Econ Test 1

The __________ suggests that decisions about quantities are best made incrementally.

marginal principle

Law of Supply

Tendency of suppliers to offer more of a good at a higher price

The cost-benefit principle states that _____ are the incentives that shape decisions.

costs and benefits

increasing opportunity costs have a ____ graph

curved

The law of diminishing marginal utility means that that as person receives more of a good, the added utility from each additional unit

decreases.

Fixed factor

do not change with output

3 factors of production

land, labor, capital

Nerida Kyle could either commute to work via Uber or purchase a new car. The average cost of her one-way Uber trip is $15. Nerida works five days a week for 50 weeks a year. Based solely on avoiding the cost of an Uber, Nerida should purchase a car if the cost of the car is _____ than _____ per week.

less; $150

when the consumption of an additional unit of a good or service makes a person worse off

negative marginal utility

The opportunity costs of attending college include the:

potential income that could be earned working..

MR=MC

profit maximization

Opportunity cost arises from the fundamental economic problem of

scarcity

The study of economics arises because of the necessity of choice, and the necessity of choice arises because of the fundamental problem of:

scarcity

Gabriella starts using a new baking technique, and she can now do twice as much of everything. In a single day, Gabriella can now bake 10 muffins or eight cookies, rather than the five muffins and four cookies she could previously bake. Gabriella's production possibility frontier has _____, and her opportunity cost of making cookies _____.

shifted right; is unchanged

The marginal cost of an additional worker is

the additional cost of hiring one more worker.

all factors are _____ in the long run

variable

diminishing marginal utility

when the consumption of an additional unit of a good or service provides the person with a smaller increase in satisfaction than previous units

The marginal principle helps individuals decide:

whether to do a bit more of an activity or a bit less of it.

Kevin Williamson goes to a local coffee shop and orders a medium-sized latte. His willingness to pay for that latte is $6. The price of the latte is $2. The cost to the coffee shop to produce the latte is $1. How much economic surplus does Kevin gain when he purchases the latte?

$4

capitalism

- capital (means of production) is privately owned -social programs are possible through taxation

Describe economic decision making at the margin for buyers

-Declining marginal benefit -buy if MB>Price -wont buy if Price>MB

determinants of the market demand for a good

-consumer preferences -income -price of related goods -market size -congestion and network effects -expectations about the future

socialism

-govt owns the means of production and directs its use -NOT THE SAME as social programs

describe how demand changes with complement goods

-negative price relationship -buy less when other price rises

substitutes in production

-negative price relationship -supply decreases when other price rises (ex: supply of sweaters decreases when price of scarves rise)

describe how demand changes with substitute goods

-positive price relationship -buy more when other price rises

complements in production

-positive price relationship -supply increases when other price rises

determinants of the market supply of a good

-production costs (input prices) -technology (productivity) - prices of related outputs -market size (# of firms) -expectations about the future

why does price change?

-role of prices: regulator, invisible hand, allocation of resources -Market equilibrium: MB=MC, QD=QS -Market dynamics: changes in determinants of supply and demand

Describe economic decision making at the margin for sellers

-sell if price>mc -stop when price=mc -wont sell if MC>price

Rational Rule for Markets

MB=MC

Rational Rule for Buyers

MB=Price

Rational Rule for Sellers

MC=Price

Optimal consumption point

MRS=Price Ratio

Bang for your buck equation

MU1/P1=MU2/P2

Budget Line Equation

P1Q1+P2Q2=Y

After a global pandemic increases demand for PPE AND increases supply of PPE, equilibrium quantity increased. What will happen to equilibrium price?

The change in price depends on the relative size of the change in demand and the change in supply.

Which principle tells you that the true cost of something is the next best alternative you have to give up to get it?

The opportunity cost principle.

quantity demanded

a specific amount at a specific price

command economy

an economy in which production, investment, prices, and incomes are determined centrally by a government. focuses on equity

market economy

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. focuses on efficiency

law of diminishing marginal product

as a firm uses more of a variable factor of production, with a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes

The key to using the cost-benefit principle is to think about _____ aspects of a decision.

both financial and nonfinancial

In a voluntary economic transaction between a buyer and a seller, _____ can earn economic surplus from the transaction.

both the buyer and the seller

inferior goods

buy less when income increases

normal goods

buy more when income increases

Marginal utility equation

change in total utility/change in quantity consumed

variable factor

change with output

communism

community owns the means of production and makes joint decisions about its use

You are considering whether you should go out to dinner at a restaurant with your friend. The meal is expected to cost you $50, you typically leave a 20% tip, and a round-trip Uber ride will cost you $15. You value the restaurant meal at $30 and the time spent with your friend at $50. You should ____ to dinner with your friend because the benefit of doing so is _____ than the cost.

go; greater

Jonathan Mendez is deciding whether to study for his economics exam at a café down the street or go to a concert a few cities over. The time spent commuting to the concert is ____ in his opportunity cost calculations and represents a _____ cost.

included; nonfinancial

The production process for making Coke produces excess water, which is bottled and sold as Dasani Water. An increase in the price of Coke will

increase the supply of Dasani.

After a global pandemic increases demand for PPE, we expect that equilibrium price will ___ and equilibrium quantity will ____.

increase; increase

marginal cost of production ___ as quantity ____

increases; increases

Suppose Martha consumes tofu and peanut butter. Which describes Martha's marginal rate of substitution for tofu and peanut butter? the amount of tofu she needs in order to consume one less unit of peanut butter while remaining just as well off the consumption bundle of tofu and peanut butter that yields the greatest satisfaction how much tofu and peanut butter she can purchase if prices change the change in how much tofu and peanut butter she can purchase if her income changes

the amount of tofu she needs in order to consume one less unit of peanut butter while remaining just as well off

demand

the entire relationship between price and quantity for a good. A set of prices/quantities that consumers are willing to buy

marginal utility

the extra satisfaction a person obtains from consuming one more unit of a good or service

law of demand

the quantity demanded is higher when the price is lower

The short run is a period of time in which

the quantity of at least one factor of production is fixed.

marginal rate of substitution

the rate at which a person will give up good y to get an additional unity of good x while at the same time remaining indifferent (same level of utility)

Utility is the measure of

the relative satisfaction, enjoyment, or contentment a person receives from consuming a good or service.

utility

the satisfaction experienced from consuming a good or service

long run

the time period in which all inputs can be varied

short run

the time period in which at least one input is fixed

The opportunity cost of a good is:

the value of the next best alternative given up to acquire the good.