Quiz 1

three economic questions every society faces

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?

goods

items that we value or desire to satisfy our wants

causation

one event caused the other to occur

self-interest

At the core of incentives, motivates most people, helps predict human behavior, doesn't mean you're selfish

Absolute advantage

The ability to produce a good using fewer resources

economic growth

Expansion of the economy over time, ability to produce more goods and services; measured by the annual percentage change in real (indexed for inflation) output of goods and services per capita (real gross domestic product (GPD) per capita), reflecting the expansion of the economy over time

rule of rational choice

Expected marginal benefits are greater than the expected marginal costs; people alter their behavior if the expected marginal benefits from doing so outweigh the expected marginal cost

How is a command economy different from a market economy?

In a command economy, central members of a planning board or organization make decisions about what and how much to produce. A market economy makes those decisions as the result of decentralized decision making by individual producers and consumers, coordinated by their offers to buy and sell on markets.

Why was the opportunity cost of going to college higher for LeBron James (Cleveland Cavaliers star) than it is for most undergraduates?

LeBron James's forgone alternative to going to college—starting a highly paid professional basketball career sooner than he could have otherwise—was far more lucrative than the alternatives facing most undergraduates. Because the forgone alternative was more valuable for LeBron James, his opportunity cost of going to college was higher than for most.

positive statement

Objective and testable, describes what happened and why it happened, does not have to be a true statement

property rights

Private use of goods and services; theoretical socially-enforced constructs in economics for determining how a resource or economic good is used and owned; give individuals to use their property efficiently ; government protects these through the legal system and public policy

What is rational behavior?

Rational behavior is when people do the best they can based on their values and information, under current and anticipated future consequences. Rational individuals weigh the benefits and costs of their actions, and they pursue actions only if they perceive their benefits to be greater than their costs.

normative statement

Subjective and contestable, prescribes, involves judgement about what should be or what ought to happen

comparative advantage

a person, region, or country has this advantage when they can produce a good or service at a lower opportunity cost than others\

Prices communicate information about the relative value of resources. Which of the following would cause the relative value and, hence, the price, of potatoes to rise? a. A fungus infestation wipes out half the Idaho potato crop. b. The price of potato chips rises. c. Scientists find that eating potato chips makes you better looking. d. The prices of wheat, rice, and other potato substitutes fall dramatically.

a, b, and c would cause increases in the relative value and price of potatoes. In d, a reduction in the prices of potato substitutes would make alternatives more attractive and reduce the relative value and price of potatoes

macroeconomics

aggregate (total) economy, looks at economic problems influencing the whole society (ex. inflation, unemployment, business cycles, economic growth)

command economy

an economy in which the government uses central planning to coordinate most economic activities (ex. N Korea, Cuba)

market economy

an economy that allocated goods and services through the private decisions of consumers, input suppliers, and firms (ex. Hong Kong, Singapore, New Zealand, Switzerland - no nation has a pure market economy)

mixed economy

an economy where government and private sectors determine the allocation of resources (ex. US)

the circular flow model

an illustration of the continuous flow of goods, services, inputs and payments between firms and households

inflation

an increase in the overall price level in the economy, sustained inflation is believed to be caused by an oversupply in money or loss of value in money

If a country wants to maximize the value of its output, each job should be carried out by the person who ______. a. has the highest opportunity cost b. has a comparative advantage in that activity c. can complete the particular job most rapidly d. enjoys that job the least

b

Money costs ______. a. are not opportunity costs, because they involve money b. are opportunity costs, because you could have used that money to buy other goods and services c. are always the only relevant opportunity costs d. are not opportunity costs, because they involve money, and are always the only relevant opportunity costs

b

When we look at a particular segment of the economy, such as a given industry, we are studying ______. a. macroeconomics b. microeconomics c. normative economics d. positive economics

b

specialization

concentrating on only one activity (or a few activities), based on comparative advantage, allows a person to make the best use of our limited resources and limited opportunity cost

Why do even "non-economic" issues have an economic dimension?

because economics concerns anything worthwhile to some human being (including love, friendship, charity, etc.) and the choices we make among the things we value.

Why must we choose among multiple ways of producing the goods and services we want?

because goods can generally be produced in several ways, using different combinations of resources.

Why do economic predictions refer to the behavior of groups of people rather than individuals?

because looking at the behaviors of a large group of individuals allows economists to discern general patterns of actions and therefore make more reliable generalizations.

Why does the circular flow of money move in the opposite direction of the flow of goods and services?

because the money flows are the payments made in exchange for the goods and services

how will the goods and services be produced?

best method is the least cost effective, labor intensive or capital intensive

A higher price is a ______ incentive to buyers and a ______ incentive to sellers. a. positive; positive b. positive; negative c. negative; positive d. negative; negative

c

Economic disputes over the distribution of income are generally associated with which economic question? a. Who should produce the goods? b. What goods and services will be produced? c. Who will get the goods and services? d. How will the goods and services be produced?

c

If a good is scarce, ______. a. it only needs to be limited b. it is not possible to produce any more of the good c. our unlimited wants exceed our limited resources d. our limited wants exceed our unlimited resources

c

what goods and services will be produced?

consumer sovereignty, command economy, market economy, mixed economy

Normative statements ______. a. attempt to describe what happens and why it happens b. are objective and testable c. attempt to describe the way the world works d. are subjective and attempt to prescribe what should be done

d

Rational self-interest can include the welfare of ______. a. our family b. our friends c. the poor people of the world d. all of these

d

The government may help stabilize the economy by ______. a. changing the money supply and interest rates b. using changes in government spending c. using changes in taxes d. using any of these

d

Which of the following is (are) true statement(s)? a. Prices provide incentives for buyers and sellers. b. Higher prices for a good or service provide incentives for buyers to purchase less of that good or service and for producers to make or sell more of it. c. Lower prices for a good or service provide incentives for buyers to purchase more of that good or service and for producers to make or sell less of it. d. All of these statements are correct.

d

fallacy of composition

even if something is true for an individual, it is not necessarily true for many individuals as a group

microeconomics

deals with smaller units within the economy, attempting to understand the decision making behaviors of firms and households and their interaction in markets for particular goods and services (ex. health care, price of everyday items)

who will get the goods and services?

depends on the person's income/the quantity and quality of the scarce resources. markets reward education, hardwork, and training

Marginal thinking would help improve the results of which of the following activities? a. studying b. driving c. shopping d. looking for a place to park your car e. all of these

e

Scarce resources include ______. a. labor—the human effort used in producing goods and services b. land—the natural resources used in the production of goods and services c. capital—the equipment and structures used to produce goods and services d. entrepreneurs—who combine labor, land, and capital to produce goods and services e. all of these

e

Which of the following is true? a. In product markets, firms are buyers and households are sellers. b. In factor markets, firms are sellers and households are buyers. c. Firms receive money payments from households for capital, land, labor, and entrepreneurial ability. d. All of these are true. e. None of these is true.

e

empirical analysis

examine data to see whether our hypothesis fits well with facts, determines the validity of a hypothesis by using data to examine the hypothesis

theories and models

explanations of how things work that helps us understand and predict how/why economic agents (ex. consumers, producers, firm, governments) behave the way they do (simplified versions of the real world)

intangible goods

goods we cannot touch (ex. fairness, friendship, leisure, knowledge, respect)

price controls

government mandated minimum or maximum prices, strips the market price of its meaning; price floors and price ceilings

monetary policy

government policy that attempts to manage the economy by controlling the money supply and thus interest rates

fiscial policy

government policy used to attempt to stabilize the economy through taxes and government spending; to stimulate demand: taxes are lowered and government spending is increased; to reduce inflation: taxes are raised and government spending is decreased

positive incentives

increase benefits or reduce costs and thus result in an increased level of the related behavior or activity

resources

inputs (labor (physical and mental effort), land (gifts of nature, natural), capital (equipment and structures), entrepreneurial ability(special human resources related to labor)) used to produce goods and services

services

intangible acts for which people are willing to pay (ex. legal consent, medical care)

ceteris paribus

letting everything else be equal/holding everything else constant, this enables analysis of the isolated variables

tangible goods

objects that an be seen, held, tasted, smelled

scarcity

our unlimited wants exceed our limited resources

rational (purposeful) behavior

people do the best they can based on their values and information, under current and anticipated future circumstances; weigh the expected marginal (additional) benefits and marginal costs

negative incentives

reduce benefits or increase costs resulting in a decreased level of the related activity/behavior

marginal thinking

requires decision-makers to evaluate whether the benefit of one more unit of something is greater than its cost; concept of adding one more thing, made around current actions

economic goods

scarce goods created from scarce resources (ex. Drinkable H20, diamonds)

economics

study of the choices we make among our many wants and desires given our limited resources

hypothesis

testable prediction that makes some type of prediction about behavior in response to certain changes in conditions based on or assumptions

consumer sovereignty

the concept that consumers vote with their dollars in a market economy

product markets

the markets for consumer goods and services; households are buyers and firms are sellers

productivity

the number of goods and services a worker can produce per hour, determines the country's standard of living; increased by physical capital, human capital, natural resources, technology change, economic institutions, incentives

opportunity cost

the value of the best foregone alternative that was not chosen, every choice has a cost (money cost is money spent, nonmoney costs are time, talent)

correlation

two events usually occur together

efficiency

when an economy gets the most out of its scarce resources

market failure

when the economy fails to allocate resources efficiently on its own

factor (input) markets

where households sell the use of their inputs (capital, labor, land, and entrepreneurial ability) to firms; firms are the buyers and households are the sellers; payments from firms are wages (salaries), rent, interest, payments, and profits