macro test one
the two conditions for a perfectly competitive market
a. sellers all sell an identical g/s b. any individual buyer/seller isn't powerful enough on his own to affect market price
diminishing marginal benefit
as you consume more of a good, your willingness to pay for an additional unit declines
randomization
assignment of subjects by chance to a treatment or control group
mean
average; affected by outliers
opportunity cost
best alternative activity given up when making a decision
policy decisions made by the government are analyzed by _________
both micro and macro
which of the following is not an example of causation? A. heavy drinking will lead to liver disease B. exercising daily will lead to weight loss C. wearing your lucky socks while watching the football game will lead to your team winning D. all of the above
c
what is rationality
choosing the best feasible option giving the information that's available - examine the quality of the initial decision, not the outcome
suppose that the government imposes a price control on gasoline where the legal price is set at $1.50 per gallon while the equilibrium price would be $2.25. a shortage ensures. worried that you may not have enough gas to commute to work and do errands, you get up before dawn to go to a gas station to fill up the tank. but you find yourself waiting in a long line. fortunately, the station did not run out of as before your turn camp up and you were happy to drive away with a full tank of gas. refer to the scenario above. the shortage results because ______________.
consumers demand more than sellers are willing to supply at the legal price (check this one)
test #1: the mean and the median are closely related concepts. the median is the numerical value separating the higher half of your data from the lower half. you can find the median by arranging all of the observations from lowest value to highest value and picking the number in the middle. although the mean and median are closely related, the different between the two is sometimes of interest. suppose country A has 5 families. their incomes are $10,000, $20,000, $31,000, $41,000, $49,000. country A's median income is _____ and its mean income is ________. suppose country B also has 5 families. their incomes are $10,000, $20,000, $31,000, $41,000, $151,000. country B's median income is ____ and its mean income is ____. country ___ has greater income inequality.
country A: 31,000; 30,200 country B: 31,000; 50,600 more income inequality: B
competitive equilibrium
crossing point of supply and demand curves
positive economics
describes what people actually do - objective statements about the world - describing what has happened or predicting what will happen
competitive equilibrium price
equates quantity supplied and demanded
what is empiricism
evidence based analysis - develop/test theories - determine causality
empirical evidence
facts are obtained through observation and measurement (aka data)
market demand is derived by
fixing the price and adding up the quantities that each buyer demands.
movement along the demand curve
happens when a good's own price changes and its demand curve hasn't shifted
you have already purchased (non-refundable and unsellable) tickets to a concert on Friday night. a friend also invites you to her birthday party on Friday. while you like your friend, you politely decline because you really want to go to the concert. suppose you learn that your friend is serving flank steak at her party; all you can eat and at no charge. flank steak is your favorite food. your opportunity cost of going to the concert is now ______ than you had previously thought. suppose instead that you notice that the concert ticket cost you $10; previously, you had mistakenly believed the price was $100. should learning this information affect your decision to go to the concert? ___
higher; no - the tickets are nonrefundable and already purchased
a fall in the price of flour, used in making cakes, is likely to _________ of cakes
increase the quantity supplied
as a firm produces more of a good, the cost of producing each additional unit _________. this implies that the marginal cost of producing a good ____ as you make more of that good. the supply curve represents _________
increases; increases the minimum price sellers are willing to accept to sell an extra unit of a good
what is the concept of causation?
it describes how one event can bring about change in another
When comparing the equilibriums in the lobster market for August and November, the equilibrium quantity is ______ in November than in August, while the equilibrium price is ______.
lower; higher, lower or unchanged (we can't know)
a policy such as whether to increase the money supply would be studied under _____ since it deals with _________
macro; the economy as a whole
a group of economic agents who are trading a g/s would define a __________. price takers exist throughout _________ markets
market; competitive
median
middle value; not affected by outliers
the ethical implications of a hotly debated government policy would best be considered a _________
normative question, since it deals with a subjective issue based on personal preferences
the statement that the US government should increase carbon taxes to reduce carbon emissions that cause global warming is a ___________
normative statement, since it describes what ought to be done and is therefore not possible to confirm with data
the statement that the United States has an unemployment rate that is too high is a _________ statement since it describes what people __________
normative; ought to do
at the competitive equilibrium, the __________
*quantity* demanded = *quantity* supplied
the three principles of economics
1. Optimization 2. Equilibrium 3. Empiricism
what 5 factors shift a demand curve
1. Tastes and preferences 2. income and wealth 3. availability and prices of related goods 4. number and scale of buyers 5. buyers' beliefs about future
what are the two important properties of models
1. a model is only an approximation 2. a model makes predictions that can be tested with data
what are the problems with experiments
1. can be costly 2. don't provide immediate answers to some important questions 3. sometimes run poorly
what are the 3 conditions that must hold for a market to be in equilibrium? 1. the amount produced by sellers must be _____ the amount purchased by buyers 2. the costs of making a product must be _____ the final price at which the product sells 3. buyers must place a value on the uses of the product that is _______ the cost of buying the product
1. equal to 2. less than 3. greater than
2 reasons we shouldn't assume that correlation means causality
1. omitted variables 2. reverse causality
economics, anthropology, psychology, sociology, and political sciences al study human behavior. economics differs from these other social sciences because it also addresses these 3 key concepts:
1. optimization 2. equilibrium 3. empiricism
zero correlation
2 variables aren't related
correlation
2 variables change at the same time - as one changes, so does the other
negative correlation
2 variables tend to move in opposite directions ex. people with high levels of education are less likely to be unemployed
positive correlation
2 variables tend to move in the same direction ex. people who have a relatively high income are more likely to be married than those with a lower income
suppose you're hired as management consultant by a major oil company to help it optimally price gasoline at its service stations. your client would like your team to perform a study on customer's gasoline purchasing habits when they notice an increase in the price of gas. you have access to the following groups of people. people who haven't noticed a gas-price increase-50 people who drive electric cars-35 people who have recently noticed a gas-price increase-70 people who ride their bikes to work-20 people who ride the bus-100 how many people would be in your treatment group? in your control?
70 in treatment 50 in control
suppose Z is a normal good. the equilibrium price and quantity of Z in the year 2013 was $25 and 60 units, respectively. in 2017, the equilibrium price of Z had increased to $35 but the equilibrium quantity had decreased to 50 units. other things remaining the same, which of the following could explain this change? A. a leftward shift of the supply curve of Z B. a rightward shift of the supply curve of Z C. a leftward shift of the demand curve for Z D. a rightward shift of the demand curve for Z
A
some people go to the doctor once a year because it is full covered by their health plan. other people have health plans that require a copayment, so they go to the doctor less frequently. you compare life expectancy between these two groups. using the concept of a natural experiment, which of the following statements is true about the scenario? A. this is not a natural experiment B. this is a decent natural experiment C. this is a good natural experiment
B
which of the following statements are true? A. a government price control will always cause the quantity demanded to exceed the quantity supplied B. a binding price ceiling will always cause the quantity demanded to exceed the quantity supplied C. equilibrium is attained when prices are allowed to respond to market pressure D. a government price control can be used to bring markets into equilibrium
B & C
a simple economic model predicts that a fall in the price of bus tickets means that more people will take the bus. However, you observe that some people still do not take the bus even after the price of a ticket fell is the model incorrect? A. yes its possible that certain factors, such as the price of gas, were not included in the model B. no, b/c is it based on an incorrect assumption C. no, b/c it predicts the outcome of increased bus ridership on average D. yes b/c it does not predict the outcome with 100% accuracy
C
which of the following is not an important property of an economic model? A. it predicts wha would happen on average B. it makes predictions that can be tested with data C. it predicts actual results over half the time D. it is based on a theoretical construct
C
which of the following is not true about economic models? A. a model is only an approximation B. they can be highly complex and based on lengthy mathematical analysis C. they are not useful, since they do not include all variables D. models are not perfect replicas of reality
C
the Lancet, a leading medical journal, published a paper on a possible link between autism in children and the MMR vaccine. following this, the number of MMR vaccines fell and evidence of mumps increased. examine each of the following statements carefully. which of these statements, if true, would help you conclude that there is indeed a cause and effect relationship between the vaccine and autism in children? A. other studies on the same issue suggest results are inconclusive B. the study included a large number of children who had been immunized against MMR and showed signs of autism C. survey was conducted on a large group of randomly selected members D. MMR vaccine contains thimerosal, a preservative known to increase risk of autism
C and D
which of the following statements would not be considered a positive statement? A. in 2013-2014, tuition at at 4-year degree colleges grew at its slowest rate in 30 years B. in the last 10 years, the annual unemployment rate was at its peak in 2010 C. the US automobile industry had its highest growth in 5 yrs in 2012 D. tuition at 4-yr universities is too high and should be lowered
D
aggregation
adding up individual behaviors
natural experiment
an empirical study in which some process - out of the control of the experimenter - has assigned subjects to control and treatment groups in a random or nearly random way
inferior good
an increase in income shifts demand curve to the left
normal good
an increase in income shifts demand curve to the right (more demanded)
economic agent
an individual or a group that makes choices - student, criminal, business, gov, army
market
a group of economic agents who are trading a g/s plus the rules/arrangements for trading
hypotheses
a model's predictions
how does a natural experiment differ from a randomized one?
a natural experiment uses existing variation, while a randomized one generates variation
an increase in the demand for a good is represented by ______>
a rightward shift of a demand curve
substitutes
a rise in the price of 1 god leads to a right shift in the demand curve (more demanded) for the other
model
a simplified description of reality (aka, a theory) - more important for a model to be simple and useful than precisely accurate
what is equilibrium
a situation in which no agent would benefit personally by changing his/her own behavior, given the choices of others - each agent can't do any better by changing his behavior
demand schedule
a table that reports the quantity demanded at different prices, holding all else equal
supply schedule
a table that reports the quantity supplied at different prices, holding all else equal
price-takers
a buyer/seller who accepts the market price
cost-benefit analysis
a calculation that identifies the best option by summing benefits and subtracting costs cost benefit analysis = optimization
experiment
a controlled method of investigating causal relationships among variables - a method of determining cause and effect - create a treatment (test) group and a control group
complements
a fall in the price of 1 good leads to a right shift in demand for the other
input
a g/s used to produce another g/s
As part of U.S. sugar policy, the government offers to buy raw sugar from domestic sugarcane mills at a price of 18.75 cents per pound. This government offer is made for as much raw sugar as the sugarcane mills produce. Any raw sugar purchased by the government is not sold in the domestic market, as this might cause raw sugar prices to fall. Suppose conditions arise in the sugar market that would lead to a competitive equilibrium price that is below 18.75 cents per pound. In this situation, sugar mills will __________.
not sell to private buyers at this lower price and will sell to the government instead, which will drive up the domestic price until it reaches 18.75 cents per pound.
movement along the supply curve
occurs when a good's own price changes and its supply curve hasn't shifted
demand curve shifts
only when quantity demanded changes at a given price
the free-rider problem
people who don't contribute but benefit from others who do - putting private interests about public good
what is optimization
picking the best feasible option - unifies the huge range of choices that agents make > we all optimize - WHAT we optimize varies among agents (individuals optimize overall well-being while firms optimize profit)
demand curves
plots relationship between prices and quantity demanded
market supply curve
plots relationship between total quantity supplied and market price
supply curve
plots the quantity supplied at different prices
the statement that the United States has an average annual inflation rate of 2.1% is a _______ statement since it describes what people ________
positive; actually do
making a prediction today about the world's population in twenty years based on current growth trends is an example of ______ economics. advising the residents of a town to choose a toll road over a freeway extension due to a limited budget an high trucking usage is an example of ______ economics.
positive; normative
which change causes a movement along the demand curve?
price of the good itself
suppose a new off-campus university apartment complex could rent its rooms on the open market for $900 a month. if, instead, the university chooses to cap the price of rooms o $500 a month for students, the result would be that ________ suppose the university is trying to determine the most efficient way to allocate the rooms such that those who value the rooms the most get them. which of the following would you suggest as the most efficient? A. allocating rooms based on grades B. allocating rooms based on seniority C. using a random lottery D. auctioning the rooms to the highest bidder
quantity demanded would exceed the quantity supplied, resulting in a shortage D
competitive equilibrium quantity
quantity that corresponds to the competitive equilibrium price
which type of experiment is likely to yield more accurate results?
randomized, because a natural experiment may not be completely randomized
suppose you had to find the effect of seatbelt rules on road accident fatalities. would you choose to run a randomized experiment or would it make sense to use natural experiments here? explain.
randomized, because seatbelt rules may be influenced by road accident fatalities
normative economics
recommends what people, including society, should do - advises individuals and society on their choices - dependent on subjective judgements
suppose you thought income inequality in the United States had increased over time. would you expect the ration of the mean income in the United States to the median income has risen or fallen? explain.
risen, b/c mean changes more with extreme values
test #1: the law of supply states that, in most cases, the quantity supplied of a good _______ when the price of the good rises. this means we would expect a typical supply curve to be ________.
rises; upward sloping
in general, people with more education earn higher salaries. economists have offered two explanations of this relationship. the human capital argument says that high schools and colleges teach people valuable skills, and employers are willing to pay higher salaries to attract people with those skills. the signaling argument says that college graduates earn more because a college degree is a signal to employers that a job applicant is diligent, intelligent and persevering. the __________________ implies that a college student who drops out of school one month before graduation should earn much less than a student who graduates the _________________ implies that a college student who drops out of school one month before graduation should earn almost the same as a student who graduates
signaling argument human capital argument
omitted variables
something that has been left out of a study that, if included, would explain, why 2 variables are correlated - is there an omitted variable explaining why education and income are positively correlated? if you're a workaholic and stay up all night and work weekends, you'd excel in college and at work. is workaholism an omitted variable that causes you to earn more, incidentally meaning that you graduate OR does staying in college cause higher wages?
the ________ plots the relationship between prices and the quantity producers are willing to sell
supply curve
quantity demanded
the amount buyers are willing to purchase of a g/s at a given price
quantity supplied
the amount of a g/s that sellers are willing to sell at a given price
marginal cost
the extra cost generated by producing an extra unit
willingness to pay
the highest price that a buyer is willing to pay for an extra unit of a good
how does the sample size affect the validity of an empirical argument?
the larger the sample size the better
willingness to accept
the lowest price that a seller is willing to get paid to sell an extra unit of a good - for an optimizing firm, willingness to accept = marginal cost of production - for an optimizing firm, height of supply curve equals marginal cost
scientific method
the ongoing process that economists, social scientists and scientists use to a. develop models of the world b. evaluate those models by testing them with data
reverse causality
when the directions of cause and effect are mixed up ex. wealthy people tend to be healthy so either - great wealth causes better health b/c they can afford better healthcare, meds, etc OR - greater health causes greater wealth b/c healthy people can work harder and have less healthcare expenditures
supply curve shifts
when the quantity supplied changes at a given price
law of demand
the quantity demanded rises when the price falls (almost all demand curves are negatively related)
law of supply
the quantity supplied rises when the price rises (almost always positively related)
budget constraints
the set of things that a person can choose to do (or buy) without breaking her budget
economics
the study of how agents choose to allocate scarce resources and how those choices affect society
microeconomics
the study of how individuals, households, firms and governments make choices and how those choices affect prices, the allocation of resources and the well-being of other agents
macroeconomics
the study of the economy as a whole - growth rate of a country's total economic output - percent increase in inflation
net benefit
the sum of the benefits of choosing an alternative minus the sum of the costs of choosing that alternative
market demand curve
the sum of the individual demand curves of all potential buyers
Land in Sonoma, California, can be used to either grow grapes for pinot noir wine or to grow Gravenstein apples. Given this information, what is the relationship between pinot noir wine and Gravenstein apples?
they share a common input
scarce resources
things people want where the quantity that people want exceeds the available quantity
empiricism is a principle in economics that
uses data to test economic models
negatively related
when 2 variables move in opposite directions
positively related
when 2 variables move in the same direction
market price
when all sellers and buyers face the same price
excess demand
when market price < competitive equilibrium price
excess supply
when market price > competitive equilibrium price
causation
when one thing directly affects another
trade offs
when some benefits must be given up in order to gain others