Micro Economics Chapters 1-3
Efficiency
The property of society getting the most it can from its scarce resources
Suppose you find $20. if you choose to use the $20 to go the football game, your opportunity cost of going to the game is:
$20 (because you could have used the $20 to buy other things) plus the value of your time spent at the game
Comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
Externality
the impact of one person's actions on the well-being of a bystander
Scarcity
the limited nature of societies resources. Wants are insatiable and resources are scarce. You have to make choices
If the price of a good is equal to the equilibrium price,
the quantity demanded is equal to the quantity supplied and the price remains unchanged
If the price of a good is below the equilibrium price,
there is a shortage and the price will rise
If the price of a good is above the equilibrium price,
there is a surplus and the price will fall
Economic models are:
Built with assumptions
Points on the production possibilities frontier are:
Efficient
Productivity can be increased by:
Improving the education of workers
In the short run:
A decrease in inflation temporarily increases unemployment
Economic growth is depicted by:
A shift in the production possibility frontier outward
Suppose a country's workers can produce 4 watches per hour or 12 rings per hour. if there is no trade:
A) Opportunity cost of 1 watch is 3 rings
Foreign Trade:
Allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home
Suppose a country's workers can produce 4 watches per hour or 12 rings per hour. if there is no trade: A) Domestic price of 1 ring is 3 watches B) 1 ring is 1/3 watches C) 1 ring is 4 watches D) 1 ring is 1/4 watches E) 1 ring is 12 watches
B) 1 ring is 1/3 watches
Which of the following will not shift a country's production possibilities frontier outward? A) an increase in the capital stock B) an advance in technology C) a reduction in unemployment D) an increase in the labor force
C) A reduction in unemployment
According to the principle of comparative advantage:
Countries should specialize in the production of goods for which they have a lower opportunity cost of production than their trading partners.
Which of the following is not a factor of production? A) land B) labor C) capital D) money E) All of these answers are factors of production
D) Money
Which of the following statements about trade is true? A) Unrestricted international trade benefits every person in a country equally B) People that are skilled at all activities cannot benefit from trade C) Trade can benefit everyone in society because it allows people to specialize in activities in which they have an absolute advantage D) Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.
D) Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.
Which of the following involve a trade-off? A) Going to college B) Taking a nap C) Buying a car D) Watching a football game on saturday afternoon E) All of these
E) All of the above involve trade-offs
High and persistent inflation is caused by:
Governments increasing the quantity of money too much.
Shape of the PPF
If opportunity cost remains constant, PPF is a straight line. If opportunity cost of a good rises as the economy produces more of the good, PPF is a bow shape
Raising taxes and increasing welfare payments:
Improves equality at all the expense of efficiency
Shifts in Demand curve
Income- normal v. inferior good prices of related goods- substitutes v. complements tastes- if you it, you buy more expectations- future prices
If a nation has a comparative advantage in the production of a good:
It can produce that good at a lower opportunity cost than its trading partner
If a nation has an absolute advantage in the production of a good:
It can produce that good using fewer resources than its trading partner
Trade-offs are required because wants are unlimited and resources are:
Scarce
Economics is the study of how
Society manages its scarce resources
Positive statements are:
Statements of descriptive that can be tested
Because people respond to incentives, we would expect that if the average salary of accountants increases by 50 percent while the average salary of teachers increases by 20 percent:
Students will shift majors from educating to accounting
A rational person does not act unless:
The action produces marginal benefits that exceed marginal cost
Opportunity Cost
The value of the next best alternative given up in order to enjoy a particular good or service. Includes an objective as well as a subjective component
Workers in the US enjoy a high standard of living because:
Workers in the United States are highly productive
Economic growth is depicted by
a shift in the production possibilities frontier outward
Market failure
a situation in which a market left on its own fails to allocate resources efficiently
Circular Flow Diagram
a visual model of the economy that shows how dollars flow through markets among households and firms
The law of demand states that an increase in the price of a good
decreases the quantity demanded for that good
Foreign trade
allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home
Inferior good
an INCREASE in income leads to a DECREASE in demand
Normal good
an INCREASE in income leads to an INCREASE in demand
Complements
an INCREASE in the price of one leads to a DECREASE in the demand for the other
Substitutes
an INCREASE in the price of one leads to an INCREASE in the demand for the other
A decrease ( leftward shift) in the supply for a good will tend to cause
an increase in the equilibrium price and a decrease in the equilibrium quantity
An increase (rightward shift) in the demand for a good will tend to cause
an increase in the equilibrium price and quantity
Inflation
an increase in the overall level of prices in the economy
If an increase in consumer incomes leads to a decrease in the demand for camping equipment, then camping equipment is
an inferior good
Rule of Assumptions
can simplify the complex world and make it easier to understand
Positive
claims that attempt to describe the world as it is
Normative
claims that attempt to prescribe how the world should be
outward shift of frontier shows
economic growth
Division of Labor
important source of economic growth. 1. teamwork fosters productivity 2. people develop expertise
Raising taxes and increasing welfare payments
improves equity at the expense of efficiency
The law of supply states that an increase in the price of a good
increases the quantity supplied of that good
Marginal Cost
is the change in the total cost that arises when the quantity produced is incremented by one unit. Additional cost or benefit associated with a small amount extra of some action
A perfectly competitive market has
many buyers and sellers
Competitive Market
one with many buyers and sellers of a particular good or service- price taker
A monopolistic market has
only one seller
Slope of the Frontier measures
opportunity cost
Law of Demand
other things equal. when the price of the good rises- quantity demanded of a good falls
Diamond- Water Paradox
practical things that we use everyday often have little or no value in exchange versus things that often have the greatest value in the market have little or no practical use
A rational person does not act unless the action
produces marginal benefits that exceed marginal costs
Economics is the study of how
society manages its scarce resources
Incentive
something that induces a person to act
If an increase in the price of blue jeans leads to an increase in the demand for tennis shoes, then blue jeans and tennis shoes are
substitutes