Economics Section I Flash Cards

C Unlike the work, energy, knowledge, and capital in a society, human desires are insatiable. This discrepancy between limited resources and unlimited human wants creates scarcity.

1. Which of the following adjectives BEST describes human desires? a. quantifiable b. rational c. insatiable d. irregular e. limited

A Changes in technology, input prices, the number of sellers in a market, and expectations can all shift the supply curve. However, the price of related goods shifts the demand curve

10. Which of the following factors does NOT shift the supply curve? a. price of related goods b. expectations c. number of sellers d. technology e. input prices

D Normative economic statements involve value judgements in addition to economic analysis, while positive economic statements do not. In this case, the answer choice stating that the United States has the lowest GDP in the world is the only one that does not incorporate a value judgement, and so it is a positive statement.

11. Which of the following sentences is a positive economic statement? a. The United States should implement universal healthcare. b. China should prioritize capital investment over government spending. c. Taxes in Great Britain are too high at their current levels. d. The United States has the lowest GDP in the world. e. Venezuela's economy is currently the worst in the world.

B The average supermarket has over 33,000 items. Each of these products is there only because of a chain of individual choices.

12. Which of the following figures is CLOSEST to the number of items in the average supermarket, as of 2008? a. 53,000 b. 33,000 c. 47,000 d. 21,000 e. 37,000

A According to the law of demand, there is an inverse relationship between price and quantity demanded for a given good or service. So, a decrease in price would increase the quantity demanded, but not the demand

13. The price of gasoline in San Francisco decreases by 10%. As a result, demand would a. stay the same b. decrease by more than 10% c. increase by less than 10% d. decrease by less than 10% e. increase by more than 10%

E Car manufacturers require steel to produce cars, and so steel is an input for cars. So, if the price of steel increases, it becomes more expensive to produce cars, thereby shifting the curve to the left and decreasing the supply of cars.

14. Which of the following events is MOST likely to occur if the price of steel increases by 20%? a. The supply of cars increases. b. The demand for cars decreases. c. The demand for and supply of cars remain the same. d. The demand for cars increases. e. The supply of cars decreases.

A Microeconomics, one of the two main subfields of economics, deals with individuals and individual markets. By contrast, macroeconomics focuses on the overall national economy.

15. Which of the following types of economics deals with individuals and individual markets? a. microeconomics b. behavioral economics c. normative economics d. macroeconomics e. positive economics

E An increased minimum wage would likely increase the price of goods and services dependent on minimum wage labor, as employers incur higher labor costs and thus many need to raise prices to accommodate. Additionally, all of these statements rely on positive economic analysis.

16. An increased minimum wage would most likely have all of the following effects EXCEPT a. increased difficulty obtaining jobs covered by the law b. decreased profits for employers depended on minimum wage labor c. increased unemployment among minimum wage workers d. decreased well-being among some lower income individuals e. decreased prices of some goods and services

A An outcome is Pareto-efficient if no one can be made better without redistributing in a way that makes someone else worse off. That means that a given situation could have numerous Paretoefficient distributions. For example, an economy in which all resources are controlled by a few individuals can be Pareto efficient as long as there is no way to make any one better without reducing another's well-being. The same economy could also be Pareto-efficient if the resources are equally distributed among everyone.

17. All of the following statements about Pareto efficiency are true EXCEPT a. every situation has one ideal Pareto-efficient distribution b. it is a measure of a situation's efficiency c. economist Vilfredo Pareto introduced it d. economists use it to assess the use of scarce resources e. it is useful in maximizing overall well-being

C An opportunity cost of an action is the next best alternative that one gives up. Because Todd's favorite T-shirt besides the brown shirt—the one he actually buys—is the yellow shirt, that is the next best alternative he gives up. It is important to note that an opportunity cost does not include all possible alternatives.

18. Todd's favorite T-shirt colors, in order from his least favorite to his favorite, are blue, pink, yellow, and brown. The opportunity cost of Todd buying a brown T-shirt is a. the pink T-shirt b. the blue T-shirt c. the yellow T-shirt d. the blue, pink, and yellow T-shirts e. the brown T-shirt

C An outcome is Pareto efficient if no one can be made better without redistributing in a way that makes someone else worse off. In this scenario, the only answer choice in which the $50 dollars is not fully distributed is when two people receive $15 and three people receive $5 (a total of $45). $5 could be given to an additional person without making anyone else worse off, so that distribution is not Pareto-efficient.

19. An economy of 5 people produces $50 worth of goods and services. Which of the following distributions would NOT be Pareto efficient? a. One person receives $30; four people receive $5. b. One person receives $50; the others receive $0. c. Two people receive $15; three people receive $5. d. Three people receive $15; one person receives $5; one person receives $0. e. Each person receives $10.

B Income, consumer tastes, the number of buyers in a market, and expectations can all shift the demand curve. However, price cannot. A change in price can cause a movement up or down along the curve—a change in quantity demanded—but cannot shift the curve itself in any way.

2. Which of the following factors does NOT shift the demand curve? a. number of buyers b. price c. expectations d. income e. tastes

A Given the limited nature of resources and the unlimited nature of human desires—which describes the concept of scarcity—individuals must make decisions about how to distribute these scarce resources.

20. Which of the following statements BEST explains economics? a. Economics is the study of decision-making and scarcity. b. Economics is the study of money and inequality. c. Economics is the study of maximizing consumer surplus. d. Economics is the study of business and government policies. e. Economics is the study of investing and the stock market.

B Macroeconomics, one of the two main subfields of economics, focuses on overall national economies. Therefore, a national inflation rate is a macroeconomic issue. The other four answers are all microeconomic topics, as they deal with individual households, firms, or markets.

21. Which of the following topics BEST relates to macroeconomics? a. the national price of steel in Germany b. inflation rates in Venezuela c. monopolies in the United States d. a household's purchasing decisions e. a firm's price maximization strategy

A If the price of hamburgers falls, the law of demand indicates that the quantity of hamburgers demanded will increase. As a result, people will buy more hamburger buns, increasing demand for hamburger buns. Because a reduction in the price of hamburgers leads to an increase in demand for buns, these two goods are complements.

22. What would MOST likely happen If the price of hamburgers falls? a. The demand for hamburger buns increases. b. The demand for hamburger buns remains the same. c. The quantity demanded of hamburger buns decreases. d. The demand for hamburger buns decreases. e. The quantity demanded of hamburger buns increases.

A A change in consumer tastes can shift the demand curve, either increasing or decreasing demand. In this example, a government revealing that cigarettes increase the risk of cancer decreases the perceived benefits of cigarette use, therefore decreasing demand.

23. The government published a report revealing that cigarettes increase the risk of cancer, causing the demand for cigarettes to fall. This decreased demand is a result of a change in a. tastes b. substitutes c. popularity d. price e. expectations

A The opportunity cost of an action is the "cost" of the next best choice. In this scenario, Fred's forgone income is the opportunity cost of going kayaking, as it is the "cost" of not working

24. One day, Fred decides to go kayaking with his friend instead of working his usual job at the grocery store. Fred's forgone income can BEST be explained with reference to a. opportunity costs b. scarcity c. resource allocation d. trade-offs e. rationality

A Microeconomics, one of the two main subfields of economics, deals with individuals and individual markets. An oversupply of housing concerns one individual market—the housing market—making it a microeconomic issue. By contrast, GDP, unemployment, interest rates, and aggregate consumer spending are all indicators of overall economic performance, making them more related to macroeconomics.

25. Which of the following topics BEST relates to microeconomics? a. oversupply of housing on the national level b. a high interest rate on the national level c. aggregate consumer spending in France d. low unemployment in the United States e. China's increasing Gross Domestic Product

E An opportunity cost of an action is the next best alternative that one gives up. In this case, the next best alternative to buying the sneakers is buying the backpack, and so the backpack is the opportunity cost. Jasmine did have to make a trade-off when deciding which good to buy, but the backpack is most specifically an opportunity cost.

26. Jasmine decides to buy a new pair of sneakers instead of a new backpack. The backpack is a(n) a. deadweight loss b. gain from trade c. normal good d. trade-off e. opportunity cost

B A town's market for gasoline is closest to perfect competition, as it is highly competitive. There is little difference in price between sellers—in this case, gas stations—within a town.

27. The local gasoline market is closest to a. a monopoly b. perfect competition c. monopolistic competition d. an oligopoly e. a monopsony

A In economics, a rational person performs a cost benefit analysis when making decisions and acts to maximize benefits. However, economists interpret these "benefits" loosely. One might have a legitimate reason to choose a lower-paying job, pay a higher price for a certain brand of coffee, donate all their disposable income to charity, and even buy a TV instead of food, as all of these actions could be most beneficial to the decision maker. However, there is no conceivable reason why purchasing an identical, more expensive product would be beneficial, and so that action is certainly irrational.

28. Which of the following actions could NOT be rational? a. purchasing a product that is identical to but more expensive than another b. choosing a lower-paying job over a higher paying one c. donating all disposable income to charity d. buying a television instead of needed food e. paying a premium for a certain brand of coffee

C One reason why the advertised price of college might overstate the real economic cost is that one would still have to pay for housing and food even if not in college. On the other hand, the cost of college could be higher than the advertised price due to the opportunity cost of one's time—the income they could have earned were they not students.

29. Which of the following reasons BEST explains why the advertised price of college might overstate the real economic cost? a. A college education is increasingly scarce and has thus been growing in value b. Colleges often subsidize the purchase of books and other materials c. Students would still have to pay for housing and food even if not in college. d. The opportunity cost of attending college is much lower than the advertised price. e. The skills learned in college may lead to higher wages in the future.

B Normative economic statements include value judgements and usually involve opinions that cannot be argued using just economic analysis.

3. Which of the following statements BEST describes the difference between positive and normative economic statements? a. Positive economic statements are always factually correct, while normative economic statements are not. b. Normative economic statements include value judgments, while positive economic statements do not. c. Positive economic statements describe past events, while normative economic events make predictions. d. Economic analysis can support normative economic statements but not positive economic statements. e. Positive economic statements involve opinion, while normative economic statements do not.

B Vilfredo Pareto, who lived from 1848 to 1923, was an Italian economist who first introduced the concept of Pareto efficiency

30. The economist who first used the concept of Pareto efficiency was a. English b. Italian c. Spanish d. German e. Swiss

E The economic concept of trade-off describes how taking an action means giving up other potential options. In this case, Arnav has to give up other potential options no matter what action he takes, reflecting that he faces trade-offs. A closely related but incorrect answer choice is opportunity costs. Opportunity costs describe the next best choice specifically, whereas in this question asks Arnav having to choose between options more broadly.

31. Arnav must decide whether to spend his Saturday afternoon playing sports, with his family, or working. That he can choose only one option BEST reflects the economic concept of a. opportunity costs b. gains from trade c. elasticity d. rationality e. trade-offs

D Rationality is a fundamental assumption of economics. To economists, a rational person considers actions' benefits and opportunity costs and acts to maximize the benefits.

32. Traditional economics assumes that everyone acts a. cooperatively b. illogically c. selfishly d. rationally e. selflessly

E Rationality is a core assumption of economics. It holds that people perform cost-benefit analysis when making decisions, choosing the action with the largest benefit. Moreover, economists interpret "benefits" loosely; the benefits are not necessarily monetary.

33. In economics, what is a foundational feature of rationality? a. caring about self-interest over the lives of others b. trying to feature opportunity costs c. attempting to maximize monetary profit d. focusing on improving society's total surplus e. performing cost-benefit analysis to make decisions

B The law of demand explains the inverse relationship between price and quantity demanded: if the price of a good increases, the quantity demanded of that good will decrease, and vice versa. Therefore, if the price of apples increases, the quantity of apples demanded will decrease. It is important to note that quantity demanded—not demand—changes.

34. The price of apples increases. According to the law of demand, a. quantity of apples demanded will increase b. quantity of apples demanded will decrease c. demand for apples will not change d. demand for apples will decrease e. demand for apples will increase

A An outcome is Pareto-efficient if no one can be made better without redistributing in a way that makes someone else worse off. It is important to note that a Pareto-efficient outcome is not necessarily an "equal" one.

35. An outcome is Pareto efficient if a. no one can be made better without reducing another's well-being b. marginal revenues are equal to marginal costs c. opportunity costs are as low as possible d . the happiness of all participants is maximized e. goods and services are equally distributed among a society's members

E If trade is voluntary, then it must benefit both parties, as neither side would engage in trade if the costs were greater than the benefits. This does not mean, however, that the gains from trade must be equal for both parties.

36. Trade is mutually beneficial if a. no tariffs restrict the exchange b. a third party regulates the exchange c. both parties are equal in economic size d. both sides hold absolute advantages e. both sides voluntarily agree to the exchange

E A table showing the relationship between a good's price and quantity demanded is called a demand schedule. This relationship follows the law of demand, meaning that there is an inverse relationship between price and quantity demanded.

37. A table showing the relationship between price and quantity demanded is called a. a quantity demanded curve b. a demand curve c. a demand chart d. a market graph e. a demand schedule

A Scarcity, trade-offs, rationality, and gains from trade are all basic assumptions of economics. Scarcity describes the limited quantity of resources available to every human society, trade offs occur whenever one makes a choice, rationality means that individuals act to maximize benefit, and gains from trade holds that voluntary trade produces benefits for all parties involved. Competition, however, is not one of these basic assumptions; in certain economic situations, there is little to no competition.

38. Which of the following ideas is NOT a basic assumption of economics? a. competition b. rationality c. trade-offs d. gains from trade e. scarcity

B Work, energy, knowledge, and capital are all economic resources that directly contribute to the production of goods and services in an economy. Furthermore, these resources are scarce, as a society can only have limited amounts of them regardless of its wealth.

39. All of the following economic resources are a direct part of the production of goods and services EXCEPT a. capital b. money c. work d. energy e. knowledge

C A normative economic statement involves a value judgement in addition to economic analysis, whereas a positive economic statement is value free. Normative economic statements often include the word "should" to express a value judgement.

4. Which of the following statements is a normative economic statement? a. The Federal Reserve lowering the reserve ratio usually results in inflation. b. An increased income tax rate would reduce economic inequality in the United States. c. The Federal Reserve should raise interest rates to combat inflation. d. A $15 minimum wage would result in a 10% increase in unemployment. e. Higher capital investment would likely increase United States GDP in the long run

D Rational suppliers perform-cost benefit analysis when determining how much of a given good or service to supply. As long as the benefits of supplying—the price—is greater than the opportunity cost, they will continue to supply.

40. Suppliers continue to supply as long as a. variable costs are greater than fixed costs b. there is positive economic profit c. the equilibrium price is above zero d. price is greater than opportunity cost e. marginal profit is still increasing

A An opportunity cost of an action is the next best alternative that one gives up. The U.S. government could use the $30 billion it spends on its military for educational programs instead, making that a possible opportunity cost of the government's choice. However, the other four answer choices are related to the government's military spending—rather than what the government is giving up by spending on the military—and are therefore not opportunity costs.

41. The United States federal government spends $30 billion on its military. A possible opportunity cost of this choice is a. spending on educational programs b. an increase in the likelihood of war c. the cost of new tanks and battleships d. increased national security e. the $30 billion spent on the military

E A normal good is a good for which there is a positive relationship between income and demand. In other words, if one's income increases, their demand for normal goods also increases. Out of these options, a television is the most likely normal good, as one could expect demand for televisions to increase with income.

42. Which of the following goods is MOST likely normal? a. used cars b. instant noodles c. frozen food d. public transportation e. television

C According to the economic assumption of scarcity, there are limited resources but unlimited human wants. Furthermore, scarcity occurs in all economies, regardless of their prosperity.

43. The economic idea of scarcity ALWAYS exists in a. low-inflation economies b. high-inflation economies c. all economies d. developed economies e. poorer economics

C Normative economic statements incorporate value judgement. In this case, the statement about a soda tax is the only answer choice that does not express an opinion but rather expresses a cause-and-effect relationship.

44. All of the following statements are normative EXCEPT a. the United States government should increase the minimum wage b. inflation is the largest problem in the U.S. economy c. a tax on soda would likely disproportionately harm lower-income Americans d. the free market is the best approach to achieving economic equality e. the Federal Reserve should sell bonds to expand the money supply

A Markets coordinate the interaction between buyers and sellers for a particular good or service. Some markets, like the New York Stock Exchange, are formal. Others, like a town's local market for gasoline, are less formal. A town's market for gasoline is usually highly competitive and but has buyers and sellers—which in this case are gas stations.

45. Which of the following statements regarding markets is FALSE? a. Markets need an auctioneer to set the price. b. Gas stations are sellers in a town's market for gasoline. c. The New York Stock Exchange is an example of a market. d. Some markets are informal. e. A market is made up of buyers and sellers.

D New technology that makes the production process more efficient means that suppliers can create more computers given the same resources, thereby shifting the market supply curve to the right.

46. Which of the following events would MOST likely shift the supply curve for computers to the right? a. Computer producers expect higher prices in the future. b. Consumers learn of the beneficial effects of computers. c. A leading computer manufacturer goes out of business. d. New technology makes the production process more efficient. e. The price of display screens increases.

A According to traditional economics, rational people perform cost-benefit analysis to make decisions. However, most rational people do not stop and think carefully before acting; this cost benefit analysis happens quickly and intuitively.

47. Which of the following statements regarding rationality is TRUE? a. Rational people often act without thinking carefully. b. People cannot become better at acting rationally. c. What people consider a benefit cannot vary from person to person. d. Benefits in a cost-benefit analysis are always monetary. e. Those who donate to social causes are usually irrational.

A A resource is scarce if there is a limited quantity of it available. There is only so much knowledge, oil, water, and energy in any society, so these resources are thus scarce. Furthermore, scarcity occurs in every human society, regardless of its wealth. Human wants, by contrast, are unlimited and are thus not scarce.

48. All of the following resources are scarce EXCEPT a. desires b. water c. oil d. energy e. knowledge

D Models are a critical part of economics—both microeconomics and macroeconomics. These models are usually fairly simplistic and only include the necessary details, and they allow economists to incorporate theory into economic analysis.

49. Which of the following statements regarding economic models is FALSE? a. They are usually fairly simplistic. b. They include only the necessary details. c. They are important in economic analysis. d. They are best suited for use in macroeconomics. e. They often feature mathematical formulas.

D Positive economics involves using economic analysis to describe economic situations. One could use positive economics to determine if an outcome is Pareto-efficient by examining the outcome and seeing if anyone could be made better off without reducing another's well-being. This process doesn't involve any value judgment, and so it is not normative economics. Moreover, Pareto efficiency does not exclusively apply to microeconomics, macroeconomics, or behavioral economics.

5. Categorizing an outcome as Pareto efficient is MOST likely to be a function of a. behavioral economics b. microeconomics c. normative economics d. positive economics e. macroeconomics

D The opportunity cost of an action is the "cost" of the next best choice, which might be working a job in this scenario. Room and board, textbooks and supplies, and tuition are all part of the monetary price one pays for college and are thus not part of the opportunity cost. One's time is also not the "cost" of not working a job, but the forgone wages from that job are.

50. The most common opportunity cost of attending college is a. time b. textbooks and supplies c. tuition d. forgone wages e. room and board

E In An Inquiry into the Nature and Causes of the Wealth of Nation, Adam Smith argues that producers provide goods and fulfill needs in an economy because of their own self-interest.

6. Which of the following statements BEST reflects one of the core ideas of Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nation? a. A centrally planned economy maximizes net social benefit, even if it results in some inefficiencies. b. Humans are inherently compassionate, and so they produce goods that maximize social benefit. c. A successful free market economy can eliminate the scarcity common in planned economies. d. A free market economy leads to relatively equal amounts of prosperity for all participants. e. Producers provide goods and fulfill needs in an economy because of their own self-interest.

C To find the market demand curve, we add up the quantity all consumers in the market demand at every given price. This effectively means adding all individual consumers' demand curves horizontally.

7. Which of the following statements regarding supply and demand is TRUE? a. The law of supply reflects the inverse relationship between price and quantity supplied. b. If the price of a good increases, the supply curve for that good usually shifts right. c. To find the market demand curve, add all individual demand curves horizontally. d. When someone's income increases, they usually purchase fewer normal goods. e. Expectations for higher prices in the future may decrease demand in the short run.

C Only a few markets are perfectly competitive. This means there is a high degree of standardization in the good being bought and sold, and there are a large number of buyers and sellers in the market, all of whom are aware of the price but cannot influence it.

8. Which of the following statements about perfect competition is FALSE? a. The good or service being bought and sold is highly standardized. b. The market contains a large number of buyers and sellers. c. Most of the world's market are perfectly competitive. d. The market's buyers and sellers cannot influence the price. e. All buyers and sellers in the market are aware of the price.

E Specialization is incredibility important to trade and the gains that come with it. If all people or countries specialize in what they do best, they can trade with others who have different specializations. As a result, both sides will be better off, as long as this trade is voluntary

9. Which of the following concepts is MOST important in gains from trade? a. rationality b. equilibrium c. competition d. taxation e. specialization