Econ 202 Exam 1

Normative economics

"what ought to be." cannot be proven true or false.

profit

-occurs when a firm's revenues are greater than their costs -firms supplying goods for which consumers are willing to pay more than the oppurtunity cost of resources used will make a profit

The supply of a good decreases if:

-the price of a resource used to produce good rises -the number of good producers decreases -the price of a substitute in production rises -the price of good is expected to rise in the future

The three economic questions that every society must answer forced by trade-offs are:

What goods will be produced, how will they be produced, and who will receive the goods??

A change in demand

a shift in the demand curve

economists use models to

answer questions and analyze issues

surplus: shortage:

creates downward pressure on the price creates upward pressure

The price of Burger King's Whopper Hamburger declines, this will cause

demand for McDonald's Big Mac hamburgers to decrease

quantity demanded

of a good or service is the amount that consumers are willing and able to buy during a given time period at a particular price. holding other things constant. (law of demand) the higher the price, the lower quantity demanded. the lower the price, the higher quantity demanded.

change in price

results in a movement along the demand curve. (a change in the quantity demanded)

If the number of producers increases

supply increases and vice versa

quantity supplied

the amount that producers plan to sell during a given time period at a particular price

inferior goods:

the demand decreases when income increases and increases when income decreases

law of supply:

the higher the price of a good, the greater the quantity supplied because of the motivation to produce more

economic data is used

to test models

marginal benefit:

total benefit/ change in quantity. additional benefit from consuming one more. what you're willing to pay.

Positive economics

"what is." can be proven trued or false

economic models are

simplified versions of reality designed to analyze "what is" to explain human decision making in any context

economic variable:

something measurable that can have different values, such as the wages of software programmers

normal goods:

the demand increases when income increases and decreases when income decreases

The supply of a good increases if:

-the price of a resource used to produce good falls -more efficient technologies for producing goods are discovered -the number of good producers increases -the price of a substitute in production falls -the price of good is expected to fall in the future

The demand for a good decreases if:

-the price of a substitute falls -the price of a complement rises -income falls (normal good) -population decreases -the price of good is expected to fall in the future

The demand for a good increases if:

-the price of a substitute rises -the price of a complement falls -income rises (normal good) -population increases -price of good is expected to rise in the future

The role of assumptions in economic models:

Economic models make behavioral assumptions. 1. People are rational 2. People respond to economic incentives 3. Optimal decisions are made at the margin

"I was going to drop my psychology course so I could concentrate on my other courses, but I had already put so much time into the course I decided not to drop it." Is your friend's reasoning correct?

No

You observe that when the price of Oscar Mayer hot dogs decreases the demand for Wonder hot dog buns increases, therefore they are ____ goods

Oscar Mayar hot dogs and Wonder hot dog buns are considered to be complementary goods

The demand for plums is highest during the summer and lowest during the winter. Yet plum prices are normally lower in the summer than in winter. What must be happening to the supply of plums, from winter to summer, for the equilibrium price to fall?

The supply increases more than the demand increases

productive efficiency means that

a good or service is produced at the lowest possible cost

market:

a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade

Relative to a person who earns minimum wage, a person who earns $30 per hour has

a higher opportunity cost of taking a day off

McDonald's eliminates $1.00 off coupons. This will cause

a movement along the demand curve for McDonald's big ma chamburgers

scarcity and poverty are not the same thing

absence of poverty implies some basic level of need has been met. an absence of scarcity would imply that all of out desires for goods are fully satisfied. scarcity will always be with us

A mixed economy

an economy in which most economic decisions result from the interactions of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources

Which of the following is a positive economic statement? a. everyone should live at the same standard of living b. u.s. firms should not be allowed to outsource production of goods and services c. if the price of gasoline rises, a smaller quantity of it will be bought d. the government should close income tax loopholes

c. if the price of gasoline rises, a smaller quantity of it will be bought

marginal cost:

change in total cost/ change in quantity. additional cost to a firm of producing one more unit.

"Stricter college alochol policies, such as raising the price of alcohol, or banning alcohol on campus, decreases the number of students who use marijuana." According to this statement, alcohol and marijuana are ______.

complements

When there is a shortage of a good _______________________________________. The process continues until the market is finally in equilibrium.

consumers compete against one another by bidding the price upward

opportunity cost:

cost of the highest valued alternative opportunity (next best thing)

sunk costs

costs that you incur that can never be retrieved (rent)

Scarcity is the central to the study of economics because it implies that

every choice involves an opportunity cost

allocative efficiency means that

every good or service is produced up to the point where marginal benefit is equal to marginal cost

Which of the following best describes scarcity?

exceed the limited resources available.

Centrally planned economies allocate resources based on decisions by ________, while market economies answer these questions through decisions made by ___________

government (USSr, China); households and firms

The scarcity principle implies that to have more of one thing usually means

having less of another thing (trade-offs)

microeconomics is the study of

how households and firms make choices,, how they interact i markets, and how the government attempts to influence their choices

complements

if an increase in the price of one shifts the demand for the other leftward and a decrease, in the price of one shifts the demand for the other rightward. (peanut butter/ jelly) good you buy, with the other

substitute goods

if an increase in the price of one shifts the demand for the other rightward and, conversely, if a decrease in the price one shifts the demand for the other good leftward (pizza/chinese) compare two, but only choose one

equilibrium:

in a market occurs when the price balances the plans of buyers and sellers

The coordination that occurs through markets occurs because of Adam Smith's _________

invisible handq

equilibrium price:

is the price at which quantity demanded equals quantity supplied

equilibrium quantity:

is the quantity bought and sold at the equilibrium price

ceteris paribus

other things constant

as long as quantity supplied and quantity demanded differ

prices will tend to change

KFC lowers the price of a bucket of friend chicken. This will

shift the demand for McDonald's Big Mac hamburgers to the left

marginal benefit

should be more or equal to marginal cost

Markets reduce the _____________ of exchange - the costs of time and information required for exchange

transaction costs