Econ Test #1
Tax incidence
the actual division of the burden of a tax between buyers and sellers in a market.
Demand curve shows
the marginal benefit received by consumers
Supply curve shows
the marginal cost of production
Market price is determined by A. both supply and demand. B. demand only. C. supply only. D. neither supply nor demand.
A
Autarky
A situation in which a country does not trade with other countries.
How to achieve economic efficiency
To achieve economic efficiency in any market, the marginal benefit from the last unit sold should equal the marginal cost of production.
Calculating shortage
To calulate the shortage, subtract quantity supplied from quantity demanded.
Calculating surplus
To calulate the surplus, subtract quantity demanded from quantity supplied.
Demand curve
A curve that shows the relationship between the price of a product and the quantity of the product demanded.
Inferior good
A good for which the demand increases as income falls and decreases as income rises An "inferior good" is a good where, when the individual's income rises they buy less of that good.
opportunity cost
is the highest-valued alternative that must be given up to engage in an activity.
Quantity supplied
The amount of a good or service that a firm is willing and able to supply at a given price.
Market demand
The demand by all the consumers of a given good or service.
quota
is a numeric limit on the quantity of a good that can be imported, and it has an effect similar to a tariff. A quota is imposed by the government of the importing country. A voluntary export restraint (VER) is an agreement negotiated between two countries that places a numeric limit on the quantity of a good that can be imported by one country from the other country.
voluntary export restraint (VER)
is an agreement negotiated between two countries that places a numeric limit on the quantity of a good that can be imported by one country from the other country
Positive analysis
is concerned with what is,
In the diagram to the right, illustrating a binding price ceiling at P3, the amount of producer surplus transferred to consumers is represented by area (BLANK) and the deadweight loss is equal to areas (BLANK) .
1. C (the willing price to pay changes but not the equilibrium) 2. B AND D
Does a change in the price of product x shift the demand for product x
No it has a movement on the line because price change doesn't shift demand
Which of the following countries has an economy where most of the resource allocation is determined by a central planning authority? United States Italy North Korea France
North Korea
is concerned with how people respond to incentives
Physical Capital
Marginal benefit
The additional benefit to a consumer from consuming one more unit of a good or service.
Marginal cost
The additional cost to a firm of producing one more unit of a good or service.
Quantity demanded
The amount of a good or service that a consumer is willing and able to purchase at a given price.
Macroeconomics is concerned with
standard of living inflation rates unemployment rates
Price floor
A legally determined minimum price that sellers may receive.
price floor
. To affect the market outcome, a price floor must be set above the equilibrium price. Otherwise, the price floor will not be binding on buyers and sellers.
In the diagram to the right, illustrating a binding price floor at P1, the amount of consumer surplus transferred to producers is represented by area (BLANK) and the deadweight loss is equal to areas (BLANK)
1. B 2. C AND E
A price ceiling is a legally determined (BLANK) price that sellers may charge. A price floor is a legally determined (BLANK) price that sellers may receive
1. Maximum 2. Minimum
What is the effect on the price of health-care services over time? A. It increases because demand increased by more than supply. B. It decreases because demand increased by more than supply. C. It decreases because demand increased by less than supply. D. It increases because demand increased by less than supply.
A
Supply schedule A table showing the relationship between the price of a product and the quantity of the product supplied.
A table showing the relationship between the price of a product and the quantity of the product supplied.
A perfectly competitive market is a market that meets the conditions of A. (1) many buyers and sellers, (2) all firms selling differentiated products, and (3) no barriers to new firms entering the market. B. (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market. C. (1) few buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market. D. (1) many buyers and sellers, (2) all firms selling identical products, and (3) significant barriers to new firms entering the market.
B
Tax incidence is A. the actual division of the burden of a tax between buyers and government in a market. B. the potential division of the burden of a tax between buyers and government in a market. C. the actual division of the burden of a tax between buyers and sellers in a market. D. the potential division of the burden of a tax between buyers and sellers in a market.
C
Which of the following would cause a shift in the demand curve from point A to point B? A. An increase in income (normal good). B. A decrease in income (inferior good). C. An increase in the price of a substitute good. D. All of the above.
D Income of consumers. If demand increases (decreases) when income increases (decreases), the good is considered "normal." If demand decreases (increases) when income increases (decreases), the good is considered "inferior."
According to the rationality assumption, people: Use rules of thumb to make choices. Can never consider each of the most relevant alternatives. Do not ever take into account the interests or well-being of others. Do not intentionally make decisions that would leave them worse off.
Do not intentionally make decisions that would leave them worse off.
Equilibrium in a competitive
Equilibrium in a competitive market results in the economically efficient level of output, where marginal benefit equals marginal cost.
Complements
Goods and services that are used together. When two goods are complements, the more consumers buy of one, the more they will buy of the other. A decrease in the price of a complement causes the demand curve for a good to shift to the right. An increase in the price of a complement causes the demand curve for a good to shift to the left.
Change in Demand vs. Change in Quantity Demanded
It is important to understand the difference between a change in demand and a change in quantity demanded. A change in demand refers to a shift of the demand curve. A shift occurs if there is a change in one of the variables, other than the price of the product, that affects the willingness of consumers to buy the product. A change in quantity demanded refers to a movement along the demand curve as a result of a change in the product's price.
When you think of an arrangement or institution that brings buyers and sellers of a good or service together, what are you thinking of?
Market
Consumer surplus
The difference between the highest price a consumer is willing to pay for a good or service and the price the consumer actually pays. measures the benefit to consumers from participating in a market, and producer surplus measures the benefit to producers from participating in a market. Consumer surplus in a market is equal to the total benefit received by consumers minus the total amount they must pay to buy the good.
Import
are goods and services bought domestically but produced in other countries.
Export
are goods and services produced domestically but sold to other countries.
Tangible products like cars and televisions are referred to as __________. goods services
goods
tariff
is a tax imposed by a government on imports of a good into a country.
Free trade
or trade between countries that is without government restrictions, makes consumers better off
Normal good
A good for which the demand increases as income rises and decreases as income falls. A "normal good" is a good where, when an individual's income rises, they buy more of that good.
Price ceiling
A legally determined maximum price that sellers may charge.
Black market
A market in which buying and selling take place at prices that violate government price regulations.
Economic efficiency
A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.
Perfectly competitive market
A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
A black market is A. a market in which all transactions involve activities (such illicit drugs, prostitution, etc.) many in the population find morally offensive. B. very similar to a "gray" market except that the goods and services exchanged are imported. C. a market in which buying and selling take place at prices that violate government price regulations. D. a market in which buying and selling take place at prices consistent with government price regulations.
C
Consider the following statement: "An increase in supply decreases the equilibrium price. The decrease in price increases demand." The statement is A. false: increases in supply decrease price. B. true: increases in supply decrease price. Decreases in price increase demand. C. false: decreases in price affect the quantity demanded, not demand. D. false: increases in supply increase price. Decreases in price increase demand.
C
Economic surplus in a market is the sum of _____ surplus and _____ surplus. In a competitive market, with many buyers and sellers and no government restrictions, economic surplus is at a _____ when the market is in _____. A. consumer; producer; maximum; disequilibrium B. consumer; producer; minimum; equilibrium C. consumer; producer; maximum; equilibrium. D. consumer; government; maximum; equilibrium
C
The distinction between a normal and an inferior good is A. when income increases, demand for a normal good decreases while demand for an inferior good increases. B. normal goods are used for the same purposes while inferior goods are used together. C. normal goods are used together while inferior goods are used for the same purposes. D. when income increases, demand for a normal good increases while demand for an inferior good falls.
D
Who is harmed when individual nations move from autarky to free trade? A. The nation taken as a whole. B. The domestic customers of the firms that went out of business. C. The foreign customers of the firms that now specialize. D. The owners of the firms that went out of business.
D
Deadweight loss is the reduction in economic surplus resulting from a market not being in competitive equilibrium. In the diagram to the right, deadweight loss is equal to the area(s): A. B & D. B. A, B, & C. C. A. D. C & E.
D Consider the situation in which the price (P1) of a product is above the equilibrium price, as shown in the diagram above. At competitive equilibrium, consumer surplus is equal to the sum of areas A, B, and C. At the higher price, fewer units are sold, so consumer surplus declines to just the area of A. At competitive equilibrium, producer surplus is equal to the sum of areas D and E. At the higher price of P1, producer surplus changes to be equal to the sum of areas B and D. \Notice that this is less than the original economic surplus by an amount equal to areas C and E. The reduction in economic surplus resulting from a market not being in competitive equilibrium is called the deadweight loss.
Substitutes
Goods and services that can be used for the same purpose. When two goods are substitutes, the more you buy of one, the less you will buy of the other. A decrease in the price of a substitute causes the demand curve for a good to shift to the left. An increase in the price of a substitute causes the demand curve for a good to shift to the right.
If demand increases by more than supply, the equilibrium price rises. If demand increases by less than supply, the equilibrium price falls.
If demand increases by more than supply, the equilibrium price rises. If demand increases by less than supply, the equilibrium price falls.
Quantity Supplied
If only the price of the product changes, there is a movement along the supply curve, which is an increase or a decrease in the quantity supplied.
Producer surplus
The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives. Producer surplus in a market is equal to the total amount firms receive from consumers minus the cost of producing the good. In a sense, then, consumer surplus and producer surplus measure the net benefit to consumers and producers from participating in a market rather than the total benefit.
Main purpose of quota and most tariffs
The main purpose of most tariffs and quotas is to reduce the foreign competition that domestic firms face.
Law of supply
The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied. There is a positive relationship between price and quantity supplied. Therefore, the supply curve slopes upward. A change in quantity supplied is shown as a movement along the supply curve from one point to another.
normative analysis
is concerned with what should be
Comparative advantage
is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
We do not see complete specialization in the real world for three main reasons:
1. Not all goods and services are traded internationally. 2. Production of most goods involves increasing opportunity costs. 3. Tastes for products differ.
(BLANK) surplus is the difference between the lowest price a firm would be willing to accept and the price it actually receives. This component of economic surplus is illustrated in the diagram to the right by area (BLANK)
1. Producer 2. B
When the government imposes price floors or price ceilings, three important results occur:
1. Some people win. 2. Some people lose. 3. There is a loss of economic efficiency.
According to the law of demand, there is an inverse relationship between price and quantity demanded. That is, the demand curve for goods and services slopes downward. Why? A. When the price of a good increases, consumers' purchasing power falls, and they cannot buy as much of the good as they did prior to the price change. B. When price increases, quantity demanded increases. C. When the price of a good increases, consumers purchase complementary goods that are now relatively less expensive. D. A and C only.
A
shift in the entire curve.
A change in demand or supply is the result of changes in factors other than the good's own price and causes a shift in the entire curve.
The diagram in panel a is an example of A. a supply curve. B. the substitution effect. C. a supply schedule. D. the income effect.
C
Terms of trade
The ratio at which a country can trade its exports for imports from other countries.
The United States economy is best classified as a:
Mixed economy
(BLANK) surplus is the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. This component of economic surplus is illustrated in the diagram to the right by area (BLANK)
1. Consumer 2. A
Market equilibrium
A situation in which quantity demanded equals quantity supplied.
Demand schedule
A table showing the relationship between the price of a product and the quantity of the product demanded.
Comparative advantage A. is unlikely to change, once it has been defined. B. may change as time passes and circumstances change. C. is determined by governments of nations across the globe. D. is independent a countries skilled and unskilled labor quantities
B
On the diagram to the right, a movement from B to C represents a A. decrease in supply. B. change in supply. C. change in quantity supplied. D. movement down the supply curve.
B
We do not see complete specialization in the real world because A. not all goods and services are traded internationally, production of most goods involves decreasing opportunity costs, and tastes for products differ. B. not all goods and services are traded internationally, production of most goods involves increasing opportunity costs, and tastes for products differ. C. all goods and services are traded internationally, production of most goods involves increasing opportunity costs, and tastes for products are remarkably uniform. D. not all goods and services are traded internationally, production of most goods involves constant opportunity costs, and tastes for products are remarkably uniform.
B
Consumer and producer surplus measure the _____ benefit rather than the _____ benefit. A. marginal; additional B. subjective; objective C. net; total D. total; net
C
On the diagram to the right, a movement from A to C represents a A. decrease in demand. B. change in quantity demanded. C. change in demand. D. movement up the demand curve.
C
"Rent controls, government farm programs, and other price ceilings and price floors are bad." This is an example of a A. normative statement. The statement is concerned with what is. B. positive statement. The statement is concerned with what should be. C. positive statement. The statement is concerned with what is. D. normative statement. The statement is concerned with what should be.
D
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 following key economic questions are we trying to answer? How do we produce the products? Who consumes the products? What products do we produce
How do we produce the products
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 following key economic questions are we trying to answer? Who consumes the products? How do we produce the products? What products do we produce?
How do we produce the products
Law of Demand
The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease. That is, there is an inverse relationship between price and quantity demanded. This is shown as a movement along the demand curve from any point to another.
Economic surplus
The sum of consumer surplus and producer surplus
price cieling
To affect the market outcome, a price ceiling must be set below the equilibrium price. Otherwise, the price ceiling will not be binding on buyers and sellers.
Economics:
is concerned with how people respond to incentives
Economists believe that an individual or firm should continue any activity until: marginal benefit is greater than marginal cost. marginal benefit is equal to marginal cost. marginal benefit is less than marginal cost.
marginal benefit is equal to marginal cost . Continuing to engage in the activity when marginal benefit exceeds marginal cost will increase the total benefit of the activity. Conversely, continuing to engage in the activity when marginal benefit is less than marginal cost will reduce the total benefit of the activity. For this reason, the point where you should cease the activity is where marginal benefit is equal to marginal cost.
As illustrated in the diagram to the right, when a nation moves from autarky to free trade, economic surplus increases by the areas represented by A. C and D. B. A, B, C and D. C. B and E. D. B, C and D.
A Under autarky, consumer surplus would be area A in the above diagram. With imports, the reduction in price increases consumer surplus, so it is now equal to the sum of areas A, B, C, and D. Although the lower price increases consumer surplus, it reduces producer surplus. Under autarky, producer surplus was equal to the sum of the areas B and E. With imports, producer surplus is equal to only area E. Recall that economic surplus equals the sum of consumer surplus and producer surplus. Moving from autarky to allowing imports increases economic surplus in the United States by an amount equal to the sum of areas C and D.
In general, the term "ceteris paribus" means A. all else equal. B. holding everything else variable. C. unsettled mathematical paradigms. D. Both A and B
A Ceteris paribus ("all else equal") condition The requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant.
Change in Demand
A change in demand refers to a shift of the demand curve.
movement along the curve.
A change in quantity demanded or quantity supplied is the result of a change in the good's own price and causes a movement along the curve.
According to the law of demand, A. there is an inverse relationship between price and quantity demanded. Your answer is correct. B. when the price of a product increases, quantity demanded will increase. C. when the price of a product falls, quantity demanded will decrease. D. All of the above.
A
The distinction between substitutes and complements is A. substitute goods are used for the same purposes while complementary goods are used together. B. when income increases, demand for a substitute good increases while demand for a complementary good falls. C. substitute goods are used together while complementary goods are used for the same purposes. D. when income increases, demand for a complementary good decreases while demand for a substitute good increases.
A
Change in quantity Demanded
A change in quantity demanded refers to a movement along the demand curve as a result of a change in the product's price.
Supply curve
A curve that shows the relationship between the price of a product and the quantity of the product supplied
In addition to tariffs and quotas, governments sometimes erect other barriers to trade. For example, all governments require that imports meet certain health and safety requirements. Many governments also restrict imports of certain products on national security grounds. Explain whether you agree or disagree with the following statement: Sometimes, however, governments use these requirements to shield domestic firms from foreign competition. A. No, politicians never make choices that are more likely to lead to reelection when health and safety issues are involved. B. No, governments are always more concerned about national security than appeasing special interests. C. Yes, sometimes governments impose stricter health and safety requirements on imported goods than on goods produced by domestic firms. D. Yes, sometimes governments impose less strict health and safety requirements on imported goods than on goods produced by domestic firms.
C
One effect of tariffs and quotas A. is generally a net gain for the nation enacting the protective legislation. B. is to create jobs outside the industries immediately affected. C. is to cost jobs outside the industries immediately affected. D. is to reduce prices to domestic consumers as it protects jobs in the target industry.
C
When the government imposes price floors or price ceilings, A. everyone wins, goods and services distribution is more just, and there is an increase in economic efficiency. B. some people win, some people lose, and there is an increase in economic efficiency. C. some people win, some people lose, and there is a loss of economic efficiency. D. everyone wins, goods and services distribution is more just, and there is a loss of economic efficiency
C
The diagram on the right represents a tariff imposed on an individual market. The total deadweight loss (loss in economic surplus) from this tariff is illustrated by areas A. A, C, T and D. B. A and T. C. C and D. D. C, T and D
C The government collects tariff revenue equal to the tariff multiplied by the amount imported. Area T represents the government's tariff revenue. Areas C and D represent losses to U.S. consumers that are not captured by anyone. They are deadweight loss and represent the decline in economic efficiency resulting from the tariff.
Which of the following events would cause the supply curve to increase from S1 to S3? A. A decrease in the number of firms in the market. B. Higher expected future prices. C. A decrease in the price of inputs D. An increase in the price of inputs.
C When firms increase the quantity of a product that they wish to sell at a given price, the supply curve shifts to the right. This is shown by the shift from S1 to S3. When firms decrease the quantity of a product that they wish to sell at a given price, the supply curve shifts to the left. This is shown by the shift from S1 to S2.
(BLANK) goods and services are those bought by businesses to be used to increase efficiency or enhance production. -government -capital -consumption
Capital
In what type of economy does the government decide how economic resources will be allocated? -Mixed economy -Market economy -Centrally planned economy
Centrally planned economy
Which of the following is not a possible opportunity cost of attending college? The cost of housing Backpacking across Europe instead of attending college Starting a business instead of attending college Wages you could have made instead of attending class and studying
Cost of housing
According to the law of supply, A. there is a positive relationship between price and quantity supplied. B. as the price of a product increases, firms will supply less of it to the market. C. as the price of a product increases, firms will supply more of it to the market. D. A and C only
D
By trading, countries are able to consume more than they could without trade. This outcome is possible because A. world production of both goods increases after trade. B. shifting production to the more efficient country—the one with the comparative advantage—increases total production. C. inefficiencies in resource allocation are reduced. D. all of the above.
D
Economic efficiency is A. a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is not at a maximum. B. a market outcome in which the marginal benefit to consumers of the last unit produced is greater than its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum. C. a government outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum. D. a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.
D
In the diagram to the right, point A provides the _____, point B the _____, and point C the _____. A. equilibrium price; market equilibrium; surplus B. market clearing price; equilibrium point; shortage C. equilibrium price; surplus or shortage; equilibrium quantity D. equilibrium price; market equilibrium; equilibrium quantity
D
The diagram in panel a is an example of A. the income effect. B. the substitution effect. C. a demand curve. D. a demand schedule.
D