Econ 1001 midterm

The cost-benefit principle

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

increase the quantity of cookies supplied

As the price of cookies increase, firms that produce cookies will

could be either an inefficient or efficient point

If a given production combination is known to be attainable, then it:

uncertain; lower

If supply and demand both decreases, the new equilibrium price will be ________ and the new equilibrium quantity will be ________.

the supply will decrease

If the price for rubber (an input to the production of tires) increases:

production possibilities curve

A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good.

The equilibrium price principle (no cash on the table principle)

A market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all the gains through collective action

The incentive principle

A person (or a firm or a society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises. In short, incentives matter.

as you consume less of something, your marginal utility from consuming that good will increase

According to the law of diminishing marginal utility:

the scarcity principle (The no-free lunch principle)

Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another.

the efficiency principle

Efficiency is an important social goal because when the economic pie grows larger, everyone can have a larger slice.

When the price X rises, the demand for Y increases

For two goods, X and Y, to be classified as substitutes, it must be the case that:

pitfall #1

Measuring costs and benefits as proportions rather than absolute dollar amounts

necessarily an attainable point

On a graph of production possibilities curve, an inefficient point is:

downward; more people find that the price is now less than their reservation price.

One reason the demand curve slopes _______ is that as prices fall _______.

more of one good could be produced without producing less of the other

Points that lie below the production possibilities curve are inefficent because:

perfectly elastic demand

Refers to a price elasticity of demand value of infinity, and arises in the case of a horizontal demand curve.

perfectly inelastic demand

Refers to a price elasticity of supply value of zero, and arises in the case of a vertical demand curve.

2,000; 3,750

Suppose that the price of 25 cents per orange, 500 consumers each demand 4 oranges, and at the price of 20 cents per orange, 750 consumers each demand 5 oranges. Therefore, the market demand for oranges is _______ at 25 cents per orange and _______ at price of 20 cents per orange.

maximize utility

The rational spending rule is derived from the consumer's desire to:

the U.S. consumers of the firm's products; the firm's U.S. employers

When a U.S. firm engages in outsourcing, it benefits __________ and harms ___________.

the total value of all goods and serviced produced by the nation rises

When a nation reduces the barriers to international trade

buyers have an incentive to offer to pay sellers more than the current price

When the current price of a good is below market equilibrium price:

decrease in the quantity demanded

When the supply of a good decreases, there will be

neither sellers or buyers want the price to change

Which of the following is NOT a characteristic of a market in equilbrium?

sunk costs

a cost that is beyond recovery at the moment a decision must be made

ceiling price

a maximum, government-set price for something

change in quantity demanded

a movement along the demand curve that occurs in response to a change in price

change in quantity supplied

a movement along the supply curve that occurs in response to a change in price

efficient point

any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the other

inefficient point

any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other

attainable point

any combination of goods that can be produced using currently available resources

attainable point (definition)

any combination of goods that can be produced using currently available resources

unattainable point

any combination of goods that cannot be produced using currently available resources

comparative advantage principle

everyone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is lowest.

pitfall #3

failure to think at the margin

complements

if an increase in the price of one causes a leftward shift in the demand curve for the other

substitutes

if the demand for olives falls when the price of cheese falls, we know that cheese and olives are:

pitfall #2

ignoring implicit costs

sellers, dissatisfied with growing investors, will lower their prices.

in a free market, if the price of a gapped os above equilibrium price, then;

the principle of increasing opportunity cost (the low-hanging fruit principle)

in expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs.

comparative advantage

one person has a _________ _____________ over another if his or her opportunity cost of performing a task is lower than the other person's opportunity cost

absolute advantage

one person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person

positive (descriptive) economic principle

one that predicts how people will behave

normative economic principle

one that says how people should behave

replacing relatively expensive American workers with low-wage workers overseas

outsourcing is a term increasing used to refer to the act of:

Law of Demand

people do less of what they want to do as the cost of doing it rises

rational person

someone with well-defined goals who tries to fulfill those goals as best he or she can

demand for high-fiber food will decrease

suppose that recent studies conclude that high-fiber diets do not reduce the risk of developing colon cancer as was previously thought. The likely result will be that:

nominal price

the absolute price of a good in dollar terms

marginal utility

the additional utility gained from consuming an additional unit of a good

economic surplus

the benefit of taking action minus its cost (total benefit - total costs)

income effect

the change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power

unit elastic

the demand for a good is ____ _______ with respect to price if its price elasticity of demand equals one.

elastic

the demand for a good is _______ with respect to price if its price elasticity is greater than 1

Inelastic

the demand for a good is ________ with respect to price if its price elasticity of demand is less than 1

consumer surplus

the difference between a buyer's reservation price for a product and the price actually paid

buyer's surplus

the difference between the buyer's reservation price and the price he or she actually pays

total surplus

the difference between the buyer's reservation price and the seller's reservation price

total expenditure

the dollar amount that consumers spend on a product (Price x Quantity) is equal to the dollar amount that sellers recieve

real price

the dollar price of a good relative to the average dollar price of all other goods

marginal benefit

the increase in total benefit that results from carrying out one additional unit of activity

buyer's reservation price

the largest dollar amount the buyer would be willing to pay for a good

income elasticity of demand

the percentage by which a goods quantity demanded changes in repose to a 1 % change in income

cross-price elasticity of demand

the percentage by which the quantity demanded of the first good changes in response to a 1 percent change in the price of the second

price elasticity of demand

the percentage change in quantity demanded of a good or service that results from one percent change on price

seller's reservation price

the smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost

Economics

the study of how people make choices under condtions of scarcity and the results of those choices for society

Mircoeconomics

the study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets

Marcoeconomics

the study of the performance of national economies and the policies that governments use to try to improve that performance

increase the quantity supplied of a goof when its price rises

the supply curve illustrates that firms:

law of diminishing marginal utility

the tendency for the additional unit gained from consuming an additional unit of a good to diminish as consumption increases beyond some point.

average benefit/average costs

the total benefit of undertaking n units of an activity divided by n

opportunity cost

the value forgone to undertake an activity

average benefit

total benefit divided by the number of units

average costs

total cost divided by the number of units

substitutes definition

two goods for which an increase in the price of one leads to an increase in the demand for the other