exam 1

The Scarcity Principle

"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.

Amy is thinking about going to the movies tonight. A ticket costs $7 and she will have to cancel her dog-sitting job that pays $30. The cost of seeing the movie is:

$37

If the slope of the demand curve is -1.4, price is $5 and quantity demanded is 13 units, the price elasticity of demand is :

0.27

3 Important Decision Pitfalls

1) Measuring costs and benefits as proportions rather than absolute dollar amounts. 2) Ignoring implicit costs 3) Failure to think at the margin

If the price elasticity of demand for pineapples is 0.75, a 4% increase in the price of pineapple will lead to a:

3% decrease in the quantity demanded of pineapple.

Production Possibilities Curve (PPC):

A graph that plots the maximum output of one good (or task) for each level of output for the other good.

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.

What might cause a demand function to shift to the right?

An increase in the price of a substitute.

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 cost.

Principle of comparative advantage (#3):

Everyone is better off (more output) if they concentrate on the activities that they have a C.A. in.

In a few cases as income increases, demand will decrease. This is called:

Inferior Goods

Jenna decides to see a movie that costs $7 for the ticket and has an opportunity cost of $20. After the movie, she says to one of her friends that the movie was not worth it. Apparently:

Jenna overestimated the benefits of the movie.

If Leslie can produce two pairs of pants in an hour while Eva can make one pair an hour, then it must be the case that:

Leslie has an absolute advantage.

The central concern of economics is:

Scarcity

According to the prinicple of increasing opportunity cost, expanding production requires using resources in which order?

Starting with the resource with the lowest opportunity cost and proceeding to the higher opportunity cost resources.

Marginal Benefit

The increase in total benefit that results from carrying out one additional unit of an activity.

Average Benefit

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

Average Cost

The total cost of undertaking n units of an activity divided by n

If the slope of the demand curve is equal to infinity, the price elasticity of demand will be:

Zero

A movement along a demand curve from one price-quantity combination to another is called:

a change in quantity demanded.

Sunk Cost

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

Relative to a person who earns minimum wage, a person who earns $30 per hour has:

a higher opportunity cost of taking a day off.

P=

a-bQ

Microeconomics is distinguished from macroeconomics in that microeconomics focuses on:

choices madeby individuals or groups in the context of individual markets.

If the price of computers increases and the demand for monitors decreases as a result, then:

computers and monitors are complements

When the price of a good is below its equilibrium value:

consumers will bid the price up.

Points on the line of the graph are:

efficient

If points y and v are on the same line graph, they are both:

equally as efficient as one another

Shelly purchases a leather purse for $400. One can infer that:

her reservation price was at least $400.

Big-ticket items such as refrigerators have a(n) ___ price elasticity of demand compared to low budget items such as paper towels.

higher

The cost-benefit principle indicates that an action should be taken:

if the extra benefit is greater than or equal to the extra costs.

Tony notes that an electronics store is offering a flat $20 off all prices in the store. Tony reasons that if he wants to buy something with a price of $50, it is a good offer, but if he wants to buy something with a price of $500, it is not a good offer. This is an example of:

inconsistent reasoning; saving $20 is saving $20.

If the consumers cannot switch to a close substitute when the price of a good increases, the demand for that good is likely to be:

inelastic

The demand for a good is inelastic with respect to price, if the price elasticity of demand is:

is less than one.

Price elasticity of demand is often expressed as a positive number because:

it's convenient to use absolute values even though the formula yields non-positive numbers.

A decrease in the demand for bananas with no concurrent change in the supply of bananas will result in a ____ equilibrium price and a(n) ____ equilibrium quantity.

lower; lower

Capital good

man made resource

If the demand for a good is elastic, that good is likely to have:

many close substitutes.

As the price of a good rises:

more firms can cover their opportunity costs of producing the good.

Jeans in general have fewer close substitutes than any specific brand of jeans. Therefore, the demand for jeans in general would be ___ than the demand for a specific brand of jeans.

more inelastic

If income increases demand will increase. This is called a:

normal good

If the demand for computers shifts to the right as consumers' incomes rise, computers are

normal goods.

Comparative Advantage:

one person has a (CA) over another person if he has a lower opportunity cost of performing the task than the other person.

Absolute Advantage:

one person has an (AA) over another person if he takes less time to perform a task than the other person.

Normative Economic Principle

one that says how people SHOULD behave -ex) Cost-benefit principle

If a market is in equilibrium and demand increases while supply decreases, the change in the equilibrium price is ___ and the change in the equilibrium quantity is ___.

positive; indeterminate

The percentage change in quantity demanded that results from the percentage change in price is known as the:

price elasticity of demand.

A shortage occurs when:

quantity demanded exceeds quantity supplied.

If the market for sport utility vehicles has excess supply, then one can say that:

quantity supplied is greater than quantity demanded.

The fundamental reason the production possibilities curve has a downward slope is:

resources are fixed and therefore tradeoffs must be made.

Economic Surplus

the benefit of taking an action minus its cost

"Holding all other relevant factors constant, consumers will purchase more of a good as the price falls." This statement reflects the behavior underlying:

the demand curve

Dean decided to play golf rather than prepare for tomorrow's exam in economics. One can infer that:

the economic surplus from playing golf exceeded the surplus from studying.

In general, when the supply curve shifts to the left and demand is constant then:

the equilibrium price will rise.

Marginal Cost

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

The production possibilities curve shows:

the maximum production of one good for every possible production level of the other good.

Economics

the study of how people mkae choices under conditions of scarcity and of the results of those choices for society.

Microeconomics

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

Macroeconomics

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

Opportunity Cost

the value of the next-best alternative that you did not choose

Principle of Increasing Opportunity Cost (#4):

to increase the production of any good with the resources with the lowest opportunity costs first, then the next lowest and so on.

Points only outside of the graph are:

unattainable

Having a comparative advantage in a particular task means that:

you give up less to accomplish that task than do others.

{ed}=

{1/-b(P/Q)}