Microeconomics
productive efficiency
occurs when a good or service is produced at the lowest possible cost.
Every society faces trade-offs because we live in a world of scarcity. Suppose a student-athlete has the opportunity to earn $600,000 next year playing for a minor league baseball team, $500,000 next year playing for a European professional football team, or $0 returning to college for another year. The opportunity cost of the student-athlete returning to college next year is
$600,000
A hypothesis in an economic model is
1.a statement that may be either correct or incorrect about an economic variable. 2.tested before it can be accepted (or not rejected). 3.usually about a causal relationship.
When we graph the relationship between two variables, we often want to draw conclusions about whether changes in one variable are causing changes in the other variable. Doing so, however, can lead to incorrect conclusions. Reasons for drawing incorrect conclusions about cause and effect include
BOTH - an emitted variable - reverse causality
Harry Fletcher is a market analyst at an automobile firm. He forms a hypothesis that an increase in advertising will increase the demand for the firm's cars. Which of the following, if true, may result in the rejection of his hypothesis?
Car buyers base their purchasing decisions on independent reviews.
Alzuria is a developing economy. With trade and liberalization, the country has now seen substantial development in the private sector. However, government intervention in certain markets remains strong. The banking sector has a good mix of both private banks and those called "government undertakings," or public sector banks. Consumers are becoming increasingly aware of the difference in the quality of service provided by the private and the public sector banks. Competition among private banks has ensured that their employees adhere to high standards of customer service. Their public sector counterparts, however, do not appear to be making an effort to improve their customer service. Which of the following, if true, would explain the rationale behind continued patronage despite the bad service provided by public sector banks in Alzuria?
Deposits with public sector banks are insured unlike those with private banks.
Jonathan Baker is a market analyst. He works at a firm that is one of the few producers of good X. Jonathan formulates a hypothesis that an increase in advertising will increase the demand for this firm's products by attracting new customers. Which of the following, if true, would suggest that Jonathan's hypothesis will hold?
Even brand-loyal consumers can be convinced to change their preferences.
Terbia is a closed economy, which has been growing at a very slow pace over the last decade. In order to boost economic growth, the government removed trade barriers earlier this year and increased its spending on the economy. These moves were expected to generate employment and increase economic growth. However, unemployment did not decline as much as expected. Which of the following, if true, can explain this outcome?
Imported varieties of many goods were cheaper than the domestically produced varieties.
Harry Fletcher is a market analyst at an automobile firm. He formed a hypothesis that an increase in advertising would increase demand for the firm's cars. The ad campaign ran for a period of six months. However, the results were not as positive as Harry had anticipated. Which of the following, if true, can explain this outcome?
Interest rates increased substantially during this period.
Julia Paul, an analyst at a research institute, lives very close to her office and walks to work every day. Meanwhile, her colleague, Amanda Jones, dislikes the fact that it takes her almost an hour to commute to work every day. As a result, when Julia decides to move to a suburb farther away, Amanda is very surprised. Which of the following, if true, would explain Julia's behavior?
Julia saves more in rent than she spends on commuting to work.
The economy of East Paragon has been experiencing deflation for the last few months, with prices of goods and services declining. Because firms are charging lower prices, they expected higher sales. However, consumption spending did not increase much, resulting in substantial losses for these firms. Which of the following, if true, explains why consumers did not increase consumption in spite of falling prices?
Most people were expecting prices to decline further.
Trade-offs force society to make choices, particularly when answering the following three fundamental questions:
One, what goods and services will be produced? Two, how will the goods and services be produced? Three, who will receive the goods and services produced?
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 weighed all known benefits and costs, we are assuming rationality.
A market is a group of (blank)of a good or service and the institution or arrangement by which they come together to trade.
buyers and sellers
Societies organize their economies in two main ways to answer the three questions of what, how, and who. A society can have a (blank) economy in which the government decides how economic resources will be allocated. Or a society can have a (blank) economy in which the decisions of households and firms interacting in markets allocate economic resources.
centrally planned; market
Consumers, Firms, Governments
decide(s) what goods and services will be produced.
Suppose, in an effort to prevent the population from declining, Italy begins offering new mothers extended periods of paid family leave from work and, consequently, the birthrate per woman increases. If so, then this could best be characterized as an example of people responding to
economic incentives
Xylo Inc., a manufacturer of domestic appliances, lowered the prices of its products, expecting an increase in demand and sales by at least 20 percent. However, it was observed that sales increased by only 8 percent. Which of the following, if true, can explain this outcome?
he government increased personal income tax rates earlier this year.
positive analysis
is concerned with what is
normative analysis
is concerned with what ought to be
Economics
is the study of the choices people make to attain their goals, given their scarce resources.
Economics is a social science because
it applies the scientific method to the study of the interactions among individuals. it is based on studying the actions of individuals. it considers human behavior—particularly decision-making behavior.
Firms choose how to produce the goods and services they sell. In many cases firms face a tradeoff between using more workers or using more machines. For Example,
many times in the past several decades, firms may have chosen between a production method in the United States that uses fewer workers and more machines and a production method in China that uses more workers and fewer machines.
Economists use the word marginal to mean an extra or additional benefit or cost of a decision. An optimal decision occurs when
marginal benefit equals marginal cost
Any model is based on making assumptions because
models have to be simplified to be useful. we cannot analyze an economic issue unless we reduce its complexity.
Allocative efficiency
occurs when production is in accordance with consumer preferences.
When economists develop models designed to explain the choices people make, they generally assume that
people are rational
Economics is about (blank) which measures the costs and benefits of different courses of action
positive analysis
Suppose an analyst estimates how many jobs have been lost from free trade laws. This is an example of
positive analysis
Japan has a market economy. As such, Japan's economy {relative to centrally planned economies] tends to result in
productive efficiency and allocative efficiency but not necessarily equity.
A large corporation that runs nursing homes estimates that changes to Medicare will result in lower payments by Medicare to nursing homes for short-term stays by patients that require therapy or care upon leaving hospitals. Assume the corporation is considering expanding the number of "beds" it offers at its nursing homes. Given the changes to Medicare, if the marginal benefit of offering an additional bed is $8,000 and the marginal cost is $5,000 per bed, then the corporation
should offer additional beds
Opportunity cost
the highest valued alternative that must be given up to engage in an activity
Trade-offs force society to answer questions such as what goods and services will be produced, how will the goods and services be produced, and who will receive the goods and services produced. Which of the following countries has an economy where households and firms make these decisions?
Canada
Alzuria is a developing economy. With trade and liberalization, the country has now seen substantial development in the private sector. However, government intervention in certain markets remains strong. The banking sector has a good mix of both private banks and those called "government undertakings," or public sector banks. Consumers are becoming increasingly aware of the difference in the quality of service provided by the private and the public sector banks. Competition among private banks has ensured that their employees adhere to high standards of customer service. Their public sector counterparts, however, do not appear to be making an effort to improve their customer service. Which of the following, if true, would explain the careless attitude of employees in public sector banks?
Employees in the public sector have greater job security than those in the private sector.
Best Goods, one of the leading department store chains, offers goods at low prices. It recently opened many new stores across the country. After successfully setting up stores in most major cities, Best Goods faced substantial opposition in the city of Joberg, where lobbyists for smaller general stores (local businesses) opposed its entry. These lobbyists argued that Best Goods would put many local stores out of business and would also increase income inequality and unemployment in the city. Which of the following, if true, would weaken the stand of the lobbyists?
It is common for traditional retailers to modernize and successfully compete with organized retailing.
Best Goods, one of the leading department store chains, offers goods at low prices. It recently opened many new stores across the country. After successfully setting up stores in most major cities, Best Goods faced substantial opposition in the city of Joberg, where lobbyists for smaller general stores (local businesses) opposed its entry. These lobbyists argued that Best Goods would put many local stores out of business and would also increase income inequality and unemployment in the city. Which of the following can most reasonably be concluded from the information given in the question?
Lobbyists believe that those who lose jobs won't find alternative opportunities in the short term.
Which of the following is not a step economists follow when developing an economic model?
Make value judgments to be proven or disproven.
Best Goods, one of the leading department store chains, offers goods at low prices. It recently opened many new stores across the country. After successfully setting up stores in most major cities, Best Goods faced substantial opposition in the city of Joberg, where lobbyists for smaller general stores (local businesses) opposed its entry. These lobbyists argued that Best Goods would put many local stores out of business and would also increase income inequality and unemployment in the city. Which of the following, if true, would strengthen the stand of the lobbyists?
The quality of goods offered at Best Goods is usually the same quality as those offered at local stores.
mixed economy
an economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.
Microeconomics is the study of
how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
In the United States, who receives the goods and services produced depends largely on
how income is distributed
Examining how firms decide what prices to charge for the products they sell is most likely an issue in
microeconomics
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
Equity is
the fair distribution of economic benefits.
Macroeconomics is
the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.