AP Econ Test #1

Economic Growth

- An expansion of the economy's production possibilities - Allows a sustained rise in aggregate output - The economy can now produce more of everything

PPC:

- Shows the amount that can possibly be produced if all resources are fully employed.

What does the demand curve show?

- relationship between price and quantity demanded - reflects the satisfaction/utility people receive from consuming more and more of a good or service

Assume there are two goods, good X and good Y. Good X costs $5 and good Y costs $10. If your income is $200, which of the following combinations of good X and good Y is on your budget line?

0 units of good X and 20 units of good Y

Describe who gets hurt in a recession and how they are hurt:

Both the employees and firms get hurt by a recession. Employees lose their jobs and are forced to a lower standard of living Reduce the profits of firms Rise in the number of people living below the poverty line, an increase in the number of people who may lose their houses because they can't afford their mortgage payments, and a fall in the percentage of Americans with health insurance

Which of the following is the most likely result of inflation? A. falling employment B. a dollar will buy more than it did before C. people are discouraged from holding cash D. price stability E. low aggregate output per capita

C. people are discouraged from holding cash

Other Things Equal Assumption

Ceteris Paribus assumption The assumption that all other relevant factors remain unchanged Ex. If the price of cell phones increases, Ceteris Paribus, quantity demand will decrease

Constant Opportunity Cost

Constant slope/straight diagonal line Resources are easily adaptable for producing either good

Explain why a rational consumer who has diminishing marginal utility for a good would not consume an additional unit when it generates negative marginal utility, even when that unit is free.

Consuming a unit that generates marginal utility leaves the consumer with lower total utility than not consuming at all.

A consumer is spending all of her income and receiving 100 utils from the last unit of good A and 80 utils from the last unit of good B. If the price of good A is $2 and the price of good B is $1, to maximize total utility the consumer should buy A. more of good A. B. more of good B. C. less of good B. D. more of both goods. E. less of both goods.

B. more of good B

Why do we talk about business cycles for the economy as a whole, rather than just talking about the ups and downs of particular industries?

Because recessions and expansions are not restricted to a few industries but they reflect downturns and upturns for the economy as a whole. Business cycles are also an international phenomenon, sometimes moving in rough synchrony with other countries.

T/F: An increase in the amount of resources available to Tom for use in producing coconuts and fish does not change his production possibilities curve.

FALSE. An increase in the resources available to Tom for use in producing coconuts and fish changes his production possibilities curve by shifting it outward, because he can now produce more fish and coconuts than before.

T/F: Points inside a production possibilities curve are efficient and points outside a production possibilities curve are inefficient.

False. Efficiency is points along the curve Inside the PPC = inefficient because more of either good could be produced without producing less of the other. Outside the PPC = unobtainable.

If a point lies OUTSIDE the PPC it is:

Feasible (Ex. Point E)

Specialization

Gains from trade arise from this... Each person specializes in the task that he or she is good at performing.

If this country were to go to war, the most likely move would be from point C to which point? Explain.

Move to point: B The country would choose an efficient point with more (but not all) military goods with which to fight the war. Point A would be an unlikely choice because at that point there is no production of any social goods, some of which are needed to maintain a minimal standard of living.

If a point lies INSIDE the PPC it is:

NOT feasible

What type of economic analysis do questions not necessarily have a "right" answer?

Normative economic analysis

What type of economic analysis do economists tend to disagree most frequently? Why do they disagree?

Normative economics They disagree because of a differences in values + disagreements about models and simplifications

When would 2 individuals be willing to make a trade?

Only if the "price" of the good each person is obtaining from the trade is less than his own opportunity cost of producing the good himself (look + compare whichever good that individual doesn't specialize in)

Recessions

Periods of economic downturns and employment are falling (HIGH UNEMPLOYMENT)

Expansions

Periods of economic upturns when output and employment are rising

What type of economic analysis do questions have a "right" or "wrong" answer?

Positive economic analysis

How does price ceiling affect consumers?

Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result.

The law of increasing opportunity cost is reflected in the shape of the:

Production possibilities curve concave to the origin ("bowed-out")

When a point lies inside of the PPC it can be said that

Resources are under employed

Normative Economic analysis

Saying how the world should work

How is economic growth shown on a PPC?

Shown as an outward shift of the curve because production possibilities are expanded.

input

Shows the number of resources required to produce a specific amount of output (ex. # of hours, workers, acres)

T/F: A technological change that allows Tom to catch more fish relative to any amount of coconuts gathered results in a change in his production possibilities curve.

TRUE. A technological change that allows Tom to catch more fish for any amount of coconuts gathered results in a change in his production possibilities curve.

Absolute advantage

The ability to produce a good or service if he or she can make more of it with a given amount of time and resources.

comparative advantage

The ability to produce a good or service if the opportunity cost of producing the good or service is lower for that individual than for other people.

A consumer's optimal consumption bundle:

The consumption bundle that maximizes the consumer's total utility given his or her budget constraint.

What type of specialization results in the greatest gains fromtrade between the two countries?

The greatest gains are realized when each country specializes in producing the good for which it has a comparative advantage. (Choose whichever country has the comparative advantage)

Why do individuals specialize in in their career choices?

The market ensures that individuals can find the goods and services that they want, so they are willing to forgo self-sufficiency and are willing to specialize

Utility

The measure of personal satisfaction

When your alarm goes off each morning, you have a decisions to (rated by what activity you valued most) : 1. Go to school 2. Watch TV 3. Go to the mall What is the opportunity cost of going to school?

The opportunity cost of going to school is ONLY watching TV (it can't be watching TV & going to mall because of the scarcity problem -- you are only able to do 1 of those options as an alternative to going to school because you can't do 2 things at once)

increasing opportunity cost

The opportunity cost of producing additional units of a good rises as society produces more of that good

Unemployment

The total number of people who are actively looking for work but aren't currently employed

Employment

The total number of people who are actively looking for work but aren't employed

Opportunity cost

The value of what you must give up when you make a particular choice

What does it mean to be both efficient in production and efficient in allocation:

To be efficient, an economy must produce as much of each good as it can, given the production of other goods, and it must also produce the mix of goods that people want to consume

explicit cost

a cost that involves spending money

implicit cost

a non-monetary opportunity cost

Does this country's production possibilities curve exhibit increasing opportunity costs? Explain.

Yes. The PPC is convex (bowed outward), so with each additional unit of butter produced, the opportunity cost in terms of gun production (indicated by the slope of the line) increases. Likewise, as more guns are produced, the opportunity cost in terms of butter increases.

The marginal utility curve shows:

how marginal utility depends on the quantity of a good or service consumed

Manny is attending college and majoring in economics. By doing so, Manny is improving his:

human capital

economic growth means an ____

increase in what the economy can produce

What does a recession lead to?

joblessness, reduced production, reduced incomes, and lower living standards

What is a consumer's Budget Constraint?

limits the cost of a consumer's consumption bundle to no more than the consumer's income. (A consumer can't spend more than the total amount of income available to them)

higher inflation

lower emplomeny causes firms to change prices more frequently and makes relative prices more variable

Trade is based on the ____________

lower opportunity cost

scarcity in economics means:

not having sufficient resources to produce all the goods and services we want at zero cost

The optimal consumption bundle is always represented by a point

on the consumer's budget line.

When one decision is made, the next best alternative not selected is called:

opportunity cost

the fundamental cost is __________

opportunity cost Because the amount of money a consumer can spend is limited, a decision to consume more of 1 good is also a decision to consume less of some other guy

Trade

provides goods and services to others and receive goods and services in return

we have to make choices because:

resources are scarce and because choices involve a trade-off

The idea in economics that "there is no such thing as a free lunch" means that

scarce resources have alternate uses or opportunity costs

What characteristic of resources results in the need to make choices?

scarcity

If a natural disaster strikes, the production possibilities curve will:

shift inward

Output

shows the maximum amount of products that each country can produce

Marginal utility curves tend to ____________

slope downward because the consumption of most goods + services is subject to diminishing marginal utility

marginal utility per dollar:

spent on a good or service is the additional utility from spending one more dollar on that good or service.

In addition to labor, land, capital, and entrepreneurship, what's another source of economic growth?

technology (the technical means for the production of goods and services)

Marginal utility of a good or service is:

the change in total utility generated by consuming 1 additional unit of that good or service

What does it mean to think at the margin

the idea that people make decisions after thinking about the costs and benefits of adding or subtracting more or less units of time, money, effort etc.

Marginal Cost

the increase or decrease in the cost of producing one more unit or serving one more customer.

if a society is overallocating (not using their resources efficiently) this would mean that:

the marginal benefit for producing these goods and services with these resources is less than the marginal cost

The law of increasing costs:

the more a good or service is produced, the more its opportunity cost increases

The unemployment rate

the percentage of the labor force that is unemployed

output:

the quantity of jobs and services produced

What does a utility function show?

the relationship between a consumer's utility and the combination of goods + services he/she consumes

Business cycle

the short-run alternation between economic downturns (recessions) & economic upturns (expansions)

A country's labor force force is:

the sum of employment and employment

During the recession phase of a business cycle, which of the following is likely to increase?

the unemployment rate

During the recession phase of the business cycle, which of the following is likely to increase?

the unemployment rate

We measure utility in hypothetical units called:

utils

The economy, as a whole, can produce more when each person __________ in a task and ____________ with others.

1. specializes 2. trades

Which of the following would cause an inward shift of the production possibilities curve?

A decrease in the population

Deflation

A fall in the overall price level

When looking at a comparative advantage, what are you looking for/comparing?

A lower opportunity cost

Inflation

A rise in the overall price level

In which way does a straight-line production possibilities curve differ from a concave production possibilities curve?

A straight-line production possibilities curve has a constant opportunity cost.

The labor force is made up of everyone who is

employed or unemployed

Which of the following would cause an outward shift in the production possibilities curve? A. An increase in unemployment B. Increase in inflation C. increase in capital equipment D. decrease in natural resources E. decrease in # of workers

An increase in capital equipment

Define resources

Anything that can be used to produce something else

Explain Why There Would Be An Increasing Opportunity Cost

As more of a good is produced, its opportunity cost typically rises because well-suited inputs are used up and less adaptable inputs must be used instead

Which of the following is true if the PPC is concave to the origin?

As more of one good is produced, increasing amounts of the other good must be given up.

The "other things equal" assumption allows economists to: A. avoid making assumptions about reality B. focus on the effects of only one change at a time C. oversimplify D. allow nothing to change in their model E. reflect all aspects of the real world in their model

B. focus on the effects of only one change at a time

Diminishing marginal utility

Decreasing satisfaction or usefulness as additional units of a product are acquired (the more of a good or service you consume, the closer you are to being satisfied -- reaching a point at which an additional unit of the good adds nothing to your satisfaction) <-- like eating your 8th clam

A sustained increase in aggregate output over several decades represents: A. an expansion B. a recovery C. a recession D. a depression E. economic growth

E. economic growth

Define an expansion and economic growth, and explain the difference between the two concepts

Economic expansion is the period of recovery after an economic downturn Economic growth is an increase in the productive capacity of the economy (the economy's ability to produce more goods and services over the long term) An expansion can occur regardless of any increase in the economy's long-term potential for production, and it only lasts until the next downturn, while economic growth increases the economy's ability to produce more goods and services over the long term.

Outside the PPC Curve

Inflation - Producing more than you are able to, so you are hiring more people (high employment), but it won't last for long-term.

Define inflation, and explain why an increase in the price of donuts does not indicate that inflation has occurred.

Inflation is an overall increase in the price of goods and services throughout an economy. If inflation occurs, the price of donuts will most likely increase, but an increase in the price of this one good does not indicate inflation. For example, the price of donuts might have increased due to an increase in the price of sugar, while the prices of most other goods in the economy have remained unchanged.

List the 4 categories of resources used to produce goods and services?

Land, labor, capital, entrepreneurship

in an economic decision, it is best to have either:

MB > MC or MB = MC

The optimal consumption rule states that total utility is maximized when all income is spent and

MU/P = for all goods Marginal utility divided by price is equal for all goods

What does it mean when marginal benefit is greater than marginal cost?

Marginal benefit refers to the highest price a consumer is willing to pay for an additional unit of a certain good. As long as this number is higher than the marginal cost of producing that good, the consumer is likely to buy additional units until their marginal benefit decreases.

what is the optimal consumption rule?

When the consumer reaches maximum utility in the face of a budget restraint, the marginal utility per dollar spend is the same for each product.

How is an economy efficient?

When there are no missed opportunities --> There is not way to make some people better off without making other people worse off

When does an individual have a comparative advantage?

When they the opportunity cost of that production is lower for that individual than for other people

Any consumption bundle on or inside the line is considered:

affordable

The crucial problem of economics is:

allocating scarce productive resources to satisfy wants

Generally, each successive unit of a good consumed will cause marginal utility to:

decrease