Microeconomics Exam Review #1

the study of the ways individuals, firms and society make decisions to allocate limited resources to competing wants. Assumes that people: -are rational -are self-interested -respond to incentives

Economics

How well resources are used and allocated. Do people get the goods and services they want at the lowest possible resource cost?

Efficiency

Which is NOT considered a basic economic question? Who will receive the goods and services? How will the system accommodate change? What goods and services will be produced? How will these goods and services be produced?

How will the system accommodate change?

addresses society's beliefs about what should or should not take place

normative question

one person's consumption does not diminish others' benefit

Nonrival

A lawyer can argue a case in court for one hour and make $300. She could alternatively use that hour of time to type a legal brief in her office. What is the opportunity cost of her typing the legal brief? nothing, since she would always hire an administrative assistant to type for her $300, since that is the amount she could have made by arguing a case in court nothing, since she would never type a legal brief There is not enough information in this problem to be able to answer the question.

$300, since that is the amount she could have made by arguing a case in court

what are the sources of market failure?

-Lack of competition -Information is not shared by all parties -Existence of external benefits or costs -Existence of public goods

what are the 4 factors in production?

-Land -Labor -Capital -Ideas

what are 2 sources of public goods?

-Not Exclusive -Nonrival

what are the three basic questions?

1.WHAT goods and services are to be produced 2.HOW are these goods and services to be produced? 3.WHO will receive these goods and services

one country can produce more of a good than another country

Absolute advantage

the mix of goods and services is just what society desires

Allocative efficiency

Assumption used in economics that all other relevant factors or variables are held constant. Models are crafted from new ideas, then tested against real world data. For example, will more government spending lead to economic growth

Ceteris paribus

one's country opportunity cost is lower than another country's

Comparative advantage

are typically consumed together if the price of a complement decreases, the demand for the original good increases [and vice versa]

Complements

the difference between market price and what consumers are willing to pay

Consumer surplus

the loss of consumer surplus and producer surplus caused by the inefficiency of a market that is not operating at equilibrium

Deadweight loss

the maximum amount of a product that buyers are willing to purchase over some period at various prices (Ceteris Paribus)

Demand

-Non price factors affect demand; they are held constant for drawing a demand curve. They include: -tastes and preferences -income -prices of related goods-substitutes and complements -number of buyers -expectations about future prices

Determinants of Demand

Nonprice factors that affect it include: -production technology -costs of resources -prices of related commodities -expectations -number of sellers -taxes and subsidies

Determinants of Supply

market forces are in balance when the quantities demanded by consumers just equal the quantities supplied by producers

Equilibrium

the price at which the quantity demanded is just equal to quantity supplied

Equilibrium Price

the output that results when quantity demanded is just equal to quantity supplied

Equilibrium Quantity

the fairness of various issues and policies. Should executive salaries and bonuses be capped for publicly traded corporations

Equity

demand decreases as incomes rise

Inferior goods

holding all other relevant factors constant, as price increases, quantity demanded falls, and as price decreases, quantity demanded rises

Law of Demand

the study of broader issues in the economy such as inflation, unemployment and national output

Macroeconomics

the study of decision making by individuals, businesses, and industries

Microeconomics

demand increases as incomes rise

Normal goods

once a public good is provided, no one can be excluded from consuming it

Not Exclusive

the cost of a good in terms of another that must be give up

Opportunity cost

the next best alternative; what you give up to do something or purchase something

Opportunity cost

a model that shows the combinations of two goods a society can produce a full employment. -allows us to answer: -HOW MUCH can be produced -WHAT WILL IT COST to change the production mix

PPF

can be answered by available information or facts

Positive question

market economies use prices to allocate resources, goods, and services -send signals in free market economies: -Buyers: -What to buy? -How much? -Sellers: -What to sell? -How much? -What method?

Price System

a government set maximum price that must be charged for a good or service -can lead to shortages

Price ceiling

a government set minimum price that must be charged for a good or service -lead to surpluses

Price floor

the difference between market price and the price at which firms are willing to supply it

Producer surplus

goods and services are produced at their lowest possible resource (opportunity) cost

Production efficiency

unlimited wants clash with limited resources. Everyone faces it. Economics focuses on the allocation of scarce resources

Scarcity

occurs when the price is below market equilibrium and quantity demanded exceeds quantity supplied

Shortage

goods consumers will substitute for one another. When one good rises, the demand for the other good increases, and vice versa

Substitutes

the maximum amount of a product that sellers are willing and able to provide over some period at various prices (ceteris paribus)

Supply:

occur when the price is above market equilibrium and quantity supplied exceeds quantity demanded

Surplus

Paying a salesperson more for increased sales is an example of: a) an incentive. b) an opportunity cost. c) equity. d) efficiency.

a) an incentive.

Scarcity: a)is faced by all individuals and societies. b) is synonymous with poverty. c) is eliminated with greater technology. d) can be eliminated with adequate resources

a) is faced by all individuals and societies.

The economics of uranium mining would be studied in: a) microeconomics. b) deductive logic. c) inductive logic. d) macroeconomics

a) microeconomics.

Because of scarcity: a) we face tradeoffs in nearly every choice we make. b) choices are unlimited. c) wants are limited. d) resources are limitles

a) we face tradeoffs in nearly every choice we make.

Rational behavior requires thinking at the margin. Which example represents this type of thinking? a) deciding whether the overtime pay is worth working on your day off b) All of these examples represent thinking at the margin. c) deciding whether a second burger is worth the extra $2 d) deciding whether to pay a fine for polluting the local harbor or installing antipollution machinery

b) All of these examples represent thinking at the margin.

Which of these is NOT an example of market failure? a) Air is polluted by a manufacturing firm. b) Competition leads firms to provide products at the lowest possible price. c) Water is polluted by a paper company located by a river. d) Consumers must buy water from one local water utility.

b) Competition leads firms to provide products at the lowest possible price.

People use _____ to determine how many hours to work, and businesses use _____ to determine how much of their product they are willing to supply to the market. a) production efficiency; marginal analysis b) marginal analysis; marginal analysis c) marginal analysis; allocative efficiency d) allocative efficiency; production efficiency

b) marginal analysis; marginal analysis

When the government chooses to use resources to build tourist centers, the selected resources are no longer available to build highways. This BEST illustrates the concept of: a) scarcity. b) opportunity cost. c) macroeconomics. d) efficiency.

b) opportunity cost.

Economics is BEST defined as the study of how: a) to classify resources used to produce final goods and services. b) people make rational decisions. c) technology can be used to change scarce d)resources into free resources. e) resources are apportioned to satisfy human wants.

b) people make rational decisions.

Macroeconomics is concerned with issues such as: a) which job to take. b) unemployment. c) which orange juice to buy. d) what price to charge for goods.

b) unemployment.

Which statement is TRUE about specialization and exchange between two individuals? a) They generally benefit the poorer individual at the expense of the richer individual. b) They generally benefit the richer individual at the expense of the poorer individual. c) They generally benefit the poorer individual as well as the richer individual. d) They generally benefit neither the poorer individual nor the richer individual.

c) They generally benefit the poorer individual as well as the richer individual.

Supply and demand analysis is used: a) only in macroeconomics. b) only in microeconomics. c) in both microeconomics and macroeconomics. d) in neither microeconomics nor macroeconomics.

c) in both microeconomics and macroeconomics.

The opportunity costs of attending college do NOT include: a) the forgone wages that could have been earned working. b) the costs of textbooks or eBooks. c) the expenditures for food. d) required student activity fees.

c) the expenditures for food.

A production possibilities frontier that is a straight line is the result of: increasing opportunity costs. underemployment of resources. constant opportunity costs. scarcity.

constant opportunity costs.

Which situation(s) may require government intervention? I. A local business has made a profit in each of the last ten years. II. Students are having difficulty deciding whether to go the beach or to go hiking for their class trip. III. A manufacturing firm on a river is dumping production run off into the water. a) I and II b) II only c) II and III d) III only

d) III only

Which statement is a key idea in economic thinking? a) All of these are key ideas in economic thinking. b) The value of a good can be objectively measured and is the same for everyone. c) Scarcity exists for the poor but not for the rich. d) Incentives matter.

d) Incentives matter.

In the study of economics, the goals of efficiency and equity are often: a) compatible. b) objectively definable. c) given equal emphasis. d) in conflict with one another.

d) in conflict with one another.

A theory composed of a number of assumptions and facts boiled down to their basic relevant elements is called a: a) practice. b) conclusion. c) metaphor. d) model.

d) model.

When goods are produced at the lowest possible cost, an economy is said to have achieved: a) inferior quality goods. b) allocative efficiency. c) cheap production. d) production efficiency.

d) production efficiency.

the limits on international trade include all of these EXCEPT: decreasing opportunity costs and increasing returns. transportation and communication costs. Trade may hurt some industries and individuals within each country. increasing opportunity costs and diminishing returns.

decreasing opportunity costs and increasing returns.

Investment in human capital refers to: increasing the machinery and equipment that firms use. increasing the financial capital in the economy. increasing the number of people working at companies. education, on-the-job training, and professional training activities.

education, on-the-job training, and professional training activities

the factors that motivate individuals and firms to make decisions in their best interest

incentives

institutions that bring buyers and sellers together

market

In a _____ economy, individuals and firms own most resources, and in a _____ economy, the government controls most resources. socialist; planned planned; market market; planned planned; socialist

market; planned

If the government of Spain decides to spend less on the military and more on health care, the forgone spending on military items represents the: production efficiency of the extra health care. opportunity cost of the extra health care. cost factor of the extra health care. allocative cost of the extra health care.

opportunity cost of the extra health care.

the process of converting factors of production to outputs

production

The theory of comparative advantage says that countries: should import those goods they can produce at a lower opportunity cost than another country. should restrict trade by cutting off all imports. should export those goods they can produce at a lower opportunity cost than another country. can never benefit from specialization in trade.

should export those goods they can produce at a lower opportunity cost than another country.

If an economy is operating at a point that is inside of its production possibilities frontier, then it can be assumed that its resources are: efficiently allocated. underutilized. fully utilized. over-utilized.

underutilized.