ECON 201 Exam 1

Which of the following best characterizes the circular flow of income?

Businesses buy resources from households, and households use their income from the sale of resources to buy goods and services from businesses.

The nature of demand indicates that as the price of a good increases:

Buyers desire to purchase less of it

In countries like _____________ the command economy predominates.

Cuba and North Korea

Fiscal policy

economic policies that involve government spending and taxes.

Imports

goods produced abroad and sold domestically

Exports

goods produced domestically and sold abroad

Scarcity

human wants for goods, services and resources exceed what is available

Underground economy

markets where buyers and sellers make transactions without government approval, also known as black market

GDP

measure size of total production in an economy

Monetary policy

policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing.

Define Economics

study of how humans make decisions if face of scarcity

"If I didn't have class tonight, I would save the $4 campus parking fee and spend four hours at work where I earn $10 per hour." The opportunity cost of attending class this evening is:

$44

How can a group of workers, each specializing in certain tasks, produce so much more than the same number of workers who try to produce the entire good or service by themselves? Adam Smith offered three reasons. List them and briefly describe the rationale behind each.

1) Division of Labor-way in which different workers divide required tasks to produce goods or services. Ex: Workers on an assembly line. 2) Specialization-workers or firms focus on particular tasks for which they are well-suited within overall production process. 3) Economics of scale-as level of production increases, average cost of producing each individual unit declines.

Various factors cause a demand curve to shift. List four different factors.

1) Income 2) Trends & Tastes 3) Prices of Related Goods 4) Expectations

What are five things that will shift a supply curve to the right?

1) Input Prices 2) Natural Conditions 3) Expectations 4) Improvement in technology 5) Size of the market

What is the difference between a change in demand and a change in quantity demanded?

A change in demand is when the entire demand curve shifts either left of right. Change in quantity demanded is when there is movement along the demand curve, only being caused by a change in price.

Shortage

A situation in which quantity demanded is greater than quantity supplied

Surplus

A situation in which quantity supplied is greater than quantity demanded

The _______________ is the quantity where quantity demanded and quantity supplied are equal at a certain price.

Equilibrium quantity

Ceteris paibus

Latin phrase meaning "other things being equal"

Economists refer to this pattern, the _____________, which means that as a person receives more of a good, the additional or marginal utility from each additional unit of the good declines.

Law of diminishing marginal utility

Most choices involve ____________, which involves comparing the benefits and costs of choosing a little more or a little less of a good.

Marginal analysis

In a ________________, most economic decisions about what to produce, how to produce it, and for whom to produce it are made by buyers and sellers.

Market Economy

How does microeconomics relate to macroeconomics?

Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses, while macroeconomics focuses on broad issues such as growth, unemployment, inflation, and trade balance.

When most people want to know the cost of an item or a service, they look for a price tag. When economists want to determine cost, they go one step further. They use the idea of opportunity cost. Explain the concept of opportunity cost and illustrate with an example.

Opportunity cost indicates what one must give up to obtain what he or she desires. It is the value of the next best alternative. The cost of one item is the opportunity to do or consume something else. Fundamental principle of economics is that every choice has opportunity cost. An example of this is determining how many slices of pizza and how many cans of soda a person can get who has $20 budget and the pizza slices are $5 each and soda is $2 a can.

Wheat and oats are both used to make cereal and both are grown on the prairies. What would happen to the supply and demand of oats if the price of wheat were to rise?

The supply and demand of oats would both go up if the price of wheat were to rise. The higher a price goes up, the number of supplies go up. When number of supplies go up, the demand for those supplies go up as well.

Globalization

the trend in which buying and selling in markets have increasingly crossed national borders.

Productive efficiency

when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)

Allocative efficiency

when the mix of goods produced represents the mix that society most desires