Macroeconomics

Scarcity

Fewer resources that we can make good use of

Microeconomics

How households and firms make decisions and interact

Which of the following factors explains most of the differences in standards of living among countries around the world? Labor unions Productivity Minimum wage laws Welfare and transfer payments

Productivity

Equality

When economic benefits are distributed uniformly across society

What is externality?

an impact, positive or negative, of one individual's activities on the well-being of a bystander. In this case, since the neighborhood residents, as bystanders, are harmed by the activities of the party-goers, the loud music causes a negative externality. The presence of externalities can cause markets to produce too much or too little of a good or service, leading to an inefficient allocation of resources.

How might an economist gather empirical data to test the proposed relationship between money and the price level? An economist would look for data on past changes in the money supply, and note the resulting changes in the price level Unlike researchers in the hard sciences, economists cannot study complex relationships using data. Economists do not usually develop theoretical models of the economy but only analyze summary statistics about the current state of the economy. An economist would persuade the Federal Reserve to change the money supply to various levels, and observe the resulting changes in the price level.

A.

Despite their differences, with which proposition are two economists chosen at random most likely to agree?Business managers can raise profit more easily by reducing costs than by raising revenue. Employers should not be restricted from outsourcing work to foreign nations. Central banks should focus more on maintaining low unemployment than on maintaining low inflation

B.

Rationality

By their behavior we can tell what people value.

Mutually beneficial exchange

Does not count if forced

Macroeconomics

Economy-wide phenomena like inflation, unemployment and GDP growth.

Difference between efficiency and equality

Efficiency means that society is utilizing its scarce resources to attain the maximum possible benefits. Equality, on the other hand, means that those benefits are distributed evenly among all members of society. Efficiency can be thought of as the size of the economic pie, while equality describes how that economic pie is divided into individual slices.

Classify the source of market failure in each case listed. A house party plays music at a very high volume, disturbing other residents in the neighborhood. There is only one car dealership in a small town, giving the dealership the ability to influence the price of cars.

Externality, Market power

Immediately after an ice storm brought down power lines throughout the region, hardware stores were sold out of batteries and flashlights. However, within a couple of days, special deliveries brought in extra batteries and flashlights, and everyone who wanted to buy a flashlight or batteries was able to do so. Which of the following principles of economic interaction best describes this scenario? Markets allocate goods effectively. There are gains from trade. All costs are opportunity costs. When markets do not achieve efficiency, government intervention can improve overall welfare.

Markets allocate goods effectively. After the ice storm, people rushing to the store to purchase batteries and flashlights created a shortage of these items, causing their prices to rise. Hardware stores responded to the higher prices and the increased profit opportunities by requesting special deliveries to restock their inventories.

Preferences

People can make judgements about the world around them.

Beth is training for a triathlon, a timed race that combines swimming, biking, and running. Consider the following sentence: Beth has only 20 hours this week that she can devote to training. Each hour she spends swimming is an hour that she can't spend biking or running. Which basic principle of individual choice do these statements best illustrate? People face trade-offs People usually exploit opportunities to make themselves better off. Beth can use time most efficiently by spending the same amounts of time on swimming, biking, and running. Beth has an incentive to spend more time on swimming than on biking or running.

People face trade-offs. Allocating scarce resources, such as Beth's time, requires making trade-offs of one goal against another. In this case, in allocating her time, Beth faces a trade-off between improving at swimming and improving at running or biking.

Susan: I think it's safe to say that, in general, the savings rate of households in today's economy is much lower than it really needs to be to sustain an improvement in living standards. Raphael: I think a switch from the income tax to a consumption tax would bring growth in living standards. Susan: You really think households would change their saving behavior enough in response to this to make a difference? Because I don't. The disagreement between these economists is most likely due to differences in what?

Scientific judgements. There are two main reasons that economists tend to disagree: differences in values and differences in scientific judgments. In this case, the economists disagree due to differences in scientific judgments because they disagree about a factual matter: the responsiveness of saving rates to changes in tax regimes. In contrast, disagreement due to differences in values reflect differing assessments on fairness or equity.

What is economics?

The study of how society manages its scarce resources

Opportunity cost

The value of the next best alternative.

Efficiency

To allocate goods and services so that there are no more possible mutually beneficial exchanged (ex-trading). When a society gets the most it can from its scarce resources

If the United States government raises the income taxes on the wealthiest Americans, while increasing welfare payments to the poorest Americans, the result will likely decrease/increase in efficiency and increase/decrease in equality in the United States.

decrease, increase

Suppose the large number of auto accidents in a small town results in new legislation that requires all citizens of the town to install new anti-lock brakes on their cars. These new brakes cut the time it takes a car to stop by 50%, allowing drivers to more easily avoid collisions with other cars and pedestrians. The new brakes decrease/increase the probability that a vehicle will collde with another vehicle but also gives drivers an incentive to drive more recklessly/carefully , which could potentially increase/decrease the number of car accidents in the town

decrease, recklessly, increase

Suppose that the government believes the economy is not producing goods and services at its optimal level. In an attempt to stimulate the economy, the government increases the quantity of money in the economy by printing more money. This monetary policy increases/decreases the economy's demand for goods and services, leading to higher/lower product prices. In the short run, the change in prices induces firms to produce less/more goods and services. This, in turn, leads to a higher/lower level of unemployment. In other words, the economy faces a trade-off between inflation and unemployment: Higher inflation leads to higher/lower unemployment.

increases, higher, more, lower, lower. When the government uses monetary policy to increase the quantity of money, then the demand for goods and services increases. This change in the demand will lead to higher prices, causing firms to produce more goods and services—which requires more workers. Therefore, higher prices lead to lower unemployment levels in the short run. In the long run, however, an increase in the quantity of money will lead only to an increase in the price levels but will have no effect on the unemployment level. The economy faces a trade-off between inflation—an increase in the overall price levels—and unemployment in the short run. In particular, higher inflation rates usually correspond to lower unemployment levels, while lower inflation rates correspond to higher levels of unemployment.

Loggers are much more/less likely to supply wood to the market if property rights are enforced.

more. Property rights are the ability of individuals to own and control their own scarce resources. The enforcement of property rights, usually through the police and court systems, is essential for markets to function efficiently, since in the absence of secure property rights, individuals will have less incentive to produce goods and services.

What is a normative statement?

one that offers an opinion as to the way the world should be.

What is a positive statement?

one that seeks to describe the world as it is

What is market power?

the ability of an individual economic agent, or small number of economic agents, to influence the market price of a good or service. In this case, because the car dealership is the only source of cars, the car dealership faces no competition from other potential suppliers, enabling the car dealership the ability, or market power, to restrict the output of cars and charge higher prices. In short, the market power of the car dealership prevents the invisible hand from guiding the market to the efficient outcome.

what is Productivity?

the amount of goods and services that can be produced for each unit of labor input. Countries with high productivity, in which workers can produce large amounts of goods and services, tend to have higher standards of living. On the other hand, countries with low productivity, where workers produce relatively fewer goods and services, often experience lower standards of living.