Exam 1 Microeconomics Chapters 1-4

Types of Models

- Circular-Flow Diagram - Factors of production - Production Possibilites Frontier

Model

- a highly, simplified representation of a more complicated reality -Economists use these to study economic issues -Omits details, simplifies real-world

Circular-Flow diagram: firms

- buy/hire factors of production, use them to produce goods and services -Sells goods and services

Shape of PPF

-Can be straight line or bow shaped -Depends on what happens to opportunity cost as economy shifts resources from one industry to the other

market economy

-Economic decisions are made by individuals or the open market. -act by invisible hand

supply curve shifters

-Input prices -Technology -# of sellers -Expectations

Circular-Flow Diagram: Households

-Own the factors of production: sell and rent to firms for income -buy and consume goods and services

6. Markets are usually a good way to organize economic activity

-What goods to produce -how to produce them -how much of each to produce -who gets them

Change in the quantity supplied

-a movement along a fixed S curve -occurs when price changes

normative statements

-attempt to prescribe how the world should be -can not be confirmed or refuted

Opportunity cost of PPF

-equal to slope -rise over run

The production Possibilities Frontier (PPF)

-graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology

inflation

-increases in the general level of prices -almost always caused by excessive growth in the quantity of money -faster government creates money, the greater the inflation rate

Inferior good

-negatively related to income -increase shifts D to the left

Possible points on a PPF

-on the line and bellow -line is efficient

PPF straight line

-opportunity cost remains constant

5. Trade can make everyone better off

-people can specialize in producing one good or service and exchange it for other goods -countries also benefit from trade and specialization by getting better price abroad for goods they produce and buy other good cheaply from abroad.

Demand for a normal good

-positively related to income -increase in income causes increase in quantity demanded at each price

Change in supply

-shift in the S curve -occurs when either technology of costs change

positive staments

-statements that attempt to describe the world as it is -can be confirmed or refuted

Comparative advantage

-the ability to produce a good at a lower opportunity cost than another producer

Absolute advantage

-the ability to produce a good using fewer inputs than another producer

quantity demanded

-the amount of a good that buyers are willing and able to purchase

productivity

-the number of goods and services produced per unit of labor -depends on the equipment, skills, and technology available to workers

Factors of production

-the resources the economy uses to produce goods and services. -labor -land -Capital/buildings and machines used in production

the quantity demanded is

-the sum of the quantities demanded by all buyers at each price

Circular-Flow Diagram

-visual model of the economy -shows how dollars flow through markets among households and firms

opportunity cost

-whatever must be given up to obtain an item -the relevant cost for decision making

Maket failure

-when the market fails to allocate society's resources efficiently causes by externalities and market power

10 Principles of Economics

1. People Face Tradeoffs 2. The cost of something is what you give up to get it 3. Rational People think at the margin 4. People respond to incentives 5. Trade can make everyone better off 6. Markets are usually a good way to organize economic activity 7. Governments can sometimes improve market outcomes 8. A country's standard of living depends on its ability to produce goods and services 9. prices rise when the government prints too much money 10. Society faces a short-run tradeoff between inflation and unemployment

D

A competitive market is a market in which A. an auctioneer helps set prices and arrange sales. B. there are only a few sellers. C. the forces of supply and demand do not apply. D. no individual buyer or seller has any significant impact on the market price.

B

A market demand curve shows how the total quantity demanded of a good varies as A. income varies. B. price varies. C. price of the nearest substitute good varies. D. supply varies.

D

A movement downward and to the right along a demand curve is called a(n) A. increase in demand. B. decrease in demand. C. decrease in quantity demanded. D. increase in quantity demanded.

3. Rational people think at the margin

A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost.

A

An increase in quantity demanded A. results in a movement downward and to the right along a demand curve. B. results in a movement upward and to the left along a demand curve. C. shifts the demand curve to the left. D. shifts the demand curve to the right.

D

An increase in the price of a good will A. increase demand. B. decrease demand. C. increase quantity demanded. D. decrease quantity demanded.

4. People respond to incentives

Behavior changes when costs or benefits change.

C

DeShawn has spent $600 purchasing and repairing an old fishing boat, which he expects to sell for $900 once the repairs are complete. DeShawn discovers that, in addition to the $600 he has already spent, he needs to make an additional repair, which will cost another $400, in order to make the boat worth $900 to potential buyers. He can sell the boat as it is now for $400. What should he do? A. He should sell the boat as it is now for $400. B. He should keep the boat since it would not be rational to spend $1,000 on repairs and then sell the boat for $900. C. He should complete the repairs and sell the boat for $900. D. It does not matter which action he takes; the outcome is the same either way.

D

Efficiency means that: A. society is conserving resources in order to save them for the future. B. society's goods and services are distributed equally among society's members. C. society's goods and services are distributed fairly, though not necessarily equally, among society's members. D. society is getting the maximum benefits from its scarce resources.

marginal cost

Extra cost of producing one additional unit of production.

A

For two individuals who engage in the same two productive activities, it is impossible for one of the two individuals to: A. have a comparative advantage in both activities. B. have an absolute advantage in both activities. C. be more productive per unit of time in both activities. D. gain from trade with each other

A

If Iowa's opportunity cost of corn is lower than Oklahoma's opportunity cost of corn, then: A. Iowa has a comparative advantage in the production of corn. B. Iowa has an absolute advantage in the production of corn. C. Iowa should import corn from Oklahoma. D. Oklahoma should produce just enough corn to satisfy its own residents' demands.

C

If he devotes all of his available resources to cantaloupe production, a farmer can produce 120 cantaloupes. If he sacrifices 1.5 watermelons for each cantaloupe that he produces, it follows that A. if he devotes all of his available resources to watermelon production, then he can produce 80 watermelons. B. he cannot have a comparative advantage over other farmers in producing cantaloupes. C. his opportunity cost of one watermelon is 2/3 of a cantaloupe. D. his production possibilities frontier is bowed-out.

C

If something happens to alter the quantity demanded at any given price, then the demand curve A. becomes steeper. B. the demand curve becomes flatter. C. the demand curve shifts. D. we move along the demand curve.

A

In a competitive market, each seller has limited control over the price of his product because: A. other sellers are offering similar products. B. buyers exert more control over the price than do sellers. C. these markets are highly regulated by the government. D. sellers usually agree to set a common price that will allow each seller to earn a comfortable profit.

A

In a market economy, supply and demand determine A. both the quantity of each good produced and the price at which it is sold. B. the quantity of each good produced but not the price at which it is sold. C. the price at which each good is sold but not the quantity of each good produced. D. neither the quantity of each good produced nor the price at which it is sold.

C

In building economic models, economists often omit A. assumptions. B. theories. C. details. D. equations.

C

In competitive markets, which of the following is not correct? A. Firms produce identical products. B. No individual buyer can influence the market price. C. Some sellers can set prices. D. Buyers are price takers.

d

In the circular-flow diagram, which of the following is not a factor of production? a. labor b. land c. capital d. money

D

In the circular-flow diagram, which of the following items does not flow from households to firms? A. revenue B. land, labor, and capital C. factors of production D. profit

A

In the circular-flow diagram, which of the following items flows from firms to households through the markets for goods and services? A. goods and services B. dollars paid to land, labor, and capital C. dollars spent on goods and services D. wages, rent, and profit

D

In the circular-flow diagram, which of the following items flows from firms to households through the markets for the factors of production? A. goods and services B. land, labor, and capital C. dollars spent on goods and services D. wages, rent, and profit

C

In the circular-flow diagram, which of the following items flows from households to firms through the markets for goods and services? A. goods and services B. dollars paid to land, labor, and capital C. dollars spent on goods and services D. wages, rent, and profit

B

In the simple circular flow diagram, the flow of money from the markets for goods and services to the firms is called A. spending. B. revenue. C. income. D. wages, rent, and profit.

normative

Is this a positive or normative statement? A tax cut is needed to stimulate the economy

positive

Is this a positive or normative statement? An increase in the price of burritos will cause an increase in consumer demand for music downloads

positive

Is this a positive or normative statement? Prices rise when the government increases the quantity of money

normative

Is this a positive or normative statement? The government should print less money

C

Kelly and David are both capable of repairing cars and cooking meals. Which of the following scenarios is not possible? A. Kelly has a comparative advantage in repairing cars and David has a comparative advantage in cooking meals. B. Kelly has an absolute advantage in repairing cars and David has an absolute advantage in cooking meals. C. Kelly has a comparative advantage in repairing cars and in cooking meals. D. David has an absolute advantage in repairing cars and in cooking meals.

D

Ken and Traci are two woodworkers who both make tables and chairs. In one month, Ken can make 3 tables or 18 chairs, whereas Traci can make 8 tables or 24 chairs. Given this, we know that the opportunity cost of 1 table is A. 1/6 chair for Ken and 1/3 chair for Traci. B. 1/6 chair for Ken and 3 chairs for Traci. C. 6 chairs for Ken and 1/3 chair for Traci. D. 6 chairs for Ken and 3 chairs for Traci.

C

Ken and Traci are two woodworkers who both make tables and chairs. In one month, Ken can make 3 tables or 18 chairs, whereas Traci can make 8 tables or 24 chairs.. Given this, we know that A. Ken has an absolute advantage in chairs. B. Ken has a comparative advantage in tables. C. Traci has an absolute advantage in chairs. D. Traci has a comparative advantage in chairs.

B

Once the demand curve for a product or service is drawn, it A. remains stable over time. B. can shift either rightward or leftward. C. is possible to move along the curve, but the curve will not shift. D. tends to become steeper over time.

C

Prices usually reflect A. only the value of a good to society. B. only the cost to society of making a good. C. both the value of a good to society and the cost to society of making the good. D. neither the value of a good to society nor the cost to society of making the good.

B

Rational people make decisions "at the margin" by comparing a. average costs and benefits b. total costs and benefits c. additional costs and benefits d. opportunity costs and benefits

D

Refer to Table 4-1. If the market consists of Laura and Hillary only and the price falls by $1, the quantity demanded in the market increases by A. 2 units. B. 3 units. C. 4 units. D. 5 units.

C

Refer to Table 4-2. Suppose Abby, Brandi, Carrie, and DeeDee are the only four buyers in the market. If the price is $8, then the market quantity demanded is A. 4 units. B. 6 units. C. 24 units. D. 32 units.

C

Refer to Table 4-2. Whose demand does not obey the law of demand? A. Abby's B. Brandi's C. Carrie's D. DeeDee's

C

Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per year, and a worker in Oatland can grow either 20 bushels of corn or 5 bushels of oats per year. There are 20 workers in Cornland and 20 workers in Oatland. Which of the following statements is true? A. Both countries could gain from trade with each other. B. Neither country could gain from trade with each other because Cornland has an absolute advantage in both goods. C. Neither country could gain from trade with each other because neither one has a comparative advantage. D. Oatland could gain from trade between the two countries, but Cornland definitively would lose.

C

Suppose that when the price of a 16 oz. to-go cup of gourmet coffee is $4.25, students purchase 750 cups per day. If the price decreases to $3.75 per cup, which of the following is the most likely outcome? A. Students would purchase fewer than 750 cups per day. B. Students would continue to purchase 750 cups per day. C. Students would purchase more than 750 cups per day. D. We do not have enough information to answer this question.

D

The circular-flow diagram A. is an economic model. B. incorporates two types of decision makers: households and firms. C. represents the flows of inputs, outputs, and dollars. D. All of the above are correct

B

The law of demand states that, other things equal, an increase in: A. price causes quantity demanded to increase. B. price causes quantity demanded to decrease. C. quantity demanded causes price to increase. D. quantity demanded causes price to decrease.

C

The law of demand states that, other things equal, when the price of a good A. falls, the demand for the good rises. B. rises, the quantity demanded of the good rises. C. rises, the demand for the good falls. D. falls, the quantity demanded of the good rises.

B

The opportunity cost of an item is A. the number of hours that one must work in order to buy one unit of the item. B. what you give up to get that item. C. always less than the dollar value of the item. D. always greater than the cost of producing the item.

C

To obtain the market demand curve for a product, sum the individual demand curves A. vertically. B. diagonally. C. horizontally. D. and then average them.

B

Total output in an economy increases when each person specializes because: A. there is less competition for the same resources. B. each person spends more time producing that product in which he or she has a comparative advantage. C. a wider variety of products will be produced within each country due to specialization. D. government necessarily plays a larger role in the economy due to specialization.

C

When describing the opportunity cost of two producers, economists use the term A. natural advantage. B. trading advantage. C. comparative advantage. D. absolute advantage.

A

When quantity demanded decreases at every possible price, the demand curve has: A. shifted to the left. B. shifted to the right. C. not shifted; rather, we have moved along the demand curve to a new point on the same curve. D. not shifted; rather, the demand curve has become flatter.

D

When the price of a good or service changes, A. the supply curve shifts in the opposite direction. B. the demand curve shifts in the opposite direction. C. the demand curve shifts in the same direction. D. there is a movement along a given demand curve.

D

Which of the following does not affect an individual's demand curve? A. expectations B. income C. prices of related goods D. the number of buyers

C

Which of the following is a correct statement about production possibilities frontiers? A. An economy can produce only on the production possibilities frontier. B. An economy can produce at any point inside or outside a production possibilities frontier. C. An economy can produce at any point on or inside the production possibilities frontier, but not outside the frontier. D.An economy can produce at any point inside the production possibilities frontier, but not on or outside the frontier.

C

Which of the following is not held constant in a demand schedule? A. income B. tastes C. price D. expectations

You are selling your 2010 Mustang. You have already spent $1000 on repairs. At the last minute, the transmission dies. You can pay $600 to have it repaired, or sell the car "as is". Blue book value is $6500 if transmission works, $5700 if it doesn't. Do you repair the transmission?

Yes, because 6500-600=5900 5900-5700=200 You'll make $200 more by fixing the transmission

C.

You are considering staying in college another semester so that you can complete a major in economics. In deciding whether or not to stay you should: A. compare the total cost of your education to the total benefits of your education. B. compare the total cost of your education to the benefits of staying one more semester. C. compare the cost of staying one more semester to the benefits of staying one more semester. D. compare the total benefits of your education to the cost of staying one more semester.

market

a group of buyers and sellers

market power

a single buy or seller has substantial influence on market price -eg monopolies

Demand schedule

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

Supply schedule

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

Two goods are complements if

an increase in the price of one causes a fall in demand for the other

two goods are substitutes if

an increase in the price of one causes an increase in demand for the other

Points not possible on PPF

any point outside the line

B

decrease in quantity demanded A. results in a movement downward and to the right along a demand curve. B. results in a movement upward and to the left along a demand curve. C. shifts the demand curve to the left. D. shifts the demand curve to the right.

when there is an increase in demand:

demand curve shifts right

1. People face trade-offs

i. To get more of one thing, you must get less of another ii. Efficiency vs. Equity EX: Guns vs Butter. If a society wants gun for defenses, they have less money for consumer goods (butter) to raise the standard of living at home.

Increase in income causes

increase in quantity demanded at each price, shifts D curve to the right

Demand curve shifters

number of buyers, income, prices of related goods, tastes, expectations

2. The cost of something is what you give up to get it

oppertunity costs

PPF bow shaped

opportunity cost of a good rises as more of the good is produced

incentive

something that induces a person to act, i.e. the prospect of a reward or punishment

invisible hand

term economists use to describe the self-regulating nature of the marketplace -the interaction of buyers and sellers determines prices -each price reflects the good's value to buyers and the cost of producing the good -prices guide self-interested households and firms to make decisions that, in many cases, maximize society's economic well-being

marginal benefit

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

quantity supplied

the amount that sellers are will and able to sell

law of supply

the claim that the quantity supplied of a good rises when the price of the good rises

Making decisions requires compairing

the costs and benefits of alternative choices

Scarcity

the limited nature of society's resources

law of demand

the quantity demanded of a good falls when the price of the good rises

macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

Microeconomics

the study of how households and firms make decisions and how they interact in markets

economics

the study of how society manages its scarce resources

equality

when prosperity is distributed uniformly among society's members

efficiency

when society gets the most from its scarce resources

externalities

when the production or consumption of a good affects bystanders -eg pollution