econ all
Comparative vs. Absolute Advantage
- absolute concerns who can produce more - comparative uses opportunity cost
Explain the law of demand.
As price increases, quantity demanded decreases.
If labor costs rise in the automobile industry, which will happen to car prices and quantity of cars sold?
C. Supply will decrease. This increases price and lowers quantity.
What would happen in the competitive market for Apples (a normal good)? A successful ad campaign is launched. Changes in Demand or Movement along the curve? Demand curve shifts right, left, or no shift?
Demand Increases (Tastes) Right
SURPLUSES = PRICE
FLOOR
Explain the relationship between inferior goods - demand and price.
If income increases, demand for inferior good DECREASES
Acronym for Supply shifters
TRICE
If the market size increase, what happens to the demand?
increase
If there are more producers, what happens to supply?
increases
In a "bowed out PPC", what kind of opportunity cost is there?
increasing
Is this input or output data?
input
example of price floor
minimum wage
What model illustrates the opportunity cost?
production possibilities curve
Example of price ceiling
rent-controlled housing
Which markets do the households and firms interact with each other through?
resource market product market
Why are individuals and societies forced to make choices?
resources are scarce
Explain the relationship between substitues - demand and price.
rise in price of one good leads to increased demand of other
Law of Supply.
the price and quantity of a supplied good are positively related higher price = more supply
What does scarcity lead to?
trade-offs
Where is market equilibrium?
where supply and demand intersect
X and Y axis of a demand curve.
x = quantity y = price (y is the price flat) pq in order
What is a substitute?
you can choose either (coffee v tea)
What would happen in the competitive market for Apples (a normal good)? Consumers experience a reduction in income Changes in Demand or Movement along the curve? Demand curve shifts right, left, or no shift?
Demand decreases Shifts left (Income)
What would happen in the competitive market for Apples (a normal good)? Eating apples is credited with reducing the chance of heart disease. Changes in Demand or Movement along the curve? Demand curve shifts right, left, or no shift?
Demand increases Demand curve shifts right (Expectations)
total market value of all final goods and services produced within a country in one year
GDP
What model shows the tradeoffs associated with allocating resources?
PPC (Productions Possibilities Curve)
Who has the absolute advantage in lumbar production?
Pittsland
Who has the absolute advantage in steel production?
Pittsland
acronym for supply shift
TRICE
Who has the absolute advantage in the production of tables?
Taylor
Based on comparative advantages, who should specialize in making tables? Explain using opportunity cost
Taylor. Kelly would produce 1/2 chair in the two hours whereas Taylor would make 1/4 chair.
Explain TRICE
Tech Related Prices Input Prices Competition Expectations
What causes the PPC to shift?
changes in factors of production
What are the 2 related goods?
complements substitue
How are price and quantity demanded related?
inversely (price goes down = demand goes up)
What are the 4 economic resources, or factors of production?
land labor capital entrepreneurship
What does it mean to be scarce?
limited AND wanted
What are complements in production?
products made at the same time ex. oil wells producing natural gas as a byproduct
What is the opportunity cost: Each Saturday, you charge $20/hour to mow 5 neighbor's lawns and it takes 1 hour per lawn. One day, you stay home and watch tv instead of mow.
$100
What would happen in the competitive market for Apples (a normal good)? The price of pears (a substitute decreases). Changes in Demand or Movement along the curve? Demand curve shifts right, left, or no shift?
Demand of apples decreases Curve shifts left (Related Prices)
Explain the relationship between normal goods - demand and price.
If income increases, demand for normal goods increases.
If there is an input problem, how do you calculate the opportunity cost of item A as compared to item B? (topic 1.3)
Item A/B
If there is an output problem, how do you calculate the opportunity cost of item A as compared to item B? (topic 1.3)
Item B/A
Based on comparative advantages, who should specialize in making chairs? Explain using opportunity cost
Kelly Her opportunity cost of tables is 2 tables, but Taylor's is 4.
What acronym is used for change in demand?
MERIT
acronym for demand shift
MERIT
Break down MERIT
Market Size Expectations Related prices Income Tastes
What would happen in the competitive market for Apples (a normal good)? Eating apples reduces heart disease. Changes in Supply or Movement along the curve? Supply curve shifts right, left, or no shift?
Movement along the curve (Demand shift) No shift
What would happen in the competitive market for Apples (a normal good)? Price of apples decrease. Changes in Supply or Movement along the curve? Supply curve shifts right, left, or no shift?
Movement down No shift
What would happen in the competitive market for Apples (a normal good)? The price of apples decreases. Changes in Demand or Movement along the curve? Demand curve shifts right, left, or no shift?
Movement down the curve No shift (Price Change)
Are transfer payments (social security) and stocks/bonds included in GDP?
NO
Who has the absolute advantage in the production of chairs?
Neither
Are intermediate goods counted in GDP?
No
Does buying used products count towards GDP?
No
Is this counted in US GDP for 2006? value of a used textbook sold through online auction in 2006
No, it's used
Know this diagram!!
Ok
What are complements?
Products bought together (hot dog and hot dog buns)
FORMULA FOR SHORTAGE
QD - QS
FORMULA FOR SURPLUS:
QS - QD
Relationship between Qs and Qd in shortage
Qd > Qs
In surplus, compare Qs and Qd.
Qs > Qd
Explain the relationship between complements - demand and price.
Rise in price of one good = decreased demand for other
What would happen in the competitive market for Apples (a normal good)? Apple pickers negotiate higher wages. Changes in Supply or Movement along the curve? Supply curve shifts right, left, or no shift?
Supply decrease Shifts left (Input costs)
What would happen in the competitive market for Apples (a normal good)? Drought destroys orchards throughout the region. Changes in Supply or Movement along the curve? Supply curve shifts right, left, or no shift?
Supply decreases Shifts left (Competition)
What would happen in the competitive market for Apples (a normal good)? New machinery is developed to harvest apples more efficiently. Changes in Supply or Movement along the curve? Supply curve shifts right, left, or no shift?
Supply increases shifts right (Tech)
Assume that for consumers, pears and apples are substitutes. It is announced that pesticides used on most apples may be dangerous to consumers' health. As a result of this announcement, which of the following market changes is most likely to occur in the short run in the pear market?
The demand for pears will increase. D.
Based on comparative advantage, who should specialize in steel production and why?
The opportunity cost for Pittsland is 1/3 lumber and for Portburgh is 1/3 lumber. Doesn't matter, same opportunity cost
Based on comparative advantage, who should specialize in lumber production and why?
The opportunity cost is 30 for both, neither has the advantage
a situation in which an individual, business, or country can produce more of a good or service than any other producer with the same quantity of resources
absolute advantage
What is the opportunity cost: You do your homework instead of baking 2 dozen cookies.
baking 2 dozen cookies
shows the flow of money, goods and services, and factors of production through the economy
circular flow diagram
situation in which an individual, business, or country can produce a good or service at a lower opportunity cost than another producer
comparative advantage
a market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold
competitive market
What kind of opportunity cost do we have for a linear PPC?
constant
The value of which of the following is counted in US GDP? a. clean air b. childcare a father has for child c. automobile made in Sweden by US firm d. car made in US and sold in Europe
d. car made in US and sold in Europe
If there is an increase in input, what happens to wages and supply?
decrease
the actual amount of a good or service that consumers are willing and able to buy at a specific price
demand
What are substitutes in production?
easily replacable: if heating oil price increases, produce will produce more
behavior science concerned with how scarce resources are allocated among unlimited needs, wants, and desires
economics
you can't produce more of one good without decreasing production of another good
efficient
What is the opportunity cost: You have a choice - study for a test or go to a movie with friends. You choose to study for the test.
going to the movie
income earner
household
What are the two main entities of a circular flow diagram?
households and firms
What does the shape of the PPC depend on?
if opportunity costs are constant, increasing, or decreasing
Where does production have to occur for GDP?
in the US, includes foreign-owned companies
Normal v Inferior: - what you settle on - what you want to buy
normal = what you want to buy inferior = what you settle on
What are the 2 goods related to income?
normal good inferior good
the highest valued, foregone alternative to any decision made
opportunity cost
Is this an input or output problem?
output
Does economic growth shift the PPC outward or inward?
outward
What is measured along the x-y coordinate plane of PPC?
potential output
Which government intervention creates a shortage?
price ceiling
Which government intervention creates a surplus?
price floor = minimum price
actual amount of a good or service producers are willing to sell at a specific price
quantity of supply
occurs when price is below equilibrium
shortage
price is above equilibrium level
surplus
agreed upon exchange rate of two goods between two nations
terms of trade
payments the government makes to the individual without expecting a good or service in return: social security, scholarships, grants
transfer payments
Which two financial transactions are NOT included in GDP?
transfer payments stocks and bonds
anything used to produce a good or service
wages
