Macroeconomics Mid-Term
What is the difference between a change in demand (or supply) and a change in quantity demanded (or supplied)?
A change in demand/supply infers a change in the schedule and a shift of the curve whereas a change in quantity demanded/supplied is a movement from one point to another on a fixed supply curve.
Why is the ability of firms to enter industries that are prosperous important to the effective functioning of competition?
Because if firms couldn't freely enter into profitable industries, there would essentially be no competition. The firms that are in the industries that prosper will prosper and the firms that are in other industries will fail.
In what ways do the desires of entrepreneurs to obtain economic profits and avoid losses make consumer sovereignty effective?
Because it determines the types and quantities of goods consumers want at the time. Spending income and purchasing goods are like casting dollar votes, and if there are enough dollar votes for a good, producers will produce it. These dollar votes make it clear to entrepreneurs as to what goods they are going to sell in order to obtain profit and avoid loss
Why are economic principles necessarily generalized and abstract?
Because they want to get information about the majority of the population, not the outliers.
Why is an assumption made that all other variables are held constant when we construct a two variable graph of the price and quantity of a product?
Because we are trying to focus on the relationship between the two variables being tested.
How is the slope of a straight line in a two variable graph affected by the choice of the units for either variable? Explain and give an example.
Because you divide the choice of units for the variable by the price in order to obtain slope. So it determines the slope of the line. The slope depends on the way relevant variables are measured.
T or F: A change in the quantity demanded means that there has been a change in demand
False
T or F: Allocative efficiency means that goods and services are being produced by society in the least costly way
False
T or F: Coincidence of wants means that two persons want to acquire the same good or service
False
T or F: In the market for sushi, an equal increase in supply and demand will increase the equilibrium price, but have no effect of equilibrium quantity
False
T or F: Profit is the key indicator of success and failure in a command economy
False
T or F: Supply is a schedule that shows the amount of a product a producer can make in a limited time period
False
Describe the production factor for businesses that determines what combinations of resources and technologies will be used to produce goods and services?
Firms want to maximize profits and minimize production costs. These efforts induce the right mix of labor and capital. High post producers will go bankrupt and undersold, so low cost production is the most effective for firms that want to employ the most economically efficient technique of production in producing their output.
What are the advantages of the corporate form of business enterprise
They account for over 90% of all business sales. There is an ease in attracting financial capital through stock and bond markets, and limited liability of corporation owners (stockholders).
How do opponents of the decriminalization of illegal drugs use elasticity to make their arguments?
They argue that the demand for hard drugs is much more elastic that proponents. The people who dabble in drugs make up most drug users, so while addicts may be inelastic, dabblers would make goods elastic. When price is high, they will abstain or substitute.
T or F: A surplus indicates that the quantity demanded is less than the quantity supplied at that price
True
T or F: The incentive that the market system provides to induce technological improvement is the opportunity for economic profit
True
T or F: The market period is a time so short that producers cant respond to a change in demand and price
True
T or F: When a market is competitive, the individual sellers of a product are unable to reduce the supply of the product and control its prices
True
True or false: Given full employment and optimal allocation, it is not possible for an economy capable of producing just two goods to increase its production of both at any one point in time
True
In what sense is the investment schedule unstable?
Variability of expectations: business expectations change quickly when some event suggests a significant possible change in future business conditions, such as a change in economic policies. Durability: capital goods have indefinite useful lifespans. But optimism about future economic conditions can cause firms to replace older facilities with newer capital goods. Irregularity of innovation: New processes and products stimulate investment. Innovation leads to upsurges in investment spending that eventually recede. But this does not happen often. Variability of profits
Which would necessarily result, sooner or later, from a decrease in consumer demand for a product
a decrease in the profits of firms in the industry
Why do economists use the "other things equal" assumption?
Other things equal is the assumption that factors other than those being considered do not change. They do this in order to focus on the relationship that is in question without being confused by changes in other variables. Economists try to simplify as much as possible, because the world is super complex
What is the "law of demand"? What factors can cause demand for a good or service to change?
Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. There is a negative or inverse relationship between price and quantity demanded. Taste, Number of buyers, Income, Price of Related Goods, Consumer expectations
What is the "law of supply"? What factors can cause the supply of a good or service to change?
Other things equal, firms will produce and offer for sale more of their product at a high price than at a low price Resource prices, technology, taxes and subsidies, prices of other goods, producer expectations, number of sellers
What are the possible uses of household (personal) income? Which is the most common in the U.S.?
Personal consumption expenditures, personal saving, and personal income tax. The vast majority of income is spent on consumption
How do the slopes of a straight line and nonlinear curve differ? How do you estimate the slope of a nonlinear curve?
In a nonlinear curve, the slope is constantly changing, whereas with a straight line, the slope is consistent. You have to measure the slope at specific points, so you draw a straight line tangent to the curve at that point. The vertical change in the tangent and the horizontal change is the slope. Vertical/horizontal
What type of resource is fishing ground in the North Atlantic
Land
What type of resource is oil shale deposits in Canada
Land
Name the four classes of economic resources. Explain in detail what is included in each class.
Land: all natural resources used in the production process, such as, forests, mineral and oil deposits, water resources, wind, sunlight and arable land Labor: physical action and mental activities that people contribute to the production of goods and services. Capital: all manufactured aids used in producing consumer goods and services. Factory, storage, transportation and distribution facilities as well as tools and machinery Entrepreneurial Activity: takes initiative in combining resources to produce a good or service. this person is the catalyst of production. This individual also makes strategic business decisions that set the course of an enterprise, they innovate, and bear the risk of investment.
Use diminishing marginal utility concept to explain why quantity demanded will tend to rise when price of a product falls.
Law of diminishing marginal utility argues that for each successive unit of a product consumed, the benefit decreases. So consumers are only going to buy additional units of a good if the price of those units progressively reduce.
What is double-counting? How do we avoid it in social accounting?
Most products go through a series of production stages before they reach the market, meaning some of their components are bought and sold many times. So in order to avoid the "multiple counting" of those components, GDP only includes the market value of the final good and ignores intermediate goods altogether.
Why is national income accounting (a.k.a. social accounting) important to economists and political decision makers?
National income accounting measures the economy's overall performance. Thus, it enables policymakers and economists to assess the health of the economy by comparing levels of production at regular intervals, track the long run course of the economy to see whether it has grown, been constant, or declined, and formulate policies that will safeguard and improve the economy's health.
Is the quantity demanded for necessities more or less responsive to a change in price? Explain using examples
Necessities are less responsive to a change in price because if it is a necessity, it is difficult to get along without it, meaning that you're more likely to purchase even if the price goes up on it.
An invisible hand operates to identify private and public interests. What are private interests and what is public interest? What is it that leads the economy to operate as if it were directed by an invisible hand?
Private interests- finding the least costly combination of resources to produce a specific output Public interests- businesses seek to build new and improved products to increase profits, which increase society's well being. Ensures that when firms maximize their profits and resource suppliers maximize their income, the groups also help maximize society's output and income.
What are the fundamental attributes of pure capitalism?
Private property, freedom of enterprise, self-interest, competition, markets and limited government
Who will get the output from a market economy?
Product will be distributed to consumers on the basis of their ability and willingness to pay its existing market price. Their ability to purchase something has to do with the quantities of the property and human resources they supply and the prices those resources command in the resource market.
Use the concepts of the elasticity of supply to explain the volatility of gold prices.
Shifts in demand interact with highly inelastic supply cause the volatility of gold prices. Supply remains about the same, but demand for it changes. It increases when fear of inflation or domestic international turmoil may undermine the value of the dollar, reduce demand when events settle down.
Discuss the supply and demand conditions for antiques. Why are antique prices so high?
Strong demand a limited, highly inelastic supply. This is because general antiques cannot be reproduced, therefore its quantity can't really go up given demand. One of a kind antiques are perfectly inelastic. Increased population, higher income and greater enthusiasm for collecting antiques have increased the demand for antiques.
Why does the effect of a change in the price of a related good depend on whether a good is a substitute or complement? What are substitutes and complements?
Substitute- a good that can be used in place of another good. Increase in price of one good will increase the demand for the other good and vise versa. Compliment- one good that is used together with another good. These goods are demanded jointly. If the price of one goes up, the demand for the other is going to go down.
substitution effect
Substitution effect argues that when the price of one good increases, the demand for a substitute will increase. So perhaps the increase in price of coffee caused people to switch over to getting their caffeine fix with tea.
In the market system, freedom of enterprise means that
businesses are free to produce products that consumers want
Structural unemployment
change in consumer demand and technology alter the structure of the total demand for labor, both occupationally and geographically. Demand for certain skills can decline and the demand for other skills can increase. This can cause unemployment because the composition of the labor force does not immediately respond to the new structure of job opportunities. Employees thus are structurally unemployed until they adopt or develop skills that employers want. Same with geographic, if the location of job opportunities changes, this can cause some workers to become structurally unemployed. This type of unemployment is a bit more involuntary, because employees are forced to adjust skill set to meet market demands.
A situation in which the product the first trader wants to sell is the same as the product the second trader wants to buy and the product the second trader wants to sell is the same as the first trader wants to buy
coincidence of wants
The market system is a method of
communicating and coordinating economic decisions
If a 5% increase in the price of one good results in a decrease of 2% in the quantity demanded off another good then it can be concluded these two goods are
complements
When the price of one product and the demand of another product are inversely related, the two products are called
compliments
Determination by consumers of the types and quantities of goods and services that will be produced in a market economy
consumer sovereignty
A schedule shows the various amounts of a product consumers are willing and able to purchase at each price in a series of possible prices during a specified period of time
demand
An increase in the price of corn resulted in an increase in the ______ farmland and a decrease in the _______ corn fed beef
demand for, supply of
The demand for resources is
derived from the demand for the products made with the resources
The reason for the law of demand can best be explained in terms of
diminishing marginal utility
Explain what economists mean by competition.
economists means there is competition amongst economic units based on freedom of choice in pursuit of monetary return. It requires two or more buyers and two or more sellers acting independently in a particular product or resource market, and freedom of buyers and sellers to enter and leave markets on the basis of their own self interest.
When a production possibilities table or curve is construction, four assumptions are made
full employment, fixed resources, two goods, fixed technology
When demand is inelastic, the loss of revenue due to lower price is ______ than the gain in revenue due to the greater quantity demanded
greater
a decrease in the supply of oil is more offset by an increase in its demand as a result, the equilibrium price will
increase and equilibrium quantity will increase
A decrease in supply of a product would likely be caused by
increase in business taxes
in the foreign exchange market for euros that are priced in US dollars, an increase in demand for euros ______ the US dollar price of a euro and _____ the equilibrium quantity of euros. This change means that the value of the euro ______ relative to the US dollar and that the value of the U.S. dollar ____ relative to the euro
increase, increase, appreciates, depreciates
Broadly defined, competition is present if two conditions prevail ,these two conditions are...
independently acting buyers and sellers operating in markets, freedom of buyers and sellers to enter or leave the market
A problem with command economies is that economic incentives are _______________ for encouraging work or for giving signals to planners for efficient allocation of resources in the economy. Command economies do not have __________ that are important for technological advance and because there was no business competition, innovation ______________
ineffective, entrepreneurship, lagged
The demand for most farm products is highly ______, which means that large crop yields will likely ______ the total revenue of farmers. Governments often tax products such as liquor, gasoline, and cigarettes because the price elasticity of the demand is ________. A higher tax on such product will _____ tax revenue
inelastic, decrease, inelastic, increase
In what way does human specialization contribute to an economy's output?
it fosters learning by doing
When demand is elastic, the loss of revenue due to the lower price is ______ than the gain in revenue due to the greater quantity demanded
less
how do resource owners and business firms pursue their own interest
maximize profits, minimize cost of production
compared to the lower right portion, the upper left portion of most demand curves tend to be
more elastic
Complementary good, cross elasticity is
negative
define the law of demand
other things equal, as price falls, quantity demanded rises and as price rises, quantity demanded falls. There is a negative or inverse relationship between price and quantity demanded.
cross elasticity of demand formula
percent change in quantity demanded for product X/ Percent change in price of product Y
A decrease in demand means that consumers will buy _______ quantities at every price or will pay _______for the same quantities
smaller, less
The idea in economics that "there is no such thing as a free lunch" means that
scarce resources have alternative uses or opportunity costs
Wealth Effect
shifts consumption schedule upward and saving schedule down because increase in consumer wealth increases aggregate demand for consumption. Increase in wealth shifts aggregate demand right, drop in wealth shifts curve to the left.
An increase in the demand for sushi that is equal to the increase in supply of sushi will result in an equilibrium price that ____ and an equilibrium quantity that ______
stays the same, increases
What are the consequences of a price ceiling for a product if it is set below equilibrium price?
shortage, black markets, rationing problem
When the price of one product and the demand for another product are directly related the two products are called...
substitutes
What are the four most important determinants of price elasticity of demand
substitutionality, proportion of income, luxury v necessity, and time
There is no total revenue test for the elasticity of ______ because regardless of the degree of elasticity, price and revenue are _______ related
supply, directly.
A change in resource prices or the prices of other goods that could be produced will result in a change in ______ of the given product, but a change in the price of a given product will result in a change in __________
supply, quantity supplied
Which is the primary factor determining the share of the total output of the economy received by a household?
the prices at which the household sells its resources
Name a characteristic of competition as economists see it
the widespread diffusion of economic power
The demand for nike basketball shoes is more price elastic than the demand for basketball shoes as a whole. This is best explained by the fact that
there are more substitutes for Nike basketball shoes than basketball shoes as a whole
T or F: Pure capitalism is also called laissez-faire capitalism
true
T or F: total revenue will not change when price changes if the price elasticity of demand is unitary
true
consumers pursuing self interest
try to obtain the products they want at the lowest price possible and apportion their expenditures to maximize their utility
Cyclical unemployment
unemployment that is caused by a decline in total spending. Typically occurs during a recession. As demand for go
What happens to equilibrium price and quantity when there is an increase in demand, increase in supply
P unknown, Q icrease
What are three interrelated features of the economic perspective?
Scarcity and Choice, Purposeful behavior, and Marginal analysis (benefit/cost analysis)
Most goods can be classified as normal goods rather than inferior goods. The definition of a normal good means that
as consumer income increases, consumer purchases of a normal good increase.
Frictional unemployment
at any given time, workers can be in between jobs. Some of them are voluntarily moving from one job to another. Its considered as search and wait unemployment and it implies that the labor market does not operate perfectly and instantaneously. This type of unemployment is kind of desirable because it means people are trying to get higher paying jobs. They can get laid off and that's involuntary or they can quit in search of better opportunities, which is voluntary.
Midpoint formula for price elasticity of demand uses the ______ of the two quantities as a reference point in calculating the percentage change in quantity and the ______ of the two prices as a reference point in calculating percent change in price
average, average
What are the economic problems with price floors? How have they been used by the government
They create surpluses and disrupt rationing ability of prices as well as distort resource allocation.
Product Market (Circular Model)
Households buy, businesses sell
Resource market (Circular Model)
Households sell, businesses buy
If supply is inelastic and demand decreases, the total revenue of sellers will
decrease
T or F: The substitution effect suggests that at a lower price, you have the incentive to substitution the more expensive product for similar products which are relatively less expensive
false
substitute good, cross elasticity is
positive
Assume that a consumer can buy only two goods A and B, and has an income of $100. The price of A is $10 and the price of B is $20. What is the slope of the budget line if A is measured horizontally and B is measured vertically?
-0.5
What is a budget line for an individual? How can it be used to illustrate trade-offs
A budget line is a schedule or curve that shows various combinations of two products a consumer can purchase with a specific money income. Everything that is within the budget line is attainable, anything outside of it Trade-offs are illustrated from opportunity costs. What you give up to get one more unit of another good.
What is the relationship between the price of a product and a shortage of the product? What is the relationship between the price of a product and a surplus of the product?
A lower price causes a shortage because there is an increase demand for that good that exceeds the amount supplied. Higher prices cause surpluses because less people want to purchase the good.
What is an economic system? What is the difference between an economic system and a political system?
An economic system involves the production and distribution of goods, services and money whereas a political system involves the powers in place who make inferences about what the government should do based off economic principles.
What is the fallacy of composition
Assuming what is true for one group of a member of a group is true for the group as a whole.
What type of resource is a McDonald's restaurant in Rochester, Minnesota
Capital
What type of resource is an irrigation ditch in Nebraska
Capital
What is the midpoint formula
Change in quantity/(sum of quantities)/2 / Change in price/ (sum of price)/2
What are the factors that cause a change in demand?
Change in taste can make a good more favorable or the opposite. New products affect consumer taste Number of buyers- an increase in the numbers of buyers in a market will increase demand, a decrease in the number of buyers will decrease demand Income- rise in income can increase demand, and fall in income decreases demand. Changes relationship between normal (superior goods) and inferior goods. Price of related good Consumer expectations
How can the market system adapt to change? How is it done?
Changes in consumer taste are communicated to producers through an increased spending in that good. Then self-interest will induce existing competitors to expand output and entice new competitors to enter the prosperous industry. It also gives them the revenue needed to expand their market. Guided by price and profit.
Explain the major characteristics - institutions and assumptions - embodied in the market system.
Characteristics- private ownership of resources and the use of markets and prices to coordinate and direct economic activity. People act in their own self-interest. Capital is privately owned. Government provides the rules for economic activity and promotes economic stability and growth, provides certain goods that are under-produced or not produced in the market, and modifies the distribution of income. Main force is the market
Compare and contrast the two economic systems.
Command system is when the government owns most property resources and economic decision making occurs a central economic plan. Most things are decided by the government. Market system on the other hand values private ownership of property and the use of markets and prices to coordinate and direct economic activity. The role of the government in this case is limited.
Explain why competition implies both productive efficiency and allocative efficiency.
Competition forces producers to use the best technology and mix of productive resources to compete with other firms. This creates productive efficiency, or production of good in least costly way. Particular mix of goods and services most highly valued by society is created by competition because competitive markets make assignments based on consumer desires in order to make money
Explain the two major economic problems with command economies
Coordination problem- the failure of a single industry to achieve its output target causes a chain reaction that hurts the entire market. All of the industries have to be working at exact efficiency for a command economy to work. This becomes more difficult as economies expand. Bottlenecks and production stoppages become the norm instead of the exception. Incentive problem- if the government overshoots or undershoots production expectation and surplus or shortage occurs, managers who oversaw the production of the good are going to be rewarded anyways, so there is no incentive to adjust production in response to the shortages and surpluses that occur.
Explain what the term "economizing problem" means for an individual and for society?
Economic wants in society exceed economic means, forcing consuming to have to make choices with the limited resources they have. We have limited income, unlimited wants and a budget line of what we as consumers can spend, and resources are scarce.
"Economics cannot be scientific because it is based upon the value judgment that 'more (output) is better.'" Do you agree?
Economics is a social science that relies on theoretical models to create laws or theories. It does not always imply that more of an output is better.
What is economics? How do macroeconomics and microeconomics differ?
Economics is the study of the production and consumption of goods, and how they get distributed. While microeconomics is concerned with the decisions of individual consumers, workers, households, and business firms whereas macroeconomics focuses more on the economy as a whole as aggregates.
Describe the three virtues of the market system
Efficiency- market system promotes efficient use of resources by guiding them into production of goods that are most wanted by society. Incentives- market system encourages skill acquisition, hard work, and innovation in return for economic success. Freedom- market system coordinates economic activity without coercion. Thrives on enterprise and choice. Free to pursue their own self-interest subject to rewards and penalties by the market
In what sense is equilibrium GDP an equilibrium? Is it economically desirable?
Equilibrium GDP is desirable because no other level of GDP can be sustained besides the equilibrium level. It is equilibrium in the sense that it sustained the economy, Consumption equals investment, savings equals planned investment, and there are no unplanned changes in inventories.
Explain the concept of equilibrium as it relates to the functioning of free markets.
Equilibrium price is the price in the free market where the intention of buyers and sellers match. Quantity demanded equals quantity supplied. Equilibrium quantity is the quantity at which the intention of buyers and seller match so quantity demanded and quantity supplied are equal. This is viewed as the optimal location
What role does time play in affecting the elasticity of demand?
Goods tend to be more elastic the longer the time period it is under consideration for. Consumers have to adjust to price changes. Time is needed when a price is changed for example, to experiment with another good.
Give an example showing how the government implicitly uses the idea of cross elasticity of demand in its policymaking
Government uses idea of cross elasticity of demand to determine whether a proposed merger between two large firms will substantially reduce competition and therefore violate antitrust laws. For example, if coke and pepsi dominate the soda industry, and they want to merge, the government will use cross elasticity to block that merger because it will hurt competition.
What are the differences and similarities among the terms hypothesis, theory, principle, law, and model?
Hypothesis- an educated guess about the outcome of an experiment/test Theory- if a hypothesis is tested against the facts and favorable results accumulate. Well tested and widely accepted assumption of the outcome of certain behaviors. Economic principle- a very well tested and widely accepted theory becomes a statement about economic behavior or the economy that enables prediction of the probable effects of certain actions. Model- Combinations of laws and principles are incorporated into models, which are simplified representation of how something works, such as a segment of the market or economy. They are all similar in that they are all based off of trails, and are subject to change. They are reliable in terms of what we know right now.
Describe a case in which a straight line in a two variable graph would have an infinite slope and a case in which the slope of a line would be zero?
Infinite- when variables are unrelated to or independent from each other. When the same quantity is purchased no matter what the price is, the slope is infinite. Vertical line Zero- when variables are unrelated to or independent from each other. Horizontal line
Explain why knowledge of the cross elasticity of demand is important to business
It completely affects how they do business and how likely they are to change prices. If they see cross elasticity of demand with another company, they may try to compete by lowering their prices to increase the demand for their product.
What do we mean when we say that economic resources are "scarce"?
It does not mean the resource is necessarily running out, it just means there is a limited supply of a certain good in the economy.
income effect
Income effect argues that decrease in price increases purchasing power, so when the price of coffee significantly increased, it decreased the purchasing power of consumers and thus, decreased the quantity demand for coffee in the United States.
Discuss the relationship between the quantity demanded for a product and how that quantity responds to a change in income
Income elasticity of demand measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good.
What is Okuns law? What are its implications for policymakers?
Indicates that for every 1 percentage point by which the actual unemployment rate exceeds the natural rate, a negative GDP gap of about 2 percent occurs. It plays as a good predictor for policymakers on the state of unemployment.
How are inferior and normal (or superior goods) defined? What is the relationship between these goods and changes in income?
Inferior goods are goods whose demand varies inversely with money income. Normal goods are products whose demand varies directly with money income. When income rises, normal goods are preferred over inferior goods. When income decreases, the demand for inferior goods increase.
Explain how the market system provides a strong incentive for technological advance and creative destruction
It enables better products and processes to supplant inferior ones. Firms that may have been profitable at first may find themselves struggling because other firms have advance their technology, and provide customers with lower price, better quality products. For an industry to keep up, it has to be rapidly advancing in technology. This leads to creative destruction because the new products completely destroy the market positions of firms that are wedded to older ways of doing business.
The tendency of firms and resource suppliers seeking to further their own self interest while also promoting the interests of a society in a market economy
Invisible hand
Explain how an increase in the consumer demand for a product will result in more of the product being produced and more resources being allocated to its production?
It is to initiate competition. Businesses want to profit from producing a lot of something cheaply and making big money off it. So when consumer demand for a product rises, businesses are going to make more of that product to meet demand and allocate more resources to minimizing the cost of production for that good.
How does an economy benefit from specialization and the division of labor?
It makes use of differences in ability, it fosters learning by doing, and it saves time.
What do we mean when we say that GDP is a monetary measure?
It means that GDP measures the value of output in monetary terms. Without such a measure, we would have no way of comparing the relative values of the vast number of goods and services produced in different years.
2. What is meant by perfectly elastic demand? By perfectly inelastic demand? What does the demand curve look like when demand is perfectly elastic and when it is perfectly inelastic?
It means that consumers are completely responsive to a price change. The elasticity coefficient is infinite. It looks like a horizontal line in graph form.
Besides rising prices, what are the other effects of inflation?
It redistributes real income where fixed income receivers are hurt, savers benefit, and creditors are hurt by this redistribution. It squeezes profits and reduces the amount of output firms are willing to supply at the existing price level. Cause money to be over issued to banks
In what sense is the marginal propensity to consume related to the slope of the consumption schedule?
MPC is the numerical value of the slope of the consumption schedule. It is a change in the propensity to consume.
What is the difference between individual demand and market demand? What is the relationship between these two types of demand?
Market demand is just the sum of individual quantities demanded. Individual demand is just the demand of one person, whereas the market demand is the sum of quantities demanded in the market.
How do mathematicians and economists differ at times in how they construct two dimensional graphs? Give an example
Mathematicians put independent variable on the horizontal axis and the dependent on vertical axis. Economists graphing is a bit more arbitrary. Income consumption graph is consistent with mathematician models, but economists put price and cost on the vertical axis.
What is money? What important function does it perform? Explain how money performs this function and how it overcomes the disadvantages associated with barter
Money is a medium of exchange that makes trade easier. It replaced bartering because bartering required a coincidence of wants. It is a social invention to facilitate exchange.
Supply definitions of a normal good and an inferior good. Illustrate each definition with an example.
Normal good- income elasticity coefficient is positive, meaning one or more of them are demanded as income rises. Automobiles are a normal good Inferior good- A negative income elasticity coefficient designates an inferior good. Consumers decrease their purchase of an inferior good as income rises. Generic brands
What happens to equilibrium price and quantity when there is a decrease in demand, supply constant
P decrease, Q decrease
What happens to equilibrium price and quantity when there is an increase in supply, and demand remains constant
P decrease, Q increase
What happens to equilibrium price and quantity when there is a decrease in demand and increased supply
P decrease, Q unknown
What happens to equilibrium price and quantity when there is an decrease in supply, demand constant
P increase, Q decrease
What happens to equilibrium price and quantity when there is an increase in demand, but supply remains constant
P increase, Q increase
What happens to equilibrium price and quantity when there is an increase in demand, decrease in supply
P increase, Q unknwon
What happens to equilibrium price and quantity when there is an decrease in demand and decrease in supply
P unknown, Q decrease
How can GDP be improved upon as a measure of social welfare?
Pair it with the human development index, in my opinion. Because it doesn't account for non-market activities, leisure, improved product quality, the environment and a slew of other factors. The HDI can fill in some of the gaps of this.
What are the four phases of the business cycle
Peak is when business activity has reached a temporary maximum. Here, the economy is near or at full employment and the level of real output is at or very close to the economy's capacity Recession is a period of decline in total output, income and employment. This downturn can last 6 months or more and is marked by widespread contraction of business activity along with declines in real GDP. Trough of the recession is when output and employment "bottom out" at their lowest levels. This phase can be short lived or last a while. Expansion- recession is generally followed by recovery in which real GDP, income, and employment rise. The economy then reaches full employment.
Supply does not remain constant for long because the factors that determine supply change. What are these factors? How do changes in them affect supply
Resource prices- higher resource prices increase production costs and decrease supply. Technology- increase in technology enables producers to produce more of something, supply increases. taxes and subsidies- increase in taxes increases production costs and decrease supply prices of other goods- if a firm produces two different goods and the price to produce one decreases, they may substitute production and produce more of the cheaper product, increasing supply of one good and decrease supply of the other producer expectation- a change in the expectation of cost of production in the future could affect the supply now. If they are anticipating an higher price on production of something, they may withhold some of their production, and decrease the current supply. number of sellers- the larger the number of suppliers, the greater the market supply is. More sellers, more supply. And vise versa
What is the post-hoc fallacy
Since event X occurred before Event Y, Event X must have caused event Y.
What is the relationship between the slopes of lines and marginal analysis?
Slope reflects marginal changes from the status quo. Slope is important because it reflects marginal changes.
Using the resources of an individual, a firm a region or a nation to produce one fora a few goods and services
Specialization
What economic principle is suggested by the shape of the production-possibilities curve? Explain.
The Law of increasing opportunity costs is suggested by the shape of the production-possibilities curve. More of one good means fewer of the other good. As the production of a particular good increases, the opportunity cost of producing an additional unit rises.
What is the difference between planned and actual investment?
The amount business firms collectively intend to invest at each possible level of GDP. The Actual investment is the investment that companies actually end up with dependent on the speed of sales
Why does an economy's aggregate demand curve slope downward?
The downward slope of the curve is explained by the income and substitution effect. When the price of an individual product falls, consumer's nominal income allows a larger purchase of the product (income effect). As price falls, they want to buy more of a good because it's cheaper than other relative goods (substitution effect).
Why is it important for buyers and sellers to easily enter/exit the market?
The freedom of an industry to expand or contract provides the economy with the flexibility needed to remain efficient over time. Enables the economy to adjust to change in consumer taste, technology and resource availability.
Why does price elasticity of demand differ based on the price of a good as a proportion of household income? Give examples.
The higher the price of a good relative to consumer's incomes the greater the price elasticity of demand. Price elasticity for low income goods like chewing gum are inelastic, but price elasticity of high income things such as cars tend to be more elastic. This is because things such as cars are significant fractions of annual income budgets of families
How do you tell the difference between a depend and an independent variable when examining economic relationships?
The independent variable is the cause or the source. It is what changes first. Generally, income Dependent Variable- the effect or outcome. It is the variable that changes because of the consumption example. Generally, consumption.
6. Explain the effect of the number of substitutes on the price elasticity of demand
The larger the number of substitutes available, the more elastic the demand will be. The elasticity of a good is determined by how narrowly it is defined.
Explain what determines the price elasticity of supply of an economic good or service.
The quantity supplied by suppliers have to be relatively responsive to price changes. It depends on how easily and quickly producers can shift resources between alternative uses. The more rapidly they can do this, the more elastic
1. Define and explain the price elasticity of demand in terms of the relationship between the r elative (percentage) change in price. Use the elasticity coefficient in your explanation.
The price elasticity of demand is the responsiveness of consumers to a price change. Economists measure the price elasticity of demand by relative change in price. In equation: Percentage change in quantity demanded of product x/ percentage change in price of product x.
3. Demand seldom has the same elasticity at all prices. What is the relationship between the price of most products and the price elasticity of demand for them?
The total revenue. When total revenue exceeds the losses by decreasing price, then its elastic, when it's the same, its unit and when its lower, its inelastic. As you go down on the graph, more likely to be inelastic.
5. When the price of a product declines, the quantity demanded of it increases. When demand is elastic, total revenue is greater at the lower price, but when demand is inelastic, total revenue is smaller. Explain why total revenue will sometimes increase and why it will sometimes decrease?
There are factors that determine the price elasticity of demand and the amount of total revenue that will increase at a lower price. But there comes a time when demand isn't going to increase more per unit enough to justify a lower price. You can only decrease price so much before you start losing revenue.
Describe how capital accumulation works. Who votes for the production of capital goods? Why do they vote for capital goods production? Where do they obtain the dollars needed to cast their votes?
There is dollar voting for capital goods as well as consumer goods. Technological advance requires additional capital goods. Pursuing capital goods yields greater profit income in the future if the technological innovation that required additional capital goods is successful
Why is there no total-revenue test for the elasticity of supply?
There is no total revenue test for elasticity of supply because supply has a positive or direct relationship between price and amount supplied. The curve upslopes. Regardless of price elasticity, it always moves together.
"It is the function of the economist to describe the system, not prescribe changes in it." Critically evaluate.
This is what distinguishes positive from normative economics. Economists focus on positive economics or the facts, cause/effect and theories that are developed from testing. People who think through this perspective of economics would agree with this phrase.
4. What is the relationship—if there is one—between the price elasticity of demand and the slope of the demand curve?
Top part of a demand curve is elastic, middle part is unit, the bottom part is inelastic
What is an example of insights that income elasticity of demand coefficients provide about recessions.
When recessions occur and income falls, the income elasticity of demand helps predict which products will decline in demand more rapidly than others.
The command system and the market system differ in two important ways.
Who owns the factors of production and the method use to motivate, coordinate and direct economic activity?
Define demand
a schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time.
What will happen to the equilibrium quantity and price of a product in a competitive market where there is an equal increase in demand and supply
equilibrium quantity will increase and equilibrium price will stay the same
What will happen to the equilibrium quantity and price of a product in a competitive market when the decrease in demand exactly offsets an increase in supply
equilibrium quantity will stay the same and equilibrium price will decrease
T or F: Demand is the amount of a good or service that a buyer will purchase at a particular price
false
T or F: If two goods are complementary, an increase in the price of one will tend to increase the demand for the other
false
T or F: One of the five fundamental questions is who will control the output
false
T or F: a decrease in demand for tomatoes increases the equilibrium price and decrease in equilibrium quantity
false
T or F:if price falls, there will be an increase in demand
false
If supply and demand establish a price for a good so that there is no shortage or surplus of the product, then price is successfully performing its price is set at a market _____ price
rationing function, clearing
If an increase in the demand for a product and a rise in its price cause an increase in the quantity supplied, price is successfully performing its
guiding function
Interest rate effect
higher price level increases the demand for money, so given a fixed supply of money, an increase in money demand will drive up price paid for its use (interest rate). Higher interest rates curtail investment spending. This decreases aggregate demand.
Assume that the price of video game players falls. What will most likely happen to the equilibrium price and quantity of that video game?
price will increase, quantity will increase
Assume the demand for security services increases in a competitive market. What will most likely happen to the equilibrium price and quantity of security services
price will increase, quantity will increase
the law of supply states that, other things being constant, as price increases
quantity supplied increases
what are the five fundamental questions that markets respond to?
what goods and services will be produced, how will goods and services be produced, who will get the goods and services, how will the system accommodate change, how will the system promote progress
Foreign purchases effect
when US price level rises, relative to foreign price levels, foreigners buy fewer US goods and Americans buy more foreign goods. US exports fall and imports rise. Less goods demanded as net exports. Reduce the quantity of American goods purchase.
Independent good, cross elasticity is
zero