CH. 1 Micro

In economics, choices must be made because we live in a world of

scarcity.

Marginal analysis involves undertaking an activity

until its marginal benefits equal marginal costs.

The Coffee Nook, a small cafe near campus, sells cappuccinos for $2.50 and Russian tea cakes for $1.00 each. What is the opportunity cost of buying a cappuccino?

2 1/2 Russian tea cakes

Which of the following is a positive economic statement?

If the price of iPhones falls, a larger quantity of iPhones will be purchased.

Market

A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

Productive efficiency

A situation in which a good or service is produced at the lowest possible cost.

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Voluntary exchange

A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction.

allocative efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

Mixed economy

An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.

Market economy

An economy in which the decisions of households and firms as they interact in markets determine the allocation of economic resources.

Centrally planned economy

An economy in which the government decides how economic resources will be allocated.

Positive analysis

Analysis concerned with what is.

Normative analysis

Analysis concerned with what ought to be.

Marginal analysis

Analysis that involves comparing marginal benefits and marginal costs.

Which of the following is a normative economic statement?

Pharmaceutical manufacturers should not be allowed to patent their products so prescription drugs would be more affordable.

________ is a situation in which a good or service is produced at the lowest possible cost.

Productive efficiency

Economic variable

Something measurable that can have different values, such as the number of people employed in manufacturing.

Equity

The fair distribution of economic benefits.

Opportunity cost

The highest-valued alternative that must be given up to engage in an activity.

Trade-off

The idea that, because of scarcity, producing more of one good or service means producing less of another good or service.

Microeconomics

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Economics

The study of the choices people make to attain their goals, given their scarce resources.

Macroeconomics

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Which of the following is a macroeconomic question?

What determines the inflation rate?

Which of the following is a microeconomic question?

What factors determine the price of carrots?

The three fundamental questions that any economy must address are:

What goods and services to produce; how will these goods and services be produced; and who receives them?

Jewelry manufacturers produce a range of products such as rings, necklaces, bracelets, and brooches. What fundamental economic question are they addressing by offering this range of items?

What to produce?

The economic analysis of minimum wage involves both normative and positive analysis. Consider the following consequences of a minimum wage: a.The minimum wage law causes unemployment .b.A minimum wage law benefits some groups and hurts others .c.In some cities such as San Francisco and New York, it would be impossible for low-skilled workers to live comfortably in the city without minimum wage laws. d.The gains to winners of a minimum wage law should be valued more highly than the losses to losers because the latter primarily comprises businesses. Which of the consequences above are positive statements and which are normative statements?

a and b are positive statements, c and d are normative statement.

Economic model

a simplified version of reality used to analyze real-world economic situations

Consider the following statements: a.Car owners purchase more gasoline from a gas station that sells gasoline at a lower price than other rival gas stations in the area. b.Banks do not take steps to increase security since they believe it is less costly to allow some bank robberies than to install expensive security monitoring equipment. c.Firms produce more of a particular DVD when its selling price rises. Which of the above statements demonstrates that economic agents respond to incentives?

a, b, and c

Economists assume that individuals

are rational and respond to incentives.

The decision about what goods and services will be produced in a market economy is made by

consumers and firms choosing which goods and services to buy or produce.

In economics, the term "equity" means

economic benefits are distributed fairly.

Voluntary exchange ________ economic efficiency because neither the buyer nor the seller would agree to a trade unless ________.

increases; they both benefit

In economics, the term ________ means "additional" or "extra."

marginal

The highest-valued alternative that must be given up to engage in an activity is the definition of

opportunity cost.

Economic models do all of the following except

portray reality in all its minute details. (What they do is answer economic questions, make economic ideas explicit and concrete for use by decision makers and, simplify some aspect of economic life.)

Allocative efficiency is achieved when firms produce goods and services

that consumers value most.

By definition, economics is the study of

the choices people make to attain their goals, given their scarce resources.