MACRO Exam 1

economizing problem

- Limited income and unlimited wants - The budget line - Attainable and unattainable combinations - Trade-offs and opportunity costs

production possibilities curve

A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good.

price ceiling

A legal maximum on the price at which a good can be sold

Price floor

A legal minimum on the price at which a good can be sold

budget line

A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products' prices.

the paradox of voting

A situation in which society may not be able to rank its preferences consistently through paired-choice majority voting refers to

private goods

goods provided by private businesses that can be used only by those who pay for them

The Invisible Hand

term economists use to describe the self-regulating nature of the marketplace

the minimum prices producers are willing to accept for a product and the higher equilibrium price.

the Producer surplus is the difference between

other-things-equal assumption (ceteris paribus)

the assumption that factors other than those being considered do not change

-scarcity and choice -opportunity cost -purposeful behavior to increase utility -marginal analysis

the economic perspective considers:

negative externality

the harm, cost, or inconvenience suffered by a third party because of actions by others

Utility (economics)

the measurement of the the total satisfaction or "useful-ness" that a consumer receives from consuming a good or service.

opportunity cost

the most desirable alternative given up as the result of a decision

each good is produced at a level where marginal benefits equal marginal costs

the optimal point on a ppc is achieved where

Adverse Selection

the problem of incomplete information - of choosing alternatives without fully knowing the details of available options

The Coarse theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

Individual supply

the relation between the price of a good and the quantity an individual producer is willing and able to sell per period, other things constant

Market supply

the sum of the quantities supplied by each seller in the market at each price

law of increasing opportunity cost

to produce more of one good, a successively larger amount of the other good must be sacrificed

1. Land 2. Labor 3. Capital (investment) 4. Entrepreneurship

what are the four categories of economic resources?

normative economics are economic statements that value judgement and positive economics values facts

what is the difference between positive and normative economics?

used by economists and other social scientists, as well as by physical scientists and life scientists, to formulate and test hypotheses.

what is the scientific method used for?

o What are we going to make o How are we going to make then ' o Who is going to make them o How will the system consider change o How you answer them will tell you type oof economy you have?

· What are the 5 fundamental questions?

Consumer Surplus

is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price.

be produced, because the benefits are greater than the costs.

Assume that Abby, Ben, and Clara are the only citizens in a community. A proposed public good has a total cost of $1,000. All three citizens will share an equal portion of this cost in taxes. The benefit of the public good is $400 each to Abby, Ben, and Clara. Based on economic analysis, the public good should

inconsistency between voters' interest in programs and politicians' interest in reelection.

As it relates to the political process, the principal-agent problem results from the

Substitute goods

Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.

circle flow model

a model showing how goods, services, and money flow among sectors and markets in the American economy

economic system

a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.

Pigovian tax

a tax enacted to correct the effects of a negative externality

economic perspective

a viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions

Capital (investment)

all manufactured aids used in production

the market system

an economic system in which individuals, not the government control the production and distribution of goods and services; also called capitalism

laissez-faire capitalism

an economic system in which the means of production and distribution are privately owned and operated for profit with minimal or NO government interference

unattainable

anything outside of the ppc curve is:

increase equillibrium price and quantity

Given a downsloping demand curve and an upsloping supply curve for a product, an increase in the price of a substitute good (from the buyer's perspective) will

public goods

Goods, such as clean air and clean water, that everyone must share.

Direct Control Pigovian Tax

How do governments correcct positive externalities?

Tax or subsidize it for it to shirt the demand curve

How to correct externalities that cause market failures

demand curve for x to the right

If X is a normal good, a rise in money income will shift the

using least costly production techniques

If an economy is being "productively efficient," then that means the economy is:

a decrease in supply

If producers obtain higher prices than before to produce given levels of output, then the following has occurred.

the vertical intercept would be -10

If the equation y = −10 + 2.5x was plotted,

Participating in the social hierarchy

In a command economy like the old Soviet Union, one is able to improve one's lot and get ahead in society largely through

have some firms go out of business

In a market system, if firms in an industry persistently earn total revenues that are less than total costs, then that industry will:

land

Includes all natural resources used in the production process

does not consider the strength of individual voters' preferences.

Majority voting may produce economically inefficient outcomes because it

be unhappy with the amount of government involvement in the economy.

One implication of the median-voter model is that at any point in time, most voters will

under; over

Positive externalities are generally _______ produced and negative externalities are generally _______ produced

Complementary goods

Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely).

optimal output

marginal benefit = marginal cost

decrease and the equillibrium quantity will increase

An increase in the demand for corn is more than offset by an increase in its supply. As a result, the equilibrium price will

Marginal benefits

Additional benefits received when one more unit of a product is produced.

result in a product surplus

An effective price floor will:

Capital goods

Buildings, machines, technology, and tools needed to produce goods and services.

normal goods

For most products, purchases tend to fall with decreases in buyers' incomes. Such products are known as

purposeful

Economists contend that most economic decisions are

marginal cost

Extra cost of producing one additional unit of production.

independent goods

Running shoes and staplers are:

permits the production of a larger output with fixed amounts of resources

Specialization in production is economically beneficial primarily because it:

Ranking and Selecting New Locations Determining Local Saturation Setting the Menu

Starbucks became a massive international company by using marginal-benefit/marginal-cost analysis for key decisions, including:

Law of Supply

Tendency of suppliers to offer more of a good at a higher price

Socialism and communism

The Command System is known as:

a budget line

The alternative combinations of two goods that a consumer can purchase with a specific money income is shown by

individuals pursuing their self-interest will try to produce goods and services that people in society want and are willing to purchase.

The invisible hand promotes society's interests because:

price and quantity are inversely related

The law of demand states that, other things equal,

benefit of abatement equals its marginal cost of abatement

The socially optimal amount of pollution abatement occurs where society's marginal

median-voter model

The theory that under majority rule the median (middle) voter will be in the dominant position to determine the outcome of an election.

producer surplus

The triangle that is below the curve

1. What are we going to make? 2. How are we going to make it? 3. Who's going to get the produced goods? 4. How will the system consider change? 5.

What are the five fundamental questions?

to innovate, take risk, make decisions, take initiative, and employ the other factors of production

What are the main functions of the entrepenuer?

-government has ownership of resources -decisions are made by a central planning board

What happens in a command system

Firms and workers become less dependent on others for producing goods and services

Which of the following is not a reason why specialization and trade are beneficial to society?

Students at a university lobby the administration to improve dorms and reduce class sizes without increasing tuition.

Which of the following is the best example of rent-seeking behavior?

prevention of firms from exposing themselves to financial risk

Which of the following would not be emphasized in a capitalist economy?

producers consume little or none of the products they produce

With specialization in a market economy, individual _______

Marginal

__________ means "extra" or "addittional"

positive externality

a benefit received by someone who had nothing to do with the activity that generated the benefit

-private property -free enterprise -freedom of choice -self-interest -market and prices

characteristics of the market system

Law of Demand

consumers buy more of a good when its price decreases and less when its price increases

labor

physical actions and mental activities that people contribute to the production of goods and services

consumer goods

products and services that satisfy human wants directly

Market Equillibrium

quantity demanded = quantity supplied

Entrepenurial Ability

special human resource distinct from labor