Econ Ch1-4 review
Why does demand not change when the price of a good changes with no change in the other influences on buying plans?
If the price of a good falls and nothing else changes, then the quantity of the good demanded increases and there is a movement down along the demand curve, but the demand for the good remains unchanged and the demand curve does not shift.
Why do people specialize and trade?
People can compare consumption possibilities from producing all goods and services through self-sufficiency against specializing in producing only those goods and services that reflect their comparative advantage and trading their output with others who do the same.
Explain why choices respond to incentives a
People making rational decisions compare the marginal benefits of different actions to their marginal costs. Therefore people's choices change when their incentives, that is the marginal benefit and/or marginal cost, of the choice changes
What is allocative efficiency and how does it relate to the production possibilities frontier?
Production efficiency occurs when production takes place at a point on the PPF. Allocative efficiency is when marginal benefit equals the marginal cost.
Distinguish between comparative advantage and absolute advantage
comparative adv: lowest opp cost absolute adv: who has more initially of a good or service/highest productivity
The Russian government spent $6.7 billion on Olympic facilities and $16.7 billion upgrading Sochi area infrastructure. Sponsors spent $27.6 billion on hotels and facilities hoping to turn Sochi into a year-round tourist magnet. Was the opportunity cost of the Sochi Olympics $6.7, $23.4, or $51 billion? Explain your answer.
$6.7 billion if the 16.7 and 27.6 were already planned to be used then they are not an opp cost
What is the source of the gains from trade?
As long as people have different opportunity costs of producing goods or services, total output is higher with specialization and trade than if each individual produced goods and services under self-sufficiency.
How does the marginal benefit from a good change as the quantity produced of that good increases?
As the more of a good is consumed, the marginal benefit received from each unit is smaller than the marginal benefit received
Explain what it means to choose at the margin and illustrate with three choices at the margin
Choosing at the margin means choosing to do a little more or a little less of some activity
What are the flows in the market economy that go from firms to households and the flows from households to firms?
goods and services flow from firms to households. payments for factors of production, wages, rent, interest, and profits, flow from firms to households. Flowing from households to firms on the monetary side of the economy are the expenditures on goods and services and on the real side are the factors of production, labor, land, capital, and entrepreneurship.
What happens to the quantity of cell phones supplied and the supply of cell phones if the price of a cell phone falls?
if the price of a cell phone falls the quantity supplied will decrease and the supply is unchanged
List all the influences on selling plans
number of sellers, price of related goods, expected selling prices, tech changes, state of nature
List all the influences on buying plans that change demand, and for each influence
price of related goods, number of buyers, income, expected price, and tastes/preferences
What is the total revenue test?
price*quantity -price cut and elastic: tr increases -price cut and inelastic: tr decreases -price cut and unit elastic: tr unchanged
In April 2014, the money price of a carton of milk was $2.01 and the money price of gallon of gasoline was $3.63. Calculate the relative price of a gallon of gasoline in terms of milk.
relative price=opportunity cost 3.63/2.01=1.81 gallons of gas per carton of milk
What conditions must be satisfied if resources are used efficiently?
resources are used efficiently when more of one good or service cannot be produced without producing less of some of another good or service that is valued more highly
Over what range of prices does a shortage arise? What happens to the price when there is a shortage?
shortage=supply<demand and price increases
Over what range of prices does a surplus arise? What happens to the price when there is a surplus?
surplus=supply>demand and price decreases
How does the production possibilities frontier illustrate scarcity?
the unattainable combinations of production that lie beyond the PPF illustrate the concept of scarcity
Why are social institutions such as firms, markets, property rights, and money necessary?
they coordinate economic production -firms allow specializing -markets are where people engage in business -money as payment -property rights to ensure liability
What are the main functions of markets?
to enable buyers and sellers to get information and to do business with each other.
Define the price elasticity of demand and show how it is calculated.
units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. = | %change in Qdemand |/| %change in Qprice |
What is the equilibrium price of a good or service?
when quantity supplied equals the quantity demanded
What makes the demand for some goods elastic and the demand for other goods inelastic?
-closeness of substitues: closer=more elastic -time since price change: longer=more elastic -proportion of income spent: more spent=more elastic
What is a model
A model is a description of some aspect of the economic world. It includes only those features that are necessary to understand the issue under study. An economic model is designed to reflect those aspects of the world that are relevant to the user of the model and ignore the aspects that are irrelevant.
What gives a person a comparative advantage?
A person has a comparative advantage in an activity if that person can perform the activity at a lower opportunity cost than anyone else, If the person gives up the least amount of other goods and services to produce a particular good or service, the person has the lowest opportunity cost of producing that good or service.
Distinguish between a positive statement and a normative statement
A positive statement is a description of how the world is. It is testable. A normative statement is a description of how the world ought to be. It is, by its very nature, not testable because there is no universally approved criterion by which the statement can be judged
rational choice
A rational choice is one that compares the costs and benefits of the different actions and then chooses the action that has the greatest benefit over cost for the person making the choice.
tradeoff
A tradeoff reflects the point that when someone gets one thing, something else must be given up. What is given up is the opportunity cost of whatever is obtained.
why is the demand for a luxury generally more elastic (or less inelastic) than the demand for a necessity?
Demand for a necessity is generally less elastic than demand for a luxury because there are fewer substitutes for a necessity
Why does the PPF bow outward and what does that imply about the relationship between opportunity cost and the quantity produced?
Different variations of production factors and resourcecs
How do economists try to disentangle cause and effect?
Economists use models to understand some aspect of the economic world. Testing the predictions of models makes it necessary to disentangle cause and effect. To overcome this problem, economists have three methods of testing their models: natural experiments, statistical investigation, and economic experiments
What does the demand curve tell us about the price that consumers are willing to pay?
For any fixed quantity of a good available, the vertical distance of the demand curve from the x-axis shows the maximum price that consumers are willing to pay for that quantity of the good
What does the supply curve tell us about the producer's minimum supply price?
For any quantity, the vertical distance between the supply curve and the x-axis shows the minimum price that suppliers must receive to produce that quantity of output.
What are the gains from specialization and trade?
From society's standpoint, the total output of goods and services available for consumption is greater with specialization and trade. From an individual's perspective, each person who specializes enjoys being able to consume a larger bundle of goods and services after trading with others who have also specialized, than would otherwise be possible under self-sufficiency.
How is economics used as a policy tool?
Individuals use the economic ideas of marginal benefit and marginal cost when making decisions
Avital and Joshua each have their own business selling lemonade in front of their houses. When they each charge 25 cents per glass, their total revenues are equal. However, when they each charge 40 cents per glass, Avital's revenues are bigger than Joshua's revenues. This is because:
Joshua faces a more elastic demand curve over this range of prices
What is marginal cost? How is it measured?
Marginal cost is the opportunity cost of producing one more unit of a good or service. Along a PPF marginal cost is reflected in the absolute value of the slope of the PPF.
How does the production possibilities frontier show that every choice involves a tradeoff?
Movements along the PPF frontier illustrate that producing more of one good requires producing less of other good. This observation reflects the result that a tradeoff must be made when producing output efficiently.
How does the production possibilities frontier illustrate production efficiency?
The combinations of outputs that lie on the PPF illustrate the concept of production efficiency. These points are the maximum production points possible and are attained only by producing the goods and services at the lowest possible cost.
What is marginal benefit? How is it measured?
The marginal benefit from a good or service is the benefit received from consuming one more unit of it. It is measured by what an individual is willing to give up (or pay) for an additional that last unit.
What is the distinction between a money price and a relative price?
The money price of a good is the dollar amount that must be paid for it. The relative price of a good is its money price expressed as a ratio to the money price of another good. Thus the relative price is the amount of the other good that must be foregone to purchase a unit of the first good (opp cost).
How does the production possibilities frontier illustrate opportunity cost?
The negative slope of the production possibility curve illustrates the concept of opportunity cost. Moving along the production possibility frontier, producing additional units of a good requires that the output of another good must fall. This sacrifice is the opportunity cost of producing more of the first good.
Why is opportunity cost a ratio?
The slope of the PPF is a ratio that expresses the quantity of lost production of the good on the y-axis to the increase in the production of the good on the x-axis moving downward along the PPF. The steeper the slope, the greater ratio, and the greater is the opportunity cost of increasing the output of the good measured on the horizontal axis.
Why do we need a units-free measure of the responsiveness of the quantity demanded of a good or service to a change in its price?
The value of the elasticity is independent of the units used to measure the price and quantity of the product. As a result, the elasticity can be compared across the same good when quantity is measured in different units and/or the price is measured in different currencies. The elasticities of different goods also can be compared even though they are measured in different units.
Explain why opportunity cost is the best forgone alternative
When a decision to undertake one activity is made, often many alternative activities are no longer possible. Often these activities are mutually exclusive so only the highest valued alternative is actually forgone.
In one hour, Sue can produce 40 caps or 4 jackets and Tessa can produce 80 caps or 4 jackets. a. Calculate Sue's opportunity cost of producing a cap. b. Calculate Tessa's opportunity cost of producing a cap. c. Who has a comparative advantage in producing caps? d. If Sue and Tessa specialize in producing the good in which they have a comparative advantage, and they trade 1 jacket for 15 caps, who gains from the specialization and trade?
a. 1/10 jacket b. 1/20 jacket c. Tessa d. 15/1=15 vs. 40/4=10 so sue gets a better deal and 1/15=.067 vs. 4/80=.05 so Tessa also gets a better deal
Suppose that Tessa buys a new machine for making jackets that enables her to make 20 jackets an hour. (She can still make only 80 caps per hour.) a. Who now has a comparative advantage in producing jackets? b. Can Sue and Tessa still gain from trade? c. Would Sue and Tessa still be willing to trade 1 jacket for 15 caps?
a. 40/4=10 vs. 80/20=4 so Tessa has the comparative advantage b.yes; they just switch to specializing in their new comparative adv c. no; sue can produce 1j per 10 c so she wouldn't want to pay more than that
Your price elasticity of demand for bananas is 4. If the price of bananas rises by 5 percent, what is a. The percentage change in the quantity of bananas you buy? b. The change in your expenditure on bananas?
a. 4x5=20% b. 20-5=15%
Kim can produce 40 pies or 400 cakes an hour. Liam can produce 100 pies or 200 cakes an hour. a. Calculate Kim's opportunity cost of a pie and Liam's opportunity cost of a pie. b. If each spends 30 minutes of each hour producing pies and 30 minutes producing cakes, how many pies and cakes does each produce? c. Who has a comparative advantage in producing (i) pies and (ii) cakes? d. what are the total gains from trade? e. If Kim and Liam share the total gains equally, what trade takes place between them?
a. Kim: 10 cakes per pie, Liam: 2 cakes per pie b. Kim: 20 pies and 200 cakes, Liam: 50 pies and 100 cakes c. Kim: cake, Liam: pies d. 100 increase in cakes and 30 increase in pies -L: 200 cakes and K:40 pies instead of 70 pies and 300 cakes e. half the cake production of 100 is 50 cakes each and half the pie production of 30 is 15 pies each
What is the effect on the price and quantity of MP3 players (such as the iPod) if a. The price of a PC falls b. the price of an MP3 download rises? c. More firms produce MP3 players d. electronics workers' wages rise?
a. demand decreases, supply is unchanged, price increase, quantity decreases b. demand decreases, supply unchanged, price decreases, quantity decreases c. supply increase, demand unchanged, quantity increase, price decrease d. supply decrease, price increase, demand unchanged, quantity decrease
The price of food increased during the past year. a. Explain why the law of demand applies to food just as it does to other goods and services. b. Explain how the substitution effect influences food purchases when the price of food rises and other things remain the same. c. Explain how the income effect influences food purchases and provide some examples of the income effect.
a. if price of any good increases the demand decreases with a substitution and income effect b. people buy cheaper food (substitute) to decrease the marginal cost c. people buy the inferior goods to save their income, but when income increases people are able to by normal goods
Apple Inc. decides to make iTunes freely available in unlimited quantities. a. Does Apple's decision change the incentives that people face? b. Is Apple's decision an example of a microeconomic or a macroeconomic issue?
a. yes; inceases incentive to buy an iPod b. microeconomics; single business
The night before an economics test, you decide to go to the movies instead of staying home and working your MyEconLab Study Plan. You get 50 percent on your test compared with the 70 percent that you normally score. a. Did you face a tradeoff? b. What was the opportunity cost of your evening at the movies?
a. yes; tradeoff was between a higher test score and an evening with your friends at the movies. b. The opportunity cost of going to the movies is the fall in your grade. That is the 20 points forgone from choosing to see the movie rather than study.