ECON101 EXAM 1: Principles of Economics

What are the two sections of Labor?

- Physical Labor (muscle power) - Innate Ability (what you're born with)

What are not Capital in economics terms?

- Stocks - Bonds

What are the three ways Theories are illustrated?

- Tables - Graphs - Equations

What are 4 examples of Macroeconomics?

- Wages - Prices - Output (GDP, total value of output inns) - Employment

What are 4 examples of Microeconomics?

- Wages - Prices - Output (income of a specific company) - Employment

Theory (Model)

An explanation of how facts are related and shows a simplified representation of the way in which facts are related. Alternative Definition: Logical explanation of why facts fit together in a particular way.

Two goods are substitutes if a decrease in the price of one good,

Decreases the demand for the other good

What does a Demand Curve look like?

Downward sloping to the right

The opportunity cost of taking a semester-long economics class is...

Equal to the highest value of an alternative use of the time and money spent on the class.

Specialization

Essential in achieving efficiency in the use of resources. --> Enhances society's output

What does the term Marginal Analysis mean?

Refers to an analysis that involves examining a small increase or decrease in a particular economic activity.

The Income & Substitution Effects __________ each other.

Reinforce

The study of economics exists because:

Resources are scarce in relation to economic wants

What is the definition Allocative Efficiency?

Resources are used to obtain the particular mix of products society wants the most.

What are the two key factors underlying economics?

SCARCITY & CHOICE

What type of shift is Demand?

SHIFTS ENTIRE CURVE

CHANGES IN DEMAND

SHIFTS ENTIRE CURVE Increase in D --> Qd is more at each price Decrease in D --> Qd is less at each price

CHANGES IN SUPPLY

SHIFTS ENTIRE CURVE Increase in S --> Qs is more at each price Decrease in S --> Qs is less at each price

As a student of economics, when you speak of scarcity, you are referring to the ability of society to:

Satisfy economic wants given limited resources

Who is the main focus of Supply?

Sellers or Firms (Business, Producers, etc.)

Suppose there is an increase in the price of steel. We would expect the supply curve for steel barrels to:

Shift leftward

What does Specialization enhance?

Society's output

A General Principle about Marginals & Totals:

Sum the marginals to a given level and you will find the total at that level.

Why does the Marginal Benefit slope downward?

The more of you have of a good/service, the less extra satisfaction one will receive from consuming an extra unit.

Social Capital

The networks of relationships among people who live and work in a particular society, enabling that society to function effectively.

What does Utility mean?

The pleasure or satisfaction gotten from consuming goods and services. HAPPINESS!

What would cause a movement upward and to the right along the supply curve for tomatoes?

The price of tomatoes rises

What does Technology mean in terms of economics?

The processes used by a firm to produce goods and service. (A firm's technology depends on things such as skill of the managers, training of its workers, speed and efficiency of its machinery and equipment).

What does Effective Demand mean?

The quantity of a good that purchasers are willing and able to buy at a particular price, other factors the same.

How does a decrease in quantity demand effect price?

Raised price

Tammie makes $150 a day as a bank clerk. She takes off two days of work without pay to fly to another city to attend the concert of her favorite music group. The cost of transportation for the trip is $250. The cost of the concert ticket is $50. The opportunity cost of Tammie's trip to the concert is:

$600

What are 3 ways Specialization achieves efficiency?

- Ability Differences - Learning by Doing - Saving Time

Why do economists disagree?

- About the validity of the theory - How to apply a theory

What are the 4 main Factors of Production (Resources)?

- Labor - Capital - Land - Entrepreneurship

What are 2 other words for Economic Perspective?

- Marginal Analysis - Economizing Problem

What are the two sections of Capital?

- Physical Capital - Human Capital

3 Criteria for Evaluating Public Policies:

1. Efficiency (Technical Productive, Allocative) A. Max the benefits for a given cost level B. Achieve a given level of benefits at a min. cost 2. Equity, Equality, Fairness 3. Liberty A. Each individual has the right to act in accordance with private choice, free from threats or coercion by others.

What are the 4 assumptions underlying the construction of the PPC curve?

1. Full Employment & Full Production 2. Only 2 Products: X & Y 3. Fixed Resources 4. Fixed Technology

What are the 4 characteristics of Capital as defined by economists?

1. It is "people-made" 2. Takes current resources to produce 3. Enhances future production 4. Can increase through investment

What are the 3 Steps of Marginal Analysis?

1. What are the choices? A or B? 2. Given the choices, what are the opportunity costs of A, both explicit and implicit. (Which costs are avoidable? That is, which costs are recoverable at the time the decision is being made? These are the opportunity costs associated with the choice.) 3. Add up the opportunity costs, and compare to the benefits associated with the choice. If extra benefits of choice A exceeds the extra costs, choose A. If not choose B.

Suppose a gardener produces both green beans and corn in her garden. If the opportunity cost of one bushel of corn is 3/5 bushel of green beans, then the opportunity cost of 1 bushel of green beans is...

5/3 bushels of corn

What is an example of a "good" Capital?

A Factory -Buildings, machines, distribution, storage, transportation, systems, highways

Which will not cause the supply curve to shift?

A change in the price of the good

What does Market Equilibrium mean?

A condition in which the separately formulated plans of buyers and sellers of some good exactly mesh when tested in the marketplace, so that quantity supplied is exactly to the quantity demanded at the prevailing price.

What are Sunk Costs?

A cost that has already been incurred and cannot be recovered.

What would result in an increase in equilibrium price and and ambiguous change in equilibrium quantity?

A decrease in supply and an increase in demand

What would cause a decrease in the quantity supplied of computers?

A decrease in the demand for computers

What would most likely have caused the production possibilities frontier to shift outward from A to B?

A general technological advance

Inferior Good

A good for which an increase/decrease in the income of buyers causes a leftward/rightward shift in the demand curve. (Inverse Relationship)

Normal Good

A good for which an increase/decrease in the income of buyers causes a rightward/leftward shift in the demand curve. (Direct Relationship)

How does an increase in Quantity Supplied effect price?

Raise Price

What does a Production Possibilities Frontier (Curve) Show?

A graph showing the maximum possible combinations of goods that can be produced in an economy given the available factors of production and technology.

What does the term Rationing mean?

A method of allocating scarce resources and consumer goods.

Complements

A pair of goods for which an increase/decrease in the price of one causes an decrease/increase in the demand for the other, other things being equal. (Inverse Relationship)

Substitutes

A pair of goods for which an increase/decrease in the price of one causes an increase/decrease in the demand for the other, other things being equal. (Direct Relationship)

The current deep recession with a large number of workers and factories unemployed would be represented in a production possibilities frontier graph by:

A point inside the PPC

Unemployment is illustrated by:

A point inside the production possibilities curve

What does Equilibrium mean?

A position which if you attain it there is no incentive to change.

What does Demand mean?

A relation showing the various maximum amounts of a commodity that buyers would be willing and able to purchase at different prices, during a given period of time, holding all factors the same (Ceteris Paribus).

Scarcity

A situation in which there are not enough resources to produce the goods and services necessary to meet all wants and needs of people in the economy.

Marginal

A small change in a particular activity.

All of the following are held to be constant when the supply curve for a product is drawn , except the: A. Price of the product B. State of technology C. # of producers D. Price of inputs used to make the product

A. Price of the product

What type of shift is Quantity Demanded?

ALONG THE CURVE

CHANGES IN QUANTITY DEMANDED

ALONG THE CURVE Increase in Qd --> Lower Price Decrease in Qd --> Higher Price

Entrepreneurship

Accepting the risk of starting and running a business. --> Most fail, but they're necessary for market economies to survive. (Elon Musk, Jeff Bezos, Bill, Gates)

What is Productive (Technical) Efficiency?

Acting with minimum of expense, effort, and waste. Produce goods at least cost. (Maximize the value of the resources, minimize the cost of producing goods/services)

Land

All natural resources used to produce goods and services - Oil, water, forests, minerals, etc.

Economy

Any system for producing, consuming, and distributing the output of goods and services (i.e. distributing wealth and income)

Why does the Marginal Cost curve slope upward?

As a business produces more of a good/service the extra units of the good will cost more.

What is a Shortage?

As used in economics, an excess quantity demanded, at any given price.

What does Surplus mean?

As used in economics, an excess quantity supplied, at given price.

What does Diminishing Marginal Utility mean?

As you increase the consumption of good x, the Marginal Utility will eventually decline.

A point inside the production possibilities curve is:

Attainable, but the economy, is inefficient

Which of the following is an example of a normative statement? A. If the price of a product decreases, people's willingness to buy that product will increase. B. Reducing tax rate on the wealthy would benefit the nation. C. If the national saving rate were to increase, so would the rate of economic growth. D. All of the above

B. Reducing tax rate on the wealthy would benefit the nation.

Each of the following is a determinant of demand except... A. Tastes B. Technology C. Expectations D. The prices of related goods

B. Technology

Suppose a cell-phone manufacturer currently sells 20,000 cell-phones per week and makes a profit of $8000 per week. A manager at the plant observes, "Although the last 4,000 cell phones we produced and sold increased our revenue by $6,100 and our costs by $6,900, we are still making an overall profit of $5,000 per week so I think we're on the right track. We are producing the optimal (best) number of cell phones." Had the firm not produced and sold the last 4,000 cell phones, would its profits be higher or lower, and if so by how much? A. It's profits would be $700 lower B. It's profits would be $700 higher C. It's profits would be $800 higher D. It's profits would be $6100 higher

C. It's profits would be $800 higher

Which is an illustration of a microeconomic question? A. What is the current national rate of unemployment? B. Is the economy experiencing a decline in the rate of inflation? C. Will a new type of television set increase the # of buyers? D. Is the production of goods and services in the economy greater this year than last year?

C. Will a new type of television set increase the # of buyers?

Clara states that "there is a high correlation between the level of people's education and the level of their income." Ellie replies that the correlation occurs because "more education is the best way to earn more income in this country." Which statement is normative positive?

Clara's - Positive Ellies - Normative

People demand more of product X when the price of product Y decreases. This means X and Y are:

Complements

Substitution Effect

Consumers react to an increase in a good's price by consuming less of that good and more of other goods

Economics promotes which of the following as the way to make the best decision?

Continue an enjoyable activity up to the point where its MB = its MC

True or False? Consider the production possibilities curve for a country that produces only 2 goods: tractors and pineapples. Suppose that it is not possible for this country to increase its production of pineapples without producing fewer tractors. The current output combination is inefficient.

False

True or False? The basic difference between the concepts of "scarcity" and a "shortage" is that scarcity can be eliminated by allowing the price of a product to rise while that is not the case for shortage.

False

T/F Poverty and scarcity mean the same thing.

False - Poverty can be defined, statistics are available - Scarcity cannot be solved

T/F Suppose you are given $10 billion with which you can do anything you choose. Therefore, one can assert that you are no longer subject to scarcity.

False - You can't get rid of scarcity

The following is how we defined a free good: "A good which if its price is zero people will want to consume more of it than is available."

False A Free Good is when the amount available is greater than the amount people want at a zero price.

True or False? Sunk costs refer to costs that are avoidable at the time that an individual is making a decision about whether or not to undertake a particular activity.

False Sunk costs are unavoidable

An economic outcome is said to be efficient if the economy is:

Getting all it can get from the scarce resource it has available

A point outside the PPC is unattainable because:

Given society's available resources and technology

Macroeconomics

Has to do with the overall economy (aggregates). - Wages - Prices - Output (GDP, total value of output inns) - Employment

Microeconomics

Has to do with the small parts comprising the economy. - Wages - Prices - Output (income of a specific company) - Employment

An increase in demand for oil and an increase in supply of oil will:

Increase quantity, but whether it increases price depends on how much each curve shifts

3 Main Constraints of Marginal Analysis

Individuals - Income, price, time Business - Price of inputs, production techniques, firm revenues Governments - Revenues for budgets, prices of inputs

Scarcity & Choices

Individuals, firms, and the government face constraints because of scarcity.

What causes Choice?

Limited Resources

How does a decrease in Quantity Supplied effect price?

Lower Price

How does an increase in quantity demand effect price?

Lower price

CHANGES IN QUANTITY SUPPLIED

MOVE ALONG CURVE Increase in Qs --> Higher Price Decrease in Qs --> Lower Price

What type of shift is Quantity Supplied?

MOVE ALONG THE CURVE

From an economic perspective, when consumers leave a fast-food restaurant because the lines to be served are too long, they have concluded that the:

Marginal cost of waiting is greater than the marginal benefit of being served.

What is the Household Objective of Supply?

Maximize Satisfaction

Capital

Money for investment

Private Capital

Money invested in a business by an individual or a group of individuals

What is required during an Exchange?

Motivation & Incentive

Positive or Normative? "Economics is twice as interesting to study as philosophy."

Normative

Positive or Normative? "If rental housing is to be reasonably priced, rent controls are necessary."

Normative

Positive or Normative? "In order to save Social Security, the rich must be taxed at higher rates compared to low and middle income earners."

Normative

The production possibilities curve bows outward from the origin because:

Opportunity costs increase as the production of a good increases

What are Explicit Costs?

Opportunity costs where actual dollars change hands.

What are Implicit Costs?

Opportunity costs where no actual market transaction takes place.

PYNTE

P - Prices of Related Goods (Substitutes & Complements) Y - Income (Inferior & Normal Goods) N - Number of Consumers T - Tastes & Preferences E - Expectations

What acronym is used for the Determinants of Demand?

PYNTE

Sanction

Penalty for disobeying a law

Rational/Purposeful Behavior

Players in the system use available information as they act to achieve their goals, most effective way possible

Positive or Normative? "Fixing the price of rental housing below the market level causes the quantity (and quality) of available rental housing to decline."

Positive

Positive or Normative? "The health status of the elderly will improve as a result of the Medicare drug prescription program put in place in 2006."

Positive - Data can prove this

Positive or Normative? "Immigration is a major cause of lower prices for food in the US."

Positive - Data shows this

What would happen to the equilibrium price and quantity of coffee if the wages of coffee-bean pickers fell and the price of tea fell?

Price will fall and the effect on quantity is ambiguous

What happens to the Qd when the demand decreases?

Qd is less at each price

What happens to the Qd when the demand increases?

Qd is more at each price

TIPTEN

T - Technology I - Input Prices and Availability P - Prices of Substitutes in Production T - Taxes and Subsidies E - Expectations N - Number of Suppliers AND Nature

What acronym is used for the Determinants of Supply?

TIPTEN

What happens to the Qs when Supply decreases?

The Qs is less at each price

What happens the Qs when Supply increases?

The Qs is more at each price

What is Excess Quantity Demanded?

The amount by which the quantity of a good demanded exceeds the quantity supplied when the price of the good is below the equilibrium level. (Shortage)

What is Excess Quantity Supplied?

The amount by which the quantity of a good supplied exceeds the quantity demanded when the price of the good is above the equilibrium. (Surplus)

Normative Economics

The area of economics dealing with "value judgements" - What "ought to be" - Opinions, values

Positive Economics

The area of economics dealing with the issues involving "what is" - Involves, facts, data, T/F - Can be PROVED

Factors of Production (Resources)

The basic inputs used in producing goods and services (labor, capital, land, entrepreneurship)

Economics is a social science concerned with:

The best use of scarce resources to achieve the maximum satisfaction of economic wants.

Income Effect

The change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power

What does the term Opportunity Cost mean?

The cost of a good or service is measured in terms of the lost opportunity to pursue the best alternative activity with the same time and resources.

Whats does Marginal Utility mean?

The extra utility (happiness) gained from a one-unit increase in the consumption of a good or service.

Physical Capital

The human-made objects used to create other goods and services

LAW OF DEMAND

The law that the quantity demanded of a good by buyers tends to increase as the price of the good decreases and tends to decrease as the price increases, other things being equal.

LAW OF SUPPLY

The law that the quantity supplied of a good by sellers tends to increase as the price of the good increases and tends to decrease as the price decreases, other things being equal.

What Marginal Utility per Dollar Spent mean?

The ratio of marginal utility of good x to its price. The ratio indicates the extra utility obtained by consuming one extra unit of good x.

What does Supply mean?

The relation showing various maximum amounts of a commodity that sellers would be willing and able to make available for sale at alternative prices during a given period of time, all other factors remaining the same (Ceteris Paribus).

Human Capital

The skills and knowledge gained by a worker through education and experience

Economics

The social science concerned with how society, individuals, and institutions make optimal (best) choices under conditions of scarcity.

If at a given price the quantity supplied of a product is greater than the quantity demanded, then:

There is a surplus of the product

What is Allocative Efficiency?

There is production of that particular mix of goods and services most wanted by society.

Economizing Perspective/Economizing Problem/Marginal Analysis

Thinking about every day problems involving the choices in an environment with scarce resources. - Comparing MB and MC

Choice

To have something, you have to give something up

Marginal Analysis

Undertake an activity if the Marginal Benefits (MB) exceed the Marginal Costs (MC)

What does a Supply Curve look like?

Upwards sloping to the right

What is an example of Economic Perspective/Marginal Analysis?

Vioxx Pill --> Relieves pain but causes serious health consequences in the future. Drinking Wine --> Can be good of the heart, but can also increase one's risk for cancer. - In both of these examples, a CHOICE is presented.

Free Good

When the amount available is greater than the amount people want at a zero price.

Economic Good

When the amount available is less than the amount people want at a zero price

What statement best represents the Law of Demand?

When the price of a good decreases, buyers purchase more of the good.

You love peanut butter. You hear on the news that 50% of the peanut crop in the South has been wiped out by drought, and that this will cause the price of peanuts to double by the end of the year. As a result,

Your demand for peanut butter increases today