Exam 1 Microeconomics
When there is an increase in supply and an increase in demand, the new equilibrium quantity is...
known but the equilibrium price is unknown.
Factors of production
land (natural resources) , labor, capital, entrepreneurship
If supply is inelastic, then the value of price elasticity is...
less than 1
If a demand curve is a horizontal line, it is
perfectly elastic
If a demand curve is a vertical line, it is
perfectly inelastic
Do producers tend to favor price floors or price ceilings? Why? Producers favor
price floors because, when binding, price floors increase price above the equilibrium and may increase producer surplus.
Goods and services that can be used for the same purpose are ________, and goods and services that are used together are ________.
substitutes; complements
To calculate the change in total revenue...
subtract the total revenue after the price change from total revenue before the price change.
Shortage
A situation in which quantity demanded is greater than quantity supplied
Surplus
A situation in which quantity supplied is greater than quantity demanded
A free market is a market with ________ government restrictions on how a good or service can be produced or sold and with ________ government restrictions on how a factor of production can be employed.
few, few
Free Market
exists when the government places few restrictions on how goods and services can be produced or sold or on how factors of production can be employed
If San Francisco were to repeal its rent control law, the prices for short rentals in the city listed on Airbnb and other peer-to-peer sites would likely
fall because more housing units would become available as the average rent increased.
If technological advances lower the cost of computer chips, in the market for computers the equilibrium price will ________ and the equilibrium quantity will ________.
fall; increase
Economists believe that an activity should be continued up to the point where
the marginal benefit is equal to the marginal cost.
income elasticity of demand
the percent change in the quantity of a good demanded divided by the percent change in the consumer's income
cross-price elasticity of demand
the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good
What are private property rights? Private property rights are:
the rights individuals and firms have to the exclusive use of tangible, physical property and intellectual property.
Which of the following is not a factor of production?
$1,000 in cash
Lauren makes $150 a day as a bank clerk. She takes two days off work without pay, to fly to another city to attend the concert of her favorite band. The cost of transportation and lodging for the trip is $250. The cost of the concert ticket is $50. The opportunity cost of Lauren's decision to attend the concert is:
$600
Suppose that sales of bottled water decline during a recession when employment and household incomes fall. This indicates that bottled water is
A normal good
The Three Economic Ideas
1. People are rational. 2. People respond to economic incentives. 3. Optimal decisions are made at the margin.
Which of the following would not shift the demand curve for a good or service? 1. a change in the price of the good or service 2. a change in the price of a related good 3. a change in income 4. a change in expectations about the future price of the good or service
1. a change in the price of the good or service
In a simple circular-flow model, there are flows of _________ and flows of _________.
1. factors of production; goods and services 2. funds received from the sale of factors of production; spending on final goods and services
What is the role of an entrepreneur?
1. to bring together the factors of production—labor, capital, and natural resources 2. to operate a business that produces a good or service 3. to take risks
competitive market equilibrium
a market equilibrium with many buyers and sellers
Sarita can bake either a combination of 25 cakes and 15 pies or a combination of 10 cakes and 20 pies. If she now bakes 10 cakes and 20 pies, what is the opportunity cost of baking an additional 15 cakes?
5 pies
McDonald's eliminates $1.00 off coupons. This will cause
A movement along the demand curve since the price changed.
Number of Firms in the Market and Supply Curve
A change in the number of firms in the market will change supply. When new firms enter a market, the supply curve shifts to the right, and when existing firms leave, or exit, a market, the supply curve shifts to the left. In early 2017, for instance, PepsiCo entered the market for premium bottled water when it introduced LIFEWTR, which shifted the market supply curve to the right.
The price of a gallon of milk falls. Which of the following is a possible cause?
A decrease in the price of oatmeal, a complement to milk.
price ceiling
A legal maximum on the price at which a good can be sold
price floor
A legal minimum on the price at which a good can be sold
Which of the following events would shift the supply of smartphones to the right? A. a decrease in the price of inputs used to produce smartphones B. an increase in the expected future price of smartphones C. a decrease in the price of smartphones D. All of the above.
A. a decrease in the price of inputs used to produce smartphones
Which of the following is the best synonym for "marginal" in economics?
Additional
When does allocative efficiency occur?
Allocative efficiency occurs when production is in accordance with consumer preferences.
Tastes and Demand
An advertising campaign for a product can influence consumer demand. For example, PepsiCo paid millions of dollars to advertise LIFEWTR during the 2017 Super Bowl. If other firms making premium bottled water begin to advertise heavily, consumers are likely to buy more of it at every price, and the demand curve will shift to the right. An economist would say that the advertising campaign has affected consumers' taste for premium bottled water. Taste is a catchall category that refers to the many subjective elements that can enter into a consumer's decision to buy a product. Sometimes trends play a substantial role. For example, the popularity of low-carbohydrate diets caused a decline in demand for some goods, such as bread and donuts, and an increase in demand for fish. In general, when consumers' taste for a product increases, the demand curve will shift to the right, and when consumers' taste decreases, the demand curve will shift to the left.
When demand is elastic, price and total revenue move inversely...
An increase in price reduces total revenue, and a decrease in price raises total revenue.
If a market system functions well, which of the following is necessary for the enforcement of contracts and property rights?
An independent court system
T/F There is often a trade-off between efficiency and equity
true
Population/Demographics and Demand
As the demographics of a country or region change, the demand for particular goods will increase or decrease because different categories of people tend to have different preferences for those goods. For instance, the U.S. Census Bureau forecasts that Hispanics will increase from 18 percent of the U.S. population in 2016 to 29 percent in 2060. This increase will expand demand for Spanish-language books, Web sites, and cable television channels, among other goods and services.
Which of the following is the correct way to describe equilibrium in a market?
At equilibrium, quantity demanded equals quantity supplied.
Economics is a social science that studies how individuals, institutions, and society may:
Best use resources to maximize satisfaction of economic wants
If supply is perfectly inelastic, then the value of price elasticity is...
equal to 0
If supply is unit elastic, then the value of price elasticity is...
equal to 1
If supply is perfectly elastic, then the value of price elasticity is...
equal to infinity
If the products are substitutes
Then the cross-price elasticity of demand will be Positive
Economists refer to the necessity of holding all variables other than price constant in constructing the demand curve as the
Cetertis Paribus condition (all else equal)
An article on marketwatch.com states that: "While the fizzy soda drinks companies have experienced an annual volume sales decline since 2003, bottled water grew every year over the last two decades, except 2009 during the depths of the Great Recession." A factor that could have caused a decline in sales of carbonated ("fizzy") beverages is
Changing preferences towards health
Which of the following is part of the Economic Way of Thinking?
Choices can have unintended consequences.
The idea in economics that "there is no free lunch" means that:
There are opportunity costs involved even in free lunches
Why do entrepreneurs play a key role in a market system?
They bring together the factors of production.
When the quantity demanded is not very responsive to price, however, the percentage change in quantity demanded will be less than the percentage change in price, and the price elasticity of demand will be less than 1 in absolute value. In this case, demand is
Inelastic
Economists assume that the only reason people take the actions they do is in response to economic incentives.
False
T/F An increase in demand causes an increase in the equilibrium price. The increase in equilibrium price will then cause an increase in supply.
False
T/F When demand curves intersect, the curve with the larger slope in absolute value (the steeper demand curve) is more elastic.
False. When demand curves intersect, the curve with the smaller slope in absolute value(the flatter demand curve) is more elastic.
In a market system, what determines how goods and services will be produced?
Firms determine how goods and services will be produced.
According to Adam Smith, which of the following is necessary for the proper functioning of the market system?
For markets to work, people must be free to pursue their self-interest.
Tables that show the relationship between the price of a product and the quantity of the product demanded are called
Demand Schedules
Can economic analysis provide a final answer to the question of whether the government should intervene in markets by imposing price ceilings and price floors? Why or why not?
Economic analysis cannot provide such an answer because it seeks to address positive questions such as "what is."
If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in the quantity demanded of 25 percent, demand for Red Bull is _______ in this range.
Elastic
If the quantity demanded is very responsive to changes in price, the percentage change in quantity demanded will be greater than the percentage change in price, and the price elasticity of demand will be greater than 1 in absolute value. In this case, demand is
Elastic
Would you pay $12 for a cup of coffee? Starbucks is betting enough people will say "yes," as it launches a chain of luxury coffee shops called Starbucks Reserve. Which generation(s) do you expect Starbucks Reserve to attract: baby boomers (ages 53 and over), Generation X (ages 35 and over), or millennials (ages 17 and over)? Briefly explain.
Generation X, because their average incomes are likely to be higher.
Luxuries vs. Necessities- Price Elasticity of Demand
Goods that are luxuries usually have more elastic demand curves than goods that are necessities. For example, the demand for milk is inelastic because milk is a necessity, and the quantity that people buy is not very dependent on its price. Tickets to a concert are a luxury, so the demand for concert tickets is much more elastic than the demand for bread. The demand curve for a luxury is more elastic than the demand curve for a necessity.
Share of a Good in a Customer's Budget- Price Elasticity of Demand
Goods that take only a small fraction of a consumer's budget tend to have less elastic demand than goods that take a large fraction. For example, most people buy table salt infrequently and in relatively small quantities. The share of an average consumer's budget that is spent on salt is very low. So, even a doubling of the price of salt is likely to result in only a small decline in the quantity of salt demanded. "Big-ticket items," such as houses, cars, and furniture, take up a larger share in the average consumer's budget. Increases in the prices of these goods are likely to result in significant declines in the quantity demanded. In general, the demand for a good will be more elastic the larger the share of the good in the average consumer's budget.
Which of the following are the two key groups of participants in the circular flow of income?
Households and Firms
Examples of Microeconomic Issues
How consumers react to changes in product prices How firms decide what prices to charge for the products they sell Which government policy would most efficiently reduce obesity The costs and benefits of approving the sale of a new prescription drug The most efficient way to reduce air pollution
Expected Future Prices and Supply Curve
If a firm expects that the price of its product will be higher in the future, it has an incentive to decrease supply now and increase it in the future. For instance, if Coca-Cola believes that prices for premium bottled water are temporarily low—perhaps because of a recession—it may store some of its production of smartwater today to sell later on, when it expects prices to be higher.
Income and Demand Curve
If average household income rises to $58,000, the demand for premium bottled water will increase, shifting the demand curve to the right. A good is a normal good when the demand for the good increases following a rise in income and decreases following a fall in income. Most goods are normal goods, but some goods are inferior goods. A good is an inferior good when the demand for it decreases following a rise in income and increases following a fall in income. For instance, as your income rises, you might buy fewer cans of tuna or packages of instant noodles and buy more salmon or whole grain pasta. So, for you, canned tuna and instant noodles would be examples of inferior goods—not because they are of low quality but because you buy less of them as your income increases.
Expected Future Prices and Demand Curve
If enough consumers become convinced that houses will be selling for lower prices in three months, the demand for houses will decrease now, as some consumers postpone their purchases to wait for the expected price decrease. Alternatively, if enough consumers become convinced that the price of houses will be higher in three months, the demand for houses will increase now, as some consumers try to beat the expected price increase.
Price of Inputs and Supply Curve
If the price of electrolytes used in many premium bottled waters or the price of plastic bottles rises, the cost of producing premium bottled water will increase, making it less profitable at every price. The supply of premium bottled water will decline, and the market supply curve will shift to the left. Similarly, if the price of an input falls, the supply of premium bottled water will increase, and the market supply curve will shift to the right.
Which of the following is a correct statement about a mixed economy?
In a mixed economy, most economic decisions are made in markets but the government plays a significant role in the allocation of resources.
Definition of Market- Price Elasticity of Demand
In a narrowly defined market, consumers have more substitutes available. For example, if you own a service station and raise the price you charge for gasoline, many of your customers will switch to buying from a competitor. So, the demand for gasoline at one particular station is likely to be elastic. The demand for gasoline as a product, in contrast, is inelastic because consumers have few alternatives (in the short run) to buying it. The more narrowly we define a market, the more elastic demand will be.
Many variables other than price can influence market demand. These five are the most important:
Income Prices of related goods Tastes Population and demographics Expected future prices
What is the outcome of enforcing contracts and property rights in a market system?
Increased economic activity
What does increasing marginal opportunity costs mean?
Increasing the production of a good requires larger and larger decreases in the production of another good.
As a consequence of the problem of scarcity:
Individuals have to make choices from among alternatives
From 1979 to 2015, China had a policy that allowed couples to have only one child. (Since 2016, couples have been allowed to have two children.) The one-child policy caused a change in the demographics of China. Between 1980 and 2015, the share of the population aged 14 and under decreased from 36 percent to 17 percent. And, as parents attempted to ensure that the lone child was a son, the number of male children relative to female children increased.
It has undoubtedly shifted away from goods and services appealing to youthful buyers, particularly youthful female buyers.
Passage of Time- Price Elasticity of Demand
It usually takes consumers some time to adjust their buying habits when prices change. If the price of chicken falls, for example, it takes a while before consumers decide to change from eating chicken for dinner once a week to eating it twice a week. If the price of gasoline increases, it also takes a while for consumers to decide to begin taking public transportation, to buy more fuel-efficient cars, or to find new jobs closer to where they live. The more time that passes, the more elastic the demand for a product becomes.
The inverse relationship between the price of a product and the quantity of the product demanded is called the
Law of Demand
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
Matt observes that "there is a high correlation between educational attainment and the level of income." Jean concurs and adds that "high school graduates should all proceed to college."
Matt's statement is positive while Jean's statement is normative
Today, which of the following countries has a centrally planned economy?
North Korea
When a state government chooses to build more roads, the resources used are no longer available for public education programs. This dilemma illustrates the concept of:
Opportunity cost
Why do some consumers tend to favor price controls while others tend to oppose them?
Price ceilings generate shortages. Consequently, the consumers who obtain the product at a lower price win, but other consumers will lose because they would like to purchase the product but are unable to because of a shortage.
According to Adam Smith, which of the following is the instrument the invisible hand uses to direct economic activity?
Prices
Many variables other than price can affect market supply. These five are the most important:
Prices of inputs Technological change Prices of related goods in production Number of firms in the market Expected future prices
When does productive efficiency occur?
Productive efficiency occurs when a good or service is produced at the lowest possible cost.
The amount of a good or service that a consumer is willing and able to purchase at a given price is called the
Quantity Demanded
The amount of a good or service that a firm is willing and able to supply at a given price is the
Quantity Supplied
If demand decreases and supply increases, which of the following will definitely occur?
The equilibrium price will decrease.
If demand and supply both increase, which of the following will definitely occur?
The equilibrium quantity will increase.
Prices of Related Goods Produced and Supply Curve
SUBSTITUTES IN PRODUCTION: If the price of carbonated soft drinks decreases relative to the price of premium bottled water, soft drinks will become less profitable, and Coca-Cola, PepsiCo, and other firms will shift some of their productive capacity away from soft drinks and toward premium bottled water. The firms will offer more bottles of premium water for sale at every price, so the supply curve for premium bottled water will shift to the right. COMPLEMENTS IN PRODUCTION: For example, the same geological formations that contain oil usually also contain natural gas. If the price of oil rises, oil companies that begin pumping more oil from these formations will also produce more natural gas. As a result, an increase in the price of oil will cause the supply curve for natural gas—a complement in production—to shift to the right.
Availability of substitutes- Price Elasticity of Demand
So the availability of substitutes is the most important determinant of the price elasticity of demand. For example, when the price of gasoline rises, consumers have few alternatives, so the quantity demanded falls only a little. But if the price of pizza rises, consumers have many alternative foods they can eat, so the quantity demanded is likely to fall substantially.
The key determinants of the price elasticity of demand are:
The availability of close substitutes for the good The passage of time Whether the good is a luxury or a necessity The definition of the market The share of the good in the consumer's budget
opportunity cost
The highest-valued alternative that must be given up to engage in an activity.
Tradeoffs
The idea that, because of scarcity, producing more of one good or service means producing less of another good or service.
What determines equilibrium price?
The interaction of demand and supply determines
The idea of increasing marginal opportunity costs illustrates an important economic concept:
The more resources already devoted to an activity, the smaller the payoff to devoting additional resources to that activity.
Prices of Related Goods and Demand
The prices of other goods can also affect consumers' demand for a product. Consumers who buy premium bottled water could buy regular bottled water instead. Goods and services that can be used for the same purpose are called substitutes. When two goods are substitutes, the more you buy of one, the less you will buy of the other. A decrease in the price of a substitute causes the demand curve for a good to shift to the left. An increase in the price of a substitute causes the demand curve for a good to shift to the right. Goods and services that are used together—such as hot dogs and hot dog buns—are called complements. When two goods are complements, the more consumers buy of one, the more they will buy of the other. A decrease in the price of a complement causes the demand curve for a good to shift to the right. An increase in the price of a complement causes the demand curve for a good to shift to the left.
Which of the following is evidence of a shortage of walnuts?
The quantity of walnuts demanded is greater than the quantity supplied.
Briefly explain whether you agree or disagree with the following statement: "If there is a shortage of a good, it must be scarce, but there is not a shortage of every scarce good."
The statement is correct because every good (except undesirable things) is scarce.
T/F Households are suppliers of factors of production—particularly labor—employed by firms to make goods and services.
True
T/F The basis for trade is comparative advantage, not absolute advantage
True
In the special case where the percentage change in quantity demanded is equal to the percentage change in price, the price elasticity of demand equals −1−1 (or 1 in absolute value). In this case, demand is
Unit Elastic
Trade-offs force society to make choices when answering three fundamental questions:
What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced?
Technological Change and Supply Curve
When positive technological change occurs, the firm will increase the quantity supplied at every price, and its supply curve will shift to the right. Negative technological change (Earthquake/Natural Disaster) will raise firms' costs, and firms will earn lower profits from producing the good. Therefore, negative technological change will cause the market supply curve to shift to the left.
In a market system, how does society decide who will receive the goods and services produced?
Who receives the goods and services produced depends largely on how income is distributed.
Examples of Macroeconomic Issues
Why economies experience periods of recession and increasing unemployment Why, over the long run, some economies have grown much faster than others What determines the inflation rate What determines the value of the U.S. dollar in exchange for other currencies Whether government intervention can reduce the severity of recessions
Which of the following exemplifies a microeconomic question?
Will a new type of electronic reader or tablet increase the number of buyers?
Which of the following is the correct definition of demand curve?
a curve that shows the relationship between the price of a product and the quantity of the product demanded
It is expected that the price of a bushel of wheat will increase in one month. This belief will result in
a decrease in current supply of wheat
An unexpected frost in the orange groves of California would cause
a decrease in the supply of orange juice, increasing the equilibrium price.
price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
A good for which demand increases as income rises is ________, and a good for which demand increases as income falls is ________.
a normal good; an inferior good
market equilibrium
a situation in which quantity demanded equals quantity supplied
Which of the following is the correct definition of demand schedule?
a table that shows the relationship between the price of a product and the quantity of the product demanded
Price floor is set
above market equilibrium
Changes in which of the following items will shift the supply curve of hamburgers?
an increase in the price of meat used to produce hamburgers
Combinations either on the frontier or inside the frontier
are attainable with the resources available
Product Markets
are markets for goods—such as smartphones—and services—such as medical treatment. In product markets, households are demanders and firms are suppliers
Factor Markets
are markets for the factors of production
Firms
are suppliers of goods and services
Most Supply curves
are upward sloping
Combinations on the frontier are efficient
because all available resources are being fully utilized, and the fewest possible resources are being used to produce a given amount of output
Combinations inside the frontier are inefficient
because maximum output is not being obtained from the available resources—perhaps because the assembly line is not operating at its capacity.
Voluntary Exchange
both the buyer and the seller of a product are made better off by the transaction
How is the price elasticity of demand measured?
by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price
How are economic resources allocated in a market economy?
by the decisions of households and firms interacting in markets
Suppose people buy more of good 1 when the price of good 2 falls. These goods are
complements.
Which of the following shifts the supply curve for oranges?
disastrous weather that destroys about half of this year's orange crop
Outward shifts in the production possibilities frontier represent
economic growth because they allow the economy to increase the production of goods and services, which ultimately raises the standard of living
If supply is elastic, then the value of price elasticity is...
greater than 1
What happens when the quantity demanded is very responsive to changes in price? The percentage change in quantity demanded will be
greater than the percentage change in price
Law of Supply
holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied
Black markets may arise
in reaction to binding price ceilings
Centrally Planned Economy
in which the government decides how economic resources will be allocated
A production possibilities frontier with a bowed-outward shape indicates
increasing opportunity costs as more and more of one good is produced.
productions possibilities frontier
is a curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology.
supply schedule
is a table that shows the relationship between the price of a product and the quantity of the product supplied
A shift of a demand curve
is an increase or a decrease in demand
A movement along a demand curve
is an increase or a decrease in the quantity demanded
Positive Analysis
is concerned with what is
Normative Analysis
is concerned with what ought to be.
Whether carried out by an individual or a country, production beyond the production possibilities frontier
is not physically possible
Mixed economy
is still primarily a market economy because most economic decisions result from the interaction of buyers and sellers in markets. However, the government plays a significant role in the allocation of resources.
Absolute Advantage
is the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources.
The production possibilities frontier shows the ________ combinations of two products that can be produced in a particular time period with available resources.
maximum attainable
When demand is inelastic, price and total revenue...
move in the same direction: An increase in price raises total revenue, and a decrease in price reduces total revenue
Income Effect
of a price change refers to the change in the quantity demanded of a good that results because a change in the good's price increases or decreases consumers' purchasing power. When the price of a good falls, the increased purchasing power of consumers' incomes will usually lead them to purchase a larger quantity of the good. When the price of a good rises, the decreased purchasing power of consumers' incomes will usually lead them to purchase a smaller quantity of the good.
Suppose the U.S. government encouraged new medical school graduates to take over existing practices from doctors wishing to retire by paying both the new and retiring doctors $100,000. These doctors would be exemplifying the economic idea that
people respond to economic incentives.
A change in quantity demanded
refers to a movement along the demand curve as a result of a change in the product's price
A change in quantity supplied
refers to a movement along the supply curve as a result of a change in the product's price
Substitution Effect
refers to the change in the quantity demanded of a good that results because a change in price makes the good more or less expensive relative to other goods that are substitutes. When the price of premium bottled water falls, people will substitute buying premium bottled water for other goods, such as regular bottled water or carbonated soft drinks, like Coke and Pepsi.
The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the __________ the payoff to devoting additional resources to that activity.
smaller
Increasing marginal opportunity costs occur because...
some workers, machines, and other resources are better suited to one use than to another
Economic Variable
something measurable that can have different values, such as the number of people employed in manufacturing
If the best surgeon in town is also the best at cleaning swimming pools, then according to the theory of comparative advantage, this person should
specialize in being a surgeon because its opportunity cost is lower.
Comparative Advantage
the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors
If the price of chicken falls, then in the market for beef,
the demand curve for beef shifts leftward.
When the demand curve shifts to the right what happens to equilibrium price and quantity?
the equilibrium price and quantity will both increase.
Equity
the fair distribution of economic benefits
A change in all of the following variables will change the market demand for a product except
the price of the product.
perfectly inelastic
the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero. No matter how much price may increase or decrease, the quantity remains the same. For only a very few products will the quantity demanded be completely unresponsive to the price, making the demand curve a vertical line. The drug insulin is an example.
Perfectly Elastic
the quantity demanded is infinitely responsive to price, and the price elasticity of demand equals infinity. If a demand curve is perfectly elastic, an increase in price causes the quantity demanded to fall to zero.
deadweight loss
the reduction in economic surplus resulting from a market not being in competitive equilibrium
If the products are complements
then the cross-price elasticity of demand will be negative
If the products are unrelated
then the cross-price elasticity of demand will be zero
If income elasticity of demand is negative
then the good is inferior (high-fat meat)
If income elasticity of demand is positive and greater than 1
then the good is normal and a luxury (caviar)
If income elasticity of demand is positive but less than 1
then the good is normal and a necessity (bread)
As the firm moves down the production possibilities frontier, if the marginal opportunity cost does not change...
then the production possibilities frontier will be a straight line but if it increases, then the production possibilities frontier will be bowed outward.
Cable television companies must pay increased charges by the networks for the programs the cable companies carry. As a result, the price of cable television rises. Therefore
there is a movement up the demand curve for cable television to a smaller quantity demanded.
Economists use models
to answer questions and analyze issues
Circular Flow Diagram
to see how participants in markets are linked
Economic data is used
to test models
Homer changes jobs and his new job pays him a higher income. Before he changed jobs, Homer purchased 3 pounds of tuna and 2 pounds of chicken. After he changed jobs, Homer now purchases 2 pounds of tuna and 3 pounds of chicken. For Homer,
tuna is an inferior good and chicken is a normal good.
In arriving at a useful economic model, these five steps are followed:
1) decide on the assumptions to be used; 2) formulate a testable hypothesis; 3) use economic data to test the hypothesis; 4) revise the model if it fails to explain the economic data; and 5) retain the revised model to help answer similar economic questions.
In a market system, how does society decide what goods and services will be produced?
Consumers, firms, and the government determine what goods and services will be produced by the choices they make.
With respect to consumption, individuals and countries
can, through trade, consume beyond their production possibilities frontiers.