Economics Exam 1

The U.S. Postal Service (USPS) charges Amazon about $2 to deliver a package. The USPS argues that its contract with Amazon allows it to reduce the loss it suffers on its overall operations. A business writer for the Washington Post observes: "Looked at from the standpoint of incremental revenue (huge) minus these incremental expenses (modest), the Postal Service could very easily have come to the conclusion that, even at $2 a package, the Amazon contract was likely to be highly profitable." Sources: Eli Rosenberg, "Trump Said Amazon Cost The the USPS 'Billions.' But the Post Office Has a Different Explanation." Washington Post, May 11, 2018. What does the writer mean by "incremental revenue" and "incremental cost"? Why would he focus on incremental revenue and incremental cost rather than on total revenue and total cost? "Incremental" means the same thing as

"marginal." If the marginal revenue exceeds the marginal cost, the USPS's profit will increase. If the marginal cost exceeds the marginal revenue, the USPS's profit will decrease.

Ch 4

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Economics is the study of the choices people make to attain their​goals, given their scarce resources.

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The diagram to the right illustrates a hypothetical demand curve representing the relationship between price​ (in dollars per​ unit) and quantity ​(in ​1,000s of units per unit of time​). Total revenue is ​$180,000. ​(Enter your response as an​ integer.)

180,000

Refer to the graph. What is the opportunity cost of moving from point B to point C?

20 sedans

free market

A free market exists when the government places few restrictions on how goods and services can be produced or sold or on how factors of production can be employed

a normal good; an inferior good

A good for which demand increases as income rises is ________, and a good for which demand increases as income falls is ________.

Market

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

technological change

A second factor that causes a change in supply is technological change, which is a positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs

supply schedule

A supply schedule is a table that shows the relationship between the price of a product and the quantity of the product supplied

Which of the following events would create economic growth, that is, shift the production possibilities frontier outward?

A. An increase in the available labor. B. An increase in technology that affects the production of both goods. C. An increase in the available natural resources. D. ALL OF THE ABOVE

If a country has a comparative advantage in the production of a good, then that country

A. has a lower opportunity cost in the production of that good

Terms Ch 1

Allocative efficiency Centrally planned economy Economic model Economic variable Economics Equity Macroeconomics Marginal analysis Market Market economy Microeconomics Mixed economy Normative analysis Opportunity cost Positive analysis Productive efficiency Scarcity Trade-off Voluntary exchange

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

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

When does allocative efficiency occur?

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

Economic variable

An economic variable is something measurable that can have different values, such as the number of people employed in manufacturing

terms

Black market Consumer surplus Deadweight loss Economic efficiency Economic surplus Marginal benefit Marginal cost Price ceiling Price floor Producer surplus Tax incidence

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.

Economic efficiency

Economic efficiency is 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.

Economic Surplus

Economic surplus in a market is the sum of consumer surplus and producer surplus

Economics

Economics is the study of the choices consumers, business managers, and government officials make to attain their goals, given their scarce resources.

ceteris paribus condition

Economists refer to the necessity of holding all variables other than price constant in constructing a demand curve as the ceteris paribus condition.

With voluntary exchange, both the buyer and the seller of a product are made better off by the transaction

Equity is harder to define than efficiency because there isn't an agreed-upon definition of fairness. For some people, equity means a more equal distribution of economic benefits than would result from an emphasis on efficiency alone

If you and your neighbor both grow oranges and grapefruits and you are better than your neighbor at picking both oranges and grapefruits, there can be no advantage to you in specializing in growing only one type of fruit and trading with your neighbor for the other.

False

In a competitive market, firms can dictate what the equilibrium price of a good or a service will be.

False

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

Firms determine how goods and services will be produced.

substitutes; complements

Goods and services that can be used for the same purpose are ________, and goods and services that are used together are ________.

Suppose we can divide all the goods produced by an economy into two types: consumption goods and capital goods. Capital goods, such as machinery, equipment, and computers, are goods used to produce other goods. Suppose a technological advance occurs that affects the production of consumption goods but not capital goods. Use the three-point curved drawing tool to show the effect of this technological change by drawing a new production possibilities frontier. Properly label this curve.

If a technological advance occurs that affects the production of consumption goods, then the production possibilities frontier will shift out along the axis that measures the quantity of consumption goods 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.

Which of the following covers the study of topics such as inflation or​ unemployment?

Macroeconomics

Marginal analysis

Marginal analysis involves comparing marginal benefits and marginal costs.

Marginal Cost

Marginal cost is the change in a firm's total cost from producing one more unit of a good or service

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

North Korea

market economy

Or a society can have a market economy, in which the decisions of households and firms as they interact in markets determine the allocation of economic resources.

Producer Surplus

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

Producer surplus is the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives

Product markets

Product markets are markets for goods—such as smartphones—and services—such as medical treatment. In product markets, households are demanders, and firms are suppliers

When does productive efficiency occur?

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

mixed economies

Some economists argue that the extent of government intervention makes it no longer accurate to refer to the economies of the United States, Canada, Japan, and Western Europe as pure market economies. Instead, these countries are considered mixed economies because, while most economic decisions result from the interaction of buyers and sellers in markets, the government plays a significant role in the allocation of resources.

Consumer Surplus

Surplus = Price willing to pay - Price of product

demand schedule

Tables that show the relationship between the price of a product and the quantity of the product demanded are called demand schedules

quantity demanded

The amount of a good or service that a consumer is willing and able to purchase at a given price is called the quantity demanded

quantity supplied

The amount of a good or service that a firm is willing and able to supply at a given price is the quantity supplied

What happens if a country produces a combination of goods that efficiently uses all of the resources available in the economy?

The country is operating on its production possibilities frontier.

market demand

The demand curve in Figure 3.1 shows the market demand, which is the demand by all the consumers of a given good or service

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

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

income effect

The income effect of a price change refers to the change in the quantity demanded of a good that results because a change in the good's price increases or decreases consumers' purchasing power. Purchasing power​ is the quantity​ of goods a consumer can buy with a fixed amount of income.

law of demand

The inverse relationship between the price of a product and the quantity of the product demanded is called the law of demand

Marginal benefit

The marginal benefit is the additional benefit to a consumer from consuming one more unit of a good or service

Law of supply

The market supply curve in Figure 3.4 is upward sloping. We expect most supply curves to be upward sloping, according to the Law of supply, which states that,​ holding everything else constant,​ increases in price cause increases in the quantity supplied, and decreases in price cause ​​​​​​​​decreases in the quantity supplied

opportunity cost

The opportunity cost of any activity is the highest-valued alternative that must be given up to engage in that activity

substitution effect

The substitution effect refers to the change in the quantity demanded of a good that results because a change in price makes the good more or less expensive relative to​ other​ goods that are substitutes.​

surplus

The total amount of consumer surplus in a market is equal to the area below the demand curve and above the market price

Trade-offs

Therefore, every society faces trade-offs: Producing more of one good or service means producing less of another good or service

The basis for trade is comparative advantage, not absolute advantage.

True

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

What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced?

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?

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.

surplus

When the quantity supplied is greater than the quantity demanded, there is a surplus in the market. In this case, the surplus is equal to 2 million pairs (11million−9million=2million)(11 million-9 million=2 million) . When there is a surplus, firms will have unsold goods piling up, which gives them an incentive to increase their sales by cutting the price

Microsoft charges a price of​ $599 for a copy of Windows 7. Is this pricing decision​ rational?

When we assume the managers at Microsoft have used all available information and have weighed all known benefits and​ costs, we are assuming rationality.

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

While economists assume that people respond to economic incentives, they recognize that there are other motives for people's actions.

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.

We can show economic efficiency:

With points on the production possibilities frontier.

The income effect; the substitution effect

________ is used to describe how changes in price affect a consumer's purchasing power, and ________ is used to describe how a change in price affects the quantity demanded of a good by making it more or less expensive than substitute goods.

A production possibilities frontier​ (PPF) is

a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.

Which of the following is the textbook's definition of a supply schedule?

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

The primary difference between absolute and comparative advantage is

absolute advantage refers to the ability to produce more of a good or service using the same amount of resources and comparative advantage refers to the ability to produce a good or service at a lower opportunity cost.

In​ general, the term ​"ceteris paribus​" means

all else equal.

A hypothesis in an economic model is

all of the above.

Market price is determined by

both supply and demand.

The production possibilities frontiers depicted in the diagram to the right illustrate

both the labor force and capital stock increasing.

How are economic resources allocated in a market economy?

by the decisions of households and firms interacting in markets

A society can have a centrally planned economy, in which the government decides how economic resources will be allocated

centrally planned economy

competitive market

competitive market is a market with many buyers and many sellers

What do economists mean by the word "marginal"?

extra or additional

In a simple circular-flow model, there are flows of _________ and flows of _________.

factors of production; goods and services B. funds received from the sale of factors of production; spending on final goods and services C. Both (a) and (b) are correct.

A free market is a market with ________ government restrictions on how a good or service can be produced or sold and with ________ government restrictions on how a factor of production can be employed.

few; few

Which of the following are the two key groups of participants in the circular flow of income?

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.

Economics is a social science because

it applies the scientific method to the study of the interactions among individuals. B. it considers human behavior—particularly ​decision-making behavior. C. it is based on studying the actions of individuals. D. all of the above.

price controls

legally binding maximum or minimum price

Firms choose how to produce the goods and services they sell. In many​ cases, firms face a​ trade-off between using more workers or using more machines. For​ example,

many times in the past several​ decades, firms may have chosen between a production method in the United States that uses fewer workers and more machines and a production method in China that uses more workers and fewer machines.

Economists use the word marginal to mean an extra or additional benefit or cost of a decision. An optimal decision occurs when

marginal benefit equals marginal cost.

Any model is based on making assumptions because

models have to be simplified to be useful. B. we cannot analyze an economic issue unless we reduce its complexity. C. both a and b.

The Scottish philosopher Adam Smith argued in 1776 that

prices would do a better job of coordinating the activities of buyers and sellers than guilds could.

The diagram to the right illustrates a very important relationship in economics between two​ variables: the price of a good and the quantity demanded of that good. The two variables in this diagram​ are:

price​ (dollars per​ bushel) on the vertical axis and quantity​ (bushels per​ week) on the horizontal axis.

Absolute advantage is the ability of an individual, a firm, or a country to

produce more of a good or service than competitors using the same amount of resources.

The primary difference between product markets and factor markets is that

product markets are markets for​ goods, while factor markets are markets for factors of production—​labor, ​capital, natural​ resources, and entrepreneurial ability.

What is the law of demand

rule that, holding everything else constant, when the price of a good falls, the quantity demanded will increase, and when the price of a good rises, the quantity demanded will decrease

Factors of production are the inputs used to make goods and services. Factors of production are divided into four broad categories:

s. Factor markets are markets for the factors of production

One of the basic facts of life is that people must make choices as they try to attain their goals. This unavoidable fact comes from a reality an economist calls

scarcity.

The distinction between substitutes and complements is

substitute goods are used for the same purposes while complementary goods are used together.

The production possibilities frontiers depicted in the diagram to the right illustrate

technological advances in the tank industry.

One of the great benefits of trade is

that it makes it possible for society to become better off by increasing its consumption.

Equity is

the fair distribution of economic benefits.

Opportunity cost is

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

extra or additional

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

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.

Property rights are

the rights individuals or firms have to the exclusive use of their​ property, including the right to buy or sell it.

Macroeconomics is

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

The distinction between a normal and an inferior good is

when income​ increases, demand for a normal good increases while demand for an inferior good falls.

A free market exists

when the government places few restrictions on how a good or a service can be produced or sold or on how a factor of production can be employed.

We can show economic inefficiency:

with points inside the production possibilities frontier

Which of the following shows a negative linear relationship

y = 49 - 1.2x

A perfectly competitive market is 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.

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

​One, what goods and services will be​ produced? Two, how will the goods and services be​ produced? Three, who will receive the goods and services​ produced?

Consider the following​ statement: ​"An increase in supply decreases the equilibrium price. The decrease in price increases​ demand." The statement is

​false: decreases in price affect the quantity​ demanded, not demand.

In the diagram to the​ right, the curve labeled​ "S" is apparently​ _____, while the curve labeled​ "D" is apparently​ _____.

​nonlinear; linear