Ch 1-5
efficiency
when society is getting maximum benefits from its scarce resources ------> absence of waste making the pie as big as possible
innovation
which is the successful introduction and adoption of a new product or first use of a new method.
property rights
the rights to use, control, and obtain benefits from a good resource
the importance of secondary effects.
"Mediocre economists often consider only the immediate direct effects of a change, whereas a good economist will also consider indirect effects that may only become observable over time." This statement most clearly emphasizes
Cross-Price Elasticity of Demand
% change in Qd for good 1/ % change in price of good 2
Price Elasticity of Demand formula
% change in Qd/ % change in P
Propositions About Which Most Economists Agree
-A ceiling on rents reduces the quantity and quality of housing availble (93%) -Tariffs and import quotas usually reduce general economic welfare (93%) -The U.S. should not restrict employers from outsourcing work to foreign countries (90%) -The U.S. should eliminate agriculture subsidies (85%) -The gap between Social Security funds and expenditures will become unsustainably large within fifty years if current policies remain unchanged. (85%) -A large federal budget deficit has an adverse effect on the economy (83%) -A minimum wage increases unemployment among young and unskilled workers. (79%) Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings (78%)
Model
-A highly simplified representation of a more complicated reality -Economists use models to study economic issues
Perfectly Competitive Market
-All goods exactly the same -Buyers and sellers so numerous that no one can affect market price. (PRICE TAKER)
Firms in Circular-Flow Diagram
-Buy/hire factors of production, use them to produce goods and services -Sell goods and services
Demand Curve Shifter: Income
-Demand for a normal good is positively related to income -Increase in income causes increase in quantity demand at each price, shifts D curve to the right -Demand for an inferior good is negatively related to income. An increase in income shift D curves for inferior goods to the left
Why do Economists disagree
-Economists often give conflicting policy advice -They sometimes disagree about the validity of alternative positive theories about the world. -They may have different values and, therefore, different normative views about what policy should try to accomplish
What factors determine the cost of producing a good or service?
-Elements of nature and political disruptions -The prices of resources used to make the good -Technology
Determinants of Price Elasticity of Demand
-Extent to which close substitutes are available -whether the good is a necessity or a luxury -How broadly or narrowly the good is defined -The time horizon-elasticity is higher in the long run than the short run
Society faces a short-run tradeoff between inflation and unemployment
-In the short-run (1-2 years), many economic policies push inflation and unemployment in opposite directions -Other factors can make this tradeoff more or less favorable, but the tradeoff is always present
Elasticity
-Measures how much one variable responds to changes in another variable -Def: Elasticity is a numerical measure of the reponsiveness of Qd or Qs to one of its determinants
Households in Circular-Flow diagram
-Own the factors of production, sell/rent them to firms for income -Buy and consume goods and services
Principles of decision making are
-People face tradeoffs -The cost of any action is measured in terms of foregone opportunities -Rational people make decision by comparing marginal costs and marginal benefits -People respond to incentives
Principles of the economy as a whole are:
-Productivity is the ultimate source of living standards -Money growth is the ultimate source of inflation -Society faces a short-run tradeoff between inflation and unemployment
Incentive
-Something that induces a person to act. Ex: the prospect of a reward or punishment. -Rational people respond to incentives
Rational People
-Systematically and purposefully do the best they can to achieve their objectives. -Make decisions by evaluating costs and benefits of marginal changes
Productivity
-The most important determinant of living standards -The amount of goods and services produced per unit of labor
Principles of interactions among people are
-Trade can be mutually beneficial -Markets are usually a good way of coordinating trade -Government can potentially improve market outcomes if there is a market failure or if the market outcome is inequitable
"Organize economic activity"
-What goods to produce -How to produce them -How much of each to produce -Who gets them
Invisible Hand
-Written by Adam Smith in "The Wealth of Nations" (1776) -Each of these households and firms acts as if "led by an invisible hand" to promote economic well-being. -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
Suppose Dave works 8 hrs per day and that in 1 hour Dave can either mow 1 lawn or he can trim 5 bushes. 1) What is Dave's opportunity cost of mowing 4 lawns? 2) What is Dave's opportunity cost of trimming 30 bushes?
1) 20 bushes 2) 6 lawns
Suppose Jacob is planning to sell his house. He has already spent $10,000 on various house repairs and can sell his house now for $100,000. Jacob has another option of spending an additional $15,000 to improve his kitchen in which he will be able to sell his house for $120,000. Should Jacob make the kitchen improvements before selling his house?
1) should only make the kitchen improvements be4 selling house if the marginal benefit exceeds the marginal cost 2) marginal benefit= 120,000 (improve)- 100,000 (don;t improve= 20,000 3)marginal cost= 15,000 (amount to pay for improvements 4) 20,000 (mb) > 15,000 (mc) 5) Yes, he should make the kitchen improvements be4 selling house
Supply Curve Shifters
1. Input Prices 2. Technology 3. Number of Sellers 4. Expectations
Demand Curve Shifters
1. Number of buyers 2. Income 3. Prices of Related Goods 4. Tastes 5. Expectations
OPP cost of 1. going to college for a year 2. seeing a movie
1. not just the tuition/rent/books and fees but also the foregone wages if you were to get a job (the value of your time could be spent doing something else) 2. not just the price of the ticket but also the value of the time you spend in the theater
governments intervene to:
1. promote efficiency (rid of market failure-caused by externalities) and 2. promote equity/equality
Complete the following table by indicating whether an event will cause a movement along the demand curve for peanut butter or a shift of the demand curve for peanut butter, holding all else constant. 1. a change in the expectations of consumers about prices 2. a decrease in the price of hazelnut spread (a substitute for peanut butter) 3. an increase in the price of peanut butter
1. shift 2. shift 3. movement along
Complete the following table by indicating whether an event will cause a movement along the supply curve for peanut butter or a shift of the supply curve for peanut butter, holding all else constant. 1. a decrease in the number of producers 2. a decrease in the price of peanut butter 3. a change in expectations about the future price of peanut butter
1. shift 2. movement along 3. shift
1. when individuals engage in voluntary trade, both parties are made better off 2. by moving goods and resources to those who value them most, trade creates value and increases the wealth created by societies resources
2 important aspects of voluntary trade
What goods will be produced? How will goods be produced? For whom will goods be produced?
3 basic questions faced by all economics:
Human, physical, natural
3 categories of resources
1. Use of goods and services is always costly, so decision-makers must make trade-offs 2. individuals choose purposefully 3. Incentives matter
3 guide posts of economic thinking
market prices communicate information market prices coordinate the actions of market participants market prices motivate economic players
3 important functions performed by market prices:
1. an increase in the economy's resource base would expand our ability to produce goods and services 2. advancements in technology can expand the economy's production possibilities 3. an improvement in the rules of the economy can increase output 4. By working harder and giving up current leisure, we could increase our level of output
4 factors that can shift the PPC outward
1. private owners can gain by using their resources in ways that are beneficial to others 2. Private owners have a strong incentive to care for and manage what they own 3. They have an incentive to conserve for the future 4. They have an incentive to lower the chance that their property will cause damage to the property of others
4 important incentives
Consider the market supply of donuts. Complete the following table by indicating whether an event will cause a movement along the supply curve for donuts or a shift of the supply curve for donuts, holding all else constant.
A change in expectations about the future price of donuts = shift An increase in the price of donuts= movement An increase in the number of producers= shift
Supply Curve Shifter: Input Prices
A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right
Natural resource
A field used for crops such as corn or wheat
Microeconomics
A firm's decision about the size of its new factory
Determine whether each of the following topics would more likely be studied in microeconomics or macroeconomics.
A firm's decision about the size of its new factory micro The optimal interest rate for the Federal Reserve to target macro The effects of government tax policy on long-term economic growth macro
Inferior Good
A good for which, other things being equal, an increase in income leads to a decrease in demand
Normal Good
A good for which, other things being equal, an increase in income leads to an increase in demand.
inelastic
A good without any close substitutes is likely to have relatively____________demand, since consumers cannot easily switch to a substitute good if the price of the good rises.
sports car
A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the most elastic demand? sports car or heart doctor
Production Possibilities Frontier
A graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology
Demand Curve
A graphical object showing the relationship between the price of a good and the amount of the good that buyers are willing and able to purchase at various prices
supply curve
A graphical object showing the relationship between the price of a good and the amount that sellers are willing and able to supply at various prices
What does Interdependence and trade allow everyone to enjoy?
A greater quantity and variety of goods and services.
Market
A group of buyers and sellers (need not be in a single location)
Capital
A saxophone used by a professional brand
Market Power
A single buyers or seller has substantial influence on market price (Ex: monopoly)
Supply Schedule
A table showing the relationship between the price of a good and the amount of it that sellers are willing and able to supply at various prices
Demand Schedule
A table showing the relationship between the price of a good and the amount that buyers are willing and able to purchase at various prices
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
Circular-Flow Diagram
A visual model of the economy, shows how dollars flow through markets among households and firms
Comparative Advantage
Ability to produce a good at a lower opportunity cost than another producer
Absolute Advantage
Ability to produce a good using fewer inputs than another producer
in the use of free exchange and competitive markets
Adam Smith believed
socialism
Adam Smith was opposed to
Market Economy
Allocates resources through decentralized decisions of many households and firms as they interact in markets.
Quantity Demanded
Amount of the good that buyers are willing and able to purchase
Quantity Supplied
Amount that sellers are willing and able to sell
Supply Curve Shifter: Number of Sellers
An increase in the number of sellers increases the quantity supplied at each price
Which of the following might lead to an increase in the equilibrium price of jelly and a decrease in the equilibrium quantity of jelly sold?
An increase in the price of grapes, an input to jelly
During the Revolutionary War, the American colonies could not raise enough tax revenue to fully fund the war effort; to make up the difference, the colonies decided to print more money. Printing money to cover expenditures is sometimes referred to as an inflation tax. Who is being taxed when more money is printed? A- Banks only B- Families of soldiers in active duty C- Anyone who is holding money
Answer is C. When the government prints money, it imposes a tax on anyone who is holding money. This is because printing money decreases the value of money by causing inflation, or an increase in the overall level of prices in the economy. See Section: Principle 9: Prices Rise When the Government Prints Too Much Money.
You were planning to spend Saturday working at your part-time job, but a friend asks you to go skiing. You were planning to spend Saturday studying at the library, but a friend asks you to go skiing. What are included in the true cost of going skiing?
Any monetary costs from going skiing, as well as anything you lose by going skiing, wages/time studying
Demand Curve Shifters: Tastes`
Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right
What is the law of supply?
As the price of a good increases, producers will wish to supply more of it
Positive Statement
Attempt to describe the world as it is. They can be confirmed or refuted/
Normative Statement
Attempt to prescribe how the world should be
Which of the following describe some of the trade-offs faced by a family deciding whether to buy a new car? Check all that apply. A- The vehicle is available in several colors. B- An increase in the family's car payment means the family will be unable to afford a vacation. C- Fuel efficient cars are more expensive, but regular cars require spending more on gas. D- A larger vehicle means saving time by not having to make multiple trips somewhere, but a smaller vehicle is cheaper.
B C D
example of how government can improve market outcomes
Because a type of fish is on the verge of extinction, the government imposes rules that prohibit fishing in the publicly owned spawning grounds. At first, owners of fishing boats complain about this restriction on where they can fish, but soon they notice that the number of adult fish swimming outside the protected area is much higher than it was before. With the restriction, each fishing boat ends up catching more fish than it did before the restriction was in place. Which of the following principles of economic interaction best describes this scenario? When a market outcome is inefficient, government intervention can improve overall welfare. In this case, since the young fish can be caught by any boat owner, the individual pursuit of self-interest leads to a bad outcome—extinction of this type of fish—which makes everyone in the fishing industry worse off. If the government prohibits fishing in the spawning grounds where young fish are born and mature, this motivates boat owners to consider alternatives until the fish mature and reproduce. With this restriction, everyone is better off in the end.
The following table contains statements that provide some analysis of policies that address breast cancer.
Breast cancer is the fifth most common cause of cancer death. positive For women aged 60 to 69, breast cancer screening significantly reduces breast cancer mortality. positive Doctors should encourage women aged 60 to 69 to be screened for breast cancer. normative The government should force doctors to encourage women aged 60 to 69 to be screened for breast cancer. normative
An economy produces hot dogs and hamburgers. If a discovery of the remarkable health benefits of hot dogs were to change consumers' preferences, it would: A)expand the PPF B)contract the PPF C) move the economy along the PPF D) move the economy inside the PPF
C
hw example of opportunity cost
Caroline is training for a triathlon, a timed race that combines swimming, biking, and running. Consider the following sentence: Each hour she spends swimming is an hour that she can't spend biking or running. Which basic principle of individual choice does this sentence best illustrate? Answer: All choices have opportunity costs. If Caroline decides to swim, she forgoes the time that she could have spent biking or running. So the opportunity cost of an hour of swimming is an hour of biking or an hour of running, whichever is the highest-valued alternative Kyoko must sacrifice in order to spend an additional hour swimming. There is no information on the effectiveness of an extra hour of swimming as compared to that of an extra hour of biking or running. Therefore, you don't know whether Caroline has an incentive to spend more time on swimming. Similarly, you don't know whether it is most efficient for Caroline to spend the same amount of time on each of the three activities.
Law of Demand
Claim that the quantity demanded of a good falls when the price of the good rises, other things equal
Law of Supply
Claim that the quantity supplied of a good rises when the price of the good rises, other things equal
clothing
Clothing, boot-cut jeans, pants Least elastic?
boot-cut jeans
Clothing, boot-cut jeans, pants Most elastic?
pants
Clothing, boot-cut jeans, pants in between?
more
Compared to the short-run demand for oil, the demand for oil in the long run will tend to be __________ elastic
inefficient
Consider the market for hamburgers in an economy where the market equilibrium is characterized by a quantity of hamburgers of 50 million and a price of $5.00 per hamburger. Suppose that currently 30 million hamburgers are being produced and sold at a price of $7.50. This outcome in the market for hamburgers is economically____________
Even though I was willing to pay up to $79 for a watch, I bought a watch for only $71. Consumers' Surplus Producer's Surplus Neither
Consumers' Surplus
Supply Curve Shifters: Technology
Cost- Saving technological improvement has the same effect as a fall in input prices, shifts S curve to the right
All of the following topics fall within the study of microeconomics EXCEPT A)the impact of cigarette taxes on the smoking behavior of teenagers. B)the role of Microsoft's market power in the pricing of software. C)the effectiveness of antipoverty programs in reducing homelessness. D)the influence of the government budget deficit on economic growth.
D
Because you understand the law of demand, you can deduce that the correct graphical representation of the demand for CDs must be .Moreover, you know that at a price of $10 per CD, the is five million CDs.
D1 & quantity demanded
A graphical representation of the relationship between the price of a good and the amount of the good that buyers are willing and able to purchase at various prices Quantity Demanded Demand Curve Demand Schedule Law of Demand
Demand Curve
A table showing the relationship between the price of a good and the amount that buyers are willing and able to purchase at various prices Quantity Demanded Demand Curve Demand Schedule Law of Demand
Demand Schedule
The following graph shows the market for donuts in Denver, where there are over 1,000 donut shops at any given moment. Suppose the Surgeon General issues a public statement saying that consuming donuts is bad for your health. Show the effect of this change on the market for donuts by shifting one or both of the curves on the following graph, holding all else constant.
Demand curve shifts to the left
The market price of calzones in a college town decreased recently, and the students in an economics class are debating the cause of the price decrease. Some students suggest that the price decreased because the price of dough, an important ingredient for making calzones, has decreased. Other students attribute the decrease in the price of calzones to a recent decrease in college student enrollment. The second group of students attributes the decrease in the price of calzones to the decrease in college student enrollment. On the following graph, adjust the supply and demand curves to illustrate the second group's explanation for the decrease in the price of calzones.
Demand curve shifts to the left
Adjust the graph to illustrate your answer by showing the positions of the supply and demand curves in 2010.
Demand curve shifts to the left Supply curve shifts to the right
The market price of pizzas in a college town increased recently, and the students in an economics class are debating the cause of the price increase. Some students suggest that the price increased because the price of dough, an important ingredient for making pizzas, has increased. Other students attribute the increase in the price of pizzas to a recent increase in college student enrollment. The second group of students attributes the increase in the price of pizzas to the increase in college student enrollment. On the following graph, adjust the supply and demand curves to illustrate the second group's explanation for the increase in the price of pizzas.
Demand curve shifts to the right
Adjust the graph to illustrate your answer by showing the positions of the supply and demand curves in 2011.
Demand curve shifts to the right Supply curve shifts to the left
You are trying to decide whether to take a vacation. Most of the costs of the vacation (airfare, hotel, and foregone wages) are measured in dollars, but the benefits of the vacation are psychological. How can you compare the benefits to the costs? A- Compare the airfare and hotel costs of the vacation against the foregone wages. B- Determine the benefits of what you give up by going on the vacation, and compare them to the benefits of going on vacation. C- Get a degree in psychology.
Determine the benefits of what you give up by going on the vacation, and compare them to the benefits of going on vacation
Consumers' Surplus is above the __________, and beneath the ______ _____.
Equilibrium, Demand curve
Producers' Surplus is below the __________, and above the ______ _____.
Equilibrium, Supply Curve
What does productivity depend on?
Equipment, skills, and technology available to workers
Supply Curve Shifter: Expectations
Example: Events in Middle East lead to expectations of higher oil prices. In response, owners of Texas oilfields reduce supply now, save some inventory to sell later at a higher price. Therefore, S curve shifts to right.
Demand Curve Shifters: Expectations
Expectations affect consumers' buying decisions
Causes of Market Failure
Externalities and Market Power
True or False: An increase in the demand for notebooks raises the quantity of notebooks demanded but not the quantity supplied
FALSE
True or False: When both demand and supply curves shift, the curve that shifts with smaller magnitude determines effect on undetermined equilibrium object
False
True or False: When both the demand and supply curve shift, you can always determine the effect on price and quantity without knowing the magnitude of the shifts.
False
Adam Smith
Father of economic thinking
Price Elasticity rule of thumb
Flatter curve=Higher Steeper curve=lower
For the following activity, identify the flow of goods and services and the flow of dollars as either household to firm or firm to household: Selena pays a storekeeper $1 for a quart of milk.
Flow of goods/services: Firm to Household Flow of Dollars: Household to Firm
For the following activity, identify the flow of goods and services and the flow of dollars as either household to firm or firm to household: Shanna spends $30 to get a haircut.
Flow of goods/services: firm to household Flow of Dollars: household to firm
For the following activity, identify the flow of goods and services and the flow of dollars as either household to firm or firm to household: Salma earns $10,000 from her 10% ownership of Acme Industrial.
Flow of goods/services: household to firm Flow of Dollars: firm to household
For the following activity, identify the flow of goods and services and the flow of dollars as either household to firm or firm to household: Stuart earns $4.50 per hour working at a fast-food restaurant.
Flow of goods/services: household to firm Flow of Dollars: firm to household
Society faces a tradeoff
Getting more of one good requires sacrificing some of the other
scarce
Goods and services are
Imports
Goods produced abroad and sold domestically
Exports
Goods produced domestically and sold abroad
Promote Equity
Government may alter market outcome to promote equity
Market
Group of buyers and sellers of a particular product
Price Elasticity: luxuries vs. necessities
Higher for luxuries
Price Elasticity: Long run vs. short run
Higher in long run
Which of the following would increase the current demand for beef?
Higher pork prices Higher consumer income
Who are the "actors" in the circular-flow diagram
Households and firms
Macroeconomics
How a change in interest rates by the Federal Reserve impacts unemployment
a demand schedule
However, if Eleanor's boss is more interested in the detailed numbers used to construct this visual representation, you would instead advise your coworker that ________________ would be more appropriate
a demand curve
If Eleanor's boss is interested in a graphical representation of the relationship between the price and quantity of televisions demanded, you would advise your coworker to construct ________________________ using the data provided.
higher, sellers to offer lower prices
If a surplus exists in the cantaloupe market, then the current price must be______________than the equilibrium price. For the market to reach equilibrium, you would expect______________________
elastic
If it is easy to increase production of a good in response to a higher price, the good is likely to have relatively _______ supply
Suppose that both of the events you have just analyzed are partly responsible for the decrease in the price of calzones. Based on your analysis of the explanations offered by the two groups of students, how would you figure out which of the possible causes was the dominant cause of the decrease in the price of calzones?
If the equilibrium quantity of calzones decreases, then the demand shift in the market for calzones must have been larger than the supply shift.
Suppose that both of the events you have just analyzed are partly responsible for the increase in the price of hamburgers. Based on your analysis of the explanations offered by the two groups of students, how would you figure out which of the possible causes was the dominant cause of the increase in the price of hamburgers?
If the equilibrium quantity of hamburgers decreases, then the supply shift in the market for hamburgers must have been larger than the demand shift.
Suppose that both of the events you have just analyzed are partly responsible for the increase in the price of pizzas. Based on your analysis of the explanations offered by the two groups of students, how would you figure out which of the possible causes was the dominant cause of the increase in the price of pizzas?
If the equilibrium quantity of pizzas decreases, then the supply shift in the market for pizzas must have been larger than the demand shift.
example of markets are a good way to organize economic activity
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. After the ice storm, people rushing to the store to purchase batteries and flashlights created a shortage of these items. However, to accommodate this shortage, hardware stores requested special deliveries to restock their inventories, bringing back equilibrium in the market.
Enforce Property Rights
Important role for government
What causes inflation?
In almost all cases of large or persistent inflation, the culprit is growth in the quantity of money. When a government creates large quantities of the nation's money, the value of the money falls. In Germany in the early 1920s, when prices were on average tripling every month, the quantity of money was also tripling every month. Although less dramatic, the economic history of the United States points to a similar conclusion: The high inflation of the 1970s was associated with rapid growth in the quantity of money, and the low inflation of more recent experience was associated with slow growth in the quantity of money.
indirect effects that often result from an action or policy change.
In economics, secondary effects refer to the
Positive
In some circumstances, if taxes are lowered, government revenues actually increase.
Demand Curve Shifter: # of Buyers
Increase in number of buyers increases quantity demanded at each price, shifts D curve to right
Inflation
Increases in general level of prices
How are inflation and unemployment is related short run?
Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services. Higher demand may over time cause firms to raise their prices, but in the meantime, it also encourages them to hire more workers and produce a larger quantity of goods and services. More hiring means lower unemployment.
Marginal Changes
Incremental adjustments to an existing plan.
Long-Run Inflation
Inflation is almost always caused by excessive growth in quantity of money, which causes the value of money to fall
positive economic statement
Is the following statement a positive or normative economic statement? "Taxes on alcohol result in less drinking and driving."
Price Elasticity for narrowly defined goods
It is higher than for broadly defined ones
Normative
It is immoral for a government to redistribute money from one person to another.
If you have private-ownership rights to something, what does this mean?
It means that you can transfer, sell, or mortgage the good.
Suppose that there are three beachfront parcels of land available for sale in Huntington, and six people who would each like to purchase one parcel. Assume that the parcels are essentially identical and that the minimum selling price of each is $570,000. The following table states each person's willingness and ability to purchase a parcel. Willingness and Ability to Purchase (Dollars) Jacques 700,000 Kyoko 630,000 Musashi 590,000 Rina 550,000 Sean 510,000 Yvette 500,000 Which of these people will buy one of the three beachfront parcels? Check all that apply. Jacques Kyoko Musashi Rina Sean Yvette
Jacques Kyoko Musashi
The purchase of new technology used to make the new series of laptops
Jonas, the president of a company that makes electronic devices, borrows a large sum of money from the local bank to purchase new, automated technology to make a new series of laptop computers. This new generation of laptops is expected to drive desktop computers out of the market. As depicted in the above scenario, which of the following is an example of investment?
$140
Julia needs a new kitchen. She finds Ralph, a contractor, through an ad he posted in the local newspaper. Ralph paid $55 to post the ad in the newspaper. After Julia and Ralph agree on the price for the new kitchen, they sign a contract, which Julia has a law firm write up for $85, stating that Ralph will install Julia's new kitchen for $2,100. The transaction costs associated with this exchange are
increases, less
Kevin is skilled at making both bracelets and necklaces. Kevin has no preference between making bracelets or necklaces since he earns the same amount from the two activities. If the selling price of necklaces increases from $20 to $40, then Kevin's opportunity cost of making bracelets ________________ and making bracelets is now__________profitable than making necklaces.
an example of scarce resources
Larry is training for a triathlon, a timed race that combines swimming, biking, and running. Consider the following sentence: Larry has only 20 hours per week that he can devote to training for his race. Which basic principle of individual choice does this sentence best illustrate? resources are scarce -- Larry faces limited choices due to time constraints. If he had an unlimited amount of time, he would spend many more hours training for the triathlon. However, time, the key resource for his training, is scarce, and Larry has only 20 hours to spend.
$155
Laura needs a new kitchen. She finds Mitch, a contractor, through an ad he posted in the local newspaper. Mitch paid $60 to post the ad in the newspaper. After Laura and Mitch agree on the price for the new kitchen, they sign a contract, which Laura has a law firm write up for $95, stating that Mitch will install Laura's new kitchen for $2,200. What are the total transaction costs for this exchange?
The claim that, other things being equal, the quantity demanded of a good falls when the price of that good rises Quantity Demanded Demand Curve Demand Schedule Law of Demand
Law of Demand
Scarcity
Limited nature of society's resources
The statement demonstrates that even when government policies are enacted with good intentions, they do not always guarantee good outcomes due to unintended consequences and secondary effects.
Local government bans on plastic grocery bags due to environmental concerns have led to increased emergency room visits and deaths related to harmful bacteria such as E. coli, as many people do not wash their bags after each use. Which of the following best characterizes the statement?
______________________ is the study of economy-wide phenomena. Therefore, the influence of the government budget deficit on economic growth is a macroeconomic topic, while the others are all microeconomic topics. See Section: Microeconomics and Macroeconomics.
Macroeconomics
Squatters cannot legally sell the land they occupy. Squatters cannot mortgage, or borrow against, the land.
Many underdeveloped economies have a large number of squatters—people who occupy a plot of land without any deed existing to give anyone formal ownership. Therefore, they use the land and its resources, but they do not officially own the land. How might the lack of well-defined property rights hold back economic growth?
What are the two markets in the circular-flow diagram?
Market for goods and services and market for factors of production
Price Elasticity of Demand
Measures how much Qd responds to a change in P
_______________________ is the study of how households and firms make decisions and how they interact in specific markets.
Microeconomics
Suppose that the price of a sedan increased from $10,000 to $15,000. This would cause a ________ _____ the demand curve
Movement Along
When the price changes, but all other determinants of the quantity demanded remain constant, the result is a ________ ______ the demand curve.
Movement along
Suppose that there are three beachfront parcels of land available for sale in Asilomar and six people who would each like to purchase one parcel. Assume that the parcels are essentially identical and that the minimum selling price of each is $400,000. The following table states each person's willingness and ability to purchase a parcel. Which of these people will buy one of the three beachfront parcels? Check all that apply.
Musashi, Rina, & Sean
example of marginal analysis
Neha is training for a triathlon, a timed race that combines swimming, biking, and running.Because her pool sessions are helping her swim more quickly, Neha plans to reduce by 1 hour per week the time she spends training on the bike and increase by 1 hour the time she spends in the swimming pool; however, her husband says that she should stop doing any biking and running and spend all 20 hours per week in the pool. Which basic principle of individual choice does Neha's plan illustrate that her husband's advice does not? Many decisions are made on the margin. explanation: Neha's decision about pool time versus bike time is a how-much decision. Both bike time and pool time can help reduce her race time. Because pool time seems to be having a greater effect at the moment, it makes sense for her to spend a bit more time in the pool and a bit less time on the bike. However, this does not mean that it makes sense for her to spend all her time in the pool and no time on the bike. If she cut out all training on the bike, the value of a little bit of bike training might be higher than the value of the last hour of pool training. Neha does not treat biking versus swimming as an all-or-nothing decision. She makes small changes at the margin in the number of hours spent training for each activity.
I paid $45 for a jersey sweater last week. This week, the same store is selling sweaters for $38. Consumers' Surplus Producer's Surplus Neither
Neither
Are Labor unions are the primary reason the standard of living in the United States has changed over time ?
No, The increase in average income and thus the standard of living is mainly the result of increased productivity. In other words, an hour of work produces more goods and services than it used to in your grandparents' era
Are prices an accurate measure of a good's total value?
No, prices reflect marginal value, not total value.
Positive or Normative: A tax cut is needed to stimulate the economy.
Normative because it is a value judgement
Positive or Normative: The government should print less money
Normative because this is a value judgement, cannot be confirmed or refuted
Points above PPF
Not possible
for whom
One of the three basic questions an economy has to face is ___________goods and services will be produced.
Competitive market
One with many buyers and sellers, each has a negligible effect on price
For PPF, if opportunity cost remains constant, then
PPF is a straight line
For PPF, if opportunity cost of a good rises as more of the good is produced, then
PPF is bow-shaped
example of trade can make everyone better off
People in the U.S. state of Iowa eat both corn and potatoes. It is technically possible for farmers to grow both corn and potatoes in Iowa, yet almost no farmers grow potatoes. Instead, every year, Iowa exports corn and imports potatoes from the U.S. state of Idaho, where farmers specialize in potatoes. Which of the following principles of economic interaction best describes this scenario? There are gains from trade when producers specialize. Idaho specializes in potatoes, and Iowa specializes in corn. Specialization allows the two states to produce more potatoes and corn as a whole than if both states attempted to produce everything. Trade ensures that people in both states have enough corn and potatoes to eat.
Which of the following are generally true of rent control? Check all that apply. People most in need of an apartment may not be able to rent one. The quantity of available rental apartments increases. All consumers gain from rent control. Non-price methods of rationing emerge. The quality of rental apartments improves.
People most in need of an apartment may not be able to rent one. Non-price methods of rationing emerge.
Income Elasticity of Demand
Percent change in Qd/Percent change in income
100 x P2-P1/P2+P1/2
Percentage Change in Price
100 x Q2-Q1/Q2+Q1/2
Percentage Change in Quantity
Inefficient
Points located inside the production possibilities frontier
Efficient
Points located on the production possibilities frontier
Unattainable
Points located outside the production possibilities frontier
Positive or Normative: Prices rise when the government increases the quantity of money
Positive because it describes a relationship, could used data to confirm or refute
Positive or Normative: An increase in the price of burritos will cause an increase in consumer demand for music downloads
Positive because it describes a relationship.
Points on PPF
Possible and efficient (all resources are fully utilized)
Points under PPF
Possible and not efficient
Percentage Change in Quantity/Percentage Change in Price
Price Elasticity of Demand
Price Elasticity example
Price elasticity is higher when close substitutes are available
make more money/get a job
Price is used to ration scarce goods/resources in a market economy. This rationing method incentives people to do what?
1. the right to exclusive use of the property 2. legal protection from invaders 3. the right to transfer, sell, exchange, or mortgage the property
Private property rights involve 3 things
The demand curve shows the relationship between the price of a good and the quantity demanded, with all other factors held constant. One of those other factors is household income. If the average household income increases or decreases, the result is a _____ __ ___ ______ _____
Shift of the Demand Curve
I sold a used textbook for $39, even though I was willing to go as low as $31 in order to sell it. Consumers' Surplus Producer's Surplus Neither
Producer's Surplus
A decrease in average income causes a leftward _____ __the demand curve; therefore, you may conclude that sedans are a ______ good.
Shift of, normal
Promoting Efficiency
Public policy may promote efficiency
Why Policymakers should think about incentives?
Public policymakers should never forget about incentives: Many policies change the costs or benefits that people face and, as a result, alter their behavior. A tax on gasoline, for instance, encourages people to drive smaller, more fuel-efficient cars. That is one reason people drive smaller cars in Europe, where gasoline taxes are high, than in the United States, where gasoline taxes are low. When policymakers fail to consider how their policies affect incentives, they often end up with unintended consequences
The amount of a good that buyers are willing and able to purchase at a given price Quantity Demanded Demand Curve Demand Schedule Law of Demand
Quantity Demanded
Middlemen __________ transaction costs
Reduce
Each resource described in the table is an element of human resources, capital, or natural resources.
Resource: Resource type A field used for crops such as corn or: wheat: Natural resource Correct A truck used by a delivery service company Capital Correct Your saxophone skills enhanced by taking the music theory lessons and practicing Human resource Correct
Factors of Production
Resources the economy uses to produce goods and services including: labor, land, capital (buildings and machines used in production)
in San Francisco, where there are over a thousand burger joints at any given moment. Suppose the price of ground beef, a major ingredient in hamburgers, suddenly increases. Supply Decreases Supply Increases Demand Increases Demand Decreases
Supply Decreases
Economists play what two roles?
Scientists and policy advisors
Moving along a PPF
Shifting resources from the production of one good to other
Assumptions
Simplify the complex world, make it easier to understand
invisible hand
Smith assumed that individuals try to maximize their own good (and become wealthier), and by doing so, through trade and entrepreneurship, society as a whole is better off. The invisible hand is essentially a natural phenomenon that guides free markets and capitalism through competition for scarce resources. prices are the instrument with which the invisible hand directs economic activity
1. specialization permits individuals to take advantage of their existing skills 2. specialized workers become more skilled through time 3. DOL allows for the adoption of mass production technology
Specialization and DOL increase output with 3 options
Macro
Study of economy-wide phenomena, including inflation, unemployment, and economic growth
Micro
Study of how households and firms make decisions an how they interact in markets
If Cross-Price Elasticity of Demand is greater than zero, then
Substitutes
Market Demand
Sum of quantities demanded by all buyers at each price
The following graph shows the market for croissants in Detroit, where there are over 1,000 bakeries at any given moment. Suppose the price of flour, a major ingredient in croissants, suddenly increases. Show the effect of this change on the market for croissants by shifting one or both of the curves on the following graph, holding all else constant.
Supply curve shifts to the left
The market price of pizzas in a college town increased recently, and the students in an economics class are debating the cause of the price increase. Some students suggest that the price increased because the price of dough, an important ingredient for making pizzas, has increased. Other students attribute the increase in the price of pizzas to a recent increase in college student enrollment. The first group of students thinks the increase in the price of pizzas is due to the fact that the price of dough, an important ingredient for making pizzas, has increased. On the following graph, adjust the supply and demand curves to illustrate the first group's explanation for the increase in the price of pizzas.
Supply curve shifts to the left
The market price of calzones in a college town decreased recently, and the students in an economics class are debating the cause of the price decrease. Some students suggest that the price decreased because the price of dough, an important ingredient for making calzones, has decreased. Other students attribute the decrease in the price of calzones to a recent decrease in college student enrollment. The first group of students thinks the decrease in the price of calzones is due to the fact that the price of dough, an important ingredient for making calzones, has decreased. On the following graph, adjust the supply and demand curves to illustrate the first group's explanation for the decrease in the price of calzones.
Supply curve shifts to the right
rightward shift of, less expensive to build
Suppose a technological improvement increases the speed with which robots can attach bolts to cars from 2,500 bolts per hour to 3,000 bolts per hour. Assuming that the wage rate remains the same, this would cause a _______________ the supply curve. This is because the technological improvement makes cars______________
earning money
Suppose that in the hypothetical country of Caffistan, coffee mugs are distributed to whoever is willing to pay the most. This distribution rule gives the residents of Caffistan an incentive to spend time
example of incentive
Suppose that in the hypothetical country of Trashland, garbage cans are distributed to whoever is willing to pay the most. This distribution rule gives the residents of Trashland an incentive to spend time Economists study the choices that people make as they seek to obtain the greatest benefits at the least possible costs. If owning a good will maximize people's benefits in this sense, they will choose to do things to help them obtain that good. As a result, the way that goods are distributed influences how people act. If the distribution of goods is to those willing to pay the most, people have an incentive to spend time earning money to pay for goods. When goods are distributed by price, economists refer to it as a market economy. Different rules for distributing goods will change individuals' incentives. For example, if the next person in line will be awarded a good, people have an incentive to hold their place in the line. Similarly, if a government policy assigns goods to individuals, then people have an incentive to lobby government officials to try to influence the way the goods are given out.
It shifts to the left
Suppose that the bracelets market consists of several suppliers like Kevin who are skilled at making both bracelets and necklaces. Which of the following is likely to happen to the supply curve of bracelets when the price of a necklaces increases?
quantity supplied, movement along
Suppose that the price of sedans in the previous graph increases from $18,000 to $23,000 per car. This would cause the__________________ of sedans to increase, which is reflected on the graph by a ____________________the supply curve.
All prosperity comes from:
TRADE
TRUE OR FALSE: In the circular-flow diagram, one loop represents the flow of goods, services, and factors of production, and the other loop represents the corresponding flow of dollars.
TRUE
Which of the following factors might cause transaction costs to be high?
Taxes Lack of information Physical obstacles
Normative
Taxes are too high.
What does slope of the PPF tell you?
Tells you the opportunity cost of one good in terms of the other.
Quantity Demanded
The amount of a good that buyers are willing and able to purchase at a given price
Quantity Supplied
The amount of a good that sellers are willing and able to supply at a given price
productivity
The amount of goods and services per each unit of labor input. In nations where workers can produce a larger quantity of goods and services per hour, most people enjoy a high standard of living; in nations where workers produce less quantity of goods and services per hour experience lower standard of living.
Law of Supply
The claim that, other things being equal, the quantity supplied of a good increases when the price of that good rises
Law of Demand
The claim that, with other things being equal, the quantity demanded of a good falls when the price of that good rises
Scientific Method
The dispassionate development and testing of theories about how the world works
Macroeconomics
The effects of government tax policy on long-term economic growth
How to increase inflation rate?
The faster the government creates money
You win $100 in a basketball pool. You have a choice between spending the money now or putting it away for a year in a bank account that pays 5% interest. Which of the following is included in the opportunity cost of spending $100 now? A- There isn't an opportunity cost because you won the money B- The $105 you would have a year from now if you put it in the bank C- The cost of entering the basketball pool
The opportunity cost is The $105 you would have a year from now if you put it in the bank The opportunity cost of an item is what you give up to get that item. In this case, by spending the $100 now, you give up the money you would have a year from now if you put it in the bank account that pays 5% interest.
the immediate benefits are highly visible, while the secondary effects of lost jobs in other industries are less visible.
The popularity of trade restrictions, tariffs, and quotas often reflects that
The Social Security system provides income for people over age 65. If a recipient of Social Security decides to work and earn some income, the amount he receives in Social Security benefits is typically reduced.
The provision of Social Security benefits lowers an individual's incentive to save for retirement because it provides income to retired individuals once they've reached age 65. This means that even if an individual hasn't been saving for retirement while working, he can still count on Social Security benefits to support himself through the retirement years. Moreover, because a person gets fewer after-tax Social Security benefits the greater his earnings are, there is also an incentive not to work (or not work as much) once he has hit the retirement age of 65.
Economics
The study of how society manages its scarce resources -How much people decided what to buy, how much to work, save, and spend -How firms decide how much to produce, how many workers to hire -how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs
Suppose Americans decide to save more of their incomes. If banks lend this extra saving to businesses, which use the funds to build new factories, how might this lead to faster growth in productivity? Who do you suppose benefits from the higher productivity? Is society getting a free lunch?
The savings made by people are mobilized by the banks. Banks in turn provide loans to the business firms which use the funds to expand their production by establishing new factories. This leads to faster growth in productivity because when production capacities are increased so is the per capita production. The benefit from the increased productivity is enjoyed by workers, entrepreneurs and all households. Society is not getting a free handout because when people are saving their money there is a trade-off. The people postponing their present needs and saving for the future helps the economy improve productivity.
The requirement to use a safety seat when traveling with young children by air results in more injuries from auto accidents. Which of the following best interprets the statement?
The statement demonstrates that good policies do not guarantee desirable outcomes.
Because the requirement to use a safety seat when traveling with young children by air results in more injuries from auto accidents, all safety regulation must be abandoned.
The statement presents the fallacy of composition. The statement illustrates the fallacy of composition. The fact that the requirement to use a child safety seat during air travel results in more injuries from auto accidents does not imply that all safety regulation should be abandoned. Although good policies do not guarantee desirable outcomes, abandoning all safety regulations may promote reckless behavior and result in even more injuries. Instead, regulators should find an efficient way to address the pitfalls of particular regulations. For example, they may consider requiring airlines to charge lower airfares for children.
Which of the following accurately explains why professional wrestlers earn more than nurses?
The supply of professional wrestlers is small relative to nurses, and price is determined by marginal value (not total value).
example of opportunity cost
The total cost of a choice includes both the actual monetary amount paid and the opportunity cost of your time incurred by making that choice over another. By turning down the cashier job (and going to college), you forgo earning your annual salary of $27,000, so this is the opportunity cost of your time from attending your first year of college. You also choose to pay $34,000 for tuition, supplies, and additional housing expenses. So your total cost of attending your first year of college is over $61,000 . Nevertheless, you decide to attend college, so the value of the benefits must exceed the cost.
Which of the following most accurately explains why the supply curve for a good slopes upward to the right?
There is a direct relationship between a good's price and the amount offered for sale by suppliers.
What do prices do in market economies?
They are signals that guide economic decisions and allocate scarce resources
A 1996 bill reforming the federal government's antipoverty programs limited many welfare recipients to only 2 years of benefits. This change gives people the incentive to find a job ____ quickly than if welfare benefits lasted forever. The loss of benefits after 2 years will result in the distribution of income becoming ____ equal. In addition, the economy will be ____ efficient because of the change in working incentives.
This change gives people the incentive to find a job more quickly than if welfare benefits lasted forever. The loss of benefits after 2 years will result in the distribution of income becoming less equal. In addition, the economy will be more efficient because of the change in working incentives. This change in the government's antipoverty program reduces equality in the distribution of income, since those who cannot find a job will get no income at all; however, the economy is more efficient given the increased incentive for the unemployed to find work and contribute to the nation's output.
Tradeoff
To achieve greater equality, could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks size of economic "pie".
1. gains from specialization 2. division in labor 3. gains from mass production methods 4. gains from innovation
Trade makes it possible for people to generate more output through 4 mechanisms
PPF illustrates the concepts of:
Tradeoff and opportunity cost, efficiency and inefficiency, unemployment, and economic growth.
Private owners can gain by employing their resources in ways that are beneficial to others, and they bear the opportunity cost of ignoring the wishes of others.
True
When a demand curve for a specific product (shoes or apples, for example) is constructed, changes in the number of consumers in the market are held constant.
True
False
True or False: Suppose that the hypothetical country of Kernaland has a chronic scarcity of corn, its staple grain. This implies that people in Kernaland must be poor.
False
True or False: The pricing system ensures that even the lowest-valued demands are satisfied.
False
True or False: Under market organization, individuals can communicate their preferences to other decision makers directly, through communication, but not indirectly, through their choice of whom to transact with.
True
True or False: We all face scarcity.
True
True or False: When an entrepreneur earns a profit, this indicates that the value of the good or service produced exceeds the value of the other items that could have been produced with those same resources.
Scientists
Try to explain the world
Policy advisors
Try to improve it
Demand Curve Shifter: Prices of Related Goods
Two goods are substitutes causes an increase in demand for the other. Two goods are complements if an increase in the price of one causes a fall in demand for the other
Substitutes
Two goods for which an increase in price of one leads to an increase in the demand for the other
Complements
Two goods for which an increase in the price of one leads to a decrease in the demand for the other
Opportunity Cost
Whatever must be given up to obtain it
explained why people in some nations were wealthier than those in others
Wealth of Nations
Adam Smith
Wealth of Nations author?
There is less of a good freely available from nature than people would like
What does it mean if something is scarce?
Equality
When prosperity is distributed uniformly among society's members
Efficiency
When society gets the most from its scarce resources
Positive
When the government increases taxes, rates of tax evasion increase.
When monetary policy increases and decreases what happens?
When the government uses monetary policy to decrease the quantity of money, then the demand for goods and services decreases. This change in the demand will lead to lower prices, causing firms to produce fewer goods and services—which requires fewer workers. Therefore, lower prices lead to higher unemployment levels in the short run. 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.
Market Failure
When the market fails to allocate society's resources efficiently.
Externalities
When the production or consumption of a good affects bystanders. (Ex: pollution)
Adam Smith
Where does economics originate or with whom?
Private property rights are well-defined and enforced. Firms can freely enter or exit the market without any barriers.
Which of the following must be true for a market to be able to achieve an efficient outcome?
Tomatoes
Which of the following would be expected to have a supply curve that is more elastic in the short run? tomatoes or brain surgeons
allows both parties to be better off, value is subjective
Why trade?
Assume that the three beachfront parcels are sold to the people that you indicated in the previous section. Suppose that a few days after the last of those beachfront parcels is sold, another essentially identical beachfront parcel becomes available for sale at a minimum price of $360,000. This fourth parcel be sold, because will purchase it from the seller for at least the minimum price.
Will be & Yvette
$23
You work as an assistant coach on the university basketball team and earn $14 per hour. One day, you decide to skip the hour-long practice and go to the local carnival instead, which has an admission fee of $9. The total cost (valued in dollars) of skipping practice and going to the carnival (including the opportunity cost of time) is
Human resource
Your saxophone skills enhanced by taking the music theory lessons and practicing
change in supply
a change in the number of units supplied in response to a change in any factor other than the good's price A SHIFT IN THE ENTIRE SUPPLY CURVE
Choice
a logical consequence of scarcity
market failure
a situation in which a market left on its own fails to allocate resources efficiently
equilibrium
a state in which the forces of demand and supply are in balance
Economics is best defined as the study of
a) how society manages its scarce resources.
Governments may intervene in a market economy in order to
a) protect property rights. b) correct a market failure due to externalities. c) achieve a more equal distribution of income. ALL OF EM
If a nation has high and persistent inflation, the most likely explanation is
a) the central bank creating excessive amounts of money.
Jake is training for a triathlon, a timed race that combines swimming, biking, and running. Consider the following sentence: Each hour he spends swimming is an hour that he can't spend biking or running. Which basic principle of individual choice does this sentence best illustrate?
a. People usually exploit opportunities to make themselves better off. b. Jake has an incentive to spend more time on swimming than on biking or running. c. all choices have opportunity costs. * d. Jake can use time most efficiently by spending the same amounts of time on swimming, biking, and running.
Explain whether each of the following government activities is motivated by a concern about equality or a concern about efficiency. In the case of efficiency, discuss the type of market failure involved. a. regulating cable TV prices b. providing some poor people with vouchers that can be used to buy food c. prohibiting smoking in public places d. breaking up Standard Oil (which once owned 90 percent of all oil refineries) into several smaller companies e. imposing higher personal income tax rates on people with higher incomes f. instituting laws against driving while intoxicated
a. This shows the government's concern about efficiency. The market failure involved is due to market power where small group of persons or a single person influences market prices. b. This shows the government's concern about equality. c. This shows the government's concern about efficiency. The market failure involved is known as an externality. It shows the negative impact of the smoker's actions on the well-being of others. d. This shows the government's concern about efficiency. The market failure involved is due to market power, where Standard Oil would unduly influence the market prices of oil and exploit people. e. This shows the government's concern about equality. f. This shows the government's concern about efficiency. The market failure involved is known as an externality. It shows the negative impact of the intoxicated driver's actions on the well-being of others.
economics
about how people choose
Absence of scarcity
all desires of goods and services have been met
market economy:
allocated resources through the decentralized decisions of many households and firms as they interact in markets for goods and services; invisible hand; no central decision maker like in communism PRICES guide self-interest households and firms to make decisions that maximize society's economic well-being
market
an abstract concept that encompasses the forces of demand and supply and the interaction of buyers and sellers with the potential for exchange to occur
inflation
an increase in the overall prices in the economy
Natural resources
anything the earth produces
A marginal change is one that
b) incrementally alters an existing plan.
Adam Smith's "invisible hand" refers to
b) the ability of free markets to reach desirable outcomes, despite the self-interest of market participants.
In her school's food court, Sydney notices that a cup of yogurt costs $3.00 and a bag of chips costs $2.00. Since Sydney just finished studying for an economics exam, she immediately calculates that the relative price of a cup of yogurt is 1.5 ____ __ _____ per cup of yogurt
bags of chips
Why isn't trade among countries like a game with some winner and some losers?
because both sides can gain something
pessimistic
buy less to save for the future
optimistic
buy more now
How do rational people make decisions?
by comparing the marginal benefits and marginal costs and seeing if the marginal benefits exceed the marginal costs
Your opportunity cost of going to a movie is
c) the total cash expenditure needed to go to the movie plus the value of your time.
market organization
capitalism
change in demand
change in the number of units purchased for a good in response to a change in a factor other than a change in the good's price SHIFT IN THE ENTIRE DEMAND CURVE
change in quantity demanded
change in the number of units purchased for a good in response to a change in the good's price MOVEMENT ALONG THE SAME DEMAND CURVE
change in quantity supplied
change in the number of units supplied in a response to a change in the price of a good MOVEMENT ALONG THE SAME SUPPLY CURVE
imbalances between quantity demanded and quantity supplied
changing prices correct
making decisions requires:
comparing the costs and benefits of alternative choices
they might otherwise charge prices above cost of production or withold a vital resource for an exorbitant amount of money
competition protects buyers from sellers because
from the power of any single employer
competition protects employees
If Cross-Price Elasticity of Demand is less than zero, then
complements
Suppose that the price of a gallon of gas falls from $4 to $3. Because sedans and gasoline are ___________ , a decrease in the price of a gallon of gas shifts the demand curve for sedans to the _____ .
complements, right
economic costs
cost of all resources used to produce a good, including opportunity costs
central idea of economic efficiency
cost-benefit comparison
If consumers began eating more chicken and less beef, the cattle population would
decrease
Now suppose Congress passes a new tax that decreases the income of Denver residents. If donuts are a normal good, this will cause the demand for donuts to .
decrease
leftward shift in the demand curve (equilibrium price and equilibrium quantity falls)
decrease in demand
people typically purchase fewer goods
decrease in income
decrease in quantity supplied
decrease in price,
leftward shift in the supply curve equilibrium price rises equilibrium quantity falls
decrease in supply
increase in demand for good
decrease in the price of the complement,
The following graph shows the market for roses in 2010. Between 2010 and 2011, the equilibrium quantity of roses remained constant, but the equilibrium price of roses increased. From this, you can conclude that between 2010 and 2011, the supply of roses and the demand for roses .
decreased & increased
Suppose that school administrators want to encourage healthy choices and decide to impose a $0.75 price increase on bags of chips. Given that the absolute price of a cup of yogurt is unchanged, the relative price of a cup of yogurt _________
decreases
demand for the good decreases
decreases in the price of the complement,
Scarcity
defined objectively
Poverty
defined subjectively
consumer income, changes in the number of consumers in the market, change in the price of a related good, changes in expectation, demographic changes, changes in consumer tastes and preferences
demand curve shifters
Your coworker Kate is really concerned about a project that she has just been assigned. She is in charge of analyzing and determining conditions in the market for televisions from an extensive sales report. If Kate's boss is interested in a graphical presentation of the relationship between the price and quantity of televisions demanded, you would advise your coworker to construct a ______ _____ using the data provided. However, if Kate's boss is more interested in the detailed numbers used to construct this visual representation, you would instead advise your coworker that a ______ ________ would be more appropriate.
demand curve, demand schedule
relatively flat
elastic supply makes the supply curve
demographic changes
demand for many products is strongly influenced by the demographic composition of the market
marginal changes
describe a small incremental adjustment to an existing plan of action - you don't just study or blow it off its whether you study 24/7 or do you study 1 less hour and go gym instead?
producer surplus
difference between the price that suppliers actually recieve and the minimum price they would have accepted to produce that good
A(n) ____________ ________________ is a simplified representation of some aspect of the economy.
economic model
socialism
economic system in which the government owns the income producing assets and directly determines what goods they produce
private property rights
efficiency of markets hinges on
society faces an important trade off:
efficiency vs. equality
An outcome is said to be ______________ if the economy is getting all it can from the scarce resources it has available. Points on (rather than inside) the production possibilities frontier represent ____________ levels of production.
efficient efficient
related goods
either substitutes or compliments
an increase in prices which encourages production and discourages consumption
excess demand leads to
falling prices which discourages production and encourages consumption
excess supply leads to
they'll buy more now
expect higher prices in the future,
they'll buy less now
expect lower prices,
Explain the two main causes of market failure and give an example
externality the impact of one person's actions on the well being of a bystander ex: factories polluting people's home areas market power the ability of a single economic order (or small group of actors) to have a substantial influence on market prices ex: if everyone in town needs water but there is only one well, the owner of the well is not subject to the rigorous competition with which the invisible hand normally keeps self-interest in check; she may take advantage of this opportunity by restricting the output of water so she can charge a higher price
two possibilities of market failure
externality and market power
True or False: Eventually, scarcity will be eradicated.
false
Because resources are scarce, not every conceivable outcome is ____________. With the resources it has, the economy can produce at any point on or inside the production possibilities frontier, but it cannot produce at points outside the frontier
feasible
A point inside the production possibilities frontier is ______________ but not _____________
feasible efficient
Based on the circular flow model, households earn income when ___________ purchase ______________ in resource markets.
firms resources
elastic goods
flatter demand curves
business cycle
fluctuations in economic activity, such as employment and production
complements
good that are consumed jointly
Market:
group of buyers and sellers - need not be in single location
minimum price necessary to induce suppliers to produce that unit and the opportunity cost of producing that unit
height of the supply curve at any quantity shows the
The circular-flow diagram illustrates that, in markets for the factors of production, _________________ are sellers, and __________ are buyers.
households firms
economic way of thinking
how incentives alter the choices that people make
3 Subcategories for the Ten Principles
how people make decisions, how people interact, and how the economy as a whole works how people make decisions 1. People face trade-offs 2. The Cost of something is what you give up to get it 3. Rational people think at margin 4. People respond to incentive how people interact 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 how the economy as a whole works 8. A country's standard of living depend on its ability to produce goods & services 9. Price rise when the government prints too much money 10. Society faces a short-run trade off between inflation and unemployment -
Main problem economics addresses
human beings have unlimited wants and desires in a world with limited resources
down
if price goes down, quantity supply goes
up
if price goes up, quantity supply goes
demand for the good decreases
if price of a substitute decreases,
demand for the good also increases
if the price of a goods substitute increases,
rational people respond to:
incentives
rightward shift in the demand curve (increase in equilibrium)
increase in demand
people purchase more goods
increase in income
increase in quantity supplied
increase in price,
shifts to the right equilibrium price falls equilibrium quantity rises
increase in supply
demand for the good decreases
increase in the price of the good's complement,
The following graph shows the market for laptops in 2009. Between 2009 and 2010, the equilibrium quantity of laptops remained constant, but the equilibrium price of laptops decreased. From this, you can conclude that between 2009 and 2010, the supply of laptops and the demand for laptops .
increased & decreased
The following graph shows the market for cars in 2008. Between 2008 and 2009, the equilibrium price of cars remained constant, but the equilibrium quantity of cars increased. From this, you can conclude that between 2008 and 2009, the supply of cars and the demand for cars . Adjust the graph to illustrate your answer by showing the positions of the supply and demand curves in 2009.
increased & decreased I guess answer is increased & increased Demand curve shifts to the right Supply curve shifts to the right
The following graph shows the market for pianos in 2008. Between 2008 and 2009, the equilibrium price of pianos remained constant, but the equilibrium quantity of pianos increased. From this, you can conclude that between 2008 and 2009, the supply of pianos _________ , and the demand for pianos_________ .
increased, increased
Raise our standard of living
increases in either productivity or efficiency
The voucher program causes the population of New York City to increase. With more donut consumers in New York City, the demand for donuts _________, which shifts the demand curve to the _____.
increases, right
slope
indicates the amount of one product that must be given up to produce more of the other
invisible hand
individuals pursuing their own self interests
steeper
inelastic supply makes the supply curve
If Income elasticity of demand is less than zero, then
inferior
resources
inputs used to produce goods and services
normative statement
is one that offers an opinion as to the way the world should be. The first and third statements fall into this category.
positive statement
is one that seeks to describe the world as it is. The second and fourth statements fall into this category.
benefit of business failures
is that losses and failures move resources to those who can put them to use in ways other people value
Consumer surplus
is the difference between a buyer's willingness to pay (what the item is worth to the buyer) and the price the buyer actually pays.
Investment
is the purchase, construction, or development of physical and human resources that expands an economy's future resources.
Macroeconomics
is the study of factors that affect the entire economy
Microeconomics
is the study of how prices and quantities are determined through interactions between buyers and sellers (individuals and firms) in individual markets.
Human resources
knowledge, skill, talent, ingenuity, and advancements in technology
Macroeconomics
larger scale
Suppose that in the hypothetical country of Trashland, garbage cans are distributed based on government policy. This distribution rule gives the residents of Trashland an incentive to spend time
lobbying government officials
Suppose the market for cantaloupes is unregulated. That is, cantaloupe prices are free to adjust based on the forces of supply and demand. If a shortage exists in the cantaloupe market, then the current price must be than the equilibrium price. For the market to reach equilibrium, you would expect .
lower & buyers to offer higher prices
Suppose the market for cars is unregulated. That is, car prices are free to adjust based on the forces of supply and demand. If a shortage exists in the car market, then the current price must be ____ than the equilibrium price. For the market to reach equilibrium, you would expect ______
lower, buyers to offer higher prices
Classify the following topic as relating to microeconomics or macroeconomics: The impact of higher national saving on economic growth
macro
Classify the following topic as relating to microeconomics or macroeconomics: The relationship between the inflation rate and changes in the quantity of money
macro
Determine whether each of the following topics would more likely be studied in microeconomics or macroeconomics: The government's decision on how much to spend on public projects
macro
market system relies on voluntary exchange, price signals, and freedom of entry political system responds primarily to the votes of the majority
major differences between market and political organizations
Physical resources (capital)
manmade resources
price elasticity of demand
measures the responsiveness of consumers to changes in price.
Trade-offs
meeting one desire or another
market organization (capitalism)
method of organization that allows for unregulated prices and decentralized decisions to private property owners to resolve the basic economic problems
Classify the following topic as relating to microeconomics or macroeconomics: A family's decision about how much income to save
micro
Classify the following topic as relating to microeconomics or macroeconomics: A firm's decision about how many workers to hire
micro
Classify the following topic as relating to microeconomics or macroeconomics: The effect of government regulations on auto emissions
micro
Determine whether each of the following topics would more likely be studied in microeconomics or macroeconomics: A consumer's optimal choice when buying a flat-screen TV
micro
Determine whether each of the following topics would more likely be studied in microeconomics or macroeconomics: The effect of a cigarette tax on the quantity of cigarettes sold
micro
If Income elasticity of demand is greater than zero, then
normal
profit
occurs when a firm's revenues exceed it's costs
accounting costs
often ignores the opportunity costs of resources already owned by the firm
the value of the production of other goods sacrificed as a result of producing the good
opportunity cost is equal to
information about which goods consumers most desire and the availability of resources necessary for production
prices provide producers with
losses
penalties imposed on firms that use resources in ways that reduce their value
middleman
people who buy or sell goods or services, or arranged trades
rational people
people who systematically and purposefully do the best they can to achieve their objectives rational people think at the margin: make decisions by looking at marginal costs & benefits/evaluating costs and benefits of marginal changes
Identical products, as well as a large number of buyers and sellers, are characteristics of a market. In such markets, sellers of goods influence the prevailing market price, giving them the role of price in the market. True or False: The market for lettuce does exhibit the two primary characteristics that define perfectly competitive markets.
perfectly competitive, cannot, & takers False
constraint
prevents us from completely fulfilling our desires
equals quantity demanded
price goes up until quantity supplied
information about the availability of goods
price provides consumers with
If the economy goes into a recession and incomes fall, what happens in the markets for infer
prices and quantities both rise
The p____________ _______________ ____________ is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology.
production possibilities frontier
profit=revenue-costs
profit formula
equality
prosperity/benefits are distributed uniformly among society's members - each portion of the pie is equal to each other tradeoff: to achieve greater equality, could redistribute income from wealthy to poor but this reduces incentive to work and produce and thus shrinks size of total economic pie
inelastic supply
quantity supplied is not very sensitive to changes in price
elastic supply
quantity supplied is relatively sensitive to changes in price
Suppose that the price of a sedan increases from $20,000 to $25,000. This would cause the ________ ________ of sedans to increase, which is reflected on the graph by a ________ ______the supply curve.
quantity supplied, movement along
individual planning/decisions
replaced by central planning and decisions made through political process
seized
resources cannot be
profits
reward earned by firms that increase the value of resources in the market place
Following a technological improvement—for example, an increase in the speed with which robots can attach bolts to cars—there is a _________ _____ __the supply curve because the technological improvement makes cars ____ _________ __ _____
rightward shift of, less expensive to build
Foundation of economic analysis
scarcity, choice, and trade-offs form
production possibilities curve
shows the maximum amount of any two products that can be produced from a fixed set of resources, and the possible trade-offs between them
Microeconomics
small scale
scarcity
society has limited resources and therefore cannot produce all the goods and services people to wish to have SCARCITY = the limited nature of society's resources
Absence of poverty
some basic level of need has been met
incentive
something (such as prospect of a punishment or reward) that includes a person to act
incentive
something that motivates a person to take an action
example of marginal benefits and costs
spend more on water or diamonds? The reason is that a person's willingness to pay for a good is based on the marginal benefit that an extra unit of the good would yield. The marginal benefit, in turn, depends on how many units a person already has. Water is essential, but the marginal benefit of an extra cup is small because water is plentiful. By contrast, no one needs diamonds to survive, but because diamonds are so rare, people consider the marginal benefit of an extra diamond to be large.
law of supply
states that there's a positive relationship between the price of a product and the amount of it that will be supplied
inelastic goods
steeper curves
economics
study of how society manages its scarce resources
change in resource prices, changes in technology, elements of nature and political disruptions, changes in taxes
supply curve shifters
Dead weight Loss is located above the ______ _____, below the ______ _____, and to the right of the, _____ _______
supply curve, demand curve, price ceiling
Your task is to take this and construct a graphical representation of the data. In doing so, you determine that as the price of soda rises, the quantity of soda supplied increases. This confirms the . .
supply schedule & law of supply
The discovery of a large new reserve of crude oil will shift the ________ curve for gasoline, leading to a ________ equilibrium price.
supply, lower
An increase in ________ will cause a movement along a given demand curve, which is called a change in ______
supply, quantity demanded
invisible hand
tendency for market prices to direct individuals pursuing their own self-interests into productive activities that also promote the economic well-being of society
market power
the ability of a single economic order (or small group of actors) to have a substantial influence on market prices ex:if everyone in town needs water but there is only one well, the owner of the well is not subject to the rigorous competition with which the invisible hand normally keeps self-interest in check; she may take advantage of this opportunity by restricting the output of water so she can charge a higher price.
property rights
the ability of an individual to own and exercise control over scarce resources
opportunity cost
the cost of something is what you give up to get it includes not just money but value of time //best alternative use of resource - cost of any action is measured in terms of foregone opportunity opp cost of any item is whatever must be given up to obtain it - it is the relevant cost for decision making
Movie tickets and DVDs are substitutes. If the price of DVDs increases, what happens in the market for movie tickets?
the demand curve shifts to the right
Invention
the discovery of a product or process, often through the use of imagination, ingenuity, and experimentation
competitive markets and well-defined and enforced private property rights
the efficiency of market organization is dependent on 2 things:
competition
the great regulator
opportunity costs
the highest value of alternative sacrificed in order to choose an option incurred when people make choices and they are subjective and vary across people
externality
the impact of one person's actions on the well being of a bystander / production or consumption of good affects bystanders ex: factories polluting
A change in which of the following will not shift the demand curve for hamburgers?
the price of hamburgers
transaction costs
the time, effort, and other resources needed to search out, negotiate, and consummate an exchange
law of comparative advantage
the total output of an economy or trading partners is greatest when each good is produced by person with the lowest opportunity cost for that good
example of tradeoff - giving up something to do something else
there is no such thing as a free lunch, guns and butter (more we spend on national defense the less can spend on consumer goods to raise std of living), have more $ to buy stuff requires working longer hrs which leaves less time for leisure, society deciding between efficiency or equality
what are the broad reasons for a government to intervene in the economy and change the allocation of resources that people would choose on their own?
to promote both efficiency and equality efficiency: think of market failure --> externality+ market power when there is market failure, the government can implement policies to reduce externality. With the example of the factories creating pollution and health problems, the government can make rules to restrict factories polluting. The market power example of a person owning the only water well reminds me of a monopoly and government can have rules to restrict monopolies and trusts. the invisible hand promote efficiency, but not equality. Government can promote both efficiency and equality. For example, making lower income people pay lower taxes than higher income people. Welfare programs. EOP programs.
opportunity cost of production
total economic cost of producing a good or service
True or False: Suppose that the hypothetical country of Kernaland has a chronic scarcity of corn, its staple grain. This implies that there is less corn freely available from nature than residents of Kernaland would like.
true
monetary
tuition, books, lost earnings
Because of scarcity it is important
we use resources productively and efficiently
marginal analysis example
when a manager considers whether to increase output, she compares the cost of the needed labor and materials to the extra revenue
all gains from trade have been fully realized and economic efficiency is present
when a market is in equilibrium,
incentive example:
when gas prices rise, consumers carpool and buy more hybrids and fewer SUVs, when cigarette taxes increase teen smoking falls, high price in a market provides an incentive for buyers to consume less and an incentive for sellers to produce more