chapter 1-5 Econ

Any given demand or supply curve is based on the ceteris paribus assumption that ___________________.

B. all else is held equal

The term "ceteris paribus" means that:

B. all variables except those specified are constant

The ___________ is the only price where quantity demanded is equal to quantity supplied.

A. equilibrium price

In the circular flow diagram model:

A. households receive income from businesses in exchange for providing inputs and use that income to buy goods and services from businesses. B. businesses receive revenues from households in exchange for providing goods and services and use those revenues to buy inputs from households. D. Both (a) and (b) are correct.

The model that economists use for illustrating the process of individual choice in a situation of scarcity is the _________________, sometimes also called the opportunity set, a diagram which shows what choices are possible.

B. budget constraint

Economic models like the _____________________ are not physical models, but instead are diagrams or graphs or even mathematical equations that represent economic patterns or theories.

B. circular flow diagram

Regardless of whether you are looking through the microeconomics microscope or the macroeconomics telescope, the fundamental subject material of the interconnected __________ doesn't change.

B. economy

Scarcity implies that:

B. it is impossible to completely fulfill the unlimited human desire for goods and services with the limited resources available.

_____________ - a term referring to the fact that for many goods, as the level of production increases, the average cost of producing each individual unit declines.

C. Economies of scale

The slope of the _________________ is determined by the relative price of the two goods, which is calculated by taking the price of one good and dividing it by the price of the other good.

C. budget constraint

The law of ____________________________ explains why people and societies rarely make all-or-nothing choices.

C. diminishing marginal utility

Refer to Figure 4-1. Using the graph above and beginning on D1, a shift to D2 would indicate a(n):

C. increase in demand

Economists refer to the relationship that a higher price leads to a lower quantity demanded as the _____________.

C. law of demand

As a person receives more of a good, the _______________ from each additional unit of the good declines.

C. marginal utility

Philosophers draw a distinction between positive statements, which describe the world as it is, and ___________________s, which describe how the world should be.

A. normative statement

The model that economists use for illustrating the process of individual choice in a situation of scarcity is the budget constraint, sometimes also called the _______________, a diagram which shows what choices are possible.

A. opportunity set

A demand curve shows the relationship between price and _________________ on a graph.

A. quantity demanded

The opportunity cost of attending university is likely to include all except which of the following?

A. the cost of haircuts received during the school term

Refer to Figure 2-2. When the economy moves from Point A to Point B in the diagram above:

A. the economy begins using its resources efficiently to produce both food and clothing. B. the economy operates at its productive capacity once it reaches Point B. C. the economy increases production of both clothing and food. D. All of the above occur.

In countries like _____________ the command economy predominates.

Cuba and North Korea

"If I didn't have class tonight, I would save the $4 campus parking fee and spend four hours at work where I earn $10 per hour." The opportunity cost of attending class this evening is:

D. $44

Refer to Figure 2-1. Along the production possibilities frontier, the most efficient point of production depicted is:

D. All points on the production possibilities frontier are equally efficient

Which of the following lies primarily within the realm of macroeconomics?

a study of tax cuts stimulate aggregate production

Which of the following is generally accepted as a valid criticism of the production of useful goods and services?

environmental pollution

The circular flow diagram of economic activity is a model of the:

flow of goods, services, and payments between households and firms

In the ______________, households receive goods and services and pay firms for them.

goods and services market

Which of the following best describes a fiscal policy tool?

government spending

Which of the following best describes a monetary policy tool?

interest rates

Because of their relatively small national economies, which of the following is most likely considered to be the most important factor for Belgium, Korea, and Canada to take full advantage of specialization?

international trade

In the ____________, households work and receive payment from firms.

labor market

When nations desire a healthy macroeconomy, they typically focus on three goals, one of these being:

low inflation

In a _______________________, most economic decisions about what to produce, how to produce it, and for whom to produce it are made by buyers and sellers.

market-oriented economy

The basic difference between macroeconomics and microeconomics is:

microeconomics concentrates on the behaviour of individual consumers and firms while macroeconomics focuses on the performance of the entire economy.

The basic difference between macroeconomics and microeconomics is that:

microeconomics is concerned with the trees (individual markets) while macroeconomics is concerned with the forest (aggregate markets)

Demand is said to be _____________ when the quantity demanded is not very responsive to changes in price.

B. inelastic

The evidence on the supply curve of financial capital is controversial, but at least in the short run, the elasticity of savings with respect to the interest rate appears to be __________.

B. inelastic

If a firm faces ________________________, while the prices for the output the firm produces remain

B. lower costs of production

Many economists believe that the trend toward greater wage inequality across the U.S. economy was primarily caused by _____________.

B. new technologies

If the demand curve for a life-saving medicine is perfectly inelastic, then a reduction in supply will cause the equilibrium price to:

B. rise and the equilibrium quantity to stay the same.

If new manufacturers enter the computer industry, then (ceteris paribus):

B. the supply curve shifts to the right

Demand is said to be __________ when the quantity demanded changes at the same proportion as the price.

B. unit elastic

Many states do have ____________, which impose an upper limit on the interest rate that lenders can charge.

B. usury laws

Refer to Figure 7-1. With reference to Graph A, at a price of $10, total revenue equals:

C. $400

Refer to Figure 7-1. With reference to Graph A, at a price of $5, total revenue equals:

C. $500

Suppose that Mimi plays golf 5 times per month when the price is $40 and 4 times per month when the price is $50. What is the price elasticity of Mimi's demand curve?

C. 1

In the United States, a typical credit card interest rate ranges from ______________ per year.

C. 12% to !8%

Suppose that Bobo purchases 1 pizza per month when the price is $19 and 3 pizzas per month when the price is $15. What is the price elasticity of Bobo's demand curve?

C. 4.25

The demand for a product is unit elastic. At a price of $20, 10 units of a product are sold. If the price is increased to $40, then one would expect sales to equal:

C. 5 units

As the __________ substitute for low-skill labor becomes available, the demand curve for low-skill labor will shift to the left.

C. technology

When consumers and businesses have greater confidence that they will be able to repay in the future, _______________________.

C. the quantity demanded of financial capital at any given interest rate will shift to the right.

Whenever there is a shortage at a particular price, the quantity sold at that price will equal:

C. the quantity supplied at that price

If labor demand is downward sloping and labor supply is upward sloping, then when labor demand rises faster than labor supply, it is expected that real wages __________.

C. will increase

Several types of economic events can cause a shift in labor demand, so that a higher or lower quantity of labor is hired at every salary or wage. List three of these events.

Changes in education and training, changes in technology, changes in government regulations. Changes in the number of workers, changes in required education, changes in government policies.

Define consumer surplus and producer surplus.

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

The demand and supply model can explain the existing levels of prices, wages, and rates of return. Demand and supply can also be used to explain how economic events will cause changes in prices, wages, and rates of return. There are only four 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 right or to shift left.

Suppose that a 20% increase in the price of gasoline causes a 5% decrease in the consumption of gasoline and a 30% drop in the sales of SUVs. What can you say about elasticities?

The elasticity of demand for gasoline is 0.25 (inelastic) and the cross-price elasticity of SUVs with respect to the price of gasoline is -1.5. Gasoline and SUVs are complements.

When nations desire a healthy macroeconomy, they typically focus on several goals:. Three are:

Growth in the standard of living, a low level of unemployment, low inflation, and a sustainable balance of trade between countries.

The elasticity of supply and demand determines whether a shift in supply or demand will have a larger effect on quantity or price. Discuss the four scenario outcomes and the various effects on price and quantity.

If demand is elastic, then shifts in supply will have a larger effect on quantity than on price. If demand is inelastic, then shifts in supply will have a larger effect on price than on quantity. If supply is elastic, then shifts in demand will have a larger effect on quantity than on price. If supply is inelastic, then shifts in demand will have a larger effect on price than on quantity.

Recent decades have seen a trend toward globalization, which means that buying and selling in markets have crossed national borders to an increasing extent. As a result, firms and workers from different countries are increasingly interconnected. Globalization has occurred for a number of reasons. List three reasons and briefly describe their effect contributing toward globalization.

Improvements in shipping and air cargo have driven down transportation costs. Innovations in computing and telecommunications have made it easier and cheaper to manage long-distance economic connections of production and sales. Many valuable products and services in the modern economy can take the form of information. These products and many others can be transported over telephones and computer networks at ever-lower costs. Finally, international agreements and treaties between countries have encouraged greater trade.

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

Various factors may cause a demand curve to shift: changes in income, changes in population, changes in taste, changes in expectations of future prices.

Each year, researchers at the Heritage Foundation and the Wall Street Journal look at 50 different categories of economic freedom for countries around the world. In each category, they give each nation a score based on extent of economic freedom in that category. What sorts of questions regarding the level of economic freedom might these researchers have asked within this survey which would help rank nations' economic freedom? Please list at least three questions.

Who's in control of economic decisions? Are people free to do what they want and to work where they want? Are businesses free to produce when they want and what they choose, and to hire and fire as they wish? Are banks free to choose who will receive loans? Or does the government control these kinds of choices?

Define zero elasticity and describe the resultant demand curve.

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

Which of the following best denotes the reason for the existence of substantial black markets?

a command economy

In the first chapter of The Wealth of Nations, Smith introduces the idea of the __________, which means 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.

division of labor

The two main tools of macroeconomic policy include monetary policy, and fiscal policy, which involves __________ spending.

governement

In a command economy, the __________ either makes most economic decisions itself or at least strongly influences how the decisions are made.

government

Macroeconomics:

is concerned with the expansion and contraction of the overall economy

In a discussion of economics, which of the following would exert the most influence on an individual firm's decision to hire workers?

the macroeconomy

Macroeconomic topics do not usually include:

the profit maximizing decisions of an individual manufacturer

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

-A decrease in the price of a substitute in production. -An decrease in input prices which make production less expensive. -A change in technology. -An expected decrease in future price. -An increase in the number of producers. -Deregulation. -A reduction in taxes or an increase in subsidies. -Weather.

If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. This is known as ___________________

B. excess demand

Which of the following would reduce the supply of microcomputers?

B. higher wage rates for the workers that assemble the computers

What is the difference between a change in demand and a change in quantity demanded?

A change in quantity demanded is caused by a change in the price of the product and is represented as a movement along a stationary demand curve. A change in demand is caused by a change in tastes, income, price of a related good, number of consumers or expectations and is illustrated as a horizontal shift of the entire demand curve.

Refer to Table 5-1. If D2 and S1 represent the demand and supply schedules in a particular market, then the equilibrium price and quantity are __________ and __________, respectively.

A. $8; 15

In 2010, Americans had about _____________ outstanding in credit card debts not paid on time.

A. $900 billion

On April 1, 2009, in the middle of a recession, the government of the province of Ontario, Canada increased the provincial minimum wage from $8.75 to $9.50. What will the likely effect of this policy be?

A. Both the leftward shift in the labor demand curve and the higher minimum wage will lead to an increase in the unemployment rate.

__________ is the change in what is on the horizontal axis (quantity) divided by the change in what is on the vertical axis (price).

A. Elasticity

Refer to Figure 5-1. The movement from __________ to __________ is consistent with a decrease in the price of cotton (a substitute).

A. Point A; Point H

Demand is said to be ___________ when the quantity demanded is very responsive to changes in price.

A. elastic

When economists are sketching examples of a demand or supply curve that is close to horizontal, they refer to that demand or supply curve as ____________.

A. elastic

If the supply curve for a product is horizontal, then the elasticity of supply is:

A. equal to infinity

If the supply curve for a product is vertical, then the elasticity of supply is:

A. equal to zero

The ____________ is the quantity where quantity demanded and quantity supplied are equal at a certain price.

B. equilibrium quantity

The price elasticity of demand for tickets to local baseball games is estimated to be equal to 0.89. In order to boost ticket revenues, an economist would advise:

A. increasing the price of game tickets because demand is inelastic.

When economists are sketching examples of demand and supply, it is common to sketch a demand or supply curve that is close to vertical, and then to refer to that curve as _________.

A. inelastic

Refer to Figure 7-1. Graph B represents a demand curve that is relatively __________. Total revenue __________ as the price decreases from $10 to $5.

A. inelastic; decreases

Refer to Figure 2-2. At Point A in the production possibilities graph shown above, the economy

A. is not using its resources efficiently

Since Baltimore passed the first _______________ in 1994, several dozen cities enacted similar laws in the late 1990s and into the 2000s.

A. living wage law

The demand curve for a typical good has a(n):

A. negative slope because some consumers switch to other goods as the price rises.

The "law of supply" functions in labor markets; that is, a higher __________ for labor leads to a higher quantity of labor supplied.

A. price

If the supply curve for aspirin is perfectly elastic, then a reduction in demand will cause the equilibrium price to:

A. stay the same and the equilibrium quantity to fall.

As the _____________ complement for high-skill labor becomes cheaper, the demand curve for high-skill labor will shift to the right.

A. technology

Interpret the following statement: "An increase in the price of wheat will encourage farmers to increase the quantity of wheat supplied to the market."

A. the statement is correct

A severe freeze has once again damaged the Florida orange crop. The impact on the market for orange juice will be a leftward shift of:

A. the supply curve

If cola and iced tea are good substitutes for consumers, then it is likely that:

A. their cross price elasticities are greater than zero.

According to the law of supply:

A. there is a direct relationship between price and the quantity supplied.

A 25 percent decrease in the price of breakfast cereal leads to a 20 percent increase in the quantity of cereal demanded. As a result:

A. total revenue will decrease

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 wheat and oats are substitutes on the demand side, the increase in the price of wheat increases the demand for oats. Wheat and oats are also substitutes on the supply side, so the increase in the price of wheat reduces the supply of oats.

Refer to Table 5-1. If D2 and S2 represent the demand and supply schedules in a particular market, then the equilibrium price and quantity are __________ and __________, respectively.

B. $10; 12

Refer to Table 5-1. If D1 and S1 represent the demand and supply schedules in a particular market, then the equilibrium price and quantity are __________ and __________, respectively.

B. $4; 16

Billy Bob's Barber Shop knows that a 5 percent increase in the price of their haircuts results in a 15 percent decrease in the number of haircuts purchased. What is the elasticity of demand facing Billy Bob's Barber Shop?

B. 3

Are markets always in equilibrium?

B. No, but if there is no outside interference, they tend to move toward equilibrium.

Refer to Figure 5-1. The movement from __________ to __________ is consistent with a successful advertising campaign that claims wool keeps you warm.

B. Point A; Point F

Steel mill wage costs increase by 18 percent over a year. What is the likely economic effect on the market for steel?

B. There is an increase in the cost of producing steel, which shifts the supply curve of steel to the left, thereby increasing the price of steel.

How do apple growers react to the news of medical research findings that suggest that eating apples leads to greater health benefits than were previously known?

B. They increase the quantity of apples supplied.

A change in price of a good or service typically causes ___________________________ for that specific good or service.

B. a change along the supply curve

Which of the following would most likely shift the production possibilities curve inward

B. a decrease in the average number of hours worked per week as the labor force chooses to enjoy more leisure time

The supply curve of textbooks (which are produced using paper made from trees) will shift to the left in response to:

B. a sharp increase in the demand for and construction of wood-frame homes.

Many cooks view butter and margarine to be substitutes. If the price of butter rises, then in the market for margarine:

B. both the equilibrium price and quantity will rise

When demand is inelastic:

B. consumers are not very responsive to changes in price.

A 10 percent decrease in the price of potato chips leads to a 30 percent increase in the quantity of soda demanded. It appears that:

B. cross-price elasticity of demand for soda is -3.

Refer to Figure 4-3. A change from Point A to Point E represents a(n):

B. decrease in supply

If the demand curve is perfectly elastic, then an increase in supply will:

B. increase the quantity exchanged but result in no change in the price.

______________ are enacted when discontented sellers, feeling that prices are too low, appeal to legislators to keep prices from falling.

C. Price floors

The imposition of a price ceiling on a market often results in:

C. a shortage

Which of the following will not result in a leftward shift of the market demand curve for labor?

C. an increase in the wage rate

When __________________, a firm will supply a higher quantity at any given price for its output, and the supply curve will shift to the right.

C. costs of production fall

Refer to Figure 4-2. A change from Point A to Point B represents a(n):

C. decrease in quantity demanded

The labor ____________ curve(s) will shift _______________ if there is an increase in productivity or an increase in the demand for the final product.

C. demand; right

Youth smoking seems to be more __________ than adult smoking—that is, the quantity of youth smoking will fall by a greater percentage than the quantity of adult smoking in response to a given percentage increase in price.

C. elastic

Refer to Table 5-1. Suppose that D2 and S1 are the prevailing demand and supply curves for a product. If the demand schedule changes from D2 to D1, then:

C. equilibrium quantity decreases from 15 to 13.

A perfectly elastic supply curve is:

C. horizontal

The longer the time period considered, the more the elasticity of supply tends to:

C. increase

Refer to Figure 4-3. A change from Point A to Point B represents a(n):

C. increase in quantity supplied

Improvements in the productivity of labor will tend to:

C. increase wages

If the demand for software engineers __________ slower than does supply, then wages of software engineers will __________.

C. increases; fall

Taxes on goods with __________ demand curves will tend to raise more tax revenue for the government than taxes on goods with __________ demand curves.

C. inelastic; elastic

A demand or supply curve with ______________ would be horizontal in appearance.

C. infinite elasticity

A 10 percent increase in income leads to a 15% decrease in the quantity of macaroni and cheese demanded but no change in the price of macaroni and cheese. From this information, we can assume:

C. macaroni is an inferior good and price elasticity of supply is infinite.

The elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in __________.

C. price

In contrast to goods and services markets, _____________ are rare in labor markets, because rules that prevent people from earning income are not politically popular.

C. price ceilings

A straightforward example of a _______________, often used for simplicity, is the interest rate.

C. rate of return

The price elasticity of demand measures the:

C. responsiveness of quantity demanded to a change in price.

A more efficient means of processing algae to produce an anticancer drug is discovered. As a result, the supply curve for the drug will:

C. shift to the right, decreasing the price of the drug

A drought decreases the supply of agricultural products, which means that at any given price a lower quantity will be supplied; conversely, especially good weather would shift the __________________ .

C. supply curve to the right

Refer to Figure 7-1. With reference to Graph B, at a price of $5, total revenue equals:

D. $200

The United States has approximately ___________ credit card holders.

D. 180 million

Andy views beer and pizza as complements to one another. If the price of pizza decreases, economists would expect:

D. Andy's demand for beer to increase

If an increase in the price of Good X causes a decrease in the demand for Good Y, we can conclude that:

D. Goods X and Y are complement goods

Refer to Table 5-1. Suppose that D1 and S2 are the demand and supply schedules for Product A. If the government imposes a price ceiling of $4, then:

D. a 10 unit shortage will result

Which of the following results in a rightward shift of the market demand curve for labor?

D. an increase in demand for the firm's product

Which of the following will not result in a rightward shift of the market supply curve for labor?

D. an increase in labor productivity

A 10 percent increase in the price of soda leads to a 20 percent increase in the quantity of iced tea demanded. It appears that:

D. cross-price elasticity of demand for iced tea is -2.

A price cut will increase the total revenue a firm receives if the demand for its product is:

D. elastic

Supply is said to be ____________ when the quantity supplied is very responsive to changes in price.

D. elastic

Refer to Table 5-1. Suppose that D1 and S1 are the prevailing demand and supply curves for a product. If the demand schedule changes from D1 to D2, then:

D. equilibrium price increases from $6 to $8

If the supply curve for housing is perfectly inelastic, then a reduction in demand will cause the equilibrium price to:

D. fall and the equilibrium quantity to stay the same.

Refer to Figure 4-3. A change from Point A to Point D represents a(n):

D. increase in supply

Other things being equal, a __________ supply of workers tends to __________ real wages.

D. larger; decrease

The elasticity of supply is defined as the ________ change in quantity supplied divided by the _______ change in price.

D. percentage; percentage

Price elasticity of demand is defined as:

D. the percentage change in quantity demanded divided by the percentage change in price.

Whenever there is a surplus at a particular price, the quantity sold at that price will equal:

D. the quantity demanded at that price

Which of the following statements most likely lies within the realms of macroeconomics

Due to an economic recession, manufacturing firms began implementing layoffs of their workforces.

What is a black market, and under what economic condition is it most likely to thrive?

Even the most command-oriented economies operate with substantial black markets, or underground economies, which are markets where the buyers and sellers make transactions without the government's approval.

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

For most products, most of the time, the income elasticity of demand is positive: that is, a rise in income will cause an increase in the quantity demanded. This pattern is common enough that these goods are referred to as normal goods. However, for a few goods, an increase in income means that one might purchase less of the good; for example, a person with a higher income might buy fewer hamburgers, because they are buying more steak instead, or a person with a higher income might buy less cheap wine and more imported beer. When the income elasticity of demand is negative, the good is called an inferior good.

Explain why U.S. minimum wage laws have historically had only a small impact on employment.

From text: Let's suppose that the minimum wage set lies just slightly below the equilibrium wage level. Wages could fluctuate according to market forces above this price floor, but they would not be allowed to move beneath the floor. In this situation, the price floor minimum wage is said to be nonbinding—that is, the price floor isn't determining the market outcome. Even if the minimum wage moves just a little higher, it will still have no effect on the quantity of employment in the economy, as long as it remains below the equilibrium wage. Even if the minimum wage is increased by enough so that it rises slightly above the equilibrium wage and becomes binding, only a small excess supply gap between the quantity demanded and quantity supplied of low-skill labor.

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

Markets tend toward equilibrium 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 toward equilibrium. If a surplus exists, suppliers are unhappy about not being able to sell the quantity of goods or services they wish, and will tend to lower prices in order to persuade consumers to purchase more goods and services.

With alternative policies like income subsidies and directed construction subsidies readily available, why do governments enact price floors and price ceilings?

One reason is that in public policy debates over price controls, people often don't take into account the unintended but predictable tradeoffs. Another reason is that government sometimes views laws about price floors and ceilings as having zero cost, while giving subsidies to demanders or suppliers requires a government to collect taxes and spend money.

Define social surplus and deadweight loss.

Social surplus is the sum of consumer surplus and producer surplus. Total surplus is larger at the equilibrium quantity and price than it will be at any other quantity and price. Deadweight loss is loss in total surplus that occurs when the economy produces at an inefficient quantity.

Around the world, many countries have passed laws to keep farm prices higher than they otherwise would be. Why does this widespread practice continue?

Price floors are enacted when discontented sellers, feeling that prices are too low, appeal to legislators to keep prices from falling.

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.

Step 1: What did the market look like before the change? In this case there are two markets: low-skill labor and high-skill labor. In each market, the original demand curve for labor is D0, the original supply curve for labor is S0, and the original equilibrium is E0, where the equilibrium wage is w0 and the equilibrium quantity is q0. Step 2: Does the new technology affect the supply of labor or the demand for labor? The new technology affects demand for labor. Step 3: How will the new technology alter demand for the two types of labor? As the technology substitute for low-skill labor becomes cheaper, demand for low-skill labor will shift to the left, as shown by the shift from D0 to D1 in the market for low-skill labor. As the technology complement for high-skill labor becomes cheaper, demand for high-skill labor will shift to the right, as shown by the shift from D0 to D1 in the market for high-skilled labor. Step 4: Compare the new equilibrium to the original equilibrium. The new equilibrium for low-skill labor at E1 has a lower wage and quantity than the original equilibrium E0 in the market for low-skill labor. The new equilibrium for high-skilled labor at E1 has a higher wage and quantity than the original equilibrium.

Define consumer surplus, producer surplus, and social surplus.

The amount that individuals would have been willing to pay minus the amount that they actually paid is called consumer surplus. Producer surplus is the amount that a seller is paid for a good minus the seller's actual cost. Social surplus is the sum of consumer surplus and producer surplus.

Define wage elasticity of labor supply and differentiate the elasticity between teenage workers and that of middle-aged adult workers in the workforce.

The income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income. Income elasticity of demand = % change in quantity demanded/% change in income The wage elasticity of labor supply for teenage workers is generally thought to be fairly elastic: that is a certain percentage change in wages will lead to a larger percentage change in the quantity of hours worked. Conversely, the wage elasticity of labor supply for adult workers in their 30s and 40s is thought to be fairly inelastic. When wages move up or down by a certain percentage amount, the quantity of hours that adults in their prime earning years are willing to supply changes but by a lesser percentage amount.

Define the elasticity of labor supply.

The percentage change in hours worked divided by the percentage change in wages

A 10% increase in the price of pizza causes a 10% drop in the quantity of both pizza and beer sold. Describe elasticities and the nature of the two products.

The price elasticity of demand for pizza is equal to (-)1 and the cross price elasticity of beer with respect to the price of pizza is also -1. In this example, beer and pizza complements.

If the question is whether a shift in supply will have a greater effect on equilibrium price or quantity, the answer lies not with the elasticity of supply, but with the elasticity of demand. Why is this?

The shifting supply curve is moving along a fixed demand curve—and the shape of that demand curve will determine the eventual outcome.

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

The term "cross-price" refers to the idea that the price of one good is affecting the quantity demanded of a different good. Specifically, the cross-price elasticity of demand 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. Cross-price elasticity of demand = % change in quantity demanded of good A/% change in price of good B If good A is a substitute for good B, like coffee and tea, then a higher price for B will mean a greater quantity consumed of good A. But if good A is a complement for good B, like coffee and sugar, then a higher price for good B will mean a lower quantity consumed of good A.

Price floors and price ceilings often lead to unintended consequences, because buyers and sellers have many margins for action. List at least four margins.

These margins include black markets, side payments, quality adjustments, and shifts in who is involved in the transaction.

How does the slope of a supply or demand curve differ from elasticity of supply or demand?

This calculation differs from elasticity in two ways. First, elasticity is the change in what is on the horizontal axis (quantity) divided by the change in what is on the vertical axis (price). Thus, elasticity involves run/rise, not rise/run. Second, elasticity is the percentage change, which is a different calculation from slope. A straight line has only one slope, but as the example in the chapter shows, a straight-line demand curve has a different elasticity at every point.

Explain the nature of individual and business decisions which drive the demand and supply of financial capital. Specifically, what kinds of factors will shift demand and supply of financial capital?

Those who supply financial capital face two broad decisions: how much to save, and how to divide up their savings among different forms of financial investments. In thinking about how much to save, people must decide what they will need in the future to address expected or unexpected events. If Investment A becomes more risky, or the return diminishes, then savers will shift their funds to Investment B—and the supply curve of financial capital for Investment A will shift back to the left while the supply curve of capital for Investment B shifts to the right. Those who demand financial capital want the money now and are willing to repay in the future. For example, individuals might borrow money to purchase a long-term possession such as a condominium, a house or a car. A business might seek financial investment so that it has the funds to build a factory or invest in a research and development project that won't pay off for five years, ten years or even more

If macroeconomics looks at the economy as a whole, it focuses on which of the following?

unemployed people

The choice on a production possibilities set that is socially preferred, or the choice on an individual's budget constraint that is personally preferred, will display _____________________.

A. allocative efficiency

Marginal thinking is best demonstrated by:

A. choosing to spend one more hour studying economics because you think the improvement in your score on the next quiz will be worth the sacrifice of time.

The leader of a federal political party made the following campaign promise: "My administration will increase national defense without requiring sacrifices elsewhere in the economy." The promise can be kept if:

A. the economy moves along the production possibilities in the direction of a greater quantity of defense. B. the economy moves from a point inside the production possibilities curve toward a point on the production possibilities curve. C. the production possibilities frontier shifts outward due to an improvement in technology. D. either b) or c) occurs, but not as a result of a).

As depicted in _________________________________, it is necessary to give up some of one good to gain more of the other good.

A. the production possibilities frontier

The general pattern that consumption of the first few units of any good tends to bring a higher level of _______ to a person than consumption of later units is a common pattern.

A. utility

Which of the following statements most likely lies within the realm of microeconomics?

An increase in labor costs will increase the additional cost of producing another bus.

Referring to Table 2-1: A student has only a few hours to prepare for two different exams this afternoon. The above table shows alternative possible exam scores with three alternative uses of the student's time. The opportunity cost of scoring a 94 on the economics exam rather than a 77 is:

B. 15 points on the history exam

Which of the following best characterizes the circular flow of income

B. Businesses buy resources from households, and households use their income from the sale of resources to buy goods and services from businesses.

After widespread press reports about the dangers of contracting "mad cow disease" by consuming beef from Canada, the likely economic effect on the U.S. demand curve for beef from Canada is:

B. a shift demand curve for beef to the left

Refer to Figure 2-1. An economy is operating at full employment, and then workers in the bread industry are laid off. This change is portrayed in the movement from:

C. C to F

Economists refer to this pattern, the ___________________________________, which means that as a person receives more of a good, the additional or marginal utility from each additional unit of the good declines.

B. law of diminishing marginal utility

Most choices involve _________________, which involves comparing the benefits and costs of choosing a little more or a little less of a good.

B. marginal analysis

Philosophers draw a distinction between ___________________, which describe the world as it is, and normative statements, which describe how the world should be.

B. positive statements

A supply curve is a graphical illustration of the relationship between price, shown on the vertical axis, and ____________, shown on the horizontal axis.

B. quantity

_________________ refers to the total number of units that are purchased at that price.

B. quantity demanded

The lesson of __________ is to forget about the money that's irretrievably gone and instead to focus on the marginal costs and benefits of future options.

B. sunk costs

But nearly all supply curves share a basic similarity: they slope _______________.

B. up from left to right

In economics, the demand for a good refers to the amount of the good that people:

B. will buy at various prices

Refer to Table 2-1. A student has only a few hours to prepare for two different exams tomorrow morning. The above table shows alternative possible exam outcomes with three alternative uses of the student's time. The opportunity cost of scoring an 84 on the history exam rather than 76 is:

C. 7 points on the economics exam

Why is there scarcity?

C. Because our unlimited wants exceed our limited resources

Attending college is a case where the ________________ exceeds the monetary cost.

C. opportunity cost

In many cases, it is reasonable to refer to the ________________ as the price.

C. opportunity cost

The downward slope of the demand curve again illustrates the pattern that as _____________ rises, _________________ decreases.

C. price, quantity demanded

When economists talk about supply, they are referring to a relationship between price received for each unit sold and the _________________.

C. quantity supplied

Gomer decides to spend an hour playing basketball rather than studying. His opportunity cost is:

C. the benefit to his grades from studying for an hour

The marginal benefit of a slice of pizza is the:

C. the maximum amount that a consumer is willing to pay for the slice

In deciding how many hours to work, Beulah will make a choice that maximizes her _______; that is, she will choose according to her preferences for leisure time and income.

C. utility

Clem Oatley could grow wheat and barley. He could grow 75 bushels of wheat or 125 bushels of barley using the same resources on an acre of his land. The price of wheat is $2.00 per bushel and the price of barley $ 0.80. Show the benefits to Clem from specialization. What should he specialize in?

Clem could make $150 if he grew only wheat and just $100 if he grew only barley. By specializing in wheat production he will be better off. Even though he can produce more bushels of barley than he can bushels of wheat.

In which of the following countries will the national government have the greatest influence with respect to the nation's economy?

Cuba

Refer to Figure 2-1. The most inefficient point depicted is:

D. Point G

The nature of demand indicates that as the price of a good increases:

D. buyers desire to purchase less of it

The demand schedule for a good:

D. indicates the quantities that will be purchased at alternative market prices.

The opportunity cost of an action:

D. is a subjective valuation that can be determined only by the individual who chooses the action.

Most real-world choices aren't about getting all of one thing or another, instead, most choices involve _________________, which involves comparing the benefits and costs of choosing a little more or a little less of a good.

D. marginal analysis

When quantity demanded decreases in response to a change in price:

D. there is a movement up along the demand curve

Scarcity exists because of:

D. unlimited wants and limited resources

The formal study of economics began when Adam Smith (1723-1790) published his famous book The Wealth of Nations in 1776. In the first chapter of The Wealth of Nations, Smith introduces the idea of the division of labor. Define "division of labor" and illustrate with an example.

Division of labor means 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. To illustrate the division of labor, Adam Smith used the example of how the tasks of making a pin were divided in a pin factory. He counted the multiple tasks involved with making a pin, including the steps involved in drawing out a piece of wire, cutting it to the right length, straightening it, putting a head on one end and a point on the other, and packaging pins for sale. In observing pin factories, Smith counted 18 distinct tasks that were often done by different people. Students can use a restaurant example or a modern factory example as well.

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.

First, specialization in a particular small job allows workers to focus on the types of production where they have an advantage. People have different skills, talents, and interests, so they will be better at some jobs than others. The particular advantages workers may be based on educational choices, which are in turn shaped by interests and talents: for example, only those with medical degrees qualify to become doctors. Second, workers who specialize in certain tasks often learn to produce more quickly and with higher quality. This pattern holds true for many workers, including assembly line laborers who build cars, stylists who cut hair, and doctors who perform heart surgery. Third, specialization allows economic agents, or actors, to take advantage of economies of scale, a term referring to the fact that for many goods, as the level of production increases, the average cost of producing each individual unit declines.

How does microeconomics relate to macroeconomics?

Microeconomics primarily examines the behaviour of individual households and firms, whereas macroeconomics concentrates on the behaviour of consumers and firms in the aggregate. Macroeconomics studies economic problems as they influence the whole of society.

Which of the following is most likely a topic of discussion in macroeconomics?

a decreased in the unemployment rate

When most people want to know the cost of an item or a service, they look for a price tag. When economists want to determine cost, they go one step further. They use the idea of opportunity cost. Explain the concept of opportunity cost and illustrate with an example.

Opportunity cost is whatever must be given up to obtain something that is desired. After the terrorist plane hijackings on September 11, 2001, many steps were proposed to improve air travel safety. For example, the federal government could provide armed "sky marshals" who would travel inconspicuously with the rest of the passengers. The cost of having a sky marshal on every flight would be roughly $3 billion per year. Retrofitting all U.S. planes with reinforced cockpit doors to make it harder for terrorists to take over the plane would have a price tag of $450 million. Buying more sophisticated security equipment for airports, like three-dimensional baggage scanners and cameras linked to face recognition software, could cost another $2 billion. But the single biggest cost of greater airline security doesn't involve spending money. It's the opportunity cost of additional waiting time at the airport.

The economics approach portrays people as self-interested. Instead, the critics argue that people should be taught to care more deeply about others. Economists offer several answers to this concern. Offer two economist responses with explanation.

Philosophers draw a distinction between positive statements, which describe the world as it is, and normative statements, which describe how the world should be. In the study of economics, positive and normative arguments often blend into each other. Second, self-interested behavior and profit-seeking can be labeled with other names, such as personal choice and freedom. Third, self-interested behavior can lead to positive social results. For example, when people work hard to make a living, they create economic output. Fourth, even people who focus on their own self-interest in the economic part of their life often set aside their own narrow self-interest in other parts of life

Define Productive Efficiency and Allocative Efficiency.

Productive efficiency means that, given the available inputs and technology, it is impossible to produce more of one good without decreasing the quantity that is produced of another good. Allocative efficiency means that the particular mix of goods being produced—that is, the specific choice along the production possibilities frontier—represents the allocation that society most desires

Define the term "sunk costs" and illustrate with an example.

Sunk costs, which are costs that were incurred in the past and cannot be recovered. Consider the case of Edgar who pays $8 to see a movie, but after watching the film for 30 minutes he knows that it's truly terrible. Should he stay and watch the rest of the movie because he paid $8, or should he leave? The money he spent is a sunk cost and unless the theater manager is feeling kindly, Edgar won't get a refund. But staying in the movie still means paying an opportunity cost in time. Thus, Edgar's choice is whether to spend the next 90 minutes suffering through a cinematic disaster or to do something— anything—else. The lesson of sunk costs is to forget about the money that's irretrievably gone and instead to focus on the marginal costs and benefits of future options.

When economists analyze how individuals make choices, they divide the decision process into two steps. Define these two steps and label the resultant model.

The first step is to consider what choices are possible for individuals. The second step is to think about which choices individuals actually make, based on their individual preferences. The model that economists use for illustrating the process of individual choice in a situation of scarcity is the budget constraint, sometimes also called the opportunity set, a diagram which shows what choices are possible.

Explain the Law of Diminishing Returns and illustrate with a relevant example.

The law of diminishing returns holds that as additional increments of resources are added to a certain purpose, the marginal benefit from those additional increments will decline. Example: When government spends a certain amount more on reducing crime, for example, the original gains in reducing crime could be relatively large. But additional increases typically cause relatively smaller reductions in crime, and paying for enough police and security to reduce crime to nothing at all would be tremendously expensive.

The two main tools of macroeconomic policy include monetary policy and fiscal policy. Briefly describe the main components of each.

The two main tools of macroeconomic policy include monetary policy, which involves policies that affect bank lending, interest rates and financial capital markets, and fiscal policy, which involves government spending and taxes.

Macroeconomics primarily examines:

broad issues such as national output, employment and inflation

In a market-oriented economy, the amount of a good that is produced is primarily decided by the interaction of:

buyers and sellers

Specialization

can lead to an increase in overall production