Micro Economics Chapters 1-3

Efficiency

The property of society getting the most it can from its scarce resources

Suppose you find $20. if you choose to use the $20 to go the football game, your opportunity cost of going to the game is:

$20 (because you could have used the $20 to buy other things) plus the value of your time spent at the game

Comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

Externality

the impact of one person's actions on the well-being of a bystander

Scarcity

the limited nature of societies resources. Wants are insatiable and resources are scarce. You have to make choices

If the price of a good is equal to the equilibrium price,

the quantity demanded is equal to the quantity supplied and the price remains unchanged

If the price of a good is below the equilibrium price,

there is a shortage and the price will rise

If the price of a good is above the equilibrium price,

there is a surplus and the price will fall

Economic models are:

Built with assumptions

Points on the production possibilities frontier are:

Efficient

Productivity can be increased by:

Improving the education of workers

In the short run:

A decrease in inflation temporarily increases unemployment

Economic growth is depicted by:

A shift in the production possibility frontier outward

Suppose a country's workers can produce 4 watches per hour or 12 rings per hour. if there is no trade:

A) Opportunity cost of 1 watch is 3 rings

Foreign Trade:

Allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home

Suppose a country's workers can produce 4 watches per hour or 12 rings per hour. if there is no trade: A) Domestic price of 1 ring is 3 watches B) 1 ring is 1/3 watches C) 1 ring is 4 watches D) 1 ring is 1/4 watches E) 1 ring is 12 watches

B) 1 ring is 1/3 watches

Which of the following will not shift a country's production possibilities frontier outward? A) an increase in the capital stock B) an advance in technology C) a reduction in unemployment D) an increase in the labor force

C) A reduction in unemployment

According to the principle of comparative advantage:

Countries should specialize in the production of goods for which they have a lower opportunity cost of production than their trading partners.

Which of the following is not a factor of production? A) land B) labor C) capital D) money E) All of these answers are factors of production

D) Money

Which of the following statements about trade is true? A) Unrestricted international trade benefits every person in a country equally B) People that are skilled at all activities cannot benefit from trade C) Trade can benefit everyone in society because it allows people to specialize in activities in which they have an absolute advantage D) Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.

D) Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.

Which of the following involve a trade-off? A) Going to college B) Taking a nap C) Buying a car D) Watching a football game on saturday afternoon E) All of these

E) All of the above involve trade-offs

High and persistent inflation is caused by:

Governments increasing the quantity of money too much.

Shape of the PPF

If opportunity cost remains constant, PPF is a straight line. If opportunity cost of a good rises as the economy produces more of the good, PPF is a bow shape

Raising taxes and increasing welfare payments:

Improves equality at all the expense of efficiency

Shifts in Demand curve

Income- normal v. inferior good prices of related goods- substitutes v. complements tastes- if you it, you buy more expectations- future prices

If a nation has a comparative advantage in the production of a good:

It can produce that good at a lower opportunity cost than its trading partner

If a nation has an absolute advantage in the production of a good:

It can produce that good using fewer resources than its trading partner

Trade-offs are required because wants are unlimited and resources are:

Scarce

Economics is the study of how

Society manages its scarce resources

Positive statements are:

Statements of descriptive that can be tested

Because people respond to incentives, we would expect that if the average salary of accountants increases by 50 percent while the average salary of teachers increases by 20 percent:

Students will shift majors from educating to accounting

A rational person does not act unless:

The action produces marginal benefits that exceed marginal cost

Opportunity Cost

The value of the next best alternative given up in order to enjoy a particular good or service. Includes an objective as well as a subjective component

Workers in the US enjoy a high standard of living because:

Workers in the United States are highly productive

Economic growth is depicted by

a shift in the production possibilities frontier outward

Market failure

a situation in which a market left on its own fails to allocate resources efficiently

Circular Flow Diagram

a visual model of the economy that shows how dollars flow through markets among households and firms

The law of demand states that an increase in the price of a good

decreases the quantity demanded for that good

Foreign trade

allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home

Inferior good

an INCREASE in income leads to a DECREASE in demand

Normal good

an INCREASE in income leads to an INCREASE in demand

Complements

an INCREASE in the price of one leads to a DECREASE in the demand for the other

Substitutes

an INCREASE in the price of one leads to an INCREASE in the demand for the other

A decrease ( leftward shift) in the supply for a good will tend to cause

an increase in the equilibrium price and a decrease in the equilibrium quantity

An increase (rightward shift) in the demand for a good will tend to cause

an increase in the equilibrium price and quantity

Inflation

an increase in the overall level of prices in the economy

If an increase in consumer incomes leads to a decrease in the demand for camping equipment, then camping equipment is

an inferior good

Rule of Assumptions

can simplify the complex world and make it easier to understand

Positive

claims that attempt to describe the world as it is

Normative

claims that attempt to prescribe how the world should be

outward shift of frontier shows

economic growth

Division of Labor

important source of economic growth. 1. teamwork fosters productivity 2. people develop expertise

Raising taxes and increasing welfare payments

improves equity at the expense of efficiency

The law of supply states that an increase in the price of a good

increases the quantity supplied of that good

Marginal Cost

is the change in the total cost that arises when the quantity produced is incremented by one unit. Additional cost or benefit associated with a small amount extra of some action

A perfectly competitive market has

many buyers and sellers

Competitive Market

one with many buyers and sellers of a particular good or service- price taker

A monopolistic market has

only one seller

Slope of the Frontier measures

opportunity cost

Law of Demand

other things equal. when the price of the good rises- quantity demanded of a good falls

Diamond- Water Paradox

practical things that we use everyday often have little or no value in exchange versus things that often have the greatest value in the market have little or no practical use

A rational person does not act unless the action

produces marginal benefits that exceed marginal costs

Economics is the study of how

society manages its scarce resources

Incentive

something that induces a person to act

If an increase in the price of blue jeans leads to an increase in the demand for tennis shoes, then blue jeans and tennis shoes are

substitutes