Chapter 2 Micro

can opportunity cost be objectively measured?

no, because there is no way to say for sure what the next best choice is going to be for anyone.

How do middlemen reduce transaction costs?

Example: Your local grocer reduces your transaction costs of acquiring vegetables from farmers, milk from diaries, and other products from food producers.

Self sufficiency, or trying to produce everything for yourself is the path to:

Poverty

private property rights

The right to use, control, and obtain benefits from a resource, good, or service. Private property rights involve: • the right to exclusive use. • legal protection against invaders. • the right to transfer to another.

Can private owners do anything they want with their property?

Yes as long as you don't infringe on other people's property rights with them. Private ownership encourages wise stewardship, encourages people to use their property productively, gives people a strong incentive to develop their property in ways that are useful to others, and promotes wise deveopment and conservation resources for the future

Do the owners of land and buildings near your campus have an incentive to use those assets to provide things that students value highly? Why or why not?

Yes, because they can provide goods and services that students value highly relative to their cost.

It takes 1 hour to travel from New York to D.C. by air, but it takes 5 hours by bus. If the air fare is $110 and the bus fare is $70, which is cheaper for someone whose opportunity cost of travel time is $6 per hour? How about for someone whose opportunity cost is $10 per hour? $14 per hour?

$6 per hour, bus is cheaper 6 x 5 hours= 30 plus $70 = $100 versus $110 Air travel is cheaper for $10 ($110 vs $120) and $14 per hour ($110 vs $140)

Internet sites such as eBay make it easier for sellers and buyers to find one another and, by doing so, a. reduce transactions costs. b. reduce the number of exchanges that occur. c. lower the value created by the goods and services available. d. increase transaction costs.

A

Consider the choices of women aged 30 to 50 years old with (a) a college education or (b) less than a high school education. In which case will the share of women in the work force be highest? Which will have the higher average number of children? Why?

a) college educated will have more women in the workforce because the opportunity cost of staying home is so great. They have to give up higher wages.

Four factors that could potentially shift the Production Possibilities Curve outward:

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 under which the economy functions can also increase output 4. by working harder and giving up current leisure, we could increase our production of goods and services

Private property rights change behavior in four ways:

1. incentivize people to properly care for their private property. 2. incentivize people to conserve for the future 3. use resources in ways that other people value 4. mitigate possible harm to other people

What are society's three basic questions?

1. what will be produced? 2. how will it be produced? 3. for whom will it be produced?

A profit-seeking decision maker who decides which business projects to undertake and how they should be undertaken is called a. an entrepreneur. b. a stakeholder. c. key man. d. a progressor.

A

The production possibilities curve illustrates the basic principle that a. if all the resources of an economy are being used efficiently, more of one good can be produced only if less of another good is produced. b. an economy will automatically move toward a point at which all of its resources are being used inefficiently. c. an economy's capacity to produce is unrelated to its population. d. if all the resources of an economy are being used efficiently, more of one good can be produced only if more of another good is produced.

A

why is private ownership important?

A competitive market economy promotes the efficient use of its resources. ... The goods and services produced in the economy are privately owned. This private ownership, combined with the freedom to negotiate legally binding contracts, permits people to obtain and use resources as they choose.

How is the law of comparative advantage related to specialization and division of labor?

Because it makes most sense for people who can produce one good cheaper than they can produce another and to trade with someone who can produce a good they want in exchange for what they produce at a lower cost.

Some professional athletes would have incurred a large opportunity cost from going to college. Why?

Because their alternative to college was a high paying professional sports job.

If Terrell can produce more bagels in one day than Zori can produce in one day, then a. Zori has a comparative advantage in the production of bagels. b. Terrell has a comparative advantage in the production of bagels. c. Terrell has an absolute advantage in the production of bagels. d. Terrell should produce bagels and Zori should spend her time on a different activity.

C

market organization

a method of organization in which private parties make their own plans and decisions with the guidance of unregulated market prices. the basic economic questions of consumption, production, and distribution are answered through these decentralized decisions.

Entrepreneur

a person who introduces new products or improved technologies and decides which projects to undertake. a successful entrepreneur's actions will increase the value of resources and expand the size of the economic pie

Socialism

a system of economic organization in which 1) the ownership and control of the basic means of production rest with the state and 2) resource allocation is determined by centralized planning rather than market forces

investment

the purchase, construction, or development of resources, including physical assets, such as plants and machinery, and human assets, such as better education. investment expands an economy's resources. the process of investment is sometimes called capital information.

creative destruction

the replacement of old products and production methods by innovative new ones that consumers judge to be superior. the process generates economic growth and higher living standards.

Is the "economic pie" fixed or variable?

variable because it is thought of as the total dollar value of all goods and services produced during some period of time. it is the grand total of the wealth or value created by each member in society. the size of the economic pie reflects the physical effort and ingenuity of human beings.

The opportunity cost of an activity: a. is not influenced by time costs b. depends on the individual's subjective values and opinions c. is the same for everyone d. is irrelevant to decision making e. must be calculated and known before undertaking that activity

B

When collective decision making is utilized to resolve economic questions regarding the allocation of resources, a. centralized decision making in all areas is inevitable. b. economic efficiency will be assured. c. the role of markets will be replaced by political decision making. d. the preferences of individuals are of no importance.

C we don't want collective decision making. Individuals should decide what to do with their private property and let the market dictate the use of resources.

law of comparative advantage

Make the good for which you have a low opportunity cost and trade for the good which you have the high opportunity cost Translation: Make something you are good at and trade for something you are not good at. Do what you do best, and trade for the rest.

What is the relationship between private property and the market?

Permission of the owner is required for use of a private property. You must either buy or lease it from the owner. Market prices provide a strong incentive for private owners to consider the desires of others and to use and develop resources that are highly valued by others.

What is the key difference between market organization and collective decision making?

the market system relies on voluntary exchange, price signals, and freedom of entry. this results in wider variety of products, a more competitive environment, and more dynamic change

What are transaction costs?

the time, effort, and other resources needed to search out, negotiate, and complete an exchange. It is a barrier and lowers the benefits of trade.

What are potential trades:

1. Finished goods exchanged through bartering with others 2. Finished goods exchanged for money 3. Business buying resources 4. Consumers buying products

In addition to specialization and division of labor, how else is economic progress achieved?

1. mass production 2. innovation

Why is the African rhino an endangered species while cattle are not,

Cows are in worldwide demand so the world produces enough to meet the demand. Rhinos are being poached so Landowners not prepared to pay high prices for game for fear of it being poached or caught by predators

In many states, the resale of tickets to sporting events at prices above the original purchase price ("ticket scalping") is prohibited. Is this a good idea? Who is hurt and who is helped by this prohibition?

Scalping allows Tickets go to those that value them most so prohibiting scalping means that the people that want the tickets most, can't get them. They would pay more, because they really value the tickets.

How do transaction costs decrease the benefits of voluntary exchange?

The cost of information, transportation, and other elements of transaction costs will some times be so great that potential gains from trade will go unrealized.

opportunity cost

The highest valued alternative that must be given up as a result of making a choice. • Opportunity costs are incurred when a choice is made. • They are subjective and vary across persons. • If an option becomes more costly, an individual will be less likely to choose it.

Does a 60 year old tree farmer have an incentive to plant and care for Douglas fir trees that will not reach optimal cutting size for 50 years? Explain.

Yes, the market value of the land will increase in anticipation of the future harvest.

Capitalism

an economic system in which productive resources are owned privately and goods and resources are allocated through market prices

How does the internet reduce transaction costs and enhance trade?

there's no added cost for selling to buyers at all times of the day and night. Even better, the cost of doing business via ecommerce means reduced transaction fees since you incur fewer expenses that you need to pass on to the buyer.

What are the two most important aspects of voluntary exchange?

1. Voluntary trade creates value and increases wealth. Value can be created by exchanges that move goods to individuals who value them more. 2. Both parties will benefit

Which of the following statements about exchange is false? a. If one trading partner gains, the other must lose. b. If a party to a potential exchange does not believe that it will lead to personal gain, he or she can chose not to engage in the trade. c. The expectation of gain motivates people to engage in trade. d. Voluntary exchange is generally mutually beneficial to the trading partners.

A

production possibilities curve

A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.

Land used to grow corn could also be used to grow soybeans. Which of the following is true when the farmer plants soybeans and the market price of corn rises? a. There will be no change in the opportunity cost of producing soybeans. b. The opportunity cost of producing soybeans increases. c. The opportunity cost of producing soybeans decreases. d. The opportunity cost of producing corn increases.

B

Why do people engage in exchange? Why do you trade for so many goods instead of just producing them yourself?

Because both people benefit. You value something more than what you are exchanging it for.

A point beyond the boundary of an economy's production possibilities curve is A. efficient. B. inefficient. C. attainable. D. unattainable. E. both attainable and efficient.

D

he number of cattle slaughtered every year for meat far exceeds the number of elephants slaughtered every year for their ivory. Despite this, cows can be found everywhere while elephants are on the verge of extinction in some countries. Which of the following best explains this difference? a. People tend to protest more every year to prevent cow extinction than they do for elephant extinction. b. The demand for ivory far exceeds the demand for beef. c. Animals slaughtered for their meat are generally better conserved by humans than animals slaughtered for nonfood uses. d. Cows can be privately owned while in many countries elephants can not.

D

Simple explanation of a production possibilities curve

Points on the curve are efficient- Points inside of the curve are inefficient Points outside of the curve are unattainable. Imagine an economy that can produce only two things: wine and cotton. According to the PPF, points A, B and C - all appearing on the PPF curve - represent the most efficient use of resources by the economy. For instance, producing 5 units of wine and 5 units of cotton (point B) is just as desirable as producing 3 units of wine and 7 units of cotton. Point X represents an inefficient use of resources, while point Y represents the goals that the economy simply cannot attain with its present levels of resources. economics1.gif As we can see, in order for this economy to produce more wine, it must give up some of the resources it is currently using to produce cotton (point A). If the economy starts producing more cotton (represented by points B and C), it would need to divert resources from making wine and, consequently, it will produce less wine than it is producing at point A. As the figure shows, by moving production from point A to B, the economy must decrease wine production by a small amount in comparison to the increase in cotton output. However, if the economy moves from point B to C, wine output will be significantly reduced while the increase in cotton will be quite small. Keep in mind that A, B, and C all represent the most efficient allocation of resources for the economy; the nation must decide how to achieve the PPF and which combination to use. If more wine is in demand, the cost of increasing its output is proportional to the cost of decreasing cotton production. Markets play an important role in telling the economy what the PPF ought to look like. Consider point X on the figure above. Being at point X means that the country's resources are not being used efficiently or, more specifically, that the country is not producing enough cotton or wine given the potential of its resources. On the other hand, point Y, as we mentioned above, represents an output level that is currently unattainable by this economy. But, if there were a change in technology while the level of land, labor and capital remained the same, the time required to pick cotton and grapes would be reduced. Output would increase, and the PPF would be pushed outwards. A new curve, represented in the figure below on which Y would fall, would then represent the new efficient allocation of resources.

What is the opportunity cost of college?

The opportunity cost of going to college includes: • Monetary cost: tuition, books. • Non‐monetary cost: forgone earnings. • If the opportunity cost of college rises (e.g. tuition rises or you get a fantastic job offer then one will be less likely to attend college. example: If you choose not to attend college, one likely scenario would be you picking up a job. Say you get a job out of high school for $35k per year. After four years you've earned about $140k (without any increases in wage or bonuses). What happens if you go to school? Let's assume your yearly tuition and expenses is $30k and you choose to put your head down and graduate within four years. Let's say you choose to stay completely focused on school and do not work while in college. After four years you are out $120k right? Well... yes, but this is where opportunity cost comes in. Because you chose to go to college instead of working, your opportunity cost is actually the sum of your college expenses plus the money you could have earned had you chosen not to work. Your opportunity cost to attend college is $260k.