Econ Test 1
The __________ suggests that decisions about quantities are best made incrementally.
marginal principle
Law of Supply
Tendency of suppliers to offer more of a good at a higher price
The cost-benefit principle states that _____ are the incentives that shape decisions.
costs and benefits
increasing opportunity costs have a ____ graph
curved
The law of diminishing marginal utility means that that as person receives more of a good, the added utility from each additional unit
decreases.
Fixed factor
do not change with output
3 factors of production
land, labor, capital
Nerida Kyle could either commute to work via Uber or purchase a new car. The average cost of her one-way Uber trip is $15. Nerida works five days a week for 50 weeks a year. Based solely on avoiding the cost of an Uber, Nerida should purchase a car if the cost of the car is _____ than _____ per week.
less; $150
when the consumption of an additional unit of a good or service makes a person worse off
negative marginal utility
The opportunity costs of attending college include the:
potential income that could be earned working..
MR=MC
profit maximization
Opportunity cost arises from the fundamental economic problem of
scarcity
The study of economics arises because of the necessity of choice, and the necessity of choice arises because of the fundamental problem of:
scarcity
Gabriella starts using a new baking technique, and she can now do twice as much of everything. In a single day, Gabriella can now bake 10 muffins or eight cookies, rather than the five muffins and four cookies she could previously bake. Gabriella's production possibility frontier has _____, and her opportunity cost of making cookies _____.
shifted right; is unchanged
The marginal cost of an additional worker is
the additional cost of hiring one more worker.
all factors are _____ in the long run
variable
diminishing marginal utility
when the consumption of an additional unit of a good or service provides the person with a smaller increase in satisfaction than previous units
The marginal principle helps individuals decide:
whether to do a bit more of an activity or a bit less of it.
Kevin Williamson goes to a local coffee shop and orders a medium-sized latte. His willingness to pay for that latte is $6. The price of the latte is $2. The cost to the coffee shop to produce the latte is $1. How much economic surplus does Kevin gain when he purchases the latte?
$4
capitalism
- capital (means of production) is privately owned -social programs are possible through taxation
Describe economic decision making at the margin for buyers
-Declining marginal benefit -buy if MB>Price -wont buy if Price>MB
determinants of the market demand for a good
-consumer preferences -income -price of related goods -market size -congestion and network effects -expectations about the future
socialism
-govt owns the means of production and directs its use -NOT THE SAME as social programs
describe how demand changes with complement goods
-negative price relationship -buy less when other price rises
substitutes in production
-negative price relationship -supply decreases when other price rises (ex: supply of sweaters decreases when price of scarves rise)
describe how demand changes with substitute goods
-positive price relationship -buy more when other price rises
complements in production
-positive price relationship -supply increases when other price rises
determinants of the market supply of a good
-production costs (input prices) -technology (productivity) - prices of related outputs -market size (# of firms) -expectations about the future
why does price change?
-role of prices: regulator, invisible hand, allocation of resources -Market equilibrium: MB=MC, QD=QS -Market dynamics: changes in determinants of supply and demand
Describe economic decision making at the margin for sellers
-sell if price>mc -stop when price=mc -wont sell if MC>price
Rational Rule for Markets
MB=MC
Rational Rule for Buyers
MB=Price
Rational Rule for Sellers
MC=Price
Optimal consumption point
MRS=Price Ratio
Bang for your buck equation
MU1/P1=MU2/P2
Budget Line Equation
P1Q1+P2Q2=Y
After a global pandemic increases demand for PPE AND increases supply of PPE, equilibrium quantity increased. What will happen to equilibrium price?
The change in price depends on the relative size of the change in demand and the change in supply.
Which principle tells you that the true cost of something is the next best alternative you have to give up to get it?
The opportunity cost principle.
quantity demanded
a specific amount at a specific price
command economy
an economy in which production, investment, prices, and incomes are determined centrally by a government. focuses on equity
market economy
an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. focuses on efficiency
law of diminishing marginal product
as a firm uses more of a variable factor of production, with a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes
The key to using the cost-benefit principle is to think about _____ aspects of a decision.
both financial and nonfinancial
In a voluntary economic transaction between a buyer and a seller, _____ can earn economic surplus from the transaction.
both the buyer and the seller
inferior goods
buy less when income increases
normal goods
buy more when income increases
Marginal utility equation
change in total utility/change in quantity consumed
variable factor
change with output
communism
community owns the means of production and makes joint decisions about its use
You are considering whether you should go out to dinner at a restaurant with your friend. The meal is expected to cost you $50, you typically leave a 20% tip, and a round-trip Uber ride will cost you $15. You value the restaurant meal at $30 and the time spent with your friend at $50. You should ____ to dinner with your friend because the benefit of doing so is _____ than the cost.
go; greater
Jonathan Mendez is deciding whether to study for his economics exam at a café down the street or go to a concert a few cities over. The time spent commuting to the concert is ____ in his opportunity cost calculations and represents a _____ cost.
included; nonfinancial
The production process for making Coke produces excess water, which is bottled and sold as Dasani Water. An increase in the price of Coke will
increase the supply of Dasani.
After a global pandemic increases demand for PPE, we expect that equilibrium price will ___ and equilibrium quantity will ____.
increase; increase
marginal cost of production ___ as quantity ____
increases; increases
Suppose Martha consumes tofu and peanut butter. Which describes Martha's marginal rate of substitution for tofu and peanut butter? the amount of tofu she needs in order to consume one less unit of peanut butter while remaining just as well off the consumption bundle of tofu and peanut butter that yields the greatest satisfaction how much tofu and peanut butter she can purchase if prices change the change in how much tofu and peanut butter she can purchase if her income changes
the amount of tofu she needs in order to consume one less unit of peanut butter while remaining just as well off
demand
the entire relationship between price and quantity for a good. A set of prices/quantities that consumers are willing to buy
marginal utility
the extra satisfaction a person obtains from consuming one more unit of a good or service
law of demand
the quantity demanded is higher when the price is lower
The short run is a period of time in which
the quantity of at least one factor of production is fixed.
marginal rate of substitution
the rate at which a person will give up good y to get an additional unity of good x while at the same time remaining indifferent (same level of utility)
Utility is the measure of
the relative satisfaction, enjoyment, or contentment a person receives from consuming a good or service.
utility
the satisfaction experienced from consuming a good or service
long run
the time period in which all inputs can be varied
short run
the time period in which at least one input is fixed
The opportunity cost of a good is:
the value of the next best alternative given up to acquire the good.