EXAM 1

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Price floors cause predictable side effects

-deadweight loss from inefficiently low quantity -inefficient allocation of sales among sellers -wasted resources -inefficiently high quality -temptation to break the law by selling below legal price

Price ceilings cause predictable side effects

-inefficiently low quantity -inefficient allocation to customers -wasted resources -inefficiently low quality -black markets

Erin has a choice between two activities: She can repair one transmission per hour or she can repair two fuel injectors per hour. What is the opportunity cost of repairing one fuel injector?

0.5 transmission

What causes economic growth?

1. An increase in factors of production: resources used to produce goods and services. 2. Better technology: the technical means for producing goods and services. 3. Demand

Important demand shifters

1. changes in the prices related to goods or services 2. changes in income 3. changes in taste 4. changes in expectations 5. changes i number of consumers

two sources of economic growth

1. factors of production 2. technology

Important supply shifters include changes in

1. input prices 2. the prices of related goods or services 3. technology 4. expectations 5. the number of producers

Deirdre can write either one more book this year or five more articles this year. What is the opportunity cost of writing half of a book this year, in terms of articles?

2.5 articles

Abby received requests from three families to babysit a toddler for four hours on Friday night. She can only babysit for one of the three families. The Fleming family offered her $30, the Gilbert family offered her $40, and the Lewis family offered her $60. If Abby chooses to babysit for the Lewis family her opportunity cost of this decision is:

40

firms

A firm is an organization that produces goods and services for sale—and that employs members of households.

A forecast

A forecast is a simple prediction of the future.

household

A household consists of either an individual or a group of people (usually, but not necessarily, a family) that share their income.

Price floors misallocate sales by:

Allowing high-cost firms to operate Preventing low-cost firms from entering the industry

positive economics

Analysis that tries to answer questions about the way the world works, which have definite right and wrong answers

Abby received requests from three families to babysit a toddler for four hours on Friday night. She can only babysit for one of the three families. The Fleming family offered her $30, the Gilbert family offered her $40, and the Lewis family offered her $60. If Abby chooses to babysit for the Lewis family her opportunity cost of this decision is: Please choose the correct answer from the following choices, and then select the submit answer button. $70. $60. $40. $30.

Correct: $40.

Suppose that in an hour Chip can gather 8 pounds of fruit or 4 pounds of nuts. In an hour, Monk can gather 9 pounds of fruit or 3 pounds of nuts. Which of the following choices would benefit both Chip and Monk if trade occurred? Please choose the correct answer from the following choices, and then select the submit answer button. 1 pound of fruit for 3/4 pound of nuts 1 pound of fruit for 1/10 pound of nuts 1 pound of fruit for 2/5 pound of nuts 1 pound of fruit for 1 pound of nuts.

Correct: 1 pound of fruit for 2/5 pound of nuts

Suppose that in an hour Chip can gather 8 pounds of fruit or 4 pounds of nuts. In an hour, Monk can gather 9 pounds of fruit or 3 pounds of nuts. Which of the following choices would benefit both Chip and Monk if trade occurred? Please choose the correct answer from the following choices, and then select the submit answer button. 1 pound of nuts for 2.5 pounds of fruit 1 pound of nuts for 3.5 pounds of fruit 1 pound of nuts for 1/2 pound of fruit 1 pound of nuts for 1 pound of fruit

Correct: 1 pound of nuts for 2.5 pounds of fruit

Which of the following is a government agency that employs economists? Please choose the correct answer from the following choices, and then select the submit answer button. Bureau of Librarian Statistics International Management Fund Financial Reserve Council of Economic Advisers

Correct: Council of Economic Advisers

True or False: If two products are substitutes in production, a decrease in the price of one of the products will result in increase in supply of the other product. This is _____. Please choose the correct answer from the following choices, and then select the submit answer button. False True

Correct: True

Some apartments in many large cities are subject to rent controls that restrict the maximum rent that can be legally collected from the tenants to an affordable level below the prevailing market rent. These rent controls are an attempt by the city governments to improve _____ of the rental markets. Please choose the correct answer from the following choices, and then select the submit answer button. equity efficiency market equilibrium both equity and efficiency

Correct: equity

Some apartments in many large cities are subject to rent controls that restrict the maximum rent that can be legally collected from the tenants to an affordable level below the prevailing market rent. These rent controls are an attempt by the city governments to improve _____ of the rental markets. Please choose the correct answer from the following choices, and then select the submit answer button. market equilibrium both equity and efficiency efficiency equity

Correct: equity

The goal of a progressive income tax system that requires people with higher incomes to pay a higher tax rate is: Please choose the correct answer from the following choices, and then select the submit answer button. efficiency. equity. both efficiency and equity. neither efficiency nor equity.

Correct: equity.

True or False: "The price of gasoline is too high" is a positive statement. This is _____. Please choose the correct answer from the following choices, and then select the submit answer button. false true

Correct: false

Which of the following are economic resources? Please choose the correct answer from the following choices, and then select the submit answer button. stocks and bonds money durable and nondurable consumer goods land, labor, capital, and human capital

Correct: land, labor, capital, and human capital

An inferior good

Demand decreases when income increases (and vice versa).

Sources of Comparative Advantage

Differences in climate Differences in factor endowments Differences in technology

Distorted price signals cause.

Distorted price signals cause resources to be misallocated.

barter

Exchange goods and services without involving money.

True or False: "The price of gasoline is too high" is a positive statement. This is _____.

False

True or False: Money used to buy the cotton used to make game-day T-shirts is a factor of production. This is _____.

False

If prices are distorted, they

If prices are distorted, they cannot give good information to buyers and sellers.

Theory of Comparative Advantage

It makes sense to produce the things you're especially good at producing... and buy everything else from others.

factors of production

Land, labor, and capital; the three groups of resources that are used to make all goods and services

trade follows what model?

Ricardian model

differences in technology

Sometimes a country has developed a particular technology that explains its comparative advantage.

The incentives built into a market economy ensure that resources are

The incentives built into a market economy ensure that resources are usually put to good use and that opportunities to make people better off are not wasted.

An increase in household spending leads to an increase in jobs in the economy. True False

True, because as households spend more on goods and services, businesses will hire more workers to produce more output.

circular flow diagram

`a visual model of the economy that shows how dollars flow through markets among households and firms

Equity

a codition in which everyone gets his or her "fair share"

trade-off

a comparison of costs and benefits of doing something

Absolute advantage

a country can produce more output per worker than other countries.

Heckscher-Ohlin model

a country that has an abundant supply of a factor of production will have a comparative advantage in goods whose production is intensive in that factor

Normally buyers would compete with each by offering

a higher price

The law of demand

a higher price for a good or service leads people to demand a smaller quantity

A decrease in supply means

a leftward shift of the supply curve

Price ceiling

a maximum price that can be legally charged for a good or service usually set below equiilibrium

factor intensity

a measure of the quantity of a factor used in comparison with other factors

Price floor

a minimum price buyers are required to pay for a good or service usually above equilibrium

comparative advantage

a model that clarifies the principle of gains from trade both individualy and countries

production possibilities frontier

a model that helps economists think of the trade offs every economy faces

An increase in supply means

a rightward shift of the supply curve

model

a simplified representation of a real situation that is used to better understand real-life situations.

Autarky

a situation in which a country does not trade with other countries

increasing opportunity cost

a situation in which producing more of one good requires giving up an increasing amount of production of another good

circular flow diagram

a visual model of the economy that shows how dollars flow through markets among households and firms

If a consumer have a choice about the timing of a purchase they buy

according to expectation

Resources should be used effiently to

achieve society's goals

land

all natural resources used to produce goods and services

Other things equal assumption

all other relevant factors remain unchanged

other things equal assumption, which means that

all other relevant factors remain unchanged.

Satisfy

all the various ways a society wants to use it

Equilibrium

an economic situation in which no individual would be better off doing something different

Every economics issue involves

an individual choice

Quota

an upper limit, set by the government, on the quantity of some good that can be bought or sold; also referred to as a quantity control.

normative economics

analysis that involves saying how the world should work

One person's spending is...

another person's income

Resources

anything that is used to produce goods or services

incentive

anything that offers rewards to people who change their behavior

The quantity supplied is the quantity that producers

are willing an able to sell at various prices

David Ricardo

argued against Corn Laws in British Parliament

Theory of comparative Advantage ability to produce

at a lower opportunity cost

Differences in climate

bannanas grow better here

Price floors encourage

black markets

Price controls that create shortages lead to

bribery and wasteful lines

Demand represents the behavior of

buyers

A competitive market has many

buyers and sellers of the same good or service, none of whom can influence the price

As the population of an economy changes the number of

buyers of a particular good also changes

What are the gains from trade?

by dividing tasks and trading, two people (or 6 billion people) can each get more of what they want than they could get by being self-sufficient.

Sacracity of resources makes society make

choices

Production and trade in an economy can be represented by the

circular flow diagram

The supply and demand model is a model of how

competitve market behaves

One reason that news stories emphasize the ways that economists disagree is that the news media prefers stories involving: Please choose the correct answer from the following choices, and then select the submit answer button. positive economics. cooperation. conflict. analysis.

conflict

Trade allows us to...

consume more than we otherwise could

sometimes markets fail and need

correction

Higher quality rasies

costs and reduces sellers profit

who produces clothing?

countries with lots of labor

At the controlled price, sellers have more

customers than goods

marginal decision

decision made at the margin of an activity about whether to do a bit more or a bit less of that activity

An increase in gas will

decrease demand for SUV

Two goods are complements if

decrease in the price of one good leads to an increase in the demand for the other.

Two goods are substitues if a

decrease in the price of one leads to a decrease in demand for the other

The expectation of a higher price for a good in the future

decreases current supply of the good - if they can store the good (and vice versa).

A normal good

demand increases when income increases

Sellers will adjust their current offerings in anticipation of the

direction of future prices in order to obtain the highest possible price.

the effects of free trade barriers on

domestic equilibrium price and quality imports

the effects of free trade on

domestic equilibrium price and quanitiy imports

A price ceiling pushes the price of a good

down and fewer sellers will want to sell

production possibility frontier, a model that helps

economists think about the trade-offs every economy faces.

markets usually lead to

efficiency

efficent

efficient if it takes all opportunities to make some people better off without making other people worse off.

First of all, the production possibility frontier is a good way to illustrate the general economic concept of

effiency

A decrease in the price of an input (all else equal) increases profits and

encourages more supply

markets move toward

equilibrium

equity

fairness

True or False: Economic growth is shown by a movement along the production possibilities frontier. This is _____. Please choose the correct answer from the following choices, and then select the submit answer button. false true

false

True or False: If the number of producers increases, market supply will decrease. This is _____. Please choose the correct answer from the following choices, and then select the submit answer button. False True

false

All points on the curve are

feasible and efficent

All points under the PPF are

feasible but not efficent

Exit implies

fewer sellers in the market, decreasing supply.

Buyers adjust current spending in anticipation of the direction of

future prices in order to obtain the lowest possible price

A black market is a market in which

goods and services are bought and sold illegally—either because they are prohibited or because the equilibrium price is illegal.

Price controls distort signals that would help the

goods get allocated their highest-valued uses.

Consumers often have to buy

goods together

When markets don't achieve efficiency:

government intervention can improve society's welfare

More substitutes lead to

greater demand elasticity

When prices are controlled, sellers cannot

have the opportunity to profit by raising prices

Corn Laws

high tariffs on imported grain that protected British landowners

Price floors encourages sellers to waste resources

higher quality than buyers are willing to pay for

We can use the PPF model to answer questions like?

how much we can produce? What will it cost us to change our mix of production? Does it make sense to import the good from somewhere else?

income distribution

how the total income created in an economy is allocated between less skilled workers, highly skilled workers, and the owners of capital and land.

Scarce

in short supply; a resource is scarce when there is not enough of the resource available to satisfy all the various ways a society wants to use it.

factor market

in which firms buy the resources they need to produce goods and services.

markets for goods and services

in which households buy the goods and services they want from firms.

Broader effects of international trade

income distribution

interaction

interaction in which my choices affect your choices, and vice versa.

Physical capital

is manufactured items used to produce other goods and services.

David Ricardo theory of comparative advantage

is still the ideological foundation for free trade

Positive economics

is the branch of economic analysis that describes the way the economy actually works.

Human capital

is the educational achievements and skills of the labor force

Labor

is the mental and physical abilities of the workforce

If a price floor is set below equilibrium

it will have no effect

If a price ceiling is set above the equilibrium price:

it will have no effect nonbinding

the true cost of something is

its opportunity cost

Sellers will supply less of a good if

its profitablility falls

increased trade usually increases

jobs in other industries (exporters)

factors of production

land, labor, capital

A decrease in demand is a

leftward shift

Price controls

legal restrictions on how high or low a market price may go

During recession a drop in bussiness spending leads to

less income, less spending, and futher drops business spending, lay offs, and rasing unemployment

Like price controls, quotas impose

losses on society

A technological innovation ... and ...

lowers costs and increases supply

Normative economics

makes prescriptions about the way the economy should work.

Elasticity

measure the percent change of one variable in response to a one-percent change in another

Price floors is the

min price buyers are required to pay for a good

capital

money for investment machines

Entry implies

more sellers in the market, increasing supply.

change in quantity (...)

movement

In times of national crisis or war the United States

must be able to rely on key domestic industries oil steel defense food

people normally take opportunities for

mutual gain

Land includes

natural resources,such as minerals, forests, water, and unimproved land.

The effect of changes in income on demand depends on

nature of the good in question

Shortages

not all buyers will be able to purchase the good

All points above the PPF are

not feasible

Surpluses do

not last: sellers will reduce price so they can move goods off the shelves

Models are important because their simplicity allows economists to focus on

only one change at a time

Inputs used in production have

opportunity costs.

people usually respond to incentives exploiting

opportunties to make themselves better off

Marco is an economist who strongly supports social and income equality. Most likely Marco _____ value-added taxes.

opposes

If price is not allowed rise, buyers most compete in

other ways waiting in line illegal bribes and favors

Buyers get higher quality but would

perfer a lower price

fiscal

pertaining to finances

two types of price controls

price ceiling and price floor

Wasted resources

price floors encorage waste

import-competing industries

produce goods and services that are also imported

exporting industries

produce goods and services that are sold abroad

To think about the trade-offs that face any economy, economists often use the model known as the

production possibilities frontier

Sellers will choose to use inputs whose

profits is the highest

differences in factor endowments

proximity to resources, abundance of factors of production

Governments sometimes control

quanity instead of price

A demand curve shows the the

quantity demanded at various prices

According to the law of demand, when the price of a product decreases:

quantity demanded increases.

As the price falls

quantity demanded rises

A supply curve shows the

quantity supplied at various prices

As the supply rises the

quantity supply rises

how do sellers respond to controlled prices

reduce quality reduce service

A quota

reduces sales

a tariff pushes up the price which

reduces the quanitiy demanded and increases domestic quanity supplied

monetary

relating to money

Why are choices necessary?

resources are scarce

Supply represents the behavior of

sellers

shortages do not last because

sellers will increase price to increase revenue

change in demand (...)

shift

When prices are held below the market price

shortages are created

globalization will force

some firms to lay off workers

Price floors

sometimes governments intervene to push market prices up instead of down

Governments policies can change

spending

There are ... and ... in production processes

substitues and complements

Government officials often do not understand

supply and demand

As producers enter and exit the market, the overall ....

supply changes

A change in producers' expectations about profitability will affect

supply curve

but for workers who lose jobs

switching industries can be difficlut and time consuming

Efficient

taking all opportunities to make some people better off without making other people worse off (distribution)

a tariff

tax on imports

technology

technical means for the production of goods and services.

comparative advantage

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

producer surplus is defined as

the difference between the amount the producer is willing to supply goods for and the actual amount recieved when he makes the trade

economic growth

the economy can now produce more of everything

Overall spending sometimes gets out of line with...

the economy's productive capacity

We can use the demand and supply model to determine:

the effects of free trade the effects of trade barriers

labor

the effort that people devote to a task for which they are paid

economic growth

the growing ability of the economy to produce goods and services

The lower the controlled price relative to the market equilibrium price,

the larger the shortage

A country has a comparative advantage in producing goods for which it has

the lowest opportunity cost

"How much" is a decision @

the margin

grains from trade

the mutual gains that individuals can achieve by specializing in doing different things and trading with one another.

There is a shortage when

the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level.

Demand

the quantity of a good or service that consumers are willing and able to buy

There is a surplus of a good when

the quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above its equilibrium level.

The quantity demanded

the quantity that buyers are willing to purchase at a particular price

license

the right, conferred by the government, to supply a good

Specialization

the situation in which each person specializes in the task that he or she is good at performing

marginal analysis

the study of marginal decisions

factor abundance

the supply of a factor of production relative to other factors

quota limit

the total amount of a good under a quota or quantity control that can be legally transacted

what comes from trade?

there are gains from trade

One key element of efficiency is that there are no missed opportunities in production

there is no way to produce more of one good without producing less of other goods.

Why are there price floors?

they do benefit some people who are better organized

consumer surplus is the difference between the

total amount consumers are willing and able to pay for a good or service and the total amount that they actually do pay

Allowing imports increases

total surplus

allowing exports increases

total surplus

The key to a much better standard of living for everyone is

trade

The PPF is about

trade offs

Policies that limit imports are known as

trade protection or simply as protection.

True or False: If producers expect lower prices in the future, the current supply curve will shift to the right. This is _____.

true

A price floor pushes the price of a good

up and few buyers will want to buy

opportunity cost

what must be given up in order to get a good

opportunity cost

what you must give up in order to get something

opportunity cost

whatever must be given up to obtain some item

New, better technology makes sellers

willing to offer more at a given price or sell their quantity at a lower price.


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