ECO 252 Exam 1 Study Guide

•Economy, "oikonomos" (Greek)

-"One who manages a household" -Households and economies have much in common

•Supply and demand together

-Determine the prices of the economy's many different goods and services

•Opportunity cost of one good

-Inverse of the opportunity cost of the other

•Expectations about future -Affect current supply -Expected higher prices •Decrease in current supply

•Number of sellers, increases -Market supply increases

•Market

-A group of buyers and sellers of a particular good or service -Buyers as a group •Determine the demand for the product -Sellers as a group •Determine the supply of the product

•Specialization and trade 2

-All countries have more food and more cars

•Society faces many decisions

-Allocate resources and output

•A household faces many decisions

-Allocate scarce resources •Taking into account: ability, effort, desire

•Trade can benefit everyone in society

-Allows people to specialize in activities in which they have a comparative advantage

•Quantity demanded

-Amount of a good that buyers are willing and able to purchase

•Gains from specialization and trade

-Based on comparative advantage -Total production in economy rises •Increase in the size of the economic pie •Everyone is better off

•If both Ruby and Frank produce both meat and potatoes

-Both gain from specialization and trade

•If Ruby produces only meat and Frank produces only potatoes

-Both gain from trade

•One person

-Can have absolute advantage in both goods -Cannot have comparative advantage in both goods

•Tastes

-Change in tastes: changes the demand •Expectations about the future -Expect an increase in income •Increase in current demand -Expect higher prices •Increase in current demand •Number of buyers, increases -Market demand increases

•Principle of comparative advantage 2

-Each good should be produced by the country with the smaller opportunity cost of producing that good

•Specialization and trade

-Farmer Frank specializes in growing potatoes •More time growing potatoes •Less time raising cattle -Rancher Ruby specializes in raising cattle •More time raising cattle •Less time growing potatoes -Trade: 5 oz of meat for 15 oz of potatoes

•Opportunity cost

-Frank: 60 min. to produce 1 oz meat, and 15 min. to produce 1 oz potatoes •To produce 1 more oz meat, give up 4 oz potatoes •To produce 1 more oz potatoes, give up ¼ oz meat -Ruby: 20 min. to produce 1 oz meat, and 10 min. to produce 1 oz potatoes •To produce 1 more oz meat, give up 2 oz potatoes •To produce 1 more oz potatoes, give up ½ oz meat

•Perfectly competitive market

-Goods offered for sale are all exactly the same -Buyers and sellers are so numerous •No single buyer or seller has any influence over the market price •Price takers -At the market price •Buyers can buy all they want •Sellers can sell all they want

•Markets take many forms

-Highly organized •Markets for many agricultural commodities -Less organized •Market for ice cream in a particular town

•Variables that can shift the demand curve

-Income -Prices of related goods -Tastes -Expectations -Number of buyers

•Shifts in the demand curve

-Increase in demand •Any change that increases the quantity demanded at every price •Demand curve shifts right -Decrease in demand •Any change that decreases the quantity demanded at every price •Demand curve shifts left

•Shifts in supply

-Increase in supply •Any change that increases the quantity supplied at every price •Supply curve shifts right -Decrease in supply •Any change that decreases the quantity supplied at every price •Supply curve shifts left

•Variables that can shift the supply curve

-Input prices -Technology -Expectations about future -Number of sellers

•The principle of comparative advantage explains:

-Interdependence -Gains from trade

•Opportunity cost of a ton of food

-Is 1 car in Japan -But only ½ car in the United States •The United States has a comparative advantage in producing food

•Opportunity cost of a car

-Is 2 tons of food in the United States -But only 1 ton of food in Japan Japan has comparative advantage

•Competitive market

-Market in which there are many buyers and many sellers -Each has a negligible impact on market price -Price and quantity are determined by all buyers and sellers •As they interact in the marketplace

•The price of trade

-Must lie between the two opportunity costs

•Income

-Normal good •Other things constant •An increase in income leads to an increase in demand -Inferior good •Other things constant •An increase in income leads to a decrease in demand

•For different opportunity costs

-One person has comparative advantage in one good -The other person has comparative advantage in the other good

A change in market equilibrium due to a shift in supply

-One summer, a hurricane destroys part of the sugarcane crop: higher price of sugar -Effect on the market for ice cream? 1.Change in price of sugar: supply curve 2.Supply curve: shifts to the left 3.Higher equilibrium price; lower equilibrium quantity

A change in market equilibrium due to a shift in demand

-One summer, very hot weather -Effect on the market for ice cream? 1.Hot weather: shifts the demand curve (tastes ) 2.Demand curve shifts to the right 3.Higher equilibrium price; higher equilibrium quantity

Shifts in both supply and demand

-One summer: hurricane and heat wave 1.Heat wave shifts the demand curve; hurricane shifts the supply curve 2.Demand curve shifts to the right; Supply curve shifts to the left 3.Equilibrium price raises -If demand increases substantially while supply falls just a little: equilibrium quantity rises -If supply falls substantially while demand rises just a little: equilibrium quantity falls

•Law of demand

-Other things equal -When the price of a good rises, the quantity demanded of the good falls -When the price falls, the quantity demanded rises

1.Shift the demand curve for cigarettes and other tobacco products

-Public service announcements -Mandatory health warnings on cigarette packages -Prohibition of cigarette advertising on television •If successful -Shift demand curve to the left

•Shortage

-Quantity demanded > Quantity supplied -Excess demand -Upward pressure on price •Movements along the demand and supply curves •Decrease in quantity demanded •Increase in quantity supplied

•Surplus

-Quantity supplied > Quantity demanded -Excess supply -Downward pressure on price •Movements along the demand and supply curves •Increase in quantity demanded •Decrease in quantity supplied

•Shifts vs. movements along curves

-Shift in the supply curve •Change in supply -Movement along a fixed supply curve •Change in the quantity supplied -Shift in the demand curve •Change in demand -Movement along a fixed demand curve •Change in the quantity demanded

•Prices of related goods

-Substitutes, two goods •An increase in the price of one •Leads to an increase in the demand for the other -Complements, two goods •An increase in the price of one •Leads to a decrease in the demand for the other

2.Try to raise the price of cigarettes

-Tax the manufacturer: higher price -Movement along demand curve •10% ↑ in price → 4% ↓ in smoking •Teenagers: 10% ↑ in price → 12% ↓ in smoking •Demand for cigarettes vs. demand for marijuana -Appear to be complements

•Comparative advantage

-The ability to produce a good at a lower opportunity cost than another producer -Reflects the relative opportunity cost

•Absolute advantage

-The ability to produce a good using fewer inputs than another producer -In producing meat: Ruby •Ruby needs 20 min. to produce 1 oz of meat •Frank needs 60 minutes -In producing potatoes: Ruby •Ruby needs 10 min. to produce 1 oz of potatoes •Frank needs 15 minutes

•Law of supply and demand

-The price of any good adjusts •To bring the quantity supplied and the quantity demanded for that good into balance -In most markets •Surpluses and shortages are temporary

•Economics

-The study of how society manages its scarce resources

•Equilibrium

-Various forces are in balance -A situation in which market price has reached the level where •Quantity supplied = Quantity demanded -Supply and demand curves intersect

•Production possibilities frontier

-Various mixes of output that an economy can produce

•Opportunity cost 2

-Whatever must be given up to obtain some item -Measures the trade-off between the two goods that each producer faces

•Supply and demand

-Words economists use most often -The forces that make market economies work -Refer to the behavior of people as they interact with one another in competitive markets

Three steps to analyzing changes in equilibrium

1.Decide whether the event shifts the supply curve, the demand curve, or, in some cases, both curves 2.Decide whether the curve shifts to the right or to the left 3.Use the supply-and-demand diagram •Compare the initial and the new equilibrium •Effects on equilibrium price and quantity

"Trade with China makes most Americans better off because, among other advantages, they can buy goods that are made or assembled more cheaply in China."

100% economists agree

"Some Americans who work in the production of competing goods, such as clothing and furniture, are made worse off by trade with China."

96% economists agree, 4% uncertain

The proposed trade between Frank the farmer and Ruby the rancher offers each of them a combination of meat and potatoes that would be impossible in the absence of trade.

In panel (a), Frank gets to consume at point A* rather than point A. In panel (b), Ruby gets to consume at point B* rather than point B. Trade allows each to consume more meat and more potatoes.

Variable- A change in this variable Price of the good itself- Represents a movement along the demand curve Income - Shifts the demand curve Prices of related goods - Shifts the demand curve Tastes - Shifts the demand curve Expectations- Shifts the demand curve Number of buyers - Shifts the demand curve

This table lists the variables that affect how much of any good consumers choose to buy. Notice the special role that the price of the good plays: A change in the good's price represents a movement along the demand curve, whereas a change in one of the other variables shifts the demand curve.

Variable- A change in this variable Price of the good itself- Represents a movement along the supply curve Input prices- Shifts the supply curve Technology- Shifts the supply curve Expectations - Shifts the supply curve Number of sellers - Shifts the supply curve

This table lists the variables that affect how much of any good producers choose to sell. Notice the special role that the price of the good plays: A change in the good's price represents a movement along the supply curve, whereas a change in one of the other variables shifts the supply curve.

Assume that England and Spain can switch between producing cheese and producing bread at a constant rate. ​ Refer to Table 3-38. England should export a. cheese and import bread. b. both goods and import neither good. c. bread and import cheese. d. neither good and import both goods.

a

If a study by medical researchers finds that eating brown rice causes weight loss while eating white rice causes weight gain, then we likely would see a. an increase in demand for brown rice and a decrease in demand for white rice. b. an increase in demand for both brown and white rice. c. a decrease in demand for brown rice and an increase in demand for white rice. d. no change in demand for either type of rice because weight loss is not a determinant of demand.

a

Refer to Figure 3-15. Perry has an absolute advantage in the production of a. neither good and Jordan has an absolute advantage in the production of novels. b. novels and Jordan has an absolute advantage in the production of poems. c. poems and Jordan has an absolute advantage in the production of novels. d. novels and Jordan has an absolute advantage in the production of neither good.

a

Suppose that a country that has a high level of output per person agrees to trade with a country that has a low level of output per person. Which country can benefit? a. both b. neither c. only the one with a low level of output per person. d. only the one with a high level of output per person.

a

Suppose the number of buyers in a market decreases and a technological advancement occurs also. What would we expect to happen in the market? a. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous. b. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous. c. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous. d. None of the above is correct.

a

Table 2-5 Corn (in bushels) Wheat (in bushels) 2000 0 1600 700 1200 1300 800 1800 400 2200 0 2500 Refer to Table 2-5. Table 2-5 shows one set of production possibilities. Which of the following combinations of corn and wheat is not currently attainable but would be attainable if there was an improvement in overall production technology? a. 1000 bushels of corn and 2000 bushels of wheat b. 1600 bushels of corn and 300 bushels of wheat c. 1400 bushels of corn and 800 bushels of wheat d. 600 bushels of corn and 1800 bushels of wheat

a

Table 3-9Assume that Maya and Miguel can switch between producing mixers and producing toasters at a constant rate. ​Refer to Table 3-9. Which of the following combinations of mixers and toasters could Miguel not produce in 80 hours? a. 6 mixers and 5 toasters. b. 7 mixers and 2 toasters. c. 5 mixers and 6 toasters. d. 4 mixers and 8 toasters.

a

When all market participants are price takers who have no influence over prices, the markets have a. numerous buyers and sellers. b. numerous buyers but only a few sellers. c. numerous sellers but only a few buyers. d. only a few buyers and sellers.

a

When quantity demanded increases at every possible price, the demand curve has a. shifted to the right. b. not shifted; rather, we have moved along the demand curve to a new point on the same curve. c. shifted to the left. d. not shifted; rather, the demand curve has become steeper.

a

When society gets the most it can from its scarce resources, then the outcome is called a. efficient. b. normal. c. efficacious. d. equitable.

a

Which of the following is not an example of the principle that trade can make everyone better off? a. All of the above are examples of the principle that trade can make everyone better off. b. Residents of Maine drink orange juice from Florida. c. Americans buy tube socks from China. d. A homeowner hires the kid next door to mow the lawn.

a

Juanita and Shantala run a business that programs and tests cellular phones. Assume that Juanita and Shantala can switch between programming and testing cellular phones at a constant rate. The following table applies. ​ Refer to Table 3-13. Which of the following points would be on Shantala's production possibilities frontier, based on a 40-hour week? a. (120 cellular phones programmed, 250 cellular phones tested) b. (180 cellular phones programmed, 150 cellular phones tested) c. (240 cellular phones programmed, 600 cellular phones tested) d. More than one of the above would be on Shantala's production possibilities frontier.

b

Rick buys a 1966 Mustang for $3,000, planning to restore and sell the car. He goes on to spend $9,000 restoring the car. At this point he can sell the car for $10,000. As an alternative, he can spend an additional $3,000 replacing the engine. With a new engine the car would sell for $13,000. Rick should a. sell the car now for $10,000. b. be indifferent between (i) selling the car now and (ii) replacing the engine and then selling it. c. complete the repairs and sell the car for $13,000. d. never try such an expensive project again.

b

The terms equality and efficiency are similar in that they both refer to benefits to society. However they are different in that a. equality refers to the opportunity cost of the benefits and efficiency refers to everyone facing identical tradeoffs. b. equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits from scarce resources. c. equality refers to everyone facing identical tradeoffs and efficiency refers to the opportunity cost of the benefits. d. equality refers to maximizing benefits from scarce resources and efficiency refers to uniform distribution of those benefits.

b

When calculating the cost of college, which of the following should you probably include? a. The income you earn at your part-time job. b. The cost of books required for college classes c. The cost of living in the dormitory. d. The cost of your meal plan for the cafeteria.

b

Which of the following is not an example of a positive, as opposed to normative, statement? a. If a nation wants to avoid inflation, it will restrict the growth rate of the quantity of money. b. Equality is more important than efficiency. c. Trade restrictions lower our standard of living. d. Higher gasoline prices will reduce gasoline consumption.

b

Which of the following is not correct? a. When developing economic theories, graphs offer a way to visually express ideas that might be less clear if described with equations or words. b. When studying the relationship between two economic variables, graphs allow economists to draw indisputable conclusions about causes and effects. c. When analyzing economic data, graphs provide a powerful way of finding and interpreting patterns. d. Graphs are one way of expressing the relationships among variables.

b

Refer to Table 4-13. Suppose Harry, Darby, and Jake are the only demanders of sandwiches. Also suppose the following:• x = 2.• The current price of a sandwich is $3.00.• The market quantity supplied of sandwiches is 5.• The slope of the supply curve is 1.Then there is currently a a. shortage of 5 sandwiches, and the equilibrium price of a sandwich is $5.00. b. surplus of 5 sandwiches, and the equilibrium price of a sandwich is $5.00. c. shortage of 5 sandwiches, and the equilibrium price of a sandwich is between $3.00 and $5.00. d. surplus of 5 sandwiches, and the equilibrium price of a sandwich is between $3.00 and $5.00.

c

When economists make a. normative statements, they are speaking not as policy advisers but as model-builders. b. positive statements, they are speaking not as scientists but as forecasters. c. positive statements, they are speaking not as policy advisers but as scientists. d. normative statements, they are speaking not as policy advisers but as scientists.

c

Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations? a. People buy more when prices are low than when prices are high. b. There is no such thing as a free lunch. c. Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable market outcomes. d. No matter how much people earn, they tend to spend more than they earn.

c

"Other things equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises." This relationship between price and quantity demanded a. applies to most goods in the economy. b. is represented by a downward-sloping demand curve. c. is referred to as the law of demand. d. All of the above are correct.

d

Assume that Huang and Min can switch between producing parasols and producing porcelain plates at a constant rate. Refer to Table 3-27. Assume that Huang and Min each has 36 labor hours available. Originally, each person divided his/her time equally between the production of parasols and plates. Now, each person spends all their time producing the good in which they have a comparative advantage. As a result, the total output of plates increased by a. 0. b. 3. c. 9. d. 1.5.

d

For a number of years country A had inflation of 3% but for the last five years has had inflation of 6%. Country B had inflation of 4% for many years, but very recently inflation unexpectedly rose to 9%. Other things the same, in which of the countries would the higher inflation rate be more likely to reduce unemployment? a. both country A and country B b. country A but not country B c. neither country A nor country B d. country B but not country A

d

In the circular-flow diagram, which of the following items represents a payment for a factor of production? a. spending by households on goods b. spending by households on services c. capital d. interest

d

Refer to Figure 2-17. The curves shown are a. preference curves. b. supply curves. c. income-consumption curves. d. demand curves.

d

Refer to Figure 3-21. Azerbaijan has an absolute advantage in the production of a. bolts and a comparative advantage in the production of bolts. b. nails and a comparative advantage in the production of bolts. c. bolts and a comparative advantage in the production of nails. d. nails and a comparative advantage in the production of nails.

d

Refer to Figure 3-3. If the production possibilities frontiers shown are each for one day of production, then which of the following combinations of tacos and burritos could Arturo and Dina together not produce in a given day? a. 300 tacos and 350 burritos b. 200 tacos and 400 burritos c. 400 tacos and 300 burritos d. 600 tacos and 250 burritos

d

Refer to Figure 4-8. Suppose the figure shows the market demand for laptop computers. Suppose the price of wireless keyboards, a complementary good, increases. Which of the following changes would occur? a. a shift from D2 to D1 b. a movement along D2 from point B to point A c. a movement along D2 from point A to point B d. a shift from D1 to D2

d

Senator Brown wants to increase taxes on people with high incomes and use the money to help the poor. Senator Johnson argues that such a tax will discourage successful people from working and will therefore make society worse off. An economist would say that a. we should agree with Senator Johnson. b. there are no tradeoffs between equity and efficiency. c. we should agree with Senator Brown. d. a good decision requires that we recognize both viewpoints.

d

When a production possibilities frontier is bowed outward, the opportunity cost of producing an additional unit of a good a. does not change as more of the good is produced. b. may increase, decrease, or not change as more of the good is produced. c. decreases as more of the good is produced. d. increases as more of the good is produced.

d

Which of the following is not an example of a market? a. The availability of Internet shopping has expanded the clothing choices for buyers who do not live near large cities. b. A small town has only one seller of electricity. c. In Florida, there are many buyers and sellers of key lime pie. d. In the United States, a sick person cannot legally purchase a kidney.

d

Which of the following is the best explanation for why President Harry Truman once said that he wanted to find a one-armed economist? a. President Truman received input from so many economists that he only wanted one view from each. b. A one-armed economist would conduct only positive analysis and no normative analysis. c. President Truman thought economists should analyze policies but not make or enforce them. d. Economists understand that most policy decisions involve trade-offs so they are likely to present multiple views of policies.

d

•Principle of comparative advantage

•Each good should be produced by the individual that has the smaller opportunity cost of producing that good -Specialize according to comparative advantage

•Equilibrium price -Balances quantity supplied and quantity demanded -Market-clearing price

•Equilibrium quantity -Quantity supplied and quantity demanded at the equilibrium price

Should the U.S. trade with other countries?

•Imports -Goods produced abroad and sold domestically •Exports -Goods produced domestically and sold abroad

•Demand -Relationship between the price of a good and quantity demanded -Demand schedule: a table -Demand curve: a graph •Price on the vertical axis •Quantity on the horizontal axis

•Individual demand -An individual's demand for a product

•Supply -Relationship between the price of a good and the quantity supplied -Supply schedule: a table -Supply curve: a graph •Price on the vertical axis •Quantity on the horizontal axis

•Individual supply -A seller's individual supply

•Quantity supplied -Amount of a good -Sellers are willing and able to sell

•Law of supply -Other things equal -When the price of a good rises, the quantity supplied of the good also rises -When the price falls, the quantity supplied falls as well

Should LeBron James Mow His Own Lawn?

•LeBron, in 2 hours -Mow his lawn, or -Film a TV commercial, earn $30,000 •Kaitlyn (neighbor), in 4 hours -Mow LeBron's lawn -Work at McDonald's, earn $50

•Market demand -Sum of all individual demands for a good or service

•Market demand curve -Sum the individual demand curves horizontally -Total quantity demanded of a good varies •As the price of the good varies •Other things constant

•Market supply -Sum of the supplies of all sellers for a good or service

•Market supply curve -Sum of individual supply curves horizontally -Total quantity supplied of a good varies •As the price of the good varies •All other factors that affect how much suppliers want to sell are hold constant

•Monopoly -The only seller in the market -Sets the price

•Other markets -Between perfect competition and monopoly

•Resources are scarc

•Scarcity: the limited nature of society's resources -Society has limited resources and therefore cannot produce all the goods and services people wish to have

•Input prices -Supply is negatively related to prices of inputs -Higher input prices: decrease in supply

•Technology -Advance in technology: reduces firms' costs: increase in supply

Should the U.S. trade with other countries? 2

•U.S and Japan -Each produces food and cars -One American worker, in one month, can produce •One car or 2 tons of food -One Japanese worker, in one month, can produce •One car or 1 ton of food