Eco 152- principles of microeconomics

Positive economics

Is is a statement of what is, purely descriptive statements or scientific predictions not including anyone's feelings.

5 Factors of production

Land, labor, physical capital, human capital and entrepreneurship

What is the substitution effect of a price change on the quantity demanded of a good or​ service?

A price change induces people to substitute among goods.

Which of the following would cause a decrease in the demand for beef​? A. An increase in the price of beef. B. A decrease in the price of fish​, a substitute for beef. C. An increase in consumer incomes ​(beef is a normal​ good). D. A decrease in the number of firms in the market

B. A decrease in the price of fish​, a substitute for beef.

economic goods

The quantity demanded exceeds the quantity supplied at zero price goods that are scarce

If the absolute price elasticity of demand is 3​, what effect will an increase of 4 percent in price have on quantity​ demanded?

The quantity demanded will decrease by 12 percent

Which of the following will cause the demand curve to​ shift? A. newer technology and improved productivity B. a change in consumer income C. more firms in the market D. a change in the cost of raw materials

a change in consumer income

The economic system in which a government establishes ownership of resources and issues rules for how to manage the production of products is best described as

a command and control system.

The effect of a quantity restriction is

a higher price.

price ceiling

a maximum price that can be legally charged for a good or service

The economic system in which individuals and families own all of the scarce resources used in​ production, decide how and what to​ produce, and how many products to​ produce, is best described as

a price system.

total revenue will decrease when

demand is elastic and price rises

The use of​ utility-based consumer choice theory

has allowed economists to make a wide array of predictions about how consumers respond to changes in​ prices, incomes, and other factors.

The market price people are willing to pay for a unit of a particular commodity is determined by

marginal utility.

The​ water-diamond paradox was solved by realizing the price people are willing to pay for a unit of a particular commodity is determined by

marginal utility.

The absolute value of the​ short-run elasticity of demand for bread has been estimated to be 0.15. Its​ long-run elasticity of demand is

more than 0.15.

According to the law of​ supply, as the price of the good​ increases, it causes a

movement upward along the supply curve.

Other than correcting​ externalities, other economic functions of government include

providing a legal​ system, allocating public​ goods, promoting​ competition, and stabilizing the economy.

The study of collective decision​ making, or the process through which​ voters, politicians and other interested parties influence nonmarket choices is known as

public choice theory.

At the market equilibrium​ price,

quantity demanded equals quantity supplied.

Other things remaining​ equal, as the relative price of a good​ falls, people consume more of that good because

that particular good now has a higher marginal utility per dollar than other goods.

the existence of scarcity requires

that people must make choices and face trade off in using their resources

marginal utility

the additional satisfaction from additional units of the good.

In economics, resources are

things used to produce items of value

A model is considered​ "good" if it yields usable predictions that are supported by​ real-world observations. T/F

true

An example of free riding would be A. trying a sample of food at a grocery store. B. having a friend buy you a movie ticket. C. walking on a golf course to play without paying. D. using the library even though you​ don't have a card

walking on a golf course to play without paying.

wants are

what people would buy if their incomes were unlimited

inelastic demand

when price increases revenues increases, when price decreases revenue decreases

An​ economy's production is efficient

whenever it is operating on its production possibilities curve.

Ceteris Paribus Assumption

"Other things constant" or "other things equal" the assumption that nothing changes except the factor or factors being studied

bounded rationality hypothesis

Assumes people are not fully rational so they cannot examine every possible choice they confront and therefore use simple rules of thumb to make decisions

Centralized Command and control (central planning) system

Authorities own resources and decide how to manage them Government makes all economic decisions

Which of the following is not true about economic​ models? A. In comparing two​ models, the simpler one is​ better, other things equal. B. A good model must be realistic. C. Models are used to explain and predict human behavior. D. A model is a simplified representation of the real world.

B a good model must be realistic

Elastic demand

Revenues rises when price decrease, revenues fall when price increases

In many​ countries, education is either wholly provided by the government or is heavily subsidized. How would an economist explain​ this?

Since education has a spillover​ benefit, private markets will under provide for it.

The two primary money transfer payments in our system are

Social Security​ old-age and disability benefits and unemployment insurance benefits.

What if the increase in demand were larger than the increase in​ supply?

The equilibrium price and quantity increase.

In a market​ system, how are the terms of exchange​ established?

The forces underlying supply and demand interact to set a price.

Labor

The human resource Productive contributions made by individuals who work

Law of increasing additional cost

The opportunity cost of additional units of a good generally increases as people attempt to produce more of a good. In graphs it is the reason the production possibilities curve is a bowed out shape Pg 36

Utility

The want satisfying power of a good or service

Economic models assume people exhibit what unrealistic characteristics

Unbounded willpower (choices always consistent w long term goals) Unbounded selfishness (people are only interested in their own satisfaction) Unbounded rationality (people are able to consider every relevant choice)

Scarcity

We do not ever have enough of everything, including time, to satisfy our every desire at zero price not the same as a shortage

3 Fundamental Economic Questions

What and how many will be produced? How will items be produced? For whom will items be produced?

Scarcity implies that

a way of rationing supplies of goods must be found.

Economists assume that when there is a change in demand​ and/or supply, that prices reach a new equilibrium

after an adjustment period that varies.

The price elasticity of demand for a particular commodity depends upon all of the following except A. the percentage of a​ consumer's total budget devoted to purchasing that commodity. B. the length of time allowed for price changes of that commodity. C. availability of complementary goods. D. the number of close substitutes for that commodity.

availability of complementary goods.

A price ceiling is

a​ government-imposed maximum price that may be charged for a good or​ service, which can lead to shortages.

The productivity gains achieved by specialization are due to

comparative advantage.

Law of Demand

consumers buy more of a good when its price decreases and less when its price increases quantity demanded of any commodity is INVERSELY related to its price

Each of the following factors has played a significant role in the rapid expansion of Medicare spending by the U.S. government except A. consumers of Medicare tend to only consume the high valued medical services. B. total medical spending​ (number of consumers times the price of medical​ services) has risen rapidly in the U.S. C. the profit motive of physicians and hospitals. D. government planners failed to correctly estimate the increase in consumption of medical services

consumers of Medicare tend to only consume the high valued medical services.

a market demand curve

derived by summing (at each price) the individual quantities demanded by all buyers in the market

Price​ ceilings, such as rent controls

discourage the construction of new housing. reduce tenant mobility as people may be reluctant to change apartments. lead to the deterioration of existing housing.

​Government-enforced prices such as price ceilings

disrupt the rationing function performed by prices in a market system.

In the decision making process for markets and the public sector

dollars spent count as votes in the market​ system, but in the public sector one person gets one vote. the spending of dollars can indicate intensity of​ want, but political voting does not. the market system is run by proportional voting rules and the public sector is run by majority rule.

Labor is a key input at​ fast-food restaurants. Suppose that the government boosts the minimum wage above the equilibrium wage of​ fast-food workers. Which of the following best describes the response of the quantity of labor employed at​ restaurants?

Fewer workers will be employed since the wage increase will induce managers to seek to substitute other inputs for the now relatively more expensive labor.

A true public good must be provided by the government. Which of the following goods provided by the government is a true public​ good? A. Flood control. B. Postal service. C. Tax collection. D. Highways where tolls are collected.

Flood control.

Three goals established by the full-employment act of 1946

Full employment Price stability Economic growth

Substitutes in goods

Goods that can be used to replace the purchase of similar goods when prices rise A change in price of one will cause a change in demand in the same direction cross price of elasticity of demand is positive Pg58

Complements in goods

Goods typically consumed together A change in price of one causes and opposite shift in the demand for the other Pg58

Which of the following is not a difference between market and collective decision​ making? A. Government goods are often provided free of​ charge, while market goods have a price. B. The government can use expropriation to extract​ payments, but private firms cannot. C. Government goods are costless to​ produce, while private goods have production costs D. Money payments can signal intensity of desire for a​ product, but voting cannot.

Government goods are costless to​ produce, while private goods have production costs.

Physical Capitol

Manufactured resources used in production

The most important categories in the federal budget are

Medicare and other​ health-related spending, Social Security and other​ income-security programs, and national defense.

Which of the following is not a true statement about U.S. government support programs for​ agriculture? A. Farm support programs are promoted as a way of helping small farmers. B. The primary beneficiaries of government support programs are large farmers. C. The primary losers from government support programs are​ consumers, who pay higher food prices. D. Most farm support goes to small​ farmers, because there are many more small farmers than large farmers.

Most farm support goes to small​ farmers, because there are many more small farmers than large farmers.

Land

Natural resources available from nature

Which of the following is not a political function of the government that leads to involvement in the​ economy? A. Public goods. B. ​In-kind transfers. C. Income redistribution. D. Merit and demerit goods.

Public goods.

What if the increase in demand were smaller than the increase in​ supply?

equilibrium price falls and quantity rises

If the demand and supply curves increase​ (shift outward) by identical proportions then

equilibrium price stays the same and quantity rises

A cost or benefit of an economic activity that has an impact on an​ individual's well-being, even though the individual was not directly involved in the​ activity, is known as​ a(n)

externality

a linear production possibilities curve

illustrates the concept of efficiency

Income elasticity of demand

measures the responsiveness of quantity demanded to a change in income and refers to the horizontal shift of the demand curve.

a characteristic of a public​ good?

no individual can be excluded from the benefits of consuming it

If economic growth occurs in a​ nation, this is represented by

its production possibilities curve moving upward and outward

Which of the functions of government below is not a normative function of​ government? A. income redistribution B. the provision of​ government-sponsored goods C. legislative regulation or prohibition when negative externalities are present D. the regulation of​ government-inhibited goods

legislative regulation or prohibition when negative externalities are present

Economics is the study of how people allocate their​ ________ resources in an attempt to satisfy their​ ________ wants. As​ such, economics is the study of how people make choices.

limited; unlimited

the political system is run by

majority rule

In determining how to allocate your​ time,

only comparative advantage but not absolute advantage matters

All of the following are government imposed quantity restrictions except A. a ban on a good making it illegal to own the good. B. import quotas. C. rent controls. D. licensing certain activities.

rent controls.

In a rent controlled​ market, we would expect to observe

renters moving into the market to take advantage of the lower rents.

The division of productive activities among persons and regions so that no one individual or region is totally​ self-sufficient is known as

specialization

Suppose the price of apples falls relative to other similar​ goods, and as a result the quantity of apples demanded increases. This is caused by

substitution effect.

What is the economic effect of price​ floors?

surpluses

The primary losers from minimum wages are

teenage and unskilled workers.

human capital

the education and training of workers

Which of the following is a dissimilarity between the market sector and the public sector decision​ making? A. the existence of an opportunity cost associated with every action B. the types of individuals working in the private sector and working in the public sector C. the type of voting system D. the existence of competition

the type of voting system

Market failure occurs when

the unrestrained market economy leads to too few or too many resources going to a specific economic activity.

Opportunity Cost

the value of the next best alternative that must be sacrificed to satisfy a want

Which of the following is a similarity between the market sector and the public sector decision​ making? A. governments can resort to using force in their regulation of economic affairs B. a dollar voting system is in effect C. goods are furnished to the ultimate consumers without payment required D. there is an opportunity cost associated with every action

there is an opportunity cost associated with every action

The explicit redistribution of income uses

transfer payments and income transfers in kind.

Money payments made by governments to individuals for which no services or goods are concurrently rendered in return EX: social security

transfer payments.

t/f Much of human behavior can be explained in terms of how individuals respond to changing incentives over time.

true

A demand schedule shows

various quantities of a good or service demanded at various prices

​Heroin, cigarettes,​ gambling, and cocaine are examples of

​government-inhibited goods.

Sports​ stadiums, museums,​ ballets, plays, and concerts are examples of

​government-sponsored goods.

During the time period assumed by a production possibilities​ curve, it is​ ________ to be at a point outside the curve and​ ________ to be at a point beneath the curve.

​impossible; possible

Evidence indicates that a system of rent controls primarily benefits

​upper-income professionals.

Voluntary exchange

makes both parties to a trade better off.

Subsidizing medical services through Medicare

makes medical services available to a large percentage of the​ population, who otherwise could not afford them. drives a wedge between the price received by providers and the price perceived by consumers. raises the price per unit of medical care received by producers.

Public schools provide educational services at a price

Below the market price

The price elasticity of demand for a normal good is 1.8 and the income elasticity of demand is 2.3 If there is an increase in price of 6 percent and a simultaneous 3 percent increase in​ income, quantity demanded will change by

-3.9 percent

A firm changes the price of its product and its sales revenues​ don't change. The absolute value of the price elasticity of demand for its product must be

1.0.

What happens in the market with an upward sloping supply curve when there is a shift in the demand curve due to an external​ shock?

A new equilibrium price will be achieved over some period of time.

Economic model

A simplified model of reality that focuses on what is most relevant to the problem and excludes what is not should capture only the essential relationships that are sufficient to analyze a particular problem or answer a particular question.

Normative Economics

A statement of what ought to be. When our morals and values are involved in the analysis. Relates to whether outcomes are good or bad. Statements using words like "ought to be" or "should be"

When there is an inferior good, an increase in consumer income will result in the

demand curve shifting to the left

Comparative advantage

Ability to produce a good or service at a lower opportunity cost than other producers

What is the difference between absolute advantage and comparative​ advantage?

Absolute advantage is when someone can produce more of a good using a given quantity of inputs while comparative advantage is when someone can produce a good at a lower opportunity cost.

Elastic demand

Absolute value of the price elasticity of demand is greater than 1

Goods

All things from which individuals derive satisfaction or happiness Including air to breathe, food, cars

voluntary exchange

An act of trading between individuals that makes both parties subjectively better off Pg 77

positive economics

Analysis that is strictly limited to making either purely descriptive statements or scientific​ predictions; for​ example, "If​ A, then​ B." A statement of what is.

Production

Any process by which resources are transformed into goods or services that can be used in consumption Pg 29

Which of the following would cause an increase in the supply of pork​? A. An increase in the price of pork. B. A decrease in the price of inputs to pork production. C. An increase in taxes. D. An increase in the number of buyers in the market.

B. A decrease in the price of inputs to pork production.

Which one of the following is a positive​ statement? A. The Fed should not have cut the interest rate so frequently. B. The Fed has cut the key interest rate several times this year. C. All these interest rate cuts should have helped the economy. D. A tax cut should be better for stimulating the economy than a cut in the interest rate

B. The Fed has cut the key interest rate several times this year.

Rational, self-interested government officials seeking more funding for mass transit through higher taxes should consider A. how to spend the funds for their own individual gain. B. the fact that raising taxes is generally unpopular and may result in a potential loss in a future election. C. that taxpayers may prefer to use mass transit to save on gas cost. D. that taxpayers may prefer to commute in their own cars rather than depend on mass transit.

B. the fact that raising taxes is generally unpopular and may result in a potential loss in a future election.

a rightward shift in the supply curve for a good may be caused by any of the following except A. an improvement in technology B. an increase in price C. A rise in the price of an input to production D. An increase in the per unit subsidy

B. An increase in price

Which of the following is not an example of a transaction​ cost? A. The time and effort spent researching the product as well as its various sellers. B. The opportunity cost of time spent looking for stores selling the desired item. C. The enjoyment of using the good. D. The cost of returning a defective product.

C The enjoyment of using the good

Suppose that owners of​ high-rise office buildings are the main employers of custodial workers in a city. The city has decided to impose rent​ controls, and it has established a rent ceiling below the previous equilibrium rental rate for offices throughout the city. How will the quantity of offices that building owners lease​ change? A. The supply of office buildings will shift to the left. B. The demand for office buildings will shift to the right. C. The quantity of office buildings supplied will decrease. .D. All of the above. How will the market wage and equilibrium quantity of labor services provided by custodial workers be affected by the imposition of rent​ controls? A. The market wage will rise and the equilibrium quantity will rise. B. The market wage will rise and the equilibrium quantity will fall. C. The market wage will fall and the equilibrium quantity will fall. .D. The market wage will fall and the equilibrium quantity will rise.

C The quantity of office buildings supplied will decrease. C The market wage will fall and the equilibrium quantity will fall.

a. A rational​, ​self-interested student decides whether to purchase a textbook required for a particular class based on all of the​ following, except A. whether he can borrow the textbook from his friends. B. the price of the textbook. C. whether the textbook has an attractive dust jacket. D. his limited​ resources, such as income and time.

C. whether the textbook has an attractive dust jacket.

Suppose Canada spends less per capita on national defense than many other countries of similar size and income. A reasonable economic explanation would be that

Canada is able to​ free-ride on the defense spending of the United States.

physical capital

Consists of factories and equipment used in production, as well as improvements to natural resources

consumer sovereignty

Consumers have individual freedom to decide what they wish to purchase

Microeconomics

Is the study of Decision making taken on by individuals (or households) and by firms.

According to the same example in the​ book, medical research has shown that grapefruit juice can reduce the effectiveness of certain medications.​ However, there is also evidence that grapefruit consumption can lower cholesterol in young people. The net effect on demand from these two findings A. will be an increase in demand as people buy more grapefruit. B. will be a change in the price of oranges. C. will be a decrease in demand as people buy less grapefruit. D. cannot be determined because they have opposite effects on demand.

D. cannot be determined because they have opposite effects on demand.

According to the example in the​ book, medical research has shown that grapefruit juice can adversely affect the effectiveness of certain medications. This is likely to affect the demand for grapefruit because A. the number of grapefruit sellers will decrease. B. people will buy less grapefruit because their incomes have increased. C. the prices of oranges will change. D. people will buy less grapefruit because their tastes and preferences have changed.

D. people will buy less grapefruit because their tastes and preferences have changed.

All of the following are assumptions underlying the production possibilities curve except A. the resource inputs are fixed over the time period. B. resources are fully employed. C. production takes place over a specific time period. D. technology is assumed to be continuously improving.

D. technology is assumed to be continuously improving.

A municipality taxing hotel guests to obtain funding for a new sports stadium should consider all of the​ following, except A. the impact of that tax on possible reduction of tourism in the local region. B. all other alternative sources of funding the sports stadium. C. the total cost of building the sports stadium. D. the winning potential of the sports team using the stadium.

D. the winning potential of the sports team using the stadium.

Macroeconomics

Is the study of the economy as a whole

Price system (market system)

Decentralized decision making process, in which prices are terms (signals) under which people agree to make exchanges Individuals and families own the resources used in production but choices about what and how many items to produce are left to private parties.

human capital

Education and training of workers

When both supply and demand decrease what will happen to the equilibrium quantity?

Equilibrium quantity will decrease

When both supply and demand increase what will happen to the equilibrium quantity?

Equilibrium quantity will increase

behavioral economics

Examines consumer behavior in face of psychological limitations and complications that may interfere with rational decision making

When more of a good is consumed, the marginal utility

Falls

Assume the cost of aluminum used by​ soft-drink companies increases. Which of the following correctly describes the resulting effects in the market for canned soft​ drinks? I. The demand for soft drinks decreases. II. The quantity of soft drinks demanded decreases. III. The supply of soft drinks decreases. IV. The quantity of soft drinks supplied decreases.

II and III

Which of the following is not an economic function of​ government? A. Ensuring​ economy-wide stability. B. Promoting competition. C. Providing a legal system. D. Income redistribution.

Income redistribution.

mixed economic system

Incorporate aspects of both centralized command and control and a decentralized price systems

Which one of the following is a primary difference between a public good and a private​ good?

Private goods are subject to the principle of rival consumption while public goods are not.

absolute advantage

The ability to produce more units of a good or service using a given quantity of labor or resource inputs, in a certain amount of time compared to others

Rationality assumption

The assumption that people do not intentionally make decisions that would leave them worse off

The rationality assumption as used in economics

The rationality assumption as used in economics

What does the price elasticity of demand​ measure?

The responsiveness of quantity demanded to a change in the price of a good.

Economics

The study of how people distribute their LIMITED resources to satisfy their UNLIMITED wants. The study of how people make choices. It is a science since the study of economics uses models and theories that are subject to empirical testing

The price of memory chips used in laptop computers declines. A. The supply​ increases, causing the equilibrium quantity to fall and the market price to rise. B. The quantity supplied​ increases, causing the equilibrium quantity to rise and the market price to fall. C. The supply​ increases, causing the equilibrium quantity to rise and the market price to fall. D. The supply​ decreases, causing the equilibrium quantity to fall and the market price to rise.

The supply​ increases, causing the equilibrium quantity to rise and the market price to fall.

In a​ market-based economy, what is the role of a system of​ prices?

To address the problem of scarcity.

The goal of the antitrust legislation

To reduce the power of firms that can determine the market price of the goods they sell

Which of the following examples are used as evidence favoring the bounded rationality​ assumption?

When purchasing electric appliances such as​ refrigerators, people sometimes buy the​ lowest-priced, energy-inefficient models even though the price savings often fail to compensate for higher future energy costs.

inelastic demand

When the absolute value of the price elasticity of demand is less than 1

unit elastic demand

Whenever the absolute value of the price elasticity of demand is equal to 1

All of the following determine the price elasticity of demand except A. a change in the price of resources used to produce the good. B. the existence of close substitutes. C. the length of the time period. D. the proportion of a​ person's budget spent on the good.

a change in the price of resources used to produce the good.

Each country has a unique economic system to allocate its scarce resources.​ However, the economic system of most of the​ world's nations are

a combination of the central planning system and the price system.

A good that has been deemed socially desirable through the political process is known as

a merit good.

according to the law of supply, as the price of the good decreases, it causes

a movement downward along the supply curve

The minimum wage is an example of

a price floor.

Which of the following will cause an outward​ (rightward) shift in​ supply? A. The cost of an input increases. B. A decline in labor productivity. C. A technological improvement. D. A reduction in consumer incomes

a technological improvement

Prices perform a rationing function by

allocating goods to the buyers who are willing and able to pay the highest price.

The division of labor increases the output of society by

allowing resources to specialize in the tasks for which they have a comparative advantage

economic way of thinking is best described as

an analytical framework enabling one to reach informed conclusions and make better decisions

division of labor

an arrangement in which each worker specializes in a particular task or job refers to the segregation of resources into different specific tasks Pg 40

Pollution produced by a factory is being dumped into a local river. The community uses local funds to clean the river. This is an example of

an external cost as the​ community, not the​ factory, is paying for the clean up.

an increase in price of a complement good Y will lead to

an inward shift in the demand for good x

Specialization of labor and trade yield greater economic efficiency when applied to interstate​ trade,

and when applied to international trade.

the relative price of any commodity is its price in terms of

another commodity

Most economists

apply the assumption that people behave as if they act rationally with an aim to maximize utility.

Advocates of behavioral economics

argue that utility theory is explained by applying the assumption of bounded rationality.

Total revenues are maximized

at the point of​ unit-elasticity on the demand curve.

If a firm increases the price of their product in the elastic portion of the demand​ curve, total revenues will

decrease

Economic models relate to the way people think rather than to the way people act. T/F

false

T/F It is relatively easy for an author to keep all normative statements out of a textbook.

false

The concept of self interest assumes that individuals can only further their goals at the expense of other individuals. T/F

false

Other things remaining​ equal, a decrease in the world oil supply like those that occurred in​ 1973-74 and 1979 would

increase the price of airline travel and decrease its equilibrium quantity

Microeconomics is the part of economic analysis that studies decision making undertaken by​ ________. Macroeconomics is the part of economic analysis that studies the behavior of​ ________.

individuals and​ firms; the economy as a whole

Which of the following statements best demonstrates the concept of bounded ​rationality? A. Individuals do not intentionally make decisions that would leave them worse off. B. Individuals make decisions as if they had understood and examined every possible alternative. C. Individuals act in their own​ self-interest. D. Individuals make​ short-run choices that are not consistent with their​ long-term goals.

individuals make short-run choices that are not consistent with their long term goals

One reason that collective and private decision making differ is

individuals working in the government sector face a different incentive structure than those in the private sector.

Because price and quantity supplied are directly​ related, we would expect the sign of the price elasticity of supply to be

positive

The income elasticity of a normal good is

positive

according to the law of supply

price and quantity are directly related (positive relationship) when price increases, the quantity supplied increases

Black markets usually arise when there are

price ceilings.

unit elastic demand

price change doesnt effect total revenue

When demand decreases and the​ (upward sloping) supply curve remains in the same​ position,

price falls and equilibrium quantity falls.

When supply increases and the​ (downward-sloping) demand curve remains in the same​ position,

price falls and equilibrium quantity rises.

market system is run by

proportional rule

People often complain about price gouging after a natural disaster. Suppose the government imposed limitations on price increases in the aftermath of a disaster. One would expect

reconstruction to take longer because the quantity supplied of new materials would increase more slowly.

In a price​ system,

relative prices change constantly to reflect changes in supply and demand.

the long run elasticity of supply in most industries is more elastic than the short run elasticity because in the long run

resources and firms can enter the industry

A point inside the production possibility curve means that

resources are not being fully utilized due to unemployment of inefficiency

Economists assume that an individual acts as if motivated by

self interest

The law of increasing additional cost

shows that the opportunity cost of additional units of a good generally increases as people attempt to produce more units of that good represented by a bowed-out production possibilities curve

In a price​ system, changes in prices

signal to consumers that some goods are relatively more or less scarce.

Suppose the market price of corn is​ $5 a bushel but the government sets a price of​ $7. As a​ result,

the government must purchase the surplus to maintain the price.

for inferior goods we can conclude that

the income elasticity of demand is negative

Market failure occurs because

the market system does not make individuals responsible for the social​ costs/benefits of their actions.

The greater the amount of productive resources we use to produce capital goods​ today,

the more consumer/consumption goods we will have in the future

The more flexible prices​ are,

the more quickly a shock to the economy can be absorbed.

Price elasticity of demand is defined as

the percentage change in quantity demanded divided by the percentage change in price.

The law of diminishing marginal utility insures that

the total utility curve will eventually increase at a decreasing rate.

Current production of capital goods means that

the production possibilities curve can be expected to shift outward in the future.

the law of supply states that there is a positive relationship between the price and the quantity supplied Thus, as the price decreases,

the quantity produced by firms decreases