EXAM 1
Price floors cause predictable side effects
-deadweight loss from inefficiently low quantity -inefficient allocation of sales among sellers -wasted resources -inefficiently high quality -temptation to break the law by selling below legal price
Price ceilings cause predictable side effects
-inefficiently low quantity -inefficient allocation to customers -wasted resources -inefficiently low quality -black markets
Erin has a choice between two activities: She can repair one transmission per hour or she can repair two fuel injectors per hour. What is the opportunity cost of repairing one fuel injector?
0.5 transmission
What causes economic growth?
1. An increase in factors of production: resources used to produce goods and services. 2. Better technology: the technical means for producing goods and services. 3. Demand
Important demand shifters
1. changes in the prices related to goods or services 2. changes in income 3. changes in taste 4. changes in expectations 5. changes i number of consumers
two sources of economic growth
1. factors of production 2. technology
Important supply shifters include changes in
1. input prices 2. the prices of related goods or services 3. technology 4. expectations 5. the number of producers
Deirdre can write either one more book this year or five more articles this year. What is the opportunity cost of writing half of a book this year, in terms of articles?
2.5 articles
Abby received requests from three families to babysit a toddler for four hours on Friday night. She can only babysit for one of the three families. The Fleming family offered her $30, the Gilbert family offered her $40, and the Lewis family offered her $60. If Abby chooses to babysit for the Lewis family her opportunity cost of this decision is:
40
firms
A firm is an organization that produces goods and services for sale—and that employs members of households.
A forecast
A forecast is a simple prediction of the future.
household
A household consists of either an individual or a group of people (usually, but not necessarily, a family) that share their income.
Price floors misallocate sales by:
Allowing high-cost firms to operate Preventing low-cost firms from entering the industry
positive economics
Analysis that tries to answer questions about the way the world works, which have definite right and wrong answers
Abby received requests from three families to babysit a toddler for four hours on Friday night. She can only babysit for one of the three families. The Fleming family offered her $30, the Gilbert family offered her $40, and the Lewis family offered her $60. If Abby chooses to babysit for the Lewis family her opportunity cost of this decision is: Please choose the correct answer from the following choices, and then select the submit answer button. $70. $60. $40. $30.
Correct: $40.
Suppose that in an hour Chip can gather 8 pounds of fruit or 4 pounds of nuts. In an hour, Monk can gather 9 pounds of fruit or 3 pounds of nuts. Which of the following choices would benefit both Chip and Monk if trade occurred? Please choose the correct answer from the following choices, and then select the submit answer button. 1 pound of fruit for 3/4 pound of nuts 1 pound of fruit for 1/10 pound of nuts 1 pound of fruit for 2/5 pound of nuts 1 pound of fruit for 1 pound of nuts.
Correct: 1 pound of fruit for 2/5 pound of nuts
Suppose that in an hour Chip can gather 8 pounds of fruit or 4 pounds of nuts. In an hour, Monk can gather 9 pounds of fruit or 3 pounds of nuts. Which of the following choices would benefit both Chip and Monk if trade occurred? Please choose the correct answer from the following choices, and then select the submit answer button. 1 pound of nuts for 2.5 pounds of fruit 1 pound of nuts for 3.5 pounds of fruit 1 pound of nuts for 1/2 pound of fruit 1 pound of nuts for 1 pound of fruit
Correct: 1 pound of nuts for 2.5 pounds of fruit
Which of the following is a government agency that employs economists? Please choose the correct answer from the following choices, and then select the submit answer button. Bureau of Librarian Statistics International Management Fund Financial Reserve Council of Economic Advisers
Correct: Council of Economic Advisers
True or False: If two products are substitutes in production, a decrease in the price of one of the products will result in increase in supply of the other product. This is _____. Please choose the correct answer from the following choices, and then select the submit answer button. False True
Correct: True
Some apartments in many large cities are subject to rent controls that restrict the maximum rent that can be legally collected from the tenants to an affordable level below the prevailing market rent. These rent controls are an attempt by the city governments to improve _____ of the rental markets. Please choose the correct answer from the following choices, and then select the submit answer button. equity efficiency market equilibrium both equity and efficiency
Correct: equity
Some apartments in many large cities are subject to rent controls that restrict the maximum rent that can be legally collected from the tenants to an affordable level below the prevailing market rent. These rent controls are an attempt by the city governments to improve _____ of the rental markets. Please choose the correct answer from the following choices, and then select the submit answer button. market equilibrium both equity and efficiency efficiency equity
Correct: equity
The goal of a progressive income tax system that requires people with higher incomes to pay a higher tax rate is: Please choose the correct answer from the following choices, and then select the submit answer button. efficiency. equity. both efficiency and equity. neither efficiency nor equity.
Correct: equity.
True or False: "The price of gasoline is too high" is a positive statement. This is _____. Please choose the correct answer from the following choices, and then select the submit answer button. false true
Correct: false
Which of the following are economic resources? Please choose the correct answer from the following choices, and then select the submit answer button. stocks and bonds money durable and nondurable consumer goods land, labor, capital, and human capital
Correct: land, labor, capital, and human capital
An inferior good
Demand decreases when income increases (and vice versa).
Sources of Comparative Advantage
Differences in climate Differences in factor endowments Differences in technology
Distorted price signals cause.
Distorted price signals cause resources to be misallocated.
barter
Exchange goods and services without involving money.
True or False: "The price of gasoline is too high" is a positive statement. This is _____.
False
True or False: Money used to buy the cotton used to make game-day T-shirts is a factor of production. This is _____.
False
If prices are distorted, they
If prices are distorted, they cannot give good information to buyers and sellers.
Theory of Comparative Advantage
It makes sense to produce the things you're especially good at producing... and buy everything else from others.
factors of production
Land, labor, and capital; the three groups of resources that are used to make all goods and services
trade follows what model?
Ricardian model
differences in technology
Sometimes a country has developed a particular technology that explains its comparative advantage.
The incentives built into a market economy ensure that resources are
The incentives built into a market economy ensure that resources are usually put to good use and that opportunities to make people better off are not wasted.
An increase in household spending leads to an increase in jobs in the economy. True False
True, because as households spend more on goods and services, businesses will hire more workers to produce more output.
circular flow diagram
`a visual model of the economy that shows how dollars flow through markets among households and firms
Equity
a codition in which everyone gets his or her "fair share"
trade-off
a comparison of costs and benefits of doing something
Absolute advantage
a country can produce more output per worker than other countries.
Heckscher-Ohlin model
a country that has an abundant supply of a factor of production will have a comparative advantage in goods whose production is intensive in that factor
Normally buyers would compete with each by offering
a higher price
The law of demand
a higher price for a good or service leads people to demand a smaller quantity
A decrease in supply means
a leftward shift of the supply curve
Price ceiling
a maximum price that can be legally charged for a good or service usually set below equiilibrium
factor intensity
a measure of the quantity of a factor used in comparison with other factors
Price floor
a minimum price buyers are required to pay for a good or service usually above equilibrium
comparative advantage
a model that clarifies the principle of gains from trade both individualy and countries
production possibilities frontier
a model that helps economists think of the trade offs every economy faces
An increase in supply means
a rightward shift of the supply curve
model
a simplified representation of a real situation that is used to better understand real-life situations.
Autarky
a situation in which a country does not trade with other countries
increasing opportunity cost
a situation in which producing more of one good requires giving up an increasing amount of production of another good
circular flow diagram
a visual model of the economy that shows how dollars flow through markets among households and firms
If a consumer have a choice about the timing of a purchase they buy
according to expectation
Resources should be used effiently to
achieve society's goals
land
all natural resources used to produce goods and services
Other things equal assumption
all other relevant factors remain unchanged
other things equal assumption, which means that
all other relevant factors remain unchanged.
Satisfy
all the various ways a society wants to use it
Equilibrium
an economic situation in which no individual would be better off doing something different
Every economics issue involves
an individual choice
Quota
an upper limit, set by the government, on the quantity of some good that can be bought or sold; also referred to as a quantity control.
normative economics
analysis that involves saying how the world should work
One person's spending is...
another person's income
Resources
anything that is used to produce goods or services
incentive
anything that offers rewards to people who change their behavior
The quantity supplied is the quantity that producers
are willing an able to sell at various prices
David Ricardo
argued against Corn Laws in British Parliament
Theory of comparative Advantage ability to produce
at a lower opportunity cost
Differences in climate
bannanas grow better here
Price floors encourage
black markets
Price controls that create shortages lead to
bribery and wasteful lines
Demand represents the behavior of
buyers
A competitive market has many
buyers and sellers of the same good or service, none of whom can influence the price
As the population of an economy changes the number of
buyers of a particular good also changes
What are the gains from trade?
by dividing tasks and trading, two people (or 6 billion people) can each get more of what they want than they could get by being self-sufficient.
Sacracity of resources makes society make
choices
Production and trade in an economy can be represented by the
circular flow diagram
The supply and demand model is a model of how
competitve market behaves
One reason that news stories emphasize the ways that economists disagree is that the news media prefers stories involving: Please choose the correct answer from the following choices, and then select the submit answer button. positive economics. cooperation. conflict. analysis.
conflict
Trade allows us to...
consume more than we otherwise could
sometimes markets fail and need
correction
Higher quality rasies
costs and reduces sellers profit
who produces clothing?
countries with lots of labor
At the controlled price, sellers have more
customers than goods
marginal decision
decision made at the margin of an activity about whether to do a bit more or a bit less of that activity
An increase in gas will
decrease demand for SUV
Two goods are complements if
decrease in the price of one good leads to an increase in the demand for the other.
Two goods are substitues if a
decrease in the price of one leads to a decrease in demand for the other
The expectation of a higher price for a good in the future
decreases current supply of the good - if they can store the good (and vice versa).
A normal good
demand increases when income increases
Sellers will adjust their current offerings in anticipation of the
direction of future prices in order to obtain the highest possible price.
the effects of free trade barriers on
domestic equilibrium price and quality imports
the effects of free trade on
domestic equilibrium price and quanitiy imports
A price ceiling pushes the price of a good
down and fewer sellers will want to sell
production possibility frontier, a model that helps
economists think about the trade-offs every economy faces.
markets usually lead to
efficiency
efficent
efficient if it takes all opportunities to make some people better off without making other people worse off.
First of all, the production possibility frontier is a good way to illustrate the general economic concept of
effiency
A decrease in the price of an input (all else equal) increases profits and
encourages more supply
markets move toward
equilibrium
equity
fairness
True or False: Economic growth is shown by a movement along the production possibilities frontier. This is _____. Please choose the correct answer from the following choices, and then select the submit answer button. false true
false
True or False: If the number of producers increases, market supply will decrease. This is _____. Please choose the correct answer from the following choices, and then select the submit answer button. False True
false
All points on the curve are
feasible and efficent
All points under the PPF are
feasible but not efficent
Exit implies
fewer sellers in the market, decreasing supply.
Buyers adjust current spending in anticipation of the direction of
future prices in order to obtain the lowest possible price
A black market is a market in which
goods and services are bought and sold illegally—either because they are prohibited or because the equilibrium price is illegal.
Price controls distort signals that would help the
goods get allocated their highest-valued uses.
Consumers often have to buy
goods together
When markets don't achieve efficiency:
government intervention can improve society's welfare
More substitutes lead to
greater demand elasticity
When prices are controlled, sellers cannot
have the opportunity to profit by raising prices
Corn Laws
high tariffs on imported grain that protected British landowners
Price floors encourages sellers to waste resources
higher quality than buyers are willing to pay for
We can use the PPF model to answer questions like?
how much we can produce? What will it cost us to change our mix of production? Does it make sense to import the good from somewhere else?
income distribution
how the total income created in an economy is allocated between less skilled workers, highly skilled workers, and the owners of capital and land.
Scarce
in short supply; a resource is scarce when there is not enough of the resource available to satisfy all the various ways a society wants to use it.
factor market
in which firms buy the resources they need to produce goods and services.
markets for goods and services
in which households buy the goods and services they want from firms.
Broader effects of international trade
income distribution
interaction
interaction in which my choices affect your choices, and vice versa.
Physical capital
is manufactured items used to produce other goods and services.
David Ricardo theory of comparative advantage
is still the ideological foundation for free trade
Positive economics
is the branch of economic analysis that describes the way the economy actually works.
Human capital
is the educational achievements and skills of the labor force
Labor
is the mental and physical abilities of the workforce
If a price floor is set below equilibrium
it will have no effect
If a price ceiling is set above the equilibrium price:
it will have no effect nonbinding
the true cost of something is
its opportunity cost
Sellers will supply less of a good if
its profitablility falls
increased trade usually increases
jobs in other industries (exporters)
factors of production
land, labor, capital
A decrease in demand is a
leftward shift
Price controls
legal restrictions on how high or low a market price may go
During recession a drop in bussiness spending leads to
less income, less spending, and futher drops business spending, lay offs, and rasing unemployment
Like price controls, quotas impose
losses on society
A technological innovation ... and ...
lowers costs and increases supply
Normative economics
makes prescriptions about the way the economy should work.
Elasticity
measure the percent change of one variable in response to a one-percent change in another
Price floors is the
min price buyers are required to pay for a good
capital
money for investment machines
Entry implies
more sellers in the market, increasing supply.
change in quantity (...)
movement
In times of national crisis or war the United States
must be able to rely on key domestic industries oil steel defense food
people normally take opportunities for
mutual gain
Land includes
natural resources,such as minerals, forests, water, and unimproved land.
The effect of changes in income on demand depends on
nature of the good in question
Shortages
not all buyers will be able to purchase the good
All points above the PPF are
not feasible
Surpluses do
not last: sellers will reduce price so they can move goods off the shelves
Models are important because their simplicity allows economists to focus on
only one change at a time
Inputs used in production have
opportunity costs.
people usually respond to incentives exploiting
opportunties to make themselves better off
Marco is an economist who strongly supports social and income equality. Most likely Marco _____ value-added taxes.
opposes
If price is not allowed rise, buyers most compete in
other ways waiting in line illegal bribes and favors
Buyers get higher quality but would
perfer a lower price
fiscal
pertaining to finances
two types of price controls
price ceiling and price floor
Wasted resources
price floors encorage waste
import-competing industries
produce goods and services that are also imported
exporting industries
produce goods and services that are sold abroad
To think about the trade-offs that face any economy, economists often use the model known as the
production possibilities frontier
Sellers will choose to use inputs whose
profits is the highest
differences in factor endowments
proximity to resources, abundance of factors of production
Governments sometimes control
quanity instead of price
A demand curve shows the the
quantity demanded at various prices
According to the law of demand, when the price of a product decreases:
quantity demanded increases.
As the price falls
quantity demanded rises
A supply curve shows the
quantity supplied at various prices
As the supply rises the
quantity supply rises
how do sellers respond to controlled prices
reduce quality reduce service
A quota
reduces sales
a tariff pushes up the price which
reduces the quanitiy demanded and increases domestic quanity supplied
monetary
relating to money
Why are choices necessary?
resources are scarce
Supply represents the behavior of
sellers
shortages do not last because
sellers will increase price to increase revenue
change in demand (...)
shift
When prices are held below the market price
shortages are created
globalization will force
some firms to lay off workers
Price floors
sometimes governments intervene to push market prices up instead of down
Governments policies can change
spending
There are ... and ... in production processes
substitues and complements
Government officials often do not understand
supply and demand
As producers enter and exit the market, the overall ....
supply changes
A change in producers' expectations about profitability will affect
supply curve
but for workers who lose jobs
switching industries can be difficlut and time consuming
Efficient
taking all opportunities to make some people better off without making other people worse off (distribution)
a tariff
tax on imports
technology
technical means for the production of goods and services.
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer/ country
producer surplus is defined as
the difference between the amount the producer is willing to supply goods for and the actual amount recieved when he makes the trade
economic growth
the economy can now produce more of everything
Overall spending sometimes gets out of line with...
the economy's productive capacity
We can use the demand and supply model to determine:
the effects of free trade the effects of trade barriers
labor
the effort that people devote to a task for which they are paid
economic growth
the growing ability of the economy to produce goods and services
The lower the controlled price relative to the market equilibrium price,
the larger the shortage
A country has a comparative advantage in producing goods for which it has
the lowest opportunity cost
"How much" is a decision @
the margin
grains from trade
the mutual gains that individuals can achieve by specializing in doing different things and trading with one another.
There is a shortage when
the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level.
Demand
the quantity of a good or service that consumers are willing and able to buy
There is a surplus of a good when
the quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above its equilibrium level.
The quantity demanded
the quantity that buyers are willing to purchase at a particular price
license
the right, conferred by the government, to supply a good
Specialization
the situation in which each person specializes in the task that he or she is good at performing
marginal analysis
the study of marginal decisions
factor abundance
the supply of a factor of production relative to other factors
quota limit
the total amount of a good under a quota or quantity control that can be legally transacted
what comes from trade?
there are gains from trade
One key element of efficiency is that there are no missed opportunities in production
there is no way to produce more of one good without producing less of other goods.
Why are there price floors?
they do benefit some people who are better organized
consumer surplus is the difference between the
total amount consumers are willing and able to pay for a good or service and the total amount that they actually do pay
Allowing imports increases
total surplus
allowing exports increases
total surplus
The key to a much better standard of living for everyone is
trade
The PPF is about
trade offs
Policies that limit imports are known as
trade protection or simply as protection.
True or False: If producers expect lower prices in the future, the current supply curve will shift to the right. This is _____.
true
A price floor pushes the price of a good
up and few buyers will want to buy
opportunity cost
what must be given up in order to get a good
opportunity cost
what you must give up in order to get something
opportunity cost
whatever must be given up to obtain some item
New, better technology makes sellers
willing to offer more at a given price or sell their quantity at a lower price.