Economics Exam 1
what is the law of supply?
the principles that, other things equal, as price rises, the quantity supplied rises supplied rises, and as price falls, the quantity supplied falls
what is equilibrium quantity?
the quantity demanded and quantity supplied that occur at the equilibrium price in a competitive market
what is utility?
the satisfaction obtained from consuming a good or service
which of the following is not a central focus of the "economic perspective"?
the scientific method
what is division of labor?
the separation of the work required to produce a product into a number of different tasks that are performed by different workers
what is the scientific method?
the systematic pursuit of knowledge by observing facts and formulating and testing hypotheses to obtain theories, principles, and laws
what is opportunity cost?
the value of the good, service, or time forgone to obtain something else.
(T/F) macroeconomics is the study of individual units that make up an economy
False
what are factors of production?
economic resources: land, labor, capital, and entrepreneurial ability
what are some facts about U.S. households?
one or more persons occupying a housing unit that provide resources to the economy and use income received to purchase goods and services that satisfy economic wants
______ is the highest value alternative that must be sacrificed in order to get something else
opportunity cost
what is the latin phrase, ceteris paribus?
other things equal
what are positive and negative externalities?
positive externalities are spillover production or consumption BENEFITS conferred on third parties without compensation from them. negative externalities are spillover production or consumption COSTS imposed on third parties without compensation to them
provide examples of positive and negative incentives
positive: raise, promotion negative: demotion, decrease in pay
what is the command system?
an economic system in which most property resources are owned by the government and economic decisions are made by a central government body
what is the market system?
an economic system in which property resources are privately owned and markets and prices are used to direct and coordinate economic activities
what is money?
an item that is generally acceptable to sellers in exchange for goods and services
henry wants to buy a book. the economic perspective suggests that henry will buy the book if:
the marginal benefit of the book is greater than its marginal cost
When an economist says that there is "too much of a good thing," the economist is suggesting that:
the marginal benefit of the thing is less than the marginal cost.
what is self-interest?
the most advantageous outcome as viewed by each firm, property owner, worker, or consumer
describe the individual's economic problem
the need for individuals and society to make choices because wants exceed needs
what is the law of demand?
the principle that, other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls
what is constant opportunity cost?
an opportunity cost that remains the same as consumers shift purchases from one product to another along a straight-line budget line
what is economic growth?
an outward shift of the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology
what is the "invisible hand"?
as though guided by an invisible hand, to promote the public or self-interest
Economics can best be described as the study of Select one: a. how to increase the level of productive resources so there is maximum output in society. b. how people, institutions, and society make choices under conditions of scarcity. c. how to use productive resources to maximize income level. d. how business structures influence the allocation of income among firms.
b. how people, institutions, and society make choices under conditions of scarcity
how is the production possibilities curve related to a budget line for individual consumers?
because they both show combinations for two goods or services that affect what you can buy with what you have
What is the economic meaning of the expression that "there is no such thing as a free lunch"? Select one: a. It refers to "free-riders," who do not pay for the cost of a product but who receive the benefit from it. b. It means that economic freedom is limited by the amount of income available to the consumer. c. It means there is an opportunity cost when resources are used to provide "free" products. d. It indicates that products only have value because people are willing to pay for them.
c. it means there is an OC when resources are used to provide "free" products
define the law of increasing opportunity costs
defined as the principle that as the production of a good increases, the opportunity cost of producing an additional unit rises
according to the Gates, winfrey, and rodriguez illustration:
opportunity costs vary greatly between individuals and matter in decision making
identify the factors affecting demand and supply
price, taste
what are principles?
statements about economic behavior that enable prediction of the probable effects of certain actions
what is the rationing function of prices?
the ability of the competitive forces of supply and demand to establish a price at which selling and buying decisions are consistant
what is shortage?
the amount by which the quantity demanded of a product exceeds the quantity supplied at a specific (below-equilibrium) price
what is surplus?
the amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above-equilibrium) price
one major feature of the economic perspective is:
the assumption of purposeful behavior by individuals
what do economists mean by "other things being equal"?
the assumtion that factors other than those being considered do not change (p. 7)
what is market equilibrium?
the balance between market supply and market demand
what is marginal analysis?
the comparision of marginal ("extra" or "additional") benefits and marginal costs, usually for decision making
what led to the demise of the command system?
the first difficulty was the coordination problem, the second was an incentive problem. The market system actually answers the four fundamental questions
explain the circular flow model
the flow of resources from households to firms and of products from firms to households
what is the circular flow diagram?
the flow of resources from households to firms and of products from firms to households
what is market failure?
the inability of a market to produce a desirable product or produce it in the "right" amount
what are economic resources?
the land, labor, capital, and entrepreneurial ability used in the production of goods and services
what are the economic resources?
the land, labor, capital, and entrepreneurial ability used in the production of goods and services
what is microeconomics?
the part of economics concerned with individual decision-making units, such as a consumer, a worker, or a business firm
what is macroeconomics?
the part of economics concerned with the economy as a whole or major components of the economy
what is equilibrium price?
the price in a competitive market at which the quantity demanded and quantity supplied are equal
what is equilibrium price?
the price in a competitive market at which the quantity demanded and quantity supplied of a product are equal
what is the equilibrium price?
the price in a competitive market at which the quantity demanded and quantity supplied of a product are equal
what is the law of increasing opportunity costs?
the principle that as the production of a good increases, the opportunity cost of producing an additional unit rises
what is a price ceiling?
a legally established maximum (below-equilibrium) price for a product
what is a price floor?
a legally established minimum (above-equilibrium) price for a product
what is a budget line?
a line that shows various combinations of two products a consumer can purchase with a specific money income, given the products' prices
what is the product market?
a market in which goods and services are sold by firms and bought by households
what is the resource market?
a market in which households sell and firms buy economic resources
what is a change in quantity demanded?
a movement from one point to another on a fixed demand curve, from one price-quantity combination to another. the cause of this is an increase or decrease in the price of a product
what is a change in quantity supplied?
a movement from one point to another on a fixed supply curve
what is a normal good and inferior good?
a normal good is a good (or service) whose consumption rises when income increases and vice versa. an inferior good is a good (or service) whose consumption declines with income rises and vice versa
what is the economic system?
a particular set of institutional arrangements and a coordinating mechanism for producing goods and services
what is supply?
a schedule or curve that shows the amounts of a product that producers are willing to make available for sale at each of a series of possible prices during a specific period
what is demand?
a schedule or curve that shows the various amounts of a product that consumers will buy at each of a series of possible prices during a specific period
what is a demand schedule?
a schedule showing the amounts of a good or service that buyers wish to purchase
what is a substitute good and complementary good?
a substitute good is a good (or service) that can be used in place of some other good, such as a pen and pencil. a complementary good is a good (or service) that is used in conjunction with some other good, such as a pen and ink
What is the economic perspective?
a viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs of their actions
The primary goal of economic activities is to Select one: a. make the most efficient use of scarce productive resources. b. equalize the distribution of consumer income and wealth. c. expand the production of goods and services. d. reallocate resources from consumption to production in the economy.
a. make the most efficient use of scarce productive resources
which expression is another way of saying "marginal cost"?
additional cost
(T/F) incentives are factors that motivate a person to act or exert effort
True
(T/F) a decrease in overall demand causes the demand curve to shift to the left
true
what are the four fundamental questions to ask in any economic system?
1. what goods and services will be produced? 2. how will the goods and services be produced? 3. who will get the goods and services? 4. how will the system promote progress?
Explain how changes in supply and demand affect equilibrium prices and quantities.
Changes in supply and demand affect equilibrium prices and quantities because they determine these things. For instance, an increase in demand would also raise equilibrium price and equilibrium quantity. Changes in supply would either reduce equilibrium price and increase equilibrium quantity, or vice versa.
Identify what government-set prices are and how they can cause product surpluses and shortages.
Government-set prices are when the government decides that prices are either unfairly high to buyers or unfairly low to sellers. This can cause product surplus and shortage because of the prices not going along with supply and demand. Either the quantity supplied exceeds quantity demanded, or quantity demanded exceeds quantity supplied.
Relate how supply and demand interact to determine market equilibrium.
Supply and demand interact to determine market equilibrium because of equilibrium price and equilibrium quantity. Supply and demand are the determinants of market equilibrium because when the amount demanded and the amount supplied are equal, that is market equilibrium.
List the categories of scarce resources and delineate the nature of the economizing problem.
The categories are: land, labor, capital, and entrepreneurial ability. The economic problem has to do with resources and the scarcity of them. Where is the best place in society to put these resources when there are few of them? This is why society has an economic problem as a whole.
Describe the role of the economics theory in economics.
The economic theory is a statement of a cause-effect relationship; when accepted by nearly all economists, an economic principle. The role of this theory in economics is that everything having to do with the economy has a cause and an effect on society and the individual.
What is economics?
The study of how people, institutions, and society make economic choices under conditions of scarcity
(T/F) Economics is the study of how people allocate their limited resources to satisfy their nearly unlimited wants
True
what is a change in demand?
a change in the quantity demanded of a product at every price; a shift of the demand curve to the right or left
what is a change in supply?
a change in the quantity supplied of a product at every price, a shift of the supply curve to the left or right
what does aggregate mean?
a collection of specific economic units treated as if they were one unit
what is a demand curve?
a curve illustrating demand in regards to price
what is a supply curve?
a curve illustrating the direct relationship between the price of a product and the quantity of it supplied, other things equal
what is the demand curve?
a curve illustrating the inverse relationship between the price of a product and the quantity of it demanded, other things equal
what is the production possibilities curve?
a curve showing the different combinations of goods and servies that can be produced in a fully employed economy, assuming the available supplies of resources and technology are fixed
Are the goods that businesses offer for "free" to consumers also free to society? Select one: a. Yes, because the individual consumer does not have to pay for them. b. Yes, because the marginal benefit is greater than the marginal cost. c. No, because scarce resources were used to produce the free goods. d. No, because society does not assign a value to free goods.
c. no because scarce resources were used to produce the free goods
The term "scarcity" in economics can refer to the fact that Select one: a. economic wants are limited and resources are abused. b. even in the richest country some people go hungry. c. no country can produce enough products to satisfy everybody's economic wants. d. it is impossible to produce too much of any particular good or service in a market economy.
c. no country can produce enough products to satisfy everybody's economic wants
what are the characteristics of a market system?
characteristics: private property, freedom of enterprise and choice, self-interest, competition, markets and prices, technology and capital goods, specialization, use of money, and active but limited government
distinguish between goods that are complements and substitutes
complements are like bread and butter. substitutes are like pen and pencil
As a consequence of the condition of scarcity Select one: a. there is never enough of anything. b. production has to be centrally planned. c. things that are plentiful have relatively high prices. d. individuals and communities have to make choices from among alternatives.
d. individuals and communities have to make choices from among alternatives
(t/f) U.S. CEOs are overpaid and something should be done about it.
depends on the situation, if they worked hard then they deserve it. but if the people under them work hard and are paid little, then the CEO does not deserve it
Among competing issues, the most important concern of economics is with the:
efficient use of limited productive resources to satisfy economic wants.
what are the determinants of demand?
factors other than price that locate the position of a demand curve
what are determinants of supply?
factors other than price that locate the position of the supply curve
(t/f) economics is the study of abundance
false, economics is the study of scarcity. Although it could be true because of the abundance of wants.
(t/f) in the world we live in, there are unlimited resources, but limited wants
false, there are limited resources but unlimited wants
(t/f) in economics, "rational self-interest" is a bad thing
false. rational self-interest is a good thing because a lot of the time it helps others
what are some facts about U.S. businesses?
firms that purchase resources and provide goods and services to the economy, or commercial establishments that attempt to earn profits for their owners by offering goods and services for sale
what happens when the government interferes in the functioning of supply and demand?
government occaisonally concludes that changes in supply and demand have created prives that are unfairly high to buyers or unfairly low to sellers. government may then place legal limits on how high or low a price may go. shortage/surplus
what does "capital" mean?
human-made resources (buildings, machinery, and equipment) used to produce goods and services
how do advances in technology affect the economy?
it betters and improves the methods of production
the U.S. economic system is a command system. Why or why not?
it is not a command system, but a market system since things are privately owned and operated
what are capital goods?
items that are used to produce other goods and therefore do not directly satisfy consumer wants
what is law of demand and supply?
law of demand is an increase in a products price will reduce the quantity demanded. law of supply is as price rises, quantity rises
the basic economic problem is essentially one of deciding how to make the best use of:
limited resources to satisfy unlimited economic wants
what is marginal thinking?
marginal thinking is marginal benefits compared to marginal cost
what is market demand and supply?
market demand is the deciding factor of a price. supply is a schedule showing the amounts of a good or service that sellers will offer at various prices
what is market supply?
market supply is derived from individual supply, the supply and demand of all individuals
you go to your bank and you say "**** this line" and leave. what economic decision did you just make?
opportunity cost
what are private and public goods?
private goods are goods that people individually buy and consume and that private firms can profitably provide because they keep people who do not pay from receiving the benefits. public goods are goods that everyone can simultaneously consume and from which no one can be excluded, even if they do not pay
what are consumer goods?
products and services that directly satisfy consumer wants
as a student of economics, when you speak of scarcity, you are referring to the ability of society to:
satisfy economic wants given economic resources
discuss the concepts of shortage and surplus in the context or supply and demand
shortage is when quantity demanded of a product exceeds quantity supplied surplus is when quantity supplied exceeds quantity demanded
describe society's economic problem
society needs to make choices because economic wants are unlimited, but the means (income, time, resources) for satisfying those wants are limited. Same issues as individuals
explain the production possibilities model
society uses its scarce resources to provide goods and services. the alternatives and choices it faces can be best understood through a macroeconomic model of production possibilities. to keep things simple, we assume -full employment: the economy is employing all of its available resources -fixed resources: the quantity and quality of the factors of production are fixed -fixed technology: the state of technology (the methods used to produce output) is constant -two goods: the economy is producing only two goods: food products and manufacturing equipment
how do you achieve an efficiently functioning market?
to achieve an efficiently functioning market, the demand curve in the market must reflect consumers' full willingness to pay and the supply curve in the market must reflect all the costs of production
(T/F) a production possibilities frontier is a model that illustrates the combination of outputs that a society can produce if all of its resources are being used efficiently
true
(T/F) comparative advantage refers to the situation where an individual, business, or country can produce at a lower opportunity cost than a competitor can
true
(T/F) in a market economy, resources are allocated among households and firms with little or no government interference
true
(t/f) a budget line shows combinations of two things a person can buy at specific prives and income
true
(t/f) there are two general types of economic systems: command and market systems
true
entrepreneurial ability is an economic resource, why?
true, because entrepreneurial ability helps others, society, and the production of goods
(t/f) marginalism involves looking at extra benefits or costs of a decision
true, marginal means extra or additional
the satisfaction or pleasure one gets from consuming a good or service is called:
utility
the utility of a specific product:
varies from person to person using the product
when are we sure we have achieved optimal allocation?
when we have achieved marginal benefit = marginal cost