Microeconomics CH 1 & 2

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Production possibilities frontier (PPF)

A curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology

Factor Market

A market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability

Free Market

A market with few government restrictions on how a good or service ca be produced or sold or on how a factor of production can be employed

Circular-flow diagram

A model that illustrates how participants in markets are linked.

A production possibilities frontier with a bowed outward shape indicates D) increasing opportunity costs as more and more of one good is produced.

A production possibilities frontier with a bowed outward shape indicates A) decreasing opportunity costs as more and more of one good is produced. B) constant opportunity costs as more and more of one good is produced. C) the possibility of inefficient production. D) increasing opportunity costs as more and more of one good is produced.

Economic Model

A simplified version of reality used to analyze real-world economic situations

Productive Efficiency

A situation in which a good or service is produced at the lowest possible cost.

Voluntary Exchange

A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction.

Allocative efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced p to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.

Allocative efficiency is achieved when B) firms produce the goods and services that consumers value most.

Allocative efficiency is achieved when A) firms produce goods and services at the lowest cost. B) firms produce the goods and services that consumers value most. C) there are no shortages or surpluses in the market. D) goods and services are fairly distributed among consumers in an economy.

Mixed economy

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

Market economy

An economy in which the decisions of households and firms interacting in markets allocate economic resources.

Centrally planned economy

An economy in which the government decides how economic resources will be allocated

Positive analysis

Analysis concerned with what is

Normative Analysis

Analysis concerned with what ought to be

Marginal analysis

Analysis that involves comparing marginal benefits and marginal costs

Bella can produce either a combination of 60 silk roses and 80 silk leaves or a combination of 70 silk roses and 55 silk leaves. If she now produces 60 silk roses and 80 silk leaves, what is the opportunity cost of producing an additional 10 silk roses? C) 25 silk leaves

Bella can produce either a combination of 60 silk roses and 80 silk leaves or a combination of 70 silk roses and 55 silk leaves. If she now produces 60 silk roses and 80 silk leaves, what is the opportunity cost of producing an additional 10 silk roses? A) 2.5 silk leaves B) 10 silk leaves C) 25 silk leaves D) 55 silk leaves

Cassie's Quilts alters, reconstructs and restores heirloom quilts. Cassie has just spent $800 purchasing, cleaning and reconstructing an antique quilt which she expects to sell for $1,500 once she is finished. After having spent $800, Cassie discovers that she would need some special period fabric that would cost her $200 in material and time in order to complete the task. Alternatively, she can sell the quilt "as is" now for $900. What should she do? D) She should purchase the period fabric, complete the task and then sell the quilt.

Cassie's Quilts alters, reconstructs and restores heirloom quilts. Cassie has just spent $800 purchasing, cleaning and reconstructing an antique quilt which she expects to sell for $1,500 once she is finished. After having spent $800, Cassie discovers that she would need some special period fabric that would cost her $200 in material and time in order to complete the task. Alternatively, she can sell the quilt "as is" now for $900. What should she do? A) It does not matter what she does; she is going to take a loss on her project. B)She should not do anymore work on the quilt because she has already spent too much time on it and has not been paid for that time. C) She should cut her losses and sell the quilt now. D) She should purchase the period fabric, complete the task and then sell the quilt.

Economics promote which of the following as the way to make the best decision? B) Continue an enjoyable activity up to the point where its marginal benefit equals its marginal cost.

Economics promote which of the following as the way to make the best decision? A) Continue an enjoyable activity as long as you do not have to pay for it. B) Continue an enjoyable activity up to the point where its marginal benefit equals its marginal cost. C) Continue an enjoyable activity until you cannot afford to pursue it. D) Continue an enjoyable activity until it is no longer enjoyable.

For each watch that Switzerland produces, it gives up the opportunity to make 50 pounds of chocolate. Germany can produce 1 watch for every 100 pounds of chocolate it produces. Which of the following is true about the comparative advantage between the two countries? C) Switzerland has the comparative advantage in watches.

For each watch that Switzerland produces, it gives up the opportunity to make 50 pounds of chocolate. Germany can produce 1 watch for every 100 pounds of chocolate it produces. Which of the following is true about the comparative advantage between the two countries? A) Switzerland has the comparative advantage in chocolate. B) Germany has the comparative advantage in watches. C) Switzerland has the comparative advantage in watches. D) Germany has the comparative advantage in watches and chocolate.

If the best lawyer in town is also the best at operating a word processor, then according to economic reasoning, this person should C) specialize in being a lawyer because its opportunity cost is lower.

If the best lawyer in town is also the best at operating a word processor, then according to economic reasoning, this person should A) should pursue the activity she enjoys more. B) specialize in being a work processor because it is more capital-intensive. C) specialize in being a lawyer because its opportunity cost is lower. D) split her time evenly between being a lawyer and a word processor.

Increasing opportunity cost along a production possibilities frontier occurs because C) some factors of production are not equally suited to producing both goods or services.

Increasing opportunity cost along a production possibilities frontier occurs because A) of ineffective management by entrepreneurs. B) of the scarcity of factors of production. C) some factors of production are not equally suited to producing both goods or services. D) of inefficient production.

Factors of production

Labor, capital, natural resources, and other inputs used to make goods and services.

Productive efficiency is achieved when D) firms produce goods and services at the lowest cost.

Productive efficiency is achieved when A) firms add a low profit margin to the goods and services they produce. B) firms produce the goods and services that consumers value most. C) there are no shortages or surpluses in the market. D) firms produce goods and services at the lowest cost.

Entrepreneur

Someone who operates a business, bringing together the factors of production - labor, capital, and natural resources - to produce goods and services

Economic Variable

Something measurable that can have different values, such as the incomes of doctors.

Table 1-1 Hours Open Total Revenue (Dollars) 1 $35 2 60 3 80 4 92 5 100 6 105 Eva runs a small bakery in the village of Roggerli. She is debating whether she should extend her hours of operation. Eva figures that her sales revenue will depend on the number of hours the bakery is open as shown in the table above. She would have to hire a worker for those hours at a wage rate of $12 per hour. Refer to Table 1-1. Using marginal analysis, determine how many hours should Eva extend her bakery's hours of operations? C) 4 hours

Table 1-1 Hours Open Total Revenue (Dollars) 1 $35 2 60 3 80 4 92 5 100 6 105 Eva runs a small bakery in the village of Roggerli. She is debating whether she should extend her hours of operation. Eva figures that her sales revenue will depend on the number of hours the bakery is open as shown in the table above. She would have to hire a worker for those hours at a wage rate of $12 per hour. Refer to Table 1-1. Using marginal analysis, determine how many hours should Eva extend her bakery's hours of operations? A) 5 hours B) 3 hours C) 4 hours D) 6 hours E) 2 hours

Ted quits his $60,000-a-year job to be a stay-at-home dad. What is the opportunity cost of his decision? A) at least $60,000

Ted quits his $60,000-a-year job to be a stay-at-home dad. What is the opportunity cost of his decision? A) at least $60,000 B) depends on the "going rate" for stay-at-home dads C) 0 since he will no longer be earning a salary D) the value he attributes to the joy of parenting

Comparative advantage

The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors

Equity

The fair distribution of economic benefits

Opportunity Cost

The highest-valued alternative that must be given up to engage in an activity

Trade-off

The idea that, because of scarcity, producing less of another good or service

The production possibilities frontier model shows that C) if all resources are fully and efficiently utilized, more of one good can be produced only by producing less of another good.

The production possibilities frontier model shows that A) a market economy is more efficient in producing goods and services than is a centrally planned economy. B) if consumers decide to buy more of a product its price will increase. C) if all resources are fully and efficiently utilized, more of one good can be produced only by producing less of another good. D) economic growth can only be achieved by free market economies.

Property Rights

The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.

Microeconomics

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Economics

The study of the choices people make to attain their goals, given their scarce resources

Macroeconomics

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth

Which of the following is a normative economic statement? D) The price of gasoline is too high.

Which of the following is a normative economic statement? A) When the price of gasoline rises, transportation costs rise. B) The current high price of gasoline is the result of strong worldwide demand. C) When the price of gasoline rises, the quantity of gasoline purchased falls. D) The price of gasoline is too high.

Market

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

Product market

a market for goods - such as computers - or services - such as medical treatment

Absolute Advantage

the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources.

economic growth

the ability of the economy to increase the production of goods and services

Trade

the act of buying and selling