Micro Exam 1

Determinants of demand:

1. Change in buyer tastes 2. Change in number of buyers 3. Change in income 4. Change in the prices of related goods 5. Change in consumer expectations

5 fundamental questions that an economy must deal with:

1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will get the goods and services? 4. How does the system accommodate change? 5. How does the system promote progress?

The concepts of the "invisible hand" and "spontaneous order" can be described as...

opposites (?) wrong b/c order comes from God (?)

Economic perspective:

A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions

Special interest effect:

Any political outcome in which a small group ("special interest") gains substantially at the expense of a much larger number of persons who each individually suffers a small loss

Limited and bundled choices:

Citizens and elected officials are forced to be less selective in choosing public goods and services than they are in choosing private goods and services

Principal agent problems:

Conflicts that arise when one group of people (principals) delegate tasks to another group (agents), but the agents act on their interests instead of the interest of the principals

Public goods:

Goods and services that are characterized by nonrivalry and nonexcludibility (everyone can use them and no private firm can break even when attempting to provide them -gov. provides and pays for with tax revenues

Private goods:

Goods or services that are individually consumed and that can be profitably provided by privately owned firms because they can exclude nontaxpayers from receiving the benefits

Normal goods:

Goods or services whose consumption increases when income increases and falls when income decreases, price remaining constant

Inferior goods:

Goods or services whose consumption whose consumption decline as income rises, prices held constant

Which is considered a factor of production?

Land, labor, AND capital!

Individual's economizing problem:

Limited income, unlimited wants, and budget lines/constraints

The study of microeconomics is primarily concerned with...

Making optimal choices under conditions of scarcity.

Complementary goods:

Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely)

Substitute goods:

Products and services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises

The simple circular flow model shows that...

Resources flow from households to firms and products flow from firms to households

Society's economizing problem:

Scarce resources and how to divide/use them

Rent seeking behavior:

The actions by persons, firms, or unions to gain special benefits from the government at the taxpayers' or anyone else's expense

Derived demand:

The demand for a resource that depends on the demand for the products it helps to produce

Consumer sovereignty:

The determination by consumers of the types and quantities of goods and services that will be produced with the scarce resources of the economy

Market failure:

The inability of a market to bring about the allocation of resources that best satisfies the wants of society; in particular, the overallocation or under allocation of resources to the production of a particular good or service because of externalities or informational problems or because markets do not produce desired market goods

When an economist says that there is too much of a good thing, the economist is suggesting that...

The marginal benefit is greater than the marginal cost.

Economizing problem:

The need to make choices because economic wants exceed economic means

A fundamental difference between the command system and the market system is that in command systems...

The public (gov.) owns most property resources and economic decision-making is set by a central economic plan created and enforced by the government but, in market systems, individuals own most resources and decision-making is set by markets and prices

The "invisible hand":

The tendency of competition to cause individuals and firms to unintentionally but quite effectively promote the interests of society even when each individual or firm is only attempting to pursue its own interests

Examples of regular externalities:

Vaccinations, deodorant, toothpaste, etc.

Sources of government failure

Voting problems (paradox of voting, inefficient voting outcomes, lack of information about voting preferences, etc.), principal-agent problems, special interest effect, rent-seeking behavior, failure to weight benefits and costs, unfunded liabilities, chronic budget deficits, misdirection of a stabilization policy, limited and bundled choices, inefficient bureaucracies, inefficient regulation/intervention, political corruption, and imperfect institutions

Substitution effect:

a change in the quantity demanded of a consumer good that results from a change in its relative expensiveness caused by a change in the good's own price

Income effect:

a change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the products price

The law of demand states that, other things equal...

an increase in a product's price will reduce the quantity of it demanded, and conversely for a decrease in price

The socially optimal amount of pollution abatement occurs where society's marginal...

cost and marginal benefit of reducing the spillover are equal

In a market economy, the government's power to coerce can...

increase economic efficiency

From society's point of view, the economic function of profits and losses is to...

promote progress and encourage development of new technology