macro test

Shortage

(excess demand): quantity demanded is greater than quantity supplied - sllers rais the price - price contunies to rise until amrket reaches equilibrium

Surplus

(excess supply)quantity supplied is greateer then quanity demanded -sellers try to increase sales by cutting price -Prices continue to fall until market reaches equilibrium.

perfectly competitive market

- All goods are exactly the same - Buyers and sellers are so numerous that no one can affect the market price, "Price takers"

Quantity demanded

- Amount of a good that buyers are willing and able to purchase

• Quantity supplied

- Amount of a good- Sellers are willing and able to sell

tastes

- Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right

Government - promote equality

- Avoid disparities in economic wellbeing - Use tax or welfare policies to change how the economic "pie" is divided

Making decisions:

- Compare costs with benefits of alternatives - Need to include opportunity costs

Prices:

- Determined: interaction of buyers and sellers - Reflect the good's value to buyers- Reflect the cost of producing the good

Circular-flow diagram

- Visual model of the economy - Shows how dollars flow through markets among households and firms

Moving along a PPF

involves shifting resources from the production of one good to the other

Law of Demand

- When the price of a good rises, the quantity demanded of the good falls - When the price falls, the quantity demanded rises

Law of supply

- When the price of a good rises, the quantity supplied of the good rises - When the price falls, the quantity supplied falls

The "invisible hand" directs economic activity through a. advertising. b. prices. c. central planning. d. government regulations.

b. prices.

Points under the PPF

- possible - not efficient (some resources underutilized)

The slope of a line that passes through points (20, 40) and (40, 14) is A. 13/10. B. 10/13. C. -13/10. D. -10/13.

C. -13/10.

Why the PPF Might Be Bowed Outward

- Different workers have different skills - Different opportunity costs of producing one good in terms of the other - There is some other resource, or mix of resources with varying opportunity costs

Government - enforce property rights

- Enforce rules and maintain institutions that are key to a market economy • People are less inclined to work, produce, invest, or purchase if large risk of their property being stolen

Two decision makers

- Firms and Households

Countries benefit from trade and specialization

- Get a better price abroad for goods they produce - Buy other goods more cheaply from abroad than could be produced at home

inflation in the long run

- Inflation is almost always caused by excessive growth in the quantity of money, which causes the value of money to fall - The faster the government creates money, the greater the inflation rate

Interacting in two markets

- Market for gods and services - Market for factors of production (inputs)

Market supply

- Sum of the supplies of all sellers of a good or service - Market supply curve: sum of individual supply curves horizontally

Prices of related goods, complements

- Two goods are complements if • An increase in the price of one leads to a decrease in the demand for the other ex: computers and shoftwear

Points on the PPF

-possible -efficient: all resources are fully utilized

Economists play two roles:

1. Scientists: try to explain the world 2. Policy advisors: try to improve it

The "invisible hand" influences market behavior through trade T or F

False

Production possibilities frontier

A graph: combinations of output that the economy can possibly produce

Market

A group of buyers and sellers (need not be in a single location)

Income - Inferior good

An increase in income leads to a decrease in demand: Shifts D curve to the left

• Income - Normal good

An increase in income leads to an increase in demand: Shifts D curve to the right

Inflation

An increase in the overall level of prices in the economy

Positive statements: descriptive

Attempt to describe the world as it is

Normative statements: prescriptive

Attempt to prescribe how the world should be

Government - promote efficiency

Avoid market failures: market left on its own fails to allocate resources efficiently - Externality - source of market failure • Production or consumption of a good affects bystanders (e.g. pollution) - Market power - source of market failure

In a certain economy, toys and greeting cards are produced, and the economy currently operates on its production possibilities frontier. Which of the following events would allow the economy to produce more toys and more greeting cards relative to the quantities of those goods that are being produced now? A. The economy experiences economic growth. B. There is a technological advance in the toy industry, but the greeting card industry experiences no such advance. C. There is a technological advance in the greeting card industry, but the toy industry experiences no such advance. D. All of the above are correct.

D. All of the above are correct.

The business cycle is measured by the a. production of goods and services. b. number of people employed. c. the interest rate. d. Both a and b are correct.

D. Both a and b are correct.

The English word that comes from the Greek word for "one who manages a household" is a. market. b. consumer. c. producer. d. economy.

D. economy

Factors of production are: A. the mathematical calculations firms make in determining their optimal production levels. B. social and political conditions that affect production. C. the physical relationships between economic inputs and outputs. D. inputs into the production process.

D. inputs into the production process.

In the circular flow diagram, which of the following items flows from firms to households through the markets for the factors of production? A. goods and services .B. land, labor, and capital. C. dollars spent on goods and services. D. wages, rent, and profit.

D. wages, rent, and profit.

A market economy allocates resources

Decentralized decisions of many firms and households - as they interact in markets

Decrease in of buyers

Decreases quantity demanded at each price • Shifts D curve to the left

Buyers as a group

Determine the demand for the product

Sellers as a group

Determine the supply of the product

Prices of related goods, substitutes

Two goods are substitutes if • An increase in the price of one leads to an increase in the demand for the other ex: pizza and hamburgers

Number of buyers Increase

Increases quantity demanded at each price • Shifts D curve to the right

competitive market

Many buyers and many sellers, each has a negligible impact on market price

People benefit from trade:

People can buy a greater variety of goods and services at lower cost

Equilibrium:

Price has reached the level where quantity supplied equals quantity demanded

Invisible hand:

Prices guide self-interested households and firms to make decisions that maximize society's economic well-being

How People Make Decisions

Principle 1: People face trade-offs Principle 2: The cost of something is what you give up to get it Principle 3: Rational people think at the margin Principle 4: People respond to incentives

How People Interact

Principle 5: Trade can make everyone better off Principle 6: Markets are usually a good way to organize economic activity Principle 7: Governments can sometimes improve market outcomes

How the economy as a whole works

Principle 8: A country's standard of living depends on its ability to produce goods and services Principle 9: Prices rise when the government prints too much money Principle 10: Society faces a short-run trade-off between inflation and unemployment

Equilibrium quantity:

Q supplied and demanded at th equilibrium price

demand curve

Shows how price affects quantity demanded

supply curve

Shows how price affects quantity supplied, other things being equal

Incentive

Something that induces a person to act

input prices

Supply is negatively related to prices of inputs - Examples of input prices: wages, prices of raw materials - A fall in input prices makes production more profitable at each output price

Economics

The study of how society manages its scarce resources

The classic tradeoff between "guns and butter" states that when a society spends more on national defense, it has less to spend on consumer goods to raise the standard of living. T or F

True

Trade with any nation can be mutually beneficial T or F

True

Opportunity cost

Whatever must be given up to obtain some item

market

a group of buyers and sellers of a particular good or service

The term used to describe a situation in which markets do not allocate resources efficiently is a. economic meltdown. b. market failure. c. equilibrium. d. the effect of the invisible hand.

b. market failure.

Which of the following transactions takes place in the markets for the factors of production in the circular-flow diagram? a. Dylan receives a salary for his work as a financial analyst for an investment firm. b. Kristin buys two business suits to wear to her job as a Chief Information Officer. c. Jim receives clean water in his home in exchange for paying his water bill. d. Caroline owns a nail salon and receives payments from her clients for her services.

a. Dylan receives a salary for his work as a financial analyst for an investment firm.

Stephen is restoring a car and has already spent $4,000 on the restoration. He expects to be able to sell the car for $5800. Stephen discovers that he needs to do an additional $2,400 of work to make the car worth $5,800 to potential buyers. He could also sell the car now, without completing the additional work, for $3,800. What should he do? a. He should sell the car now for $3,800. b. He should keep the car since it wouldn't be rational to spend $6,400 restoring a car and then sell it for only $5,800. c. He should complete the additional work and sell the car for $5,800. d. It does not matter which action he takes since the outcome will be the same either way.

a. He should sell the car now for $3,800.

Air pollution from burning fossil fuels causes damages to crops and public health. This is an example of a. a market failure caused by an externality. b. a market failure caused by market power. c. a market failure caused by equality. d. There is no market failure in this case.

a. a market failure caused by an externality.

In a particular country in 1998, the average worker needed to work 40 hours to produce 100 units of output. In that same country in 2008, the average worker needed to work 36 hours to produce 72 units of output. In that country, the productivity of the average worker a. decreased between 1998 and 2008, so we would expect the standard of living to have decreased accordingly. b. increased between 1998 and 2008, so we would expect the standard of living to have increased accordingly. c. decreased between 1998 and 2008, so we would expect inflation to have decreased accordingly. d. increased between 1998 and 2008, so we would expect inflation to have increased accordingly.

a. decreased between 1998 and 2008, so we would expect the standard of living to have decreased accordingly.

The property of society getting the most it can from its scarce resources is called a. efficiency. b. equality. c. externality. d. productivity.

a. efficiency.

In the circular-flow diagram, which of the following items flows from firms to households through the markets for goods and services? a. goods and services b. dollars paid to land, labor, and capital c. dollars spent on goods and services d. wages, rent, and profit

a. goods and services

The demand for a good or service is determined by a. those who buy the good or service. b. the government. c. those who sell the good or service. d. both those who buy and those who sell the good or service.

a. those who buy the good or service.

Consider Frank's decision to go to college. If he goes to college, he will spend $21,000 on tuition, $11,000 on room and board, and $1,800 on books. If he does not go to college, he will earn $16,000 working in a store and spend $7,200 on room and board. Frank's cost of going to college is a. $33,800. b. $42,600. c. $49,800. d. $57,000.

b. $42,600.

The slope of a line that passes through the points (20, 30) and (40, 14) is a. -5/4. b. -4/5. c. 4/5. d. 5/4.

b. -4/5.

Which of the following changes would not shift the demand curve for a good or service? a. a change in income b. a change in the price of the good or service c. a change in expectations about the future price of the good or service d. a change in the price of a related good or service

b. a change in the price of the good or service

In the simple circular-flow diagram, the participants in the economy are a. firms and government. b. households and firms. c. households and government. d. households, firms, and government.

b. households and firms

The slope of a steep upward-sloping line will be a a. small positive number. b. large positive number. c. small negative number. d. large negative number.

b. large positive number.

Holding the nonprice determinants of supply constant, a change in price would a. result in either a decrease in supply or an increase in supply. b. result in a movement along a stationary supply curve c. result in a shift of demand d. have no effect on the quantity supplied.

b. result in a movement along a stationary supply curve

One effect of the government-imposed seat belt law in the U.S. has been a. a dramatic decrease in the number of pedestrian deaths. b. safer driving. c. an increase in the number of accidents. d. a dramatic decrease in the number of driver deaths.

b. safer driving.

Today's supply curve for gasoline could shift in response to a change in a. today's price of gasoline. b. the expected future price of gasoline. c. the number of buyers of gasoline. d. .All of the above are correct.

b. the expected future price of gasoline.

In a market economy, supply and demand determine

both the quantity of each good produced and the price at which it is sold

Home is a country that produces two goods, pears and cellular phones. Last year, Home produced 450 bushels of pears and 1050 cellular phones. This year it produced 450 bushels of pears and 2000 cellular phones. Given no other information, which of the following events could explain this change? a. Home experienced increased unemployment. b. Home experienced a decline in pear-producing technology. c. Home experienced an improvement in cellular phone-making technology. d. Home experienced a reduction in resources.

c. Home experienced an improvement in cellular phone-making technology.

Dale is a guitar teacher and Terrence is a tile layer. If Dale teaches Terrence's daughter to play the guitar in exchange for Terrence tiling Dale's kitchen floor, a. only Dale is made better off by trade. b. only Terrence is made better off by trade. c. both Dale and Terrence are made better off by trade. d. neither Dale nor Terrence are made better off by trade.

c. both Dale and Terrence are made better off by trade.

A company that formerly produced music CDs went out of business because too many potential customers bought illegally-produced copies of the CDs instead of buying the product directly from the company. This instance serves as an example of a. market power. b. inefficient trade. c. inadequate enforcement of property rights. d. the invisible hand at work.

c. inadequate enforcement of property rights.

In the circular-flow diagram, a. factors of production flow from government to firms. b. goods and services flow from households to firms. c. income paid to the factors of production flows from firms to households. d. spending on goods and services flows from firms to households.

c. income paid to the factors of production flows from firms to households.

Efficiency a. and equality both refer to how much a society can produce with its resources. b. and equality both refer to how fairly the benefits from using resources are distributed between members of a society. c. refers to how much a society can produce with its resources. Equality refers to how evenly the benefits from using resources are distributed among members of society. d. refers to how evenly the benefits from using resources are distributed between members of society. Equality refers to how much a society can produce with its resources

c. refers to how much a society can produce with its resources. Equality refers to how evenly the benefits from using resources are distributed among members of society.

A variety of fuels can be used to generate electricity. Considering only the availability of the fuel and not the cost of converting it into electricity, which of the following fuels is most scarce? a. wind power b. solar energy c. fossil fuel d. hydro-power

c. fossil fuels

n the circular-flow diagram, which of the following items does not flow from firms to households? a. goods b. services c. capital d. Both a & b

capital

Rational people make decisions by

comparing marginal costs and marginal benefits

Straight line PPF

constant opportunity cost

Most economists believe that an increase in the quantity of money results in a. an increase in the demand for goods and services. b. lower unemployment in the short run. c. higher inflation in the long run. d. All of the above are correct.

d. All of the above are correct.

Which of the following is an example of a normative, as opposed to positive, statement? a. Following the most recent recession, the economy is recovering at a slower than usual pace. b. To stimulate the economy during the most recent recession, the federal government increased spending. c. In response to the most recent recession, the federal government extended the duration of unemployment benefits. d. The federal government's responses to the most recent recession were insufficient.

d. The federal government's responses to the most recent recession were insufficient

If macaroni and cheese is an inferior good, then an increase in a. the price will cause the demand curve for macaroni and cheese to shift to the left. b. the price will cause the demand curve for macaroni and cheese to shift to the right c. a consumer's income will cause the demand curve for macaroni and cheese to shift to the left. d. a consumer's income will cause the demand curve for macaroni and cheese to shift to the right

d. a consumer's income will cause the demand curve for macaroni and cheese to shift to the right

Factors of production are a. the mathematical calculations firms make in determining their optimal production levels. b. social and political conditions that affect production. c. the physical relationships between economic inputs and outputs. d. inputs into the production process

d. inputs into the production process

A society allocates its scarce resources to various uses. These scarce resources include a. land. b. people. c. machines d. All of the above are correct.

d. All of the above are correct.

The law of demand states that, other things equal, when the price of a good

falls, the quantity demanded of the good rises

A decrease in the price of a product and an increase in the number of buyers in the market affect the demand curve in the same general way. T/F

false

A movement upward and to the left along a given demand curve is called a decrease in demand. T/F

false

Bowed outward PPF

increasing opportunity costs

supply curve shifters

input prices, technology, # of sellers, expectations

The slope of a steep upward-sloping line will be a a. small positive number. b. large positive number. c. small negative number. d. large negative number.

large positive number

Points above the PPF

not possible

Demand Curve Shifters

number of buyers, income, prices of related goods, tastes, expectations

A likely example of substitute goods for most people would be

pencils and pens

Equilibrium price:

price where Q supplied = Q demanded

most important determinant of living standards

productivity

Equality

prosperity is distributed uniformly among society's members

Efficiency:

society gets the most from its scarce resources

The forces that make market economies work are

supply and demand

Rational people

systematically and purposefully do the best they can to achieve their objectives - Given the available opportunities - Make decisions by evaluating costs and benefits of marginal changes

stepper the ppf

the greater the oppurtnity cost

Scarcity

the limited nature of society's resources - Society has limited resources • Cannot produce all the goods and services people wish to have

The slope of the PPF

the opportunity cost of one good in terms of the other

market demand

the sum of all the individual demands for a particular good or service

Advances in production technology typically reduce firms' costs, which increases the quantity supplied at each price T/F

true

Economists study how people make decisions T or F

true

In a market economy, supply and demand determine both the quantity of each good produced and the price at which it is sold. T/F

true

In the circular-flow diagram, one loop represents the flow of goods, services, and factors of production, and the other loop represents the corresponding flow of dollars. T/F

true

The scientific method can be applied to the study of economics. T/F

true

When economists are trying to explain the world, they are scientists, and when they are trying to help improve the world, they are policy advisers T/F

true

Short-run trade-off between

unemployment and inflation