Econ 1 Ch 1-3

Suppose Martin just bought a guitar from Jackson off Craigslist for $110. Martin's reservation price was $140, and Jackson's reservation price was $100. The seller's surplus from this transaction was ___

$10. ($110-$100 = $10)

You are considering whether to go see a movie. The movie last 2 hours and tickets are $15 each. Assuming there is no other costs associated with going to a movie, your opportunity cost of going to a movie is...

$15 plus the value of whatever else you would have done for those 2 hours.

You are considering whether to knit a sweater for your mom's birthday. You estimate that the cost of the yarn and other materials will be $20. In addition, you estimate that it will take you about 30 hours to knit the sweater. Given that you value your time at $5 per hour, what is the opportunity cost to you of knitting the sweater?

$170. All costs, both explicit and implicit, are considered opportunity costs.

Anita knits scarves that sells on Etsy.com. When she knits 12 scarves a week her total cost is $144, and when she knits 13 scarves a week, her total cost is $169. Thus her marginal cost of knitting the 13th scarf is...

$25

Suppose a parking garage charges a fee of $1 plus an additional 50 cents for every hour you park there. If you park in the garage for 4 hours, then you will pay a total of...

$3

Suppose Martin just bought a guitar from Jackson off Craigslist for $110. Martin's reservation price was $140, and Jackson's reservation price was $100. The buyer's surplus from this transaction was...

$30. ($140-$110 = $30)

Suppose Martin just bought a guitar from Jackson off Craigslist for $110. Martin's reservation price was $140, and Jackson's reservation price was $100. The total surplus from this transaction was _____

$40. ($140-$100 = $40)

Buzz takes 10 minutes to make a pot of coffee and 40 minutes to make a loaf of banana bread. What is Buzz's opportunity cost of making a loaf of banana bread?

4 pots of coffee

Suppose you need to buy a new phone charger. You can buy one at a nearby store for $10 or you can buy one online for $8.50, but it'll take 2 days to arrive. If the cost to you of waiting two days to get the charger is $1, then your economic surplus from buying the charger online instead of at the store is..

50 cents

Sunk cost

A cost that is beyond recovery at the moment a decision must be made.

Which of the following factors will lead to an increase in supply?

A decrease in the cost of inputs to the production process; a technological advance that lowers production costs.

Which of the following factors will lead to a decrease in demand?

A decrease in the price of a substitute; a decrease in the population of potential buyers.

Production Possibilites Curve (PPC)

A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good.

The Equilibrium Principle (No-Cash-on-the-Table Principle)

A market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action.

In which of the following situations is the market equilibrium likely to be economically inefficient?

A market in which the production/consumption of the goods entails a significant cost to others (pollution from the production process/cigarettes and second-hand smoke).

Equation

A mathematical expression that describes the relationship between two or more variables

The Incentive Principle

A person (or a firm or a society) is more likely to take an action if its benefit rises, and less likely to take an action if its cost rises. In short, incentives matter. A positive economic principle.

Constant

A quantity that is fixed in value

Variable

A quantity that is free to take on different values.

Demand curve

A schedule or graph showing the quantity of a good that buyers wish to buy at each price (downward sloping).

Dependent variable

A variable in an equation whose value is determined by the value taken by another variable in the equation.

Independent Variable

A variable that determines the value of another variable in an equation

Joe and Rachel are roommates. Rachel takes 10 minutes to do the dishes, and Joe takes 15 minutes to do the dishes. So, we know that Rachel has a _____ advantage in washing dishes.

Absolute (Rachel takes less time to do the dishes than Joe)

The Scarcity Principle (No-Free-Lunch Principle)

Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another. A fundamental fact of life for everyone.

Amber takes 15 minutes to make a pot of coffee and 30 minutes to make a loaf of banana bread. Buzz takes 10 minutes to make a pot of coffee and 40 minutes to make a loaf of banana bread. Who has the comparative advantage in making banana bread.

Amber since Amber's opportunity cost of making a loaf of banana bread is 2 pots of coffee. Buzz's opportunity cost of making a loaf of banana bread is 4 pots of coffee. So Amber has the comparative advantage over Buzz in making banana bread.

Cost-Benefit Principle

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs. A normative principle.

If Cathy has an absolute advantage over Reid in cooking dinner, then...

Cathy takes less time to cook dinner than Reid.

The Principle of Comparative Advantage

Everyone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is lowest

Hazel and Rusty are farmers. Each year, Hazel can either grow 100 bushels of tomatoes or 50 bushels of green beans, and Rusty can either grow 60 bushels of tomatoes or 20 bushels of green beans. Who has the absolute advantage in growing tomatoes?

Hazel since she can grow more tomatoes than Rusty.

Slope

In a straight line, the ratio of the vertical distance the straight line travels between any two points (rise) to the corresponding horizontal distance (run).

The Principle of Increasing Opportunity Costs (Low-Hanging-Fruit Principle)

In expanding the production of any goods, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs.

Suppose Sean makes 10 tables a month, each of which he can sell for $200. Given that the average cost of making each table is $150, should Sean make more or fewer tables each month?

It's impossible to tell. Sean should base his decision on the marginal cost and marginal benefit of making another table. The average cost of the table is not same as the marginal cost of making a table. Thus, there's not enough information to determine what Sean should do.

Martha and Jamie work in a bakery. Martha takes 2 hours to make a cake and 2 hours to make a pie, and Jamie takes 4 hours to make a cake and 1 hour to make a pie. If the bakery exclusively makes cakes, but decides it wants to sell a few pies (and not so many cakes), then which one of them should spend less time making cakes in order to make pies?

Jamie because Jamie's opportunity cost of making a pie is 1/4 of a cake, and Martha's opportunity cost of making a pie is 1 cake, so it makes sense for Jamie to make pies.

Bella and Linda work in a beauty salon, either coloring or cutting people's hair. If Belle colors someone's hair, she gives up 4 haircuts. If Linda colors someone's hair, she gives up 3 haircuts. Who has a comparative advantage in coloring someone's hair?

Linda since her opportunity cost of coloring someone's hair is less than Belle's opportunity cost of coloring someone's hair.

Martha takes 2 hours to make a cake and 2 hours to make a pie, and Jamie takes 4 hours to make a cake and 1 hour to make a pie. Thus, we both know Martha and Jamie can be made better off if _____ specializes in making cakes and ____ specializes in making pies.

Martha; Jamie since Jamie has a comparative advantage in making pies and Martha has a comparative advantage in making cakes. Each should specialize in making the good at which they have a comparative advantage.

Suppose that Miles and Frank are both architects. Miles has a comparative advantage over Frank in designing skyscrapers. Why might this arise?

Miles has more innate ability, experience, and training than Frank.

If Jason's reservation price for a pound of apples is $1.40, and the market price for a pound of apples is $1.52, will Jason buy a pound of apples?

No since his reservation price is below the market price.

Suppose you pay $35 to reserve a camp site at a local state park. The rules specify that you can only receive a refund if you cancel your reservation 2 weeks before your trip. Several days before your trip, you learn that it's supposed to rain the whole time you had planned to camp, and you are having second thoughts about going. Should the $35 you paid for the camp site factor into your decision about whether to go camping?

No. Several days before your trip, the $35 you paid for the camp site is a sunk cost (regardless of whether you go camping or not, the $35 is gone). So the $35 you paid for the camp should not factor into your decision about whether to go camping.

Suppose Warren, who owns a bakery, is deciding whether to increase his daily production of cakes. All of Warren's cakes sell for $40 each, and the average cost of making each cake is $35. Is this enough information to decide whether Warren should increase his production of cake?

No. Warren should base his decision on the marginal benefit and marginal cost of making an additional cake, but the question does not tell us the marginal cost of making a cake. Average cost and marginal cost are not the same.

Comparative advantage

One person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person's opportunity cost

Positive/Descriptive economic principle

One that describes how people will actually behave

Normative economic principle

One that provides guidance about how people should behave

The introduction of rent controls could lead to which of the following.

Poorer maintenance of rent-controlled apartments; discrimination against tenants on the basis of race, religion, or other factors.

Which of the following kinds of jobs are likely to be vulnerable to outsourcing?

Rule-based jobs that can be broken down into a series of well-defined tasks and jobs that do not require workers to be physically present to complete the job.

Rational individual

Someone with well-defined goals who tries to fulfill those goals as best he or she can

Economic surplus

The benefit of taking an action minus its cost.

Factors that are likely to affect a country's comparative advantage:

The country's climate, institutions, culture, and natural resources.

Marginal benefit

The increase in total benefits that results from carrying out one additional unit of the activity

Marginal cost

The increase in total cost that results from carrying out one additional unit of an activity

Economics

The study of how people make choices under conditions of scarcity and of the results of those choices for society.

Average benefit

The total benefit of undertaking "n" units of an activity divided by "n"

Average cost

The total cost of undertaking "n" units of an activity divided by "n"

Opportunity cost

The value of what must be forgone to undertake an activity; both explicit costs and implicit costs

Vertical intercept

The value taken by the dependent variable when the independent variable equals zero.

Suppose you plan to buy a new pair of cleats and a new pair of shin guards at your local sporting good store. You have a 10% coupon for the cleats and a 50% off coupon for the shin guards. If soccer cleats are $70 and shin guards are $10, and the store will only accept one coupon per customer, then which coupon should you use?

Use the 10% coupon for the cleats because it's a bigger dollar savings.

An increase in the supply of corn (a rightward shift in the supply curve) could be the result of _______ in the price of an input to the production of corn.

a decrease

If the price of cheese increases, then this should lead to ______ in supply of pizza.

a decrease (An increase in the price of an input will lead to a decrease in supply)

If butter and popcorn are compliments, then an increase in the price of popcorn will lead to...

a decrease in the equilibrium price of butter; a decrease in the equilibrium quantity of butter.

If people who currently own homes learn that home prices are likely to go up in their area next year, then this should lead to ____ in the current supply of homes.

a decrease. (If people believe that home prices are going to go up next year, this may lead them to delay selling their homes for a year, thereby decreasing current supply)

Supply curve

a graph or schedule showing the quantity of a good that sellers wish to sell at each price (upward sloping with respect to price)

Price ceiling

a maximum allowable price, specified by law. If price ceiling is set above the equilibrium price, there will be no effect on the market since there is no tendency for prices to rise about the equilibrium price.

Price floor

a minimum allowable price, specified by law

Change in the quantity demanded

a movement along the demand curve that occurs in response to a change in price

Change in quantity supplied

a movement along the supply curve that occurs in response to a change in price

If your cousin gets a big raise to work, and as a result, goes out to eat more often, then this suggests that for your cousin restaurant meals are ____

a normal good.

Change in supply

a shift in the entire supply curve.

Change in demand

a shift of the entire demand curve

Outsourcing

a term increasingly used to connote having services performed by low-wage workers overseas

Economic efficiency occurs when...

all goods and services are produced and consumed at their socially optimal levels.

If bagels and cereal are substitutes, then a decrease in the price of bagels will lead to _____ in the demand for cereal

an increase

Prozac and Wellbutrin are both prescription medications to treat depression. If the price of Prozac increases, then this should lead to...

an increase in the price of Wellbutrin; an increase in the number of people who use Wellbutrin.

If a late frost damages a part of this year's orange crop, this should lead to...

an increase in the price of oranges; a decrease in the number of oranges bought and sold in the market.

If the price of sugar falls, this is likely to lead to _____ in the supply of candy.

an increase. (Decrease in the price of an input will lead to an increase in the supply)

Efficient point

any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the other

Inefficient point

any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other

Attainable point

any combination of goods that can be produced using currently available resources

Unattainable point

any combination of goods that cannot be produced using currently available resources

A bow-shaped production possibility curve that become steeper as production of the good on the x-axis increases reflects the fact that...

as you produce more of the goods on the x-axis, the opportunity cost of producing that good increases.

Increasing opportunity cost is reflected in a production possibilities curve that is...

bow-shaped. Opportunity cost is reflected in in the slope of the PPC, if the PPC is bow-shaped (so that the PPC becomes steeper as production of the good on the x-axis increases), then this implies that the opportunity cost of producing the good on the x-axis increases as production of that curve increases.

Martha takes 2 hours to make a cake and 2 hours to make a pie, and Jamie takes 4 hours to make a cake and 1 hour to make a pie. So, Martha has a comparative advantage over Jamie in making...

cakes. Martha's opportunity of making a cake is 1 pie, and Jamie's opportunity cost of making a cake is 4 pies, so we know Martha has a comparative advantage over Jamie in making cakes because her opportunity cost is lower than Jamie's.

The reason why countries trade with one another is that each country can benefit by specializing in the production of the goods and services at which they have a ______ advantage

comparative

If the demand for ketchup decreases when the price of hot dogs increase, then this suggests that ketchup and hot dogs are...

complements

A technological innovation that reduces the cost of extracting natural gas from the earth's surface should...

decrease the price of natural gas; increase the quantity of natural gas bought and sold in the market.

If the price of butter increases, the quantity of butter demanded will___

decrease.

You observe that the price of books has gone down at the same time that the number of books bought and sold in the market has decreased. The best explanation for this is that the...

demand for books has decreased.

The reason why some people are opposed to free-trade agreements such as NAFTA is that free trade...

doesn't guarantee that each individual in each country will be better off. Although free trade increases the total value of goods and services produced by a country, some segments of the economy may be hurt by free trade.

The fact that people do not always consciously weigh costs and benefits when making decisions...

doesn't mean that economic models aren't useful for predicting behavior.

Specialization tends to be greater than when it's ____ for individuals to interact with one another in market settings.

easy

You're trying to decide whether to go for a run. If you don't go for a run, you'll either watch TV or do your homework. Your opportunity cost of going on a run is ...

either the value you place on watching TV or the value you place on doing homework, whichever is larger.

When the price is below the equilibrium price...

excess demand gives buyers an incentive to bid up the price

When the market price is above the equilibrium price...

excess supply gives sellers an incentive to lower their price.

The fact that the production possibility curve is downward sloping illustrates the idea that...

having more of one thing generally means having less of something else.

When deciding to take an action, one common decision pitfall is to...

ignore the implicit cost of the action.

Suppose that as the price of movie tickets increase, people stop going to the movies as often because they can no longer afford to do so. This reduction in the quantity of movie tickets demanded is known as the _____ of a price change

income effect

Given that paper is made from wood, a decrease in the price of would should...

increase the quantity of paper bought and sold in the market; decrease the price of paper.

The population of Latvia has declined by over 20% since the country's split with the Soviet Union. All else equal, a decline in population will...

lead to an inward shift of the production possibilities curve. As a population falls, a country's total output will fall.

Any government policy that makes it easier to either more difficult or costly for individuals to trade with one another is likely to _____ specialization.

limit

Low population tends to ______ specialization.

limit

One common decision pitfall is to...

measure costs and benefits as proportions rather than absolute dollar amounts.

Absolute advantage

one person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person

Suppose you need to buy a new phone charger. You can buy one at a nearby store for $10 or you can buy one online for $8.50, but it'll take 2 days to arrive. According to the Cost-Benefit Principle, you should buy the cell phone charger...

online if the cost to you of waiting 2 days is less than $1.50

A new government policy that encourages investments in new factories and equipment is likely to cause an ____ shift in an economy's production possibilities curve.

outward

Economic growth is represented by an ____ shift in a country's production possibilities curve.

outward

In the long run, a government program to subsidize education is likely to lead to an...

outward shift in a country's production possibilities curve.

As price increases...

quantity demanded decreases.

When making a decision, sunk costs...

should be ignored.

Suppose that as the price of pencils increases, people buy fewer pencils and instead use pens. The resulting reduction in the quantity of pencils demanded is known as the _____ of a price change.

substitution effect

Relative to the summer months, people have less exposure to the sun during the winter. Thus, relative to the summer, we can expect...

the amount of sunscreen bought and sold in the market to be lower in the winter; the price of sunscreen to be lower in the winter; the demand for sunscreen to be lower in the winter.

Substitution effect

the change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes.

Income effect

the change in the quantity demanded of a good that results because of a change in the price of a good changes the buyer's purchasing power.

Buyer's surplus

the difference between the buyer's reservation price and the price he or she actually pays.

Total surplus

the difference between the buyer's reservation price and the seller's reservation price

Seller's surplus

the difference between the price received by the seller and his or her reservation price

Suppose the demand for gasoline increases at the same time the supply of gasoline falls, then we know that...

the equilibrium price of gasoline will go up but the equilibrium quantity could go up or down.

The idea that because resources are limited, having more of one thing generally means having less of another is captured by the fact that...

the production possibilities curve is downward sloping.

Socially Optimal Quantity

the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good

Seller's reservation price

the smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost

Microeconomics

the study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets

Failure to achieve economic efficiency means that...

total economic surplus is not maximized; everyone in the economy could be made better off.

Complements

two good are complements in consumption if an increase in the price of one causes a leftward shift in the demand curve for the other (or if a decrease causes a rightward shift)

Substitutes

two goods are substitutes in consumption if an increase in the price of one causes a rightward shift in the demand curve for the other (or if a decrease causes a leftward shift)

Suppose Tom and Ray are auto mechanics. If we want to know which one has a comparative advantage in performing oil changes, then we would want to know...

which one has the lowest opportunity cost of performing an oil change.