BECO 3310 Exam 1

The price system:

- communicates information - economizes information

3 things of cash

- store value - unit of account - medium of exchange

SURPLUS

P>PEQ QS>QD

When a country can produce a good for which it has the lowest opportunity cost we say that country has a(n)...

comparative advantage

costs will often be highly __________

concentrated

An INFERIOR GOOD is a good for which demand __________ when income ________

decreases; increases

An individuals __________ for a good is not some unconditional quantity

demand

larger benefits will be highly _______

dispersed

LAW OF DIMINISHING MARGINAL UTILITY

each unit of a good(time) that becomes available is put towards the most pressing (highest value) use; subsequent units that become available are put towards increasingly less pressing (lower value) uses.

High and/or unstable rates of inflation can make price changes...

hard to interpret

DEMANDERS

individuals desiring to acquire the good

A situation in which the quantity demanded is greater than the quantity supplied is...

shortage

There are net gains for both the US and a foreign country when trade is allowed to occur between them. However, free trade is often politically unpopular. Reasons for this may include the fact that

the costs are highly concentrated

There are billions of different prices that have to adjust relative to one another for...

the economy to function effectively

I spend just as much time teaching and researching as Elon Musk spends on Tesla innovations. (Lets just assume that this is an accurate statement). Yet Elon Musk's net worth is literally more than twice my own! I find this puzzling because i work just as many hours working as Mr. Musk does. I am only puzzled because I seem to be basing my view on...

the labor theory of value

I went to Capital Pizza the other day an ordered myself a small pie with pepperoni and extra cheese. I was perfectly happy to pay $15 for that pizza. When i finished eating it, I was not entirely full and would have ben happy to have another slice or two. However i was not willing to pay $15 for a second pizza. My behavior in this case reflects...

the law of diminishing marginal utility

Which of the following will not change the supply of iPhones? (a) the price of iPhones (b) the price of Samsung Galaxy phones (c) the price of microchips used in both iPhones and Samsung Galaxy phones (d)a shift in consumer preferences for iPhones versus Samsung Galaxy phones

the price of IPhones

QUANTITY DEMANDED

the quantity of a good desired given the particular situation (including the price of the good)

QUANTITY SUPPLIED

the quantity of a good offered given the particular situation (including the price of the good)

Policies that prevent price changes (or make them unneccesarily costly) will render prices

uninformative

Why is free trade unpopular?

- While there are undoubtedly overall (or net) gains from trade - the (smaller) costs will often be highly concentrated - the (larger benefits) will be highly dispersed

Exchange can either be achieved through _______ where there is ____________ of goods for goods... or through _____________ using money on one side

- barter - direct exchange - indirect exchange

rational

- employ means that they believe will be effective towards desired ends - when the expected costs/benefits of particular means change, individuals change their behavior

Among factors that will shift demand when they change are:

- incomes - population - prices of substitutions and complements - expectations (of future conditions, including prices) - taxes

In your textbooks discussion of the price system an increase in the price of a resource is a signal to suppliers to

- invest more in its production - to look for substitute resources - to increase the recycling of the resource

Suppose an especially dry summer drastically decreased the productivity of growing wheat. Given this change, how would the price of wheat be affected and how would the price of cookbooks that specialize in recipes using wheat flour change?

- price of wheat will increase - price of cookbooks will decrease

What happens if P< PEQ

- sellers respond by raising prices; buyers offer higher prices - market tends towards the competitive equilibrium

Among factors that will shift supply when they change are...

- technological innovations - input prices - taxes and subsidies - expectations (of future economic conditions, including prices) - entry/exit of competitors - opportunity costs (alternative production activities)

self interested

- their desired ends are subjective - individual tastes and preference - "de gustibus non est disputandum"

Make choices at the margin

- trading off a bit more of this at the cost of a bit less of that =- is the marginal individual change his/her behavior

Resources move towards uses that are ________, they move away from uses where _________________

-profitable -losses are incurred

If there is a surplus on a market, we expect that

-quantity supplied will decrease - quantity demanded will increase - price will fall

What happens if P> PEQ?

-sellers are unable to sell all that they have brought to market - they respond by lowering prices; buyers buy more in response

Benefits of Trade

1. Trade makes people better of when preferences differ 2. Trade increases productivity through specialization and the division of knowledge 3. Trade increases productivity through comparitive advantage

What does this marvel require to function effectively?

1. a reliable and stable currency 2. individuals and businesses must enjoy their profits and bear the consequences of losses 3. prices must be allowed to adjust to changes in the market conditions

____ is the ability to produce the same good using fewer inputs than another producer

absolute advantage

The opportunity cost of your education at Texas Tech may include ... (a) the value of wages that you might be earning at a full-time job. (b) the value of leisure time that you'd enjoy by not being in class. (c) the value of goods that you'd be able to buy by not paying tuition. (d) the value of being a full-time student at University of Oklahoma. (e) all of the above.

all of the above

DEMAND

an expression of what quantity the individual desires conditional on a variety of factors including price

When the price of a good rises, the demand for its ______ will fall.

complements

CONSUMER SURPLUS

every buyer on that portion of the demand curve (except the marginal buyer) pays less than they are willing to pay for the good. (upper triangle)

PRODUCER SURPLUS

every seller on that portion of the supply curve (except the marginal seller) receive a price higher than their costs of production (lower triangle)

According to the theory of comparative advantage which of the following is NOT a reason why countries can mutually gain from trade?

greater trade decreases inflation (comparative advantage and division of knowledge)

Because ceteris paribus, individuals and firms supply more of a good when the price is _________. supply curves _____________

higher - upward sloping

What is the primary cause of increases in the general level of prices?

increases in the money supply

NORMAL GOOD is a good for which demand ______ when income ________

increases; increases

SUPPLIERS

individuals desiring to offer the good in exchange for differed goods or money

How do hundreds of million of people; billions of goods coordinate?

individuals need to effective make use of others knowlege.

CETERIS PARIBUS (all else equal)

individuals will demand a greater quantity of a good if its price is lower (and vice versa)

Policies that insulate individuals and businesses from losses make the price system ...

ineffective - resources will move in the wrong direction

The increase in the general level of prices is called...

inflation

MARKETS:

institutions through which individuals voluntarily exchange their goods and/or services for other individuals property or services

SUPPLY

is an expression of what quantity the individual (or firm) desires to offer conditional on a variety of factors including price

The Price System

knowledge of particular circumstances of time and place includes the prices we face and how they change

"Loose" monetary policy can make monetary calculations...

less reliable

Individuals make decisions about having a bit more of one good at the cost of a little bit less of another good. In other words they make choices at the _______.

margin

Leon Walrus

mathematical general equilibrium theory - find general solution to how markets clear - auctioneer

If only the price of the good is changing, that is a ...

movement along the demand curve

Does a country need an absolute advantage in something for it to gain from trade?

no! gains from trade exist for a country as long as it has a comparitive advantage

The value of the next best alternative action that an individual sacrifices by acting in a particular way is his/her

opportunity cost

marginal analysis means thinking in terms of

opportunity cost

Consumer Surplus =

price paid - what a given buyer is willing to pay

Textbook Econ 101:

prices adjust so that markets clear

The _______ shows all of the combinations of goods/services a country can produce given its productivity and supply of inputs

production possibilities frontier

Since both supply and demand are conditional we distinguish them from

quantity supplied and quantity demanded

If there is a shortage on a market we expect that

quantity supplied will increase

IF some other factor other than price changes which affects the demand for a good... this will result in a

shift in the demand curve

Trade increases productivity through

specialization and division of knowledge

The division of knowledge increases with

specialization and trade

Cost is ________ to the individual

subjective

An individuals (or firms) ______ for a good is not some unconditional quantiy

supply

ABSOLUTE ADVANTAGE

the ability of an individual, firm or country to produce MORE of a particular good than others can using the SAME inputs

COMPARITIVE ADVANTAGE

the ability of an individual, firm or country to produce a good at a LOWER OPPORTUNITY COST than others can

Unique P where quantity supplied is equal to quantiy demanded

COMPETITIVE EQUILIBRIUM/ MARKET CLEARING

The latin saying roughly translates into: You cant argue tastes!

De gustibus non est disputandum

SHORTAGE (excess demand)

P < PEQ QS< QD

Assume that the opp. cost of producing 1 ton of food in SA is 10 barrels of oil... and the opp. cost of producing 1 ton of food is 1/10 of a barrel of oil in the US... WE OBSERVE THAT SA has a comp. adv. in the prod. of ____ and the US has a comp. adv. in the prod of. ____

SA= oil US = food

An increase in quantity demanded is a movement along a fixed demand curve caused by a shift in the supply curve.

TRUE

To calculate accurately the opportuity cost of an action we need to first identify the next best alternative to that action

TRUE

DEMAND CURVE:

a plot of the relationship between price and quanity demanded - downward sloping

SUPPLY CURVE:

a plot of the relationship between price and quantity supplied

What is an equilibrium price?

a price that allows quantity demanded and quantity supplied to be equal

If the price in a market is above the equilibrium price, this creates...

a surplus

Bill and Ted are stranded on an island and need food and shelter to survive. In one hour, Bill can catch 2 fish or cut down 4 palm leaves for shelter. In one hour, Ted can catch 2 fish or cut down 8 palm leaves for shelter. Who has the comparative advantage in each task? (a) Bill has the comparative advantage in palms; Ted has it in in fish. (b) Bill has the comparative advantage in fish; Ted has it in palms. (c) Ted has a comparative advantage in both fish and palms. (d) Bill has a comparative advantage in both fish and palms.

Bill has the comparative advantage in fish; Ted has it in palms

Economics is a normative science

FALSE

If you look at the cross-country data (at least according to a study by Stevenson and Wolfers (2014) discussed in your text), having a higher income does not imply higher happiness (as subjectively reported in terms of life satisfaction).

FALSE

Jenn won a free ride to four years of college. During these four years Jenn could instead do one of the following: I. Travel the world. II. Work to gather savings and career experience. III. Become an expert violinist. Which of the following is the opportunity cost of Jenn attending college? (a) zero. (b) I and II only. (c) The sum of I, II, III, and any other opportunities she passed up. (d) Whichever of I, II, III is most valuable to her.

Whichever is most valuable to her

PRODUCTION POSSIBILITIES FRONTIER

a curve showing the maximum attainable combinations of two goods that may be produced with available inputs and technology

If there is no value to be created

then an exchange will not be made voluntarily

When individuals VOLUNTARILY exchange goods

those goods move from lower value to higher value uses

at the competitive equilibrium price and quanity... is maximized

total surplus

The Food and Drug Administration (FDA) requires years of testing for new drugs to ensure that they are safe before they are marketed. Thus the FDA causes thousands of US citizens to die each year. Say what now? It's true! This is an illustration of one of the "Big Ideas" of economic thinking that your textbook discusses: ... (a) incentives matter. (b) trade-offs are everywhere. (c) the invisible hand principle. (d) adverse selection. (e) institutions matter.

trade-offs are everywhere

Economics involves positive analysis meaning that it deals with questions of what individuals

will do when they face certain incentives (not ought or believe)

If the price of a good changes the demand curve _________ shift

will not