econ mid-term exam study guide

positive analysis answers which question?

"what is?" or "what will be?"

16. which of the following key principles of economics is the principle of voluntary exchange? a. if participation in a market is voluntary, both the buyer and the seller must be better off as a result of a transaction b. what matters to people is the real value of money or income - its purchasing power - not the face value of money or income c. what matters in decision making is what happens at the margin d. the opportunity cost of something is what you sacrifice to get it

a. if participation in a market is voluntary, both the buyer and the seller must be better off as a result of a transaction

most economic analysis attempts to understand what?

how changing one variable changes the economic outcome to do this, we often assume that all ofter variables are held constant in the analysis

labor

human effort, including both physical and mental effort, used to produce goods and services

21. during your next job interview, you will use the marginal principle to explain why you should be hired. what will you say?

in accordance with the marginal principle, you should be hired because the additional cost to the company (your salary and benefits) will outweigh the contributions you will make to the firm, or the additional revenue the firm will obtain from your productive activity.

use assumptions to simplify

in any problem there are certain key elements we need to understand along with other elements that don't affect the current decisions. we use assumptions to eliminate the other elements, so we can focus on the key elements for the decision

the marginal principle

increase the level of an activity as long as its marginal benefit exceeds its marginal cost. choose the level at which the marginal benefit equals the marginal cost.

rational people respond to incentives

people will change their behavior as the benefits and costs of their actions change

economic analysis takes on what two primary forms?

positive analysis normative analysis

price ceiling

prices capped by law below equilibrium will create excess demand in the affected market

price floor

prices held above equilibrium by law will create excess supply in the affected market

excess demand (shortage)

quantity demanded exceeds the quantity supplied at the prevailing price

market demand curve

shows the relationship between price and quantity demanded by all consumers

market supply curve

shows the relationship between price and quantity supplied by all firms

individual demand curve

shows the relationship between the price of a good and the quantity demanded by an individual consumer

the principle of voluntary exchange

states that a voluntary exchange between two people makes both people better off

law of supply

states that there is a positive relationship between price and quantity supplied

principle of diminishing returns

suppose output is produced with two or more inputs, and we increase one input while holding the other input or inputs fixed. beyond some point—called the point of diminishing returns—output will increase at a decreasing rate.

real value

the value of money in terms of the quantity of goods it can buy

slope =

= vertical distance between two points/ horizontal distance between two points = rise/ run = y/ x

percent change equation (midpoint formula)

(new value- initial value) / average value x 100 where the average value is = (new value + initial value) / 2

percentage change equation

(new value- initial value) / initial value x 100

perfectly competitive market

one with many sellers and buyers of a homogeneous product and no barriers to entry

4. select the best answer. which questions usually lie at the heart of policy debates? a. positive questions b. normative questions c. all economic questions, both positive and normative d. questions about the choices made by individuals

b. normative questions

change in demand

occurs when a variable other than the prcie of the product changes

23. which economic principles are involved in the analysis of scarcity using a production possibilities curve?

The production possibilities curve involves two of the fundamental principles: the principle of opportunity cost, and the principle of diminishing returns. The principle of opportunity cost is described by a move from one point to another along the curve. The curve shows combinations of two goods, or sets of goods, that can be produced when resources are fully and efficiently employed.

3. the resources provided by nature and used ot produce goods and services are also known as a. factors of production b. natural resources c. physical capital d. productive inputs

b. natural resources

22. think about opportunity cost. what is the opportunity cost of you attending college? write a short essay describing what it really costs to attend.

What is the opportunity cost of a college degree? Consider a student who spends a total of $40,000 for tuition and books. Instead of going to college, the student could have spent this money on a wide variety of goods, including housing, stereo equipment, and world travel. Part of the opportunity cost of college is the $40,000 worth of other goods the student sacrifices to pay for tuition and books. Also, instead of going to college, the student could have worked as a bank clerk for $20,000 per year and earned $80,000 over four years. That makes the total opportunity cost of this student's college degree $120,000.

thinking at the margin

analyze a problem by asking, "what happens if we make a small change from our current point?"

natural resources

are provided by nature and include land, mineral deposits, oil and gas deposits, and water

4. this question tests your understanding of Application 1 in this chapter. from the choices A, B, and C below chose the ones that you would include in your estimate of the opportunity cost of doing business. A: the expenses for mowers and edgers B: the interest that the funds the owner invested in the business could have earned at the bank or elsewhere C: the value of the owner's time when used in the best alternative activity a. A and B b. B and C c. A and C d. A, B, and C

b. B and C

10. macroeconomics can be used to understand all EXCEPT which of the topics below? a. how the national economy works b. how consumers decide which car to buy based on their preferences versus prices c. what causes economic booms and downturns d. how to make informed business decisions

b. how consumers decide which car to buy based on their preferences versus prices

6. economic decisions are made at every level in society. when we try to decide which production method to use among several alternatives, which of the key economic questions are we trying to answer? a. what products do we produce? b. how do we produce the products? c. who consumes the products? d. which government agency should supervise the production of goods?

b. how do we produce the products?

7. economic models are a. precise representations of reality that include as many details as possible in order to accurately predict behavior b. simplifications of reality that focus only on key relationships and ignore less relevant details c. presentations of all the possible outcomes under all real world circumstances d. analytical interpretations of economic behavior involving a good deal of the surrounding social and political structure of society

b. simplifications of reality that focus only on key relationships and ignore less relevant details

2. a friend offers you a Coke, a Pepsi, or a Diet Coke. You don't like Diet Coke, so after some thought, you take the Pepsi. What is the opportunity cost of your choice? a. the Pepsi b. the Coke c. the Coke plus the Diet Coke d. the Coke plus the Diet Coke plus the Pepsi

b. the Coke

2. which of the following terms would best describe the consequence of scarcity? a. limited resources b. trade-offs c. unlimited wants d. poverty and possibly starvation

b. trade-offs

17. from the principle of voluntary exchange, we conclude that a. often buyers are made better off and sellers are worse off when an exchange is made. b. often sellers are made better off and buyers are worse off when an exchange is made. c. both the buyer and the seller must be better off as a result of a transaction d. both the buyer and the seller might be worse off as a result of a transaction

c. both the buyer and the seller must be better off as a result of a transaction

19. the sale price of a shirt is $8. there is a sign on the clothing rank that states "price marked is 20% off original price." what was the original price of the shirt? a. $49.60 b. $50 c. $65 d. $60

d. $60

12. if y = 800 - 4X, what is the slope of this line? a. -1/4 b. 1/4 c. 4 d. -4 e. 800

d. -4

11. in which of situations can we use economic analysis? a. to determine how well the government performs its roles in the market economy and to examine the tradeoffs associated with various public policies b. to answer many practical questions about markets and how they operate c. to explain why some resources increase over time and how an increase in resources translates into a higher standard of living d. all of the above

d. all of the above

8. economists develop analytical tools to deal with specific problems. which of the problems below is an economist prepared to discuss? a. the economic view of Japan's economic problems b. the economic view of poverty in Africa c. the economic view of traffic congestion d. all of the above

d. all of the above

what do we compare to make a good decisions?

marginal benefit and marginal cost

what is the most important thing to remember about the economic way of thinking?

that economics focuses on marginal change

marginal benefit

the additional benefit resulting from a small increase in some activity

marginal cost

the additional cost resulting from a small increase in some activity

quantity demanded

the amount of a product that consumers are willing and able to buy

quantity supplied

the amount of a product that firms of a product that firms are willing and able to sell

ceteris paribus is the Latin expression that means what?

"to hold all other variables fixed"

normative analysis answers which question?

"what ought to be?"

factors that increase demand

1. increase in income: if a good is a normal good, an increase in income increases demand for the good. ex. restaurant meals 2. decrease in income: if a good is an inferior good, a decrease in income will increase demand. ex: store-brand cola 3. increase in the price of a substitute 4. decrease in the price of a complement 5. increase in population. 6. shift in consumer preferences. 7. expectations of higher future prices.

three important reasons for studying microeconomics

1. to understand markets and predict changes 2. to make personal and managerial decisions 3. to evaluate public policies

three important reasons for studying macroeconomics

1. to understand why economies grow 2. to understand economic fluctuations 3. to make informed business decisions

the four main elements to the economic way of thinking

1. use assumptions to simplify 2. isolate variables 3. think at the margin 4. rational people respond to incentives

25. think about the discussion of speed and safety in the text. drivers have to decide whether or not to speed as they drive down the interstate. explain how each of the following factors affects the decision to speed: i. a smaller likelihood of getting caught speeding. ii. better safety equipment in cars. iii. increased fines for speeding.

A lower likelihood of getting caught speeding would lower the marginal cost of speeding. For instance, if there is a 10 percent chance of getting a ticket, and a ticket costs $100, the expected cost of getting caught is 0.1(100) = $10. If there is only a 5 percent chance of getting caught, the marginal cost of speeding drops to $5, and more people will speed. As cars become safer, the risk of injury in an accident decrease, as does the expected injury if one occurs. This also lowers the marginal cost of speeding and should lead to more speeding. Increased fines make speeding more expensive, raising the marginal cost and discouraging people from speeding.

supply curve

a curve showing the relationship between price and quantity supplied

complement

a good for which a decrease in the price of one good increases the demand for the other good.

substitute

a good for which an increase in the price of one good increases the demand for another good.

demand curve

a graphical representation of the demand schedule curve shows the relationship between the price of a good and the quantity demanded of that good

variable

a measure of something that can take on different values

excess supply (surplus)

a situation in which the quantity supplied exceeds the quantity demanded at the prevailing price

marginal change

a small, one-unit change

supply schedule

a table that shows the relationship between the price of a product and quantity supplied (holding all the other supply factors constant)

demadn schedule

a table that shows the relationship between the price of a product and the quantity demanded of that product

principle of voluntary exchange

a voluntary exchange between two people makes both people better off

24. among the reasons for the use of marginal analysis in economics is that there are natural and technical constraints that prevent us from achieving unlimited results. provide five examples of situations in which additional effort yields diminishing returns.

a. Additional water into a flowerpot does not cause a flower to grow proportionally to the amount of water added. b. As speed rises, it becomes harder and harder to gain an extra mile of speed. c. As consumption rises, an extra bite does not yield as much satisfaction as the previous one. d. The knowledge gained from an extra hour of study is less than the knowledge gained from the previous hour, particularly when you have been studying for a long time already. e. In an eight-hour workday, the productivity of the last hour is smaller than the productivity of the first hour.

5. if the president of Colombia commented that "we should do something to reduce inflation in Colombia" this would be an example of a. a normative statement b. a positive statement c. a statement that has both positive and normative components d. neither positive analysis nor normative analysis

a. normative statement

9. a roadmap is a good example of which of the four elements of economic thinking? a. using assumptions to simplify b. isolating variables- ceteris paribus c. thinking at the margin d. acting rationally and responding to incentives

a. using assumptions to simplify

1. economics is the study of choices under conditions of a. supply b. scarcity c. opportunity d. abundance of resources

b. scarcity

13. the optimal amount of an activity is determined at the point where the activity yields: a. maximum marginal benefit b. minimum marginal cost c. equal value of marginal benefit and marginal cost d. zero marginal cost

c. equal value of marginal benefit and marginal cost

19. which of the following is not an example of nominal value? a. a price shown on a clothing tag in a retail store. b. the value you could sell your house for at an auction today. c. may increase or decrease when nominal wages change. d. will not change with a change in the nominal wage rate.

c. may increase or decrease when nominal wages change.

18. according to the real-nominal principle, what matters to workers is the real wage rate (or purchasing power of wages). the real wage rate a. always increases when the nominal wage rate increases. b. always increase when the nominal wage rate decreases. c. may increase when the nominal wages change. d. will not change with a change in the nominal wage rate.

c. may increase when the nominal wages change.

1. the principle of opportunity cost evolves from the concept of a. consumer spending b. wealth c. poverty d. scarcity

d. scarcity

3. which of the following is not an opportunity cost of attending college? a. the wages that you could have earned while going to class b. tuition c. the cost of books d. the cost of housing

d. the cost of housing

20. james has only enough money to buy a car at the market price from 15 years age, but that amount of money is only half of what he would need to buy it today. which principle does this problem represent? a. the principle of opportunity cost b. the principle of voluntary exchange c. the principle of diminishing returns d. the real-nominal principle

d. the real-nominal principle

isolate variables

examine how a change in one factor (say, the price of apples) affects another (say, the quantity of apples a person purchases) while assuming all other factors (such as income) remain unchanged. we can then ask how a change in income affects the quantity of apples purchased, assuming the price of apples remains constant

scarcity

means that the resources we use to produce goods and services are limited

5 factors of production

natural resources labor physical capital human capital entrepreneurship

market equilibrium

occurs at the price where quantity demanded is equal to the quantity supplied

decrease in demand

occurs when consumers want to buy less of a good holding the price constant; lowers the equilibrium quantity and price in the market/

increase in demand

occurs when consumers want to buy more of a good holding the price constant

the principle of diminishing returns

says that if we produce output using two or more inputs and change the amount of only one input, beyond some point output will increase at a decreasing rate

individual supply curve

shows the relationship between price and quantity supplied by an individual firm

law of demand

states that there is a negative relationship between price and quantity demanded, ceteris paribus

microeconomics

studies the choices of individual economic agents such as households, firms, and governments; also studies how choices made by these agents affect the market for goods and services

entrepreneurship

the effort to co-ordinate the factors of production to produce and sell products

nominal value

the face value of an amount of money

human capital

the knowledge and skills acquired by a worker through education and experience and used to produce goods and services

change in quantity demanded

the movement along a demand curve

principle of opportunity cost

the opportunity cost of something is what you sacrifice to get it.

what are the factors that affect how much of a good a consumer wants to purchase

the price of the product the consumer's income the price of substitute goods the price of complementary goods the consumer's preferences or tastes the consumer's expectations of future prices

number of factors that affect the decisions of the sellers

the price of the product the wage paid to workers the price of materials the cost of capital the state of production technology expectations about future prices government taxes and subsidies

the real-nominal principle

the principle states that what matters to people is the purchasing power of money, not its face value.

factors of production

the resources used to produce goods and services

physical capital

the stock of equipment, machines, structures, and infrastructures that is used to produce goods and services

economics

the study of how people, businesses, governments, and other organizations make choices when there is scarcity

macroeconomics

the study of the nation's economy as a whole; focuses on the issues of inflation, unemployment, and economic growth

production possibility curve

used to represent opportunity costs; shows the possible combinations of products that an economy can produce, given that its productive resources are fully employed and efficiently used.

economic models

used to simplify analysis; a simplified representation of an economic environment; focuses on the main issues in an economic environment

the real-nominal principle

what matters to people is the real value of money or income- its purchasing power- not the face value of money or income

what three primary questions does economics seek to answer?

what products do we produce? how do we produce the products? who consumes the products?