HCM 402 Midterm Short Answer

The economics approach portrays people as self-interested. Instead, the critics argue that people should be taught to care more deeply about others. Offer 2 economists responses with explanation.

1. Even people with focus on their own life, they still have a part set aside for their own self-interest. 2. Self-interested behavior can lead to positive social results.

How can a group of workers, each specializing in certain tasks, produce so much more than the same number of workers who try to produce the entire good or service by themselves? Adam Smith offered three reasons. List them and briefly describe the rationale behind each.

1. Specialization in small jobs allows workers to focus on the types of production where they have an advantage. People have different skills and talents; therefor be better at certain jobs than others. 2. Those who specialize in certain jobs begin to get really good at it which allows them to produce more. 3. Specialization allows for economic growth as a whole.

As the text suggests, the demand and supply model predicts that the new computer and communications technologies will raise the pay of high-skill labor but reduce the pay of low-skill labor. Explain how this works using the four-step process.

1. What did the market look like before the change 2. The new technology affects demand for labor. 3. as the technology substitute for low-skill labor becomes cheaper, demand for low-skill labor will shift to the left. 4. The new high-skill labor has a higher wage and quantity.

Briefly explain "thin market" and "thick market". Include a brief description of how a "thin market" comes about.

A "thin market" is referred to as one with few buyers and few sellers and a "thick market" is one with many buyers and many sellers. When buyers and sellers become discouraged that is when a market can become thin.

Wheat and oats are both used to make cereal and both are grown on the prairies. What would happen to the supply and demand of oats if the price of wheat were to rise?

An increase in the price of wheat would reduce the quantity demanded of wheat, and decrease the quantity supplied of wheat. Since oats are substitute for wheat, so the increase in the price of wheat reduces the supply of oats.

Markets tend toward equilibrium and, as a result, will tend to eliminate shortages and surpluses. Why?

Because when a shortage exists, consumers, who are unhappy about not being able to purchase the products or services they want, will tend to bid the prices higher, moving the market towards equilibrium.

Various factors cause a demand curve to shift. List 4 different factors.

Changes in income, changes in population, changes in taste, and changes in expectations of future prices

Define consumer surplus and producer surplus.

Consumer surplus is the gap between the price that consumers are willing to pay, and the market equilibrium price. Producer surplus is the gap between the price for which producers are willing to sell a product, and the market equilibrium price.

The formal study of economics began when Adam Smith published his famous book. In the first chapter he introduces the idea of division of labor. Define "division of labor" and give an example.

Division of labor is the way in which the work required to produce a good or service is divided into a number of tasks that are performed by different workers. For example, the different steps it takes to make a paper airplane.

Briefly describe the legal consequences of acting as a cosigner of a loan.

If an individual acts a a cosigner of a loan that individual is legally bound by that pledge to repay some or all of the money if the original borrower does not do so.

Define cross-price elasticity of demand and discuss within the context of complementary goods and substitute goods.

It refers to the idea that the price of one good is affecting the quantity demanded of a different good. It is the percentage change in the quantity of good A that is demanded as a result of a percentage change in the price of good B.

Explain the concept of opportunity cost and give an example.

Opportunity costs is the next best thing. It is whatever must be given up to obtain something that is desired. For example, A player attends baseball training to be a better player instead of taking a vacation. The opportunity cost was the vacation

Define the term "sunk costs" and give an example.

Sunk costs are costs that occurred in the past and can not be recovered under any circumstances (the restaurant example).

The demand and supply model can explain the existing levels of prices, wages, and rates on return. Demand and supply can also be used to explain how economic events will cause changes in prices, wages, and rates on return. There are only 4 possibilities: what are they?

The economic event may cause the demand curve to shift right or to shift left, or it may cause the supply curve to shift to the right or to the left.

What are the normal goods and inferior goods? Discuss within the context of income elasticity of demand.

The normal goods are the ones that the income elasticity of demand is positive that is a rise in income will cause an increase in the quantity demanded. On the other hand, an increase in income means that one might purchase less of the good, which would be considered inferior goods.

Briefly explain the purpose of a lender requiring a pledge of collateral from a borrower in exchange for a loan.

The purpose is to provide the lender with something valuable that already belongs to the borrower, which that lender would have a right to seize and sell if the loan is not repaid.

Identify and briefly describe 2 examples of government run insurance programs.

Unemployment Insurance: every worker has a small percentage taking out of their paycheck for unemployment insurance. Workers Comp: employers are required to pay a small percentage of the salaries that they pay into funds, that are used to compensate workers who suffer an injury on the job.

Define zero elasticity and describe the resultant demand curve.

Zero elasticity is the highly inelastic case in which a percentage change in price, no matter how large, results in zero change in quantity. It refers to curves that are vertical.

What are 5 things that will shift a supply curve to the right?

a decrease in the price of a substitute in production, a change in technology, an expected decrease in future price, deregulation, and weather.