Econ Ch 1 & 2

Cassie's Quilts alters, reconstructs, and restores heirloom quilts. Cassie has just spent $800 purchasing, cleaning, and reconstructing an antique quilt which she expects to sell for $1,500 once she is finished. After having spent $800, Cassie discovers that she would need some special period fabric that would cost her $200 in material and time in order to complete the task. Alternatively, she can sell the quilt "as is" now for $900. What is the marginal cost of completing the task?

$200

indirect incentive

unintended consequences

Rich people should be taxed more.

normative

Scarcity

the limited nature of society's resources

endogenous factors

variables that are taken into account by the model and explained by the model

Lionel's Lawn Care is a company that maintains residential yards. Lionel's cost for his standard package of mowing, edging, and trimming is $15, and he charges $25 for this service. For a total price of $40, Lionel will also trim shrubs, a service that adds an additional $10 to the total cost of the standard package. What is Lionel's marginal benefit if he sells the standard package?

$25

2. What does the term "marginal" mean in economics?

an additional or extra

Positive Statement

can be tested and validated; it describes "what is"

Lionel's Lawn Care is a company that maintains residential yards. Lionel's cost for his standard package of mowing, edging, and trimming is $15, and he charges $25 for this service. For a total price of $40, Lionel will also trim shrubs, a service that adds an additional $10 to the total cost of the standard package. What is Lionel's marginal cost of adding the shrub-trimming service to the standard package?

$10

5. Cassie's Quilts alters, reconstructs, and restores heirloom quilts. Cassie has just spent $800 purchasing, cleaning, and reconstructing an antique quilt which she expects to sell for $1,500 once she is finished. After having spent $800, Cassie discovers that she would need some special period fabric that would cost her $200 in material and time in order to complete the task. Alternatively, she can sell the quilt "as is" now for $900. What is her marginal benefit if she sells the quilt "as is" now?

$100

"Law" of increasing opportunity cost

-The opportunity cost of producing a good rises as society produces more of it -The PPF will not have a constant slope

Scientific Method in Econ

-observe a phenomenon -develop a hypothesis -construct a model to test the theory -design experiment to test how well the model works and collect data

economic growth

-the process that enables a society to produce more output in the future -Can be shown by a shift outward of the PPF

Five Foundations of Economics

1. Incentives matter 2. Life is about trade-offs 3. Opportunity costs 4. Marginal thinking 5. Trade creates value

markets

Bring buyers and sellers together to exchange goods and services

barter

Exchange goods without involving money.

trade

Exchange of goods and services

marginal cost

Extra cost of producing one additional unit of production.

exogenous factors

Factors beyond our control—outside the model

production possibilities frontier

Illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently

1. One reason some manufacturing companies began moving production to China in the early 2000s was due to lower wages that could be paid to Chinese workers. Moving manufacturing to China to take advantage of lower wages so goods could be produced at a lower cost than if produced in the United States exemplifies which key economic idea?

People respond to economic incentives.

economic/marginal thinking

Requires a purposeful evaluation of available opportunities to make the best decision possible (rational thinking)

7. Cassie's Quilts alters, reconstructs, and restores heirloom quilts. Cassie has just spent $800 purchasing, cleaning, and reconstructing an antique quilt which she expects to sell for $1,500 once she is finished. After having spent $800, Cassie discovers that she would need some special period fabric that would cost her $200 in material and time in order to complete the task. Alternatively, she can sell the quilt "as is" now for $900. What should she do?

She should purchase the period fabric, complete the task and then sell the quilt

circular flow

Shows how resources and final goods and services flow through the economy

Economics concern themselves with positive analysis (T/F)

TRUE

PPF and opportunity cost are related (T/F)

TRUE

economists use models to understand the complex real world economy (T/F)

TRUE

Opportunity Cost

The highest-valued alternative that must be given up to pursue an action

Incentives

a positive or negative environmental stimulus that motivates behavior

Normative Statement

an opinion that cannot be tested or validated; it describes "what ought to be"

negative incentives

discourage action by providing undesirable consequences or punishments

positive incentives

encourage action by offering rewards or payments

endogenous factors (ANOTHER WAY TO UNDERSTAND)

factors we know about and can be controlled

direct incentive

hopefully causes a desired result ex. "mow my lawn and I will pay you 30$"

If we move down and to the right along a PPF, the opportunity cost of this movement can be measured in terms of

how much of the y-axis good we gain.

4. The cost incurred from the production of an additional unit of a product

is a marginal cost to the firm

Econonmics

is the study of allocating resources to satisfy the unlimited wants with limited resources

what is a possible problem with using faulty assumptions when building an economic model?

it could lead to poor economic decisions.

An office supply store sells a ream of printer paper at a fixed price of $4.50. Which of the following is a term used by economists to describe the money received from the sale of an additional ream of paper?

marginal revenue

The basic goal of economics is to

match limited resources to people's unlimited wants and needs

with regard to the PPF, an efficient point is a point that is

on the PPF

Ceteris Paribus

other things being equal

more taxes on the rich will increase tax revenue

positive statement

models

simplified views of reality that attempt to explain real-world phenomena

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

marginal benefit

the additional or extra benefit associated with an action

Microeconomics

the study of the economic behavior and decision making of small units, such as individuals, families, and businesses

Macroeconomics

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

double coincidence of wants

two traders are willing to exchange their products directly

As a new firm in the apple-picking business, Nicolette has considered adding an economist to her management team. This economist would be unable to help her managerial team determine

why people eat apples