Macro Test #1

5 fundamental questions

"What" goods and services will be produced? "How" will the goods and services be produced? "Who" will get the goods and services? How will the system accommodate change? How will the system promote progress

Marginal means

"extra"

Differences in systems exist by

-Degree of decentralized use of markets and prices in decision making -Degree of centralized government control

the command system

-Government ownership of resources -Decisions made by a central planning board -North Korea, Cuba, Myanmar

economic systems

-Set of institutionalized arrangements -Coordinating mechanism

rational self interest

-people strive to achieve personal satisfaction (utility) -Self interest does not equal Selfishness

Economic wants exceed society's productive capacity

.

4 categories of economic resources

1. Land (natural resources i.e. water, oil, minerals, etc.) 2.Labor(workers) 3.Capital (i.e. Machines, tools, etc.) Investment 4. Entrepreneurial ability (i.e. innovating ideas)

invisible hand

1776 Wealth of Nations by Adam Smith Unity of private and social interest Virtues of the market system Efficiency Incentives Freedom

Determinants of supply

A change in resource prices A change in technology A change in the number of sellers A change in taxes and subsidies A change in prices of other goods A change in producer expectations

Disinflation

A decrease in the rate of inflation

Graph

A visual representation of the relationship between two variables

Inflation

An increase in the overall price level in the economy; the overall price level is basically the average of prices in the economy

Law of increasing opportunity costs

As more of a particular good is produced, its marginal opportunity costs increase

A point inside the production possibilities curve is ____ while a point outside the curve is ____

Attainable; unattainable

Direct relationship

Both variables move in the same direction

how the system deals with risks

Business owners and investors face risk Losses due to input shortages Changes in consumer tastes Natural disasters that affect the supply chain Employees and suppliers have security Paid whether the firm makes a profit or not

Determinants of demand

Change in consumer tastes and preferences Change in the number of buyers Change in income -Normal goods -Inferior goods

HOW will the system change

Changes in consumer tastes Changes in technology Changes in resource prices

The demise of the command system

Command system was a failure Soviet Union, Eastern Europe, and China The coordination problem Set output targets for all goods The incentive problem No adjustments for surplus or shortage

Production possibilities curve

Concave shape

A budget line is a graph that shows the various combinations of two products that a

Consumer can buy with a given amount of money income

WHO will get the output?

Consumers with the ability and willingness to pay will get the product Ability to pay depends on income

Inflation and deflation can have harmful effects. -Inflation

Decline Purchasing power Future Uncertainty

Amount consumers are willing and able to purchase at a given price

Demand

In which of the following instances is the effect on equilibrium price dependent on the magnitude of the shifts in supply and demand?

Demand rises and supply rises

In which of the following instances is the effect on equilibrium price dependent on the magnitude of the shifts in supply and demand

Demand rises and supply rises.

Positive economics

Economic statements that are factual

Normative economics

Economic statements that involve value judgments

Hyperinflation

Extremely high inflation

A decrease in supply of X increases the equilibrium price of X, which reduces the demand for X and automatically returns the price of X to its initial level. TRUE/FALSE

FALSE

Surpluses drive market prices up; shortages drive them down. TRUE/FALSE

FALSE

A decrease in supply of X increases the equilibrium price of X, which reduces the demand for X and automatically returns the price of X to its initial level. TRUE/FALSE

FLASE

Surpluses drive market prices up; shortages drive them down. TREU/FLASE

FLASE

WHAT will be produced?

Goods and services that create a profit Consumer sovereignty -Dollar votes Method for consumers to determine which goods will be produced Determines which products and industries survive or fail

Active, but Limited Government

Government may be needed to alleviate market failures -externalities Government can increase effectiveness of a market system -Social needs vs private needs Possible government failure -Too much regulation

Laissez Faire Capitalism

Ideal economy "Keep the government from interfering with the economy" Power of government just needed to Protect private property from theft Provide a legal environment for contract enforcement People interact in markets to buy and sell

A nation can increase its production possibilities by

Improving labor productivity

totally worth it

MC<MB

thats not worth it

MC>MB

HOW will the goods be produced?

Minimize the cost per unit by using the most efficient techniques technology Prices of the necessary resources

Generalizations

Models that represent reality

use of money

Money makes trade easier Medium of exchange Without money, people would have to barter

what fi we created a legal market for human organs? (neg)

Negative effects Diminishes the special nature of life by commercializing it The market would leave out the poor and uninsured Increases the cost of medical care Prohibition on market solution has resulted in a $1 billion illegal market

Inflation and deflation can have harmful effects. -deflation

No incentives for producers

scientific method

Observe Formulate a hypothesis Test the hypothesis Accept, reject, or modify the hypothesis Continue to test the hypothesis, if necessary

Law of demand

Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls

law of supply

Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls

What if we created a legal market for human organs? (pos)

Positive effects Increase the incentive to donate Eliminate the persistent shortage of eyes, livers, hearts, kidneys, etc

can be confirmed or refuted

Positive statements

Price floor

Prices are set above the market price Chronic surpluses -Example is the minimum wage law

characteristics of the market system

Private property Freedom of enterprise Freedom of choice Self interest Competition markets and prices

Productive efficiency

Producing goods in the least costly way Using the best technology Using the right mix of resources

Allocative efficiency

Producing the right mix of goods The combination of goods most highly valued by society

Price ceiling

Set below equilibrium price Rationing problem Black markets -Example is rent control

slope nonlinear curve

Slope always changes Use a line tangent to the curve to find slope at that point

Slope

Slopes and measurement units Slopes and marginal analysis Infinite and zero slopes Vertical intercept

A movement from one point to another along the production possibilities curve would imply that

Society is producing a different combination of outputs

everyone faces scarcity. T/F

TRUE

HOW will the system progress?

Technological advance Creative destruction (increase productivity substitution of obsolete tech) Capital accumulation

rationing functions of price

The ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistent

MB is decreasing

The marginal benefit of an extra unit of a good/activity is going down as more is hold or have of that good/activity

MC is increasing

The marginal cost of an extra unit of a good/activity is going up as we hold or have more of that good/activity since more is giving up to do it.

Deflation

The opposite of Inflation, a decrease in the price level.

Unemployment

The percentage of the labor force that is unemployed.

Macroeconomics

The study of the entire economy or a major aggregate of the economy

Microeconomics

The study of the individual consumer, firm, or market

Inverse relationship

Variables move in opposite directions

If two goods are complements:

a decrease in the price of one will increase the demand for the other

A surplus of a product will arise when price is

above equilibrium, with the result that quantity supplied exceeds quantity demanded

A surplus of a product will arise when price is:

above equilibrium, with the result that quantity supplied exceeds quantity demanded.

A person should consume more of something when its marginal:

benefit exceeds its marginal cost

A rational person compares the

benefit vs the cost

If the demand for steak (a normal good) shifts to the left, the most likely reason is that:

consumer incomes have fallen.

if the price of alcohol increases, what happens to the demand for solo (plastic) cups?

cups increase

(Consider This) At fast-food restaurants:

decisions entail comparisons of marginal costs and marginal benefits

Rational decisions .

decisions that will make people better off, not worse off

determine what is going to happen to the supply/demand in the market of air travel this summer: price of training tickets decreases

demand decreases

determine what is going to happen to the supply/demand in the market of air travel this summer: income increases

demand increases

determine what is going to happen to the supply/demand in the market of air travel this summer: people expect airfares to increase next summer

demand increases

Equilibrium occurs where the

demand curve and supply curve intersect

If products A and B are complements and the price of B decreases, the

demand for A will increase and the quantity of B demanded will increase

-Scarcity and choice -Opportunity cost -Purposeful behavior to increase utility -Marginal analysis

economic perspective

A social science concerned with making optimal choices under conditions of scarcity

economics

people respond to_________

incentives

A demand curve:

indicates the quantity demanded at each price in a series of prices

A demand curve:

indicates the quantity demanded at each price in a series of prices.

markets

interaction between buyers and sellers

The market system

is a mix of decentralized decision making with some government control

A normative statement is one that

is based on value judgments

The command system

is known as socialism or communism

markets can be

local national international

rewards individuals and business

market systems

pos or neg norm: A tax cut is needed to stimulate the economy

neg

pos or neg norm: The government should print less money.

neg

can not be confirmed or refuted

normative statements

The decision to engage in one activity means forgoing some other activity. Usually that decision involves the two most important alternatives. what we need to give up to gain something else

opportunity cost

Pos or neg norm: Prices rise when the government increases the quantity of money.

pos

pos or neg norm: An increase in the price of burritos will cause an increase in consumer demand for music downloads

pos

The demand curve shows the relationship between:

price and quantity demanded.

A decrease in the demand for recreational fishing boats might be caused by an increase in the:

price of outboard motors.

how would the price of illegal drugs be affected if government increases/promote education and employment amount population?

price would increase

you are a commodity trader and you've just heard a report that the winter wheat harvest will be in 2 billion bushels, a 40 percent jump, rather than an expected 30 percent jump. what would you expect would happen to wheat prices?

prices decrease

Economic model that shows different combinations of two goods that an economy can produce

production possibilities model

(Consider This) The assertion by economists that "there is no free lunch

remains true even for goods given away free by firms

Assume a drought in the Great Plains reduces the supply of wheat. Noting that wheat is a basic ingredient in the production of bread and potatoes are a consumer substitute for bread, we would expect the price of wheat to:

rise, the supply of bread to decrease, and the demand for potatoes to increase.

If products C and D are close substitutes, an increase in the price of C will:

shift the demand curve of D to the right

If products C and D are close substitutes, an increase in the price of C will:

shift the demand curve of D to the right.

Amount producers are willing and able to sell at a given price

supply

determine what is going to happen to the supply/demand in the market of air travel this summer: a decrease in the number of airplanes

supply decreases

determine what is going to happen to the supply/demand in the market of air travel this summer: price of air cargo increases

supply decreases

determine what is going to happen to the supply/demand in the market of air travel this summer: price of jet fuel increases

supply decreases

the market system

systems found in much of the world Private markets are dominant force Private ownership of resources Self interested behavior

A market is in equilibrium if

the amount producers want to sell is equal to the amount consumers want to buy.

(Consider This) An exception to the advice "go to college, stay in college, and earn a degree" occurs when

the opportunity cost of attending college is extraordinarily high

By an "increase in demand," economists mean that:

the quantity demanded at each price in a set of prices is greater.

At the point where the demand and supply curves for a product intersect:

the quantity that consumers want to purchase and the amount producers choose to sell are the same.

linear relationship

y = a + bx, where y is the dependent variable a is the vertical intercept b is the slope of the line x is the independent variable

is there always an opportunity cost?

yes