ECON Chapter 1
Economists generally assume that
People are rational
Let V1 equal a value in period one, and V2 equal a value in period 2. What is the rate of growth between periods 1 and 2?
[(V2 - V1)/V1]x100
market
a group of buyers and sellers of a particular good or service and the institution or arrangement by which they come together to trade.
invention
a new good or a new process for making a good
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
Trade-offs force society to make choices, particularly when answering the following three fundamental questions:
1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will receive the goods and services produced?
Steps you should follow when using a formula
1) Make sure you are using the correct formula for the problem you are solving 2) Make sure the number you calculate using the formula is economically reasonable 3) Make sure you understand the economic concept the formula represents
What will be produced is determined by the choices of three groups
1) consumers 2) firms 3) government
Three important ideas about markets
1. People are rational 2. People respond to economic incentives 3. Optimal decisions are made at the margin
Firm Profit
A firm's profit is the difference between its revenue and its cost
revenue
A firm's revenue is the total amount received for selling a good price service
Technology
A firm's technology is the process it uses to produce goods and services
Which of the following statements about positive analysis is correct? A) Positive analysis is concerned with what is B) Positive analysis involves value judgments C) Positive analysis is concerned with what ought to be D) Positive analysis can be used to determine whether policies are good or bad
A) Positive analysis is concerned with what is
Services
Activities performed by people, firms or government agencies to satisfy economic wants. Ex: providing haircuts or investment advice
Which of the following statements about a hypothesis is correct? A) A hypothesis will always incorporate a value judgment B) A hypothesis is a statement that could in principle turn out to be incorrect C) A hypothesis is another name for a model D) To be called a hypothesis, a statement must first be shown to be correct
B) A hypothesis is a statement that could un principe turn out to be incorrect
Which of the following statements about economics as a social science is correct? A) Economics uses normative analysis but not positive analysis B) Economics studies the actions of individuals C) Economics is not useful in analyzing the effects of government policy D) Economics considers human behavior only in the context of business
B) Economics studies the actions of individuals
Which of the following statements about the idea that people are rational is correct? A) The idea assumes that consumers and firms always make correct decisions B) The idea assumes that consumers and firms use all available information as they act to achieve their goals C) The idea assumed that consumers and firms take into account the costs of their actions but ignore the benefits D) The idea assumes that consumers and firms take into account that benefits of their actions but ignore the costs
B) The idea assumes that consumers and firms use all available information as they act to achieve their goals
Why are models based on assumptions?
Because they have to be simplified to be useful.
Which of the following statements about an economic variable is correct? A) An economic variable must always be a positive number B) An economic variable is always measured in dollars C) An economic variable is something measurable that can have different values D) An economic variable must either be the price of a good or service or the quantity of a good or service
C) An economic variable is something measurable that can have different values
Which of the following statements is correct? A) A business has multiple locations, while a company has only a single location B) A business is always larger than a firm C) Economists use the terms firm, company, and business interchangeably D) A company is owned by one person, while a firm is owned by more than one person
C) Economists use the terms firm, company, and business interchangeably
Which of the following is a correct statement about a mixed economy? A) In a mixed economy, most economic decisions are made by the government but markets plays a significant role in the allocation of resources B) In a mixed economy, all economic decisions are made in markets C) In a mixed economy, most economic decisions are made in markets but the governments plays a significant role in allocation of resources D) In a mixed economy, the government makes all economic decisions
C) In a mixed economy, most economic decisions are made in markets but the governments plays a significant role in allocation of resources
In a market system, how does society decide what goods and services will be produced?
Consumers, firms, and the government determine what goods and services will be produced by the choices they make.
Government policymakers use economic principles to make decisions, such as A) Whether to allocate additional funds to research on cancer or to research on heart disease B) Whether to raise interest rates to reduce the threat or inflation C) Whether to raise taxes on cigarettes to discourage teenage smoking D) All of the above
D) All of the above
Which of these statements is correct? A) The word "technology" and the word "innovation" has the same meaning B) The word "technology" and the word "invention" have the same meaning C) An invention is the practical application of an innovation D) An innovation is the practical application of an invention
D) An innovation is the practical application of an invention
Which of the following statements about normative analysis is correct? A) Normative analysis should not involve value judgment B) Normative analysis is concerned with what is C) Normative analysis measures the costs and benefits of different courses or action D) Normative analysis is concerned with what ought to be
D) Normative analysis is concerned with what ought to be
Today, which of the following countries has a centrally planned economy? A) United States B) Canada C) Germany D) North Korea
D) North Korea
What did economists mean by the word marginal?
Extra or additional
Economist assume that the only reason people take the actions they do is in response to economic incentives. True or False?
False
In a market system, what determines how goods and services will be produced?
Firms determine how goods and services will be produced.
The relationship between two variables is
Linear when it is represented by a straight line and nonlinear when it is represented by a curved line
Which of the following covers the study of topics such as inflation or unemployment?
Macroeconomics
Which of the following statements about microeconomics and macroeconomics is correct?
Microeconomics involves the study of how households and firms make choices. Macroeconomics is the study of the economy as a whole
mixed economies
Most economic decisions result from the interaction of buyers and sellers, but governments play a significant role in the allocation of resources
Trade-offs
Producing more of one good or service and producing less of another good or service
________is a problem that occurs when someone concludes that a change in variable X caused a change in variable Y when, in fact, it is a change in variable Y that caused a change in variable X.
Reverse casuality
Reasons for drawing incorrect conclusions about cause an effect include
Reverse casuality and an omitted variable
rational individuals weigh
The benefits and costs of each action and choose an action only if the benefits outweigh the costs
market economy
The decisions of households and firms as they interact in markets determine the allocation of economic resources.
opportunity cost
The highest valued alternative that must be given up to engage in an activity
Innovation
The practical application of an invention
The prevalence of Alzheimer's dementia is very high among residents living in nursing homes. A student concludes that it is likely that living in a nursing home causes Alzheimer's dementia. What is the flaw in the student's reasoning?
The student is drawing false conclusions; he is making the error of reverse casuality
Economists rely on models or theories
To analyze real-world issues ranging from the effects of tarries on the prices of imported goods to the most efficient policies for reducing pollution
Microsoft charges a price of $599 for a copy of Windows 7. Is this pricing decision rational?
When we assume the managers at Microsoft have used all available information and have weighed all known benefits and costs, we are assuming rationality.
In a market system, how does society decide who will receive the goods and services produced?
Who receives the goods and services produced depends largely on how income is distributed.
centrally planned economy
an economy in which the government decides how economic resources will be allocated
marginal analysis
analysis that involves comparing marginal benefits and marginal costs
How are economic resources allocated in a market economy?
by the decisions of households and firms interacting in markets
accounting profit
excludes the costs of some economic resources that the firm does not pay for explicitly
economic profit
includes the opportunity costs of all resources used by the firms
Economics is a social science because
it applies the scientific method to the study of the interactions among individuals, it considers human behavior-particulary decision-making behavior, and it is based on studying the actions of individuals.
The main factors of production
labor, capital, natural resources, and entrepreneurial ability
The relationship between two variables is positive when ______, and the relationship between two variables is negative when__________.
one variable increases and the other increases; one variable increases and the other decreases
Economics is about ____, which measures the costs and benefits of different courses of action.
positive analysis
Capital
refers to physical capital, which includes manufactured goods that are used to produce other goods and services.
One of the basic facts of life is that people must make choices as they try to attain their goals. This unavoidable fact comes from a reality an economist calls
scarcity
Economists rely on these five basic assumptions.
scarcity, trade-offs, opportunity cost, rationality, gains from trade
human capital
skills a worker posses through accumulated training
Entrepreneur
someone who starts a business
economic variable
something measurable that can have different values, such as the incomes of doctors
Goods
tangible products that we use to satisfy our wants and needs Ex: books, computers, smartphones
Economics is the study
the choices people make to attain their goals, given their scarce resources
Equity is
the fair distribution of economic benefits
Economists believe that an activity should be continued up to the point where
the marginal benefit from the activity is equal to the marginal cost.
When the federal government crafts environmental policies that make it less expensive for firms to follow green initiatives,
the policies are consistent with economic incentives.
The slope of a straight line equals the change in value on the _______ axis ________ by the change in the value on the axis between any two points on the line
vertical;divided
When does productive efficiency occur?
when a good or service is produced at the lowest possible cost.
When does allocative efficiency occur?
when production is in accordance with consumer preferences.