to determine whether to serve breakfast all day, McDonald's should b. Would McDonald's decision have to be all or nothing - either serve breakfast only up to 10:30 A.M. or serve breakfast all day?

a. compare the marginal revenue from serving breakfast all day with the marginal cost of serving breakfast all day. b. No. McDonald's could evaluate serving items from the breakfast menu that could be cooked in better coordination with the dinner menu for a period after 10:30 A.M.

Relative to a market economy, a centrally-planned economy would be expected to be

better at neither productive efficiency nor allocative efficiency because the absence of market-imposed competition negates the need of firms to satisfy consumer wants or produce using the lowest-cost methods.

How are economic resources allocated in a market economy?

by the decisions of households and firms interacting in markets