Test 1

• According to the law of supply,

The higher the price of the good, the greater the quantity supplied. o The lower the price of the good, the smaller the quantity supplied

• the equilibrium price.

The price at the intersection of demand curve and the supply curve

• the equilibrium quantity.

The quantity at the intersection of the market demand curve is called

• Three fundamental questions must be faced in a world of scarcity are:

What is to be produced? 2. How are these goods to be produced? 3. For whom are the goods produced?

A system of economic organization in which the ownership and control of productive capital assets rests with the state and resources are allocated through central planning and political decision making is called: a. a market economy. b. a command economy. c. a corporate economy. d. capitalism.

a command economy

Which of the following would cause the demand curve for DVDs to shift to the right?

a decrease in the price of DVD players

The production possibilities curve is: a. a graph that shows the combinations of output which are most profitable to produce. b. a graph that shows the various combinations of output it is possible for an economy to produce given its available resources and technology. c. a graph that shows the various combinations of resources that can be used to produce a given level of output. d. a curve that shows the quantity of output that will be offered for sale at various prices.

a graph that shows the various combinations of output it is possible for an economy to produce given its available resources and technology.

• A demand curve -

a graphical representation that shows the inverse relationship between price and quantity demanded.

• An increase in demand results in

a greater equilibrium price and a greater equilibrium quantity.

• A decrease in supply results in

a higher equilibrium price and a lower equilibrium quantity

Excessive unemployment of resources is illustrated using a production possibilities curve by: a. an inward shift of the curve. b. an outward shift of the curve. c. a movement along the curve in a northwest direction. d. a point inside the curve.

a point inside the curve.

Based on widespread reaction to the threat of the H1N1 virus, the likely effect on the demand curve for hand sanitizers would be

a shift of the demand curve to the right.

Which of the following is a possible explanation for the shift of the production possibilities curve illustrated? a. an increase in the number of idle factories b. a technological advance that affects only bicycle production c. a technological advance that affects both pizza and bicycle production d. a decrease in the quantity of labor available due to emigration

a technological advance that affects both pizza and bicycle production

• Economic growth -

an increase in the economy's ability to produce goods and services. It is shown by an outward shift in the PPC.

• Two goods are called substitutes if

an increase in the price of one causes an increase in the demand for the other good. o Example: Coke and Pepsi, white bread and wheat bread

• Two goods are complements if

an increase in the price of one good causes a decrease in the demand for the other good. o Goods that go together such as hot fudge sauce and ice cream, peanut butter and jelly

Economic growth can be illustrated by: a. a movement along the production possibilities curve. b. a movement from a point on the production possibilities curve to a point inside the production possibilities curve. c. an inward shift of the production possibilities curve. d. an outward shift of the production possibilities curve.

an outward shift of the production possibilities curve.

• The market equilibrium is found

at the point at which the market supply and market demand curve intersect.

• Microeconomics studies the

behavior in particular markets. It studies the decision making behaviors o firms o households o their interaction in markets for particular goods or services.

In a command economy, decisions about how to allocate resources are made: a. based upon tradition. b. by a central planning board. c. by individuals and firms interacting in markets coordinated by a price system. d. by a lottery system.

by a central planning board.

• If a person, a region, or a country can produce a good or service at a lower opportunity cost than others, they have a _____________ ________________ in the production of that good or service

comparative advantage

Which concept explains how individual consumers in market economies determine what is to be produced? competition consumer sovereignty decentralized decision-making free enterprise

consumer sovereignty

Refer to Exhibit 4-2. Using the graph and beginning on D1, a shift to D0 would indicate a(n):

decrease in demand

• An increase in supply

decreases the equilibrium price and increases the equilibrium quantity.

• Consumer sovereignty

describes how individual consumers in market economies determine what is to be produced

Other things constant, an increase in the price of beef will:

discourage consumers from buying as much beef.

A flat tax, also called a proportional tax, is designed so that

everybody would be charged the same percentage of their income.

• A price ceiling, or a legal maximum price, is often set

for goods deemed important to low income households, like housing.

In a market economy, the goods produced go to those who(m): have sufficient income and are willing to pay the price asked for those goods. the government views as best suited for consumption. business firms choose to favor. desire the goods the least.

have sufficient income and are willing to pay the price asked for those goods.

• *The largest source (82 percent) of tax revenues come in the form of

income taxes on individuals (personal income taxes).

Using the graph and beginning on D1, a shift to D2 would indicate a(n):

increase in demand.

• ** The incomes of Americans have shifted the demand curve. The effect that this change in demand has on Starbucks coffee (a normal good) is an increase in demand for coffee to D2, and increase in the equilibrium price to P2 and increase in quantity to Q2.

increase in everything

• Special interest group have an intense feeling and

interest in particular issues that may be inconsistent with the general public. o influence decision makers

The law of demand illustrates a(n) ____ relationship between price and ____.

inverse; quantity demanded

• Market

is a set of arrangements through which buyers and sellers carry out exchange at mutually agreeable terms.

• Profit -

is the entrepreneurs reward

• Entrepreneurship

is the process of combining the labor, land and capital together to produce goods and services.

• The scarce resources that are used in the production of goods and services can be grouped into four categories: o

labor o land o capital o entrepreneurship

• A price floor, or a legal minimum price,

may be set on wages because wages are the primary source of income for most people.

Mixed economy

o An economic system characterized by some private and some public ownership of resources. o There is some government regulation of the markets. o Example: U. S.

Market Economy (pure capitalism)

o decentralized decision-making process o Millions of individual producers and consumers of goods and services determine what goods will be produced. o Private ownership of resources o use of prices to coordinate economic activity o unregulated/free markets o Consumer sovereignty o No government regulation of markets

Command Economy

o rely on central planning or central planning board to make economic decisions o the old communism o Decisions about what is produced are largely determined by a government official or a committee associated with the central planning organization. o Example: Cuba, North Korea, Iran

• Demand Shifters: (think of the old English spelling of pint of pynte)

prices of related goods(P) 2. incomes of demanders(Y) 3. number of demanders(N) 4. tastes of demanders(T) 5. expectations of demanders(E) • An increase in demand is represented by a rightward shift in the demand curve. • A decrease in demand is represented by a leftward

Each of the following is a determinant of demand except

production technology.

The difference between a change in quantity demanded and a change in demand is that a change in: a. quantity demanded is caused by a change in a good's own current price, while a change in demand is caused by a change in some other variable, such as income, tastes, or expectations. b. demand is caused by a change in a good's own current price, while a change in quantity demanded is caused by a change in some other variable, such as income, tastes, or expectations. c. quantity demanded is a change in the amount people actually buy, while a change in demand is a change in the amount they want to buy. d. A change in demand and a change in quantity demanded are the same thing.

quantity demanded is caused by a change in a good's own current price, while a change in demand is caused by a change in some other variable, such as income, tastes, or expectations.

Each point on the supply curve shows the:

quantity supplied at that price

• Production possibilities curve

represents the potential total output combinations of any two goods for an economy.

Improving the level of education of the labor force will: a. move the economy from a point inside the production possibilities curve to a point on the production possibilities curve. b. move the economy from a point on the production possibilities curve to a point inside the production possibilities curve. c. shift the production possibilities curve outward. d. shift the production possibilities curve inward.

shift the production possibilities curve outward.

• At a price less than the equilibrium price, a ___________, or excess quantity demanded, would exist:

shortage

• Efficiency requires

society to use its resources to the fullest extent—getting the most we can out of our scarce resources o there should be no wasted resources

• At a price greater than the equilibrium price, a _________, or excess quantity supplied, would exist:

surplus

• Marginal -

that extra, additional, incremental used to describe a change in an economic variable

• Goods are those items

that we value or desire. They satisfy human wants.

Macroeconomics is the study of

the aggregate, or total economy. Economic problems that influence the whole of country and its people: o inflation o unemployment o business cycles o economic growth.

Economics is the study of

the allocation of our limited resources to satisfy our unlimited wants.

Scarcity occurs when

the amount people desire exceeds the amount available

market supply curve for a product is

the horizontal sum of the supply curves for individual firms

• Land =

the natural resources used in the production of goods and services.

A movement along the demand curve might be caused by a change in

the price of the good or service that is being demanded.

• At the equilibrium price,

the quantity demanded equals the quantity supplied

• The law of supply states that,

the quantity supplied will vary directly with the price of the good.

When collective decision making is utilized to resolve economic questions regarding the allocation of resources, then: a. everyone will receive an equal share of the output produced. b. the preferences of individuals are of no importance. c. economic efficiency will be assured. d. the role of markets will be replaced by political decision making.

the role of markets will be replaced by political decision making.

. A severe freeze has once again damaged the Florida orange crop. The impact on the market for oranges will be a leftward shift of:

the supply curve.

• Labor =

the total of both physical and mental effort expended by people in the production of goods and services. o Payment is wages

• Price controls involve

the use of the power of the state to establish prices different from the equilibrium prices.

• Opportunity cost is

the value of best item, activity, or alternative that is not chosen.

Progressive taxes are designed so that

those with higher incomes pay a greater proportion of their income in taxes.

• Two types of capital o Physical o Human

• Physical Capital is the equipment and structures used to produce goods and services. o Office buildings, tools, machines and factories • Capital also includes human capital, the productive knowledge, education and skill people receive from education and on-the-job training.

• ceteris paribus

-"holding everything else constant"

• Supply curve shifters: (SPENT)

1. supplier input/resource prices(S) 2. prices of substitutes in production (P) 3. expectations (E) 4. number of suppliers (N) 5. technology (T) 6. regulations / laws/ taxation 7. weather

• normal goods:

A good for which demand increases as income increases (luxury)

Andy views beer and pizza as complements to one another. If the price of pizza decreases, economists would expect:

Andy's demand for beer to increase.

A devastating earthquake destroys ten percent of the population in California. As a result: a. California's production possibility curve shifts outward. b. California moves up and to the left along its production possibilities curve. c. California moves down and to the right along its production possibilities curve. d. California's production possibility curve shifts inward.

California's production possibility curve shifts inward.

Which of the following is not a question that scarcity forces all societies to? Which goods and services are to be produced? How are goods and services to be produced? . Who will get the goods and services produced? How can scarcity be eliminated?

How can scarcity be eliminated

• Inferior goods-

If income increases, demand for the good decreases. If income decreases, demand for the good increases. o The term inferior does not refer to the quality of the good, but it shows that when income changes demand changes in the opposite direction (inversely). o Example: store brands

Which of the following is an example of a pure market economy? a. United States b. Switzerland c. Singapore d. No nation has a pure market economy

No nation has a pure market economy