Econ201

(t/f) Adam Smith's "invisible hand" concept describes how corporate business reaches into the pockets of consumers like an "invisible hand."

False. the "invisible hand" refers to how markets guide self-interested people to create desirable social outcomes.

business cycle

Fluctuations in economic activity, such as employment and production

Is the price elasticity of supply for fresh fish likely to be elastic or inelastic when measured over the time period of one day? Why?

Inelastic (nearly vertical), because once the fish are caught, the quantity offered for sale is fixed and must be sold before it spoils, regardless of the price.

If the price of Pepsi increases by one cent and this induces you to stop buying Pepsi altogether and switch to Coca-Cola, what is your price elasticity of demand for Pepsi, and is it considered elastic or inelastic?

Infinite, therefore it is considered perfectly elastic.

If demand is inelastic, will an increase in price raise or lower total revenue? Why?

It will increase total revenue because a large increase in price will be accompanied by only a small reduction in the quantity demanded if demand is inelastic.

Suppose your university decides to lower the cost of parking on campus by reducing the price of a parking permit from $200 per semester to $5 per semester. What do you think would happen to the amount of time it would take to find a parking place?

It would take much longer to find a parking place.

monopoly

Market with only one seller

What are the two main characteristics of a perfectly competitive market?

The goods offered for sale are all the same, and the buyers and sellers are so numerous that no one buyer or seller can influence the price.

Is the impact of a binding price ceiling greater in the short run or the long run? Why?

The impact is greater in the long run because both supply and demand tend to be more elastic in the long run. As a result, the shortage becomes more severe in the long run.

gains from trade

The increase in total production due to specialization allowed by trade

what is the opportunity cost of saving some of your paycheck?

The items you could have enjoyed had you spent that portion of your paycheck (current consumption).

When an economist makes a normative statement, is she more likely to be acting as a scientist or a policy adviser? Why?

As a policy adviser because normative statements are prescriptions about what ought to be and are somewhat based on value judgments.

Why do people choose to become interdependent as opposed to self-sufficient?

Because a consumer gets a greater variety of goods at a much lower cost than they could produce by themselves. That is, there are gains from trade.

Why does a production possibilities frontier have a negative slope (slope down and to the right)?

Because if an economy is operating efficiently, production choices have opportunity costs. If we want more of one thing, we must have less of another.

Why is a restriction of trade likely to reduce material welfare?

Because it forces people to produce at a higher cost than they pay when they trade.

Why is the production possibilities frontier bowed outward?

Because resources are specialized and, thus, are not equally well suited for producing different outputs.

For each pair of goods listed below, which good would you expect to have the more elastic demand? Why? beer; Budweiser

Budweiser because it is a more narrowly defined market than beer so there are more substitutes for Budweiser than for beer

if consumers think that there are very few substitutes for a good, then a. supply would tend to be price elastic. b. supply would tend to be price inelastic. c. demand would tend to be price elastic. d. demand would tend to be price inelastic. e. none of the above is true.

d. demand would tend to be price inelastic.

Suppose there is an increase in both the supply and demand for personal computers. In the market for personal computers, we would expect the a. equilibrium quantity to rise and the equilibrium price to rise. b. equilibrium quantity to rise and the equilibrium price to fall. c. equilibrium quantity to rise and the equilibrium price to remain constant. d. equilibrium quantity to rise and the change in the equilibrium price to be ambiguous. e. change in the equilibrium quantity to be ambiguous and the equilibrium price to rise.

d. equilibrium quantity to rise and the change in the equilibrium price to be ambiguous.

The law of supply states that an increase in the price of a good a. decreases the demand for that good. b. decreases the quantity demanded for that good. c. increases the supply of that good. d. increases the quantity supplied of that good. e. does none of the above.

d. increases the quantity supplied of that good.

Which of the following is not a factor of production? a. land b. labor c. capital d. money e. All of the above are factors of production.

d. money

which of the following involve a trade-off? a. buying a new car b. going to college c. watching a football game on Saturday afternoon d. taking a nap e. all of the above involve trade-offs

e. all of the above involve trade-offs

t/f The minimum wage helps all teenagers because they receive higher wages than they would otherwise.

false. some may be helped but others become unemployed and still others quit school to earn what appears to a teenager to be a good wage.

t/f The government can choose to place the burden of a tax on the buyers in a market by collecting the tax from the buyers rather than the sellers.

false. the burden of a tax is determined by the relative elasticities of supply and demand.

t/f The demand for a necessity such as insulin tends to be elastic.

false. the demand for necessities tends to be inelastic

t/f A $10 tax on baseball gloves will always raise the price that the buyers pay for baseball gloves by $10.

false. the difference between what the sellers receive and the buyers pay will be $10, but the price received by the sellers usually will fall some so the price paid by the buyers will rise by less than $10.

t/f The law of demand states that an increase in the price of a good decreases the demand for that good.

false. the law of demand states that an increase in the price of a good decreases the quantity demanded of that good (a movement along the demand curve).

t/f If a country's workers can produce 5 hamburgers per hour or 10 bags of French fries per hour, absent trade, the price of 1 bag of fries is 2 hamburgers.

false. the price of 1 bag of fries is 1/2 of a hamburger.

t/f If the cross-price elasticity of demand between two goods is positive, the goods are likely to be complements.

false. the two goods are likely to be substitutes

T/F It is reasonable to assume that the world is composed of only one person when modeling international trade.

false. there must be at least two individuals for trade.

t/f If there is an increase in supply accompanied by a decrease in demand for coffee, then there will be a decrease in both the equilibrium price and quantity in the market for coffee.

false. there will be a decrease in the equilibrium price, but the impact on the equilibrium quantity is ambiguous.

T/F The statement, "An increase in inflation tends to cause unemployment to fall in the short run" is normative.

false. this statement is positive

t/f If an advanced country has an absolute advantage in the production of everything, it will benefit if it eliminates trade with less-developed countries and becomes completely self-sufficient.

false. voluntary trade benefits all traders

t/f When we use the model of supply and demand to analyze a tax collected from the buyers, we shift the demand curve upward by the size of the tax.

false. we shift the demand curve downward by the size of the tax.

(t/f) Workers in the United States have a relatively high standard of living because the United States has a relatively high minimum wage.

false. workers in the United States have a high standard of living because they are productive.

Water is necessary for life. Diamonds are not. Is the marginal benefit of an additional glass of water greater or lesser than an additional one-carat diamond? Why?

The marginal benefit of another glass of water is generally lower because we have so much water that one more glass is of little value. The opposite is true for diamonds.

If there is a surplus of a good, is the price above or below the equilibrium price for that good?

The price must be above the equilibrium price.

"invisible hand"

The principle that self-interested market participants may unknowingly maximize the welfare of society as a whole

What is the impact on the price and quantity in a market if a price ceiling is set below the equilibrium price?

The quantity supplied decreases and the quantity demanded increases, causing a shortage.

What is the impact on the price and quantity in a market if a price floor is set above the equilibrium price?

The quantity supplied increases, and the quantity demanded decreases, causing a surplus.

Suppose a gas-guzzler tax is placed on luxury automobiles. Who will likely bear the greater burden of the tax, the buyers of luxury autos or the sellers? Why?

The sellers will bear the greater burden because the demand for luxuries tends to be highly elastic. That is, when the price buyers pay rises due to the tax, wealthy buyers can easily shift their purchases toward alternative items while producers cannot quickly reduce production when the price they receive falls. The burden falls on the side of the market that is less elastic.

When we use the model of supply and demand to analyze a tax that is collected from the sellers, which way do we shift the supply curve? Why?

The supply curve is shifted upward by the size of the tax because the amount the seller requires from the buyer has been increased by precisely the size of the tax.

If we save more and use it to build more physical capital, productivity will rise and we will have rising standards of living in the future. What is the opportunity cost of future growth?

We must give up consumption today.

Why is comparative advantage important in determining trade instead of absolute advantage?

What is important in trade is how a country's costs without trade differ from each other. This is determined by the relative opportunity costs across countries.

What is the difference between a normal good and an inferior good?

When income rises, demand for a normal good increases or shifts right. When income rises, demand for an inferior good decreases or shifts left.

externality

When one person's actions have an impact on a bystander

elastic

When the quantity demanded or supplied responds substantially to a change in one of its determinants

What are the four major determinants of the price elasticity of demand?

Whether the good is a necessity or a luxury, the availability of close substitutes, the definition of the market, and the time horizon over which demand is measured.

Suppose the Daily Newspaper estimates that if it raises the price of its newspaper from $1.00 to $1.50 then the number of subscribers will fall from 50,000 to 40,000. What is the advantage of using the midpoint method?

With the midpoint method, the value of the elasticity is the same whether you begin at a price of $1.00 and raise it to $1.50 or begin at a price of $1.50 and reduce it to $1.00.

Suppose a lawyer who earns $200 per hour can also type 200 words per minute. Should the lawyer hire a secretary who can only type 50 words per minute? Why?

Yes, as long as the secretary earns less than $50 per hour, the lawyer is ahead.

income elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

cross-price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

market failure

a situation in which the market fails to allocate resources efficiently

equilibrium

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

marginal change

a small incremental adjustment to an existing plan of action

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

supply schedule

a table that shows the relationship between the price of a good and the quantity supplied

For each pair of goods listed below, which good would you expect to have the more elastic demand? Why? cigarettes; a trip to Florida over spring break

a trip to Florida because it is a luxury whereas cigarettes are a necessity (to smokers)

Food Electronics Australia 20 5 Korea 8 4 The following table shows the units of output a worker can produce per month in Australia and Korea Korea should a. specialize in food production, export food, and import electronics. b. specialize in electronics production, export electronics, and import food. c. produce both goods because neither country has a comparative advantage. d. produce neither good because it has an absolute disadvantage in the production of both goods.

b. specialize in electronics production, export electronics, and import food.

Suppose a country's workers can produce 4 watches per hour or 12 rings per hour. If there is no trade, a. the domestic price of 1 ring is 3 watches. b. the domestic price of 1 ring is 1/3 of a watch. c. the domestic price of 1 ring is 4 watches. d. the domestic price of 1 ring is 1/4 of a watch. e. the domestic price of 1 ring is 12 watches.

b. the domestic price of 1 ring is 1/3 of a watch.

Which of the following is not part of the opportunity cost of going on vacation? a. the money you could have made if you had stayed home and worked b. the money you spent on food c. the money you spent on airline tickets d. the money you spent on a Broadway show

b. the money you spent on food

opportunity cost is what you give up to get an item. What would likely be given up to obtain this item? Farmer Jones has 100 acres of land. He can plant corn, which yields 100 bushels per acre, or he can plant beans, which yield 40 bushels per acre. He chooses to plant beans.

farmer jones gives up 10,000 bushels of corn

opportunity cost is what you give up to get an item. What would likely be given up to obtain this item? Farmer Jones has 100 acres of land. He can plant corn, which yields 100 bushels per acre, or he can plant beans, which yield 40 bushels per acre. He chooses to plant corn.

farmer jones gives up 4,000 bushels of beans

Efficiency

getting maximum output from the resources available

imports

goods produced abroad and sold domestically

Exports

goods produced domestically and sold abroad

What are the variables that should affect the amount of a good that consumers wish to buy, other than its price?

income, prices of related goods, tastes, expectations, and number of buyers in the market

In order to reduce teen smoking, the government places a $2 per pack tax on cigarettes. After one month, while the price to the consumer has increased a great deal, the quantity demanded of cigarettes has been reduced only slightly. Is the demand for cigarettes over the period of one month elastic or inelastic?

inelastic

t/f The price elasticity of demand is defined as the percentage change in the price of that good divided by the percentage change in quantity demanded of that good.

the price elasticity of demand is defined as the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good.

equilibrium price

the price that balances quantity supplied and quantity demanded

equality

the property of distributing economic prosperity uniformly among the members of society

efficiency

the property of society getting the most it can from its scarce resources

equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price

Macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

Microeconomics

the study of how households and firms make decisions and how they interact in markets

economics

the study of how society manages its scarce resources

(t/f) An unintended consequence of public support for higher education is that low tuition provides an incentive for many people to attend state universities even if they have no desire to learn anything.

true

(t/f) High and persistent inflation is caused by excessive growth in the quantity of money in the economy.

true

(t/f) Rational people act only when the marginal benefit of the action exceeds the marginal cost.

true

(t/f) Sue is better at cleaning, and Bob is better at cooking. It will take fewer hours to eat and clean if Bob specializes in cooking and Sue specializes in cleaning than if they share the household duties evenly.

true

(t/f) To a student, the opportunity cost of going to a basketball game would include the price of the ticket and the value of the time that could have been spent studying.

true

(t/f) When a jet flies overhead, the noise it generates is an externality.

true

(t/f) When economists say, "There ain't no such thing as a free lunch," they mean that all economic decisions involve trade-offs.

true

T/F An advance in production technology would cause the production possibilities curve to shift outward.

true

T/F Assumptions make the world easier to understand because they simplify reality and focus our attention.

true

T/F If an economy is operating on its production possibilities frontier, it must be using its resources efficiently.

true

T/F If an economy is operating on its production possibilities frontier, it must produce less of one good if it produces more of another.

true

T/F If an economy were experiencing substantial unemployment, the economy is producing inside the production possibilities frontier.

true

T/F Most economists believe that tariffs and import quotas usually reduce general economic welfare.

true

T/F When economists make positive statements, they are more likely to be acting as scientists.

true

T/F When people act as scientists, they must try to be objective.

true

t/f A monopolistic market has only one seller.

true

t/f A price ceiling that is not a binding constraint today could cause a shortage in the future if demand were to increase and raise the equilibrium price above the fixed price ceiling.

true

t/f A price floor set above the equilibrium price is a binding constraint.

true

t/f A tax collected from buyers has an equivalent impact to a same size tax collected from sellers.

true

t/f A tax creates a tax wedge between a buyer and a seller. This causes the price paid by the buyer to rise, the price received by the seller to fall, and the quantity sold to fall.

true

t/f Absolute advantage is a comparison among producers based on productivity.

true

t/f An advance in the technology employed to manufacture Rollerblades™ will result in a decrease in the equilibrium price and an increase in the equilibrium quantity in the market for Rollerblades™.

true

t/f Comparative advantage is a comparison among producers based on opportunity cost.

true

t/f Comparative advantage, not absolute advantage, determines the decision to specialize in production.

true

t/f If Coca-Cola and Pepsi are substitutes, an increase in the price of Coca-Cola will cause an increase in the equilibrium price and quantity in the market for Pepsi.

true

t/f If Germany's productivity doubles for everything it produces, this will not alter its prior pattern of specialization because it has not altered its comparative advantage.

true

t/f If a producer is self-sufficient, the production possibilities frontier is also the consumption possibilities frontier.

true

t/f If consumers expect the price of shoes to rise, there will be an increase in the demand for shoes today.

true

t/f If gains from trade are based solely on comparative advantage, and if all countries have the same opportunity costs of production, then there are no gains from trade.

true

t/f If golf clubs and golf balls are complements, an increase in the price of golf clubs will decrease the demand for golf balls.

true

t/f If medicine is a necessity, the burden of a tax on medicine will likely land more heavily on the buyers of medicine.

true

t/f If pencils and paper are complements, an increase in the price of pencils causes the demand for paper to decrease or shift to the left.

true

t/f If producers have different opportunity costs of production, trade will allow them to consume outside their production possibilities frontiers.

true

t/f If the demand for a good is price inelastic, an increase in its price will increase total revenue in that market.

true

t/f If the income elasticity of demand for a bus ride is negative, then a bus ride is an inferior good.

true

t/f If the price elasticity of supply for blue jeans is 1.3, an increase of 10 percent in the price of blue jeans would increase the quantity supplied of blue jeans by 13 percent.

true

t/f The demand for tires should be more inelastic than the demand for Goodyear brand tires.

true

t/f The gains from trade can be measured by the increase in total production that comes from specialization.

true

t/f The income elasticity of demand for luxury items, such as diamonds, tends to be large (greater than 1).

true

t/f The law of supply states that an increase in the price of a good increases the quantity supplied of that good.

true

t/f The market supply curve is the horizontal summation of the individual supply curves.

true

t/f The price elasticity of supply tends to be more inelastic as the firm's production facility reaches maximum capacity.

true

t/f The shortage of housing caused by a binding rent control is likely to be more severe in the long run when compared to the short run.

true

t/f The supply of automobiles for this week is likely to be more price inelastic than the supply of automobiles for this year.

true

t/f The ultimate burden of a tax lands most heavily on the side of the market that is less elastic.

true

t/f Using the midpoint method to calculate elasticity, if an increase in the price of pencils from 10 cents to 20 cents reduces the quantity demanded from 1,000 pencils to 500 pencils, then the demand for pencils is unit price elastic.

true

complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other

substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other

t/f If trade benefits one country, its trading partner must be worse off due to trade.

voluntary trade benefits both traders.

opportunity cost

whatever must be given up to obtain some item

inelastic

when the quantity demanded or supplied responds only slightly to a change in one of its determinants

Why is a tax collected from the buyers equivalent to a tax collected from the sellers?

A tax places a wedge between what the buyer pays and the seller receives. Whether the buyer or the seller actually hands the tax to the government makes no difference whatsoever.

market economy

An economic system where interaction of households and firms in markets determines the allocation of resources

Suppose the Daily Newspaper estimates that if it raises the price of its newspaper from $1.00 to $1.50 then the number of subscribers will fall from 50,000 to 40,000. What is the price elasticity of demand for the Daily Newspaper when elasticity is calculated using the midpoint method?

(10,000/45,000)/(.50/1.25) = .56

Identify the parts of the circular-flow diagram immediately involved in the following transactions. Mary receives $10,000 of dividends on her General Motors stock.

$10,000 of profit from firms to market for factors of production. $10,000 income from market for factors of production to households. Capital services from households to market for factors of production. Inputs from market for factors of production to firms.

Identify the parts of the circular-flow diagram immediately involved in the following transactions. Joe gets a $15 haircut.

$15 of spending from households to market for goods and services. $15 of revenue from market for goods and services to firms. Services from firms to market for goods and services. Services from market for goods and services to households.

Identify the parts of the circular-flow diagram immediately involved in the following transactions. Mary buys a car from General Motors for $20,000.

$20,000 of spending from households to market for goods and services. $20,000 of revenue from market for goods and services to firms. Car moves from firm to market for goods and services. Car moves from market for goods and services to household.

Identify the parts of the circular-flow diagram immediately involved in the following transactions. General Motors pays Joe $5,000 per month for work on the assembly line.

$5,000 of wages from firms to market for factors of production. $5,000 of income from market for factors of production to households. Labor from households to market for factors of production. Inputs from market for factors of production to firms.

Suppose your income rises by 20 percent and your quantity demanded of eggs falls by 10 percent. What is the value of your income elasticity of demand for eggs? Are eggs normal or inferior goods to you?

-.10/.20 = -1/2. Eggs are inferior goods

Suppose that when the price of apples rises by 20 percent, the quantity demanded of oranges rises by 6 percent. What is the cross-price elasticity of demand between apples and oranges? Are these two goods substitutes or complements?

.30, , apples and oranges are substitutes because the cross-price elasticity is positive (an increase in the price of apples increases the quantity demanded of oranges).

Suppose that at a price of $2.00 per bushel, the quantity supplied of corn is 25 million metric tons. At a price of $3.00 per bushel, the quantity supplied is 30 million metric tons. What is the elasticity of supply for corn? Is supply elastic or inelastic?

.45. therefore supply is inelastic

Name two economic propositions for which more than 90 percent of economists agree.

A ceiling on rents reduces the quantity and quality of housing available. Tariffs and import quotas usually reduce general economic welfare.

price ceiling

A legal maximum on the price at which a good can be sold

price floor

A legal minimum on the price at which a good can be sold

shortage

A situation in which quantity demanded is greater than quantity supplied

surplus

A situation in which quantity supplied is greater than quantity demanded

Describe the scientific method.

The dispassionate development and testing of theory by observing, testing, and observing again.

competitive market

a market in which there are many buyers and many sellers so that each has a negligible impact on the market price

positive statements

Descriptions of the world as it is

Name two reasons why economists disagree.

Economists may have different scientific judgments. Economists may have different values.

You are watching the PBS NewsHour on public television. The first focus segment is a discussion of the pros and cons of free trade (lack of obstructions to international trade). For balance, there are two economists present—one in support of free trade and one opposed. Your roommate says, "Those economists have no idea what's going on. They can't agree on anything. One says free trade makes us rich. The other says it will drive us into poverty. If the experts don't know, how is the average person ever going to know whether free trade is best?" Can you give your roommate any insight into why economists might disagree on this issue?

Economists may have different scientific judgments. Economists may have different values. There may not really be any real disagreement because the majority of economists may actually agree.

Suppose a firm is operating at half capacity. Is its supply curve for output likely to be relatively elastic or inelastic? Why?

Elastic, because a small increase in price will induce the firm to increase production by a large amount.

A goal for a society is to distribute resources more equally and fairly. How might you distribute resources if everyone were equally talented and worked equally hard? What if people had different talents and some people worked hard, while others did not?

Fairness might require that everyone get an equal share because they were equally talented and worked equally hard. Fairness might require that people not get an equal share because they were not equally talented and did not work equally hard.

(t/f) When the government redistributes income with taxes and welfare, the economy becomes more efficient.

False. The economy becomes less efficient because it decreases the incentive to work hard.

(t/f) The United States will benefit economically if we eliminate trade with Asian countries because we will be forced to produce more of our own cars and clothes.

False. all countries gain from voluntary trade.

What are the two subfields within economics? Which is more likely to be a building block of the other? Why?

Microeconomics and macroeconomics. Microeconomics is more of a building block of macro because when we address macro issues (for example, unemployment) we have to consider how individuals respond to work incentives such as wages and welfare.

Suppose your university decides to lower the cost of parking on campus by reducing the price of a parking permit from $200 per semester to $5 per semester. What do you think would happen to the number of students desiring to park their cars on campus?

More students would wish to park on campus.

Suppose your university decides to lower the cost of parking on campus by reducing the price of a parking permit from $200 per semester to $5 per semester. Thinking in terms of opportunity cost, would the lower price of a parking permit necessarily lower the true cost of parking?

No, because we would have to factor in the value of our time spent looking for a parking place.

Is air scarce? Is clean air scarce?

No, you don't have to give up anything to get air. Yes, you can't have as much clean air as you want without giving up something to get it (pollution equipment on cars, etc.).

You are watching an election debate on television. A candidate says, "We need to stop the flow of foreign automobiles into our country. If we limit the importation of autos, our domestic auto production will rise and the United States will be better off." Is it likely that the United States will be better off if we limit auto imports? Explain.

No. If we import autos, it is because the opportunity cost of producing them elsewhere is lower than in the United States.

Suppose your university decides to lower the cost of parking on campus by reducing the price of a parking permit from $200 per semester to $5 per semester. Would the opportunity cost of parking be the same for students with no outside employment and students with jobs earning $15 per hour?

No. Students who could be earning money working are giving up more while looking for a parking place. Therefore, their opportunity cost is higher.

Suppose that the government needs to raise tax revenue. A politician suggests that the government place a tax on food because everyone must eat and, thus, a food tax would surely raise a great deal of tax revenue. However, because the poor spend a large proportion of their income on food, the tax should be collected only from the sellers of food (grocery stores) and not from the buyers of food. The politician argues that this type of tax would place the burden of the tax on corporate grocery store chains and not on poor consumers. Can the government legislate that the burden of a food tax will fall only on the sellers of food? Why or why not?

No. The tax burden is determined by the elasticity of supply and demand. The burden of a tax falls most heavily on the side of the market that is less elastic. That is, the burden is on the side of the market least willing to leave the market when the price moves unfavorably.

If a demand curve is linear, is the elasticity constant along the demand curve? Which part tends to be elastic and which part tends to be inelastic? Why?

No. The upper part tends to be elastic while the lower part tends to be inelastic. This is because on the upper part, for example, a one-unit change in the price is a small percentage change while a one-unit change in quantity is a large percentage change. This effect is reversed on the lower part of the demand curve.

You are watching a national news broadcast. It is reported that an early snowstorm is heading for Washington state and that it will likely destroy much of this year's apple crop. Your roommate says, "If there are going to be fewer apples available, I'll bet that apple prices will rise. We should buy enormous quantities of apples now and put them in storage. Later we will sell them and make a killing." Can you "beat the market" with public information? That is, can you use publicly available information to help you buy something cheap and quickly sell it at a higher price? Why or why not?

No. Usually the market immediately adjusts, so that the price has already moved to its new equilibrium value before the amateur speculator can make his or her purchase.

You are watching an election debate on television. A candidate says, "We need to stop the flow of foreign automobiles into our country. If we limit the importation of autos, our domestic auto production will rise and the United States will be better off." In the real world, does every person in the country gain when restrictions on imports are reduced? Explain.

No. When we reduce restrictions on imports, the country gains from the increased trade but individuals in the affected domestic industry may lose.

In order to reduce teen smoking, the government places a $2 per pack tax on cigarettes. After one month, while the price to the consumer has increased a great deal, the quantity demanded of cigarettes has been reduced only slightly. As an alternative, suppose the president of your tobacco firm suggests that your firm raise the price of your cigarettes independent of the other tobacco firms because the evidence clearly shows that smokers are insensitive to changes in the price of cigarettes. Is the president of your firm correct if it is his desire to maximize total revenue? Why or why not?

No. While the demand for cigarettes (the market broadly defined) may be inelastic, the demand for any one brand (market narrowly defined) is likely to be much more elastic because consumers can substitute toward other lower priced brands.

In order to reduce teen smoking, the government places a $2 per pack tax on cigarettes. After one month, while the price to the consumer has increased a great deal, the quantity demanded of cigarettes has been reduced only slightly. Suppose you are in charge of pricing for a tobacco firm. The president of your firm suggests that the evidence received over the last month demonstrates that the cigarette industry should get together and raise the price of cigarettes further because total revenue to the tobacco industry will certainly rise. Is the president of your firm correct? Why or why not?

Not necessarily. Demand tends to be more elastic over longer periods. In the case of cigarettes, some consumers will substitute toward cigars and pipes. Others may quit or never start to smoke.

Is a more realistic model always better?

Not necessarily. Realistic models are more complex. They may be confusing and they may fail to focus on what is important.

Explain the law of demand.

Other things equal, price and quantity demanded of a good are negatively related.

Explain the law of supply.

Other things equal, price and quantity supplied of a good are positively related.

Which statements are testable: positive statements or normative statements? Why?

Positive statements are statements of fact and are refutable by examining evidence.

normative statements

Prescription for how the world ought to be

You are watching a national news broadcast. It is reported that an early snowstorm is heading for Washington state and that it will likely destroy much of this year's apple crop. Your roommate says, "If there are going to be fewer apples available, I'll bet that apple prices will rise. We should buy enormous quantities of apples now and put them in storage. Later we will sell them and make a killing." If this information about the storm is publicly available so that all buyers and sellers in the apple market expect the price of apples to rise in the future, what will happen immediately to the supply and demand for apples and the equilibrium price and quantity of apples?

Sellers reduce supply (supply shifts left) in the hope of selling apples later at a higher price, and buyers increase demand (demand shifts right) in the hope of buying apples now before the price goes up. The price will immediately rise, and the quantity exchanged is ambiguous.

economic models

Simplifications of reality based on assumptions

If the government printed twice as much money, what do you think would happen to prices and output if the economy were already producing at maximum capacity?

Spending would double, but since the quantity of output would remain the same, prices would double.

Why is there a trade-off between equality and efficiency?

Taxes and welfare make us more equal but reduce incentives for hard work, lowering total output.

market power

The ability of an individual or group to substantially influence market prices

What are the gains from trade?

The additional output that comes from countries with different opportunity costs of production specializing in the production of the item for which they have the lower domestic opportunity cost.

productivity

The amount of goods and services produced from each unit of labor input

Suppose that the government needs to raise tax revenue. A politician suggests that the government place a tax on food because everyone must eat and, thus, a food tax would surely raise a great deal of tax revenue. However, because the poor spend a large proportion of their income on food, the tax should be collected only from the sellers of food (grocery stores) and not from the buyers of food. The politician argues that this type of tax would place the burden of the tax on corporate grocery store chains and not on poor consumers. Do you think the burden of a food tax will tend to fall on the sellers of food or the buyers of food? Why?

The burden will fall most heavily on the buyers of food regardless of whether the tax is collected from the buyers or the sellers. Food is a necessity, and therefore the demand for food is relatively inelastic. When the price rises due to the tax, people still must eat. Grocery chains can sell another product line when the price they receive for food falls due to the tax.

In the Wealth of Nations, Adam Smith said, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." What do you think he meant?

The butcher, brewer, and baker produce the best food possible, not out of kindness, but because it is in their best interest to do so. Self-interest can maximize general economic well-being.

Why do you think air bags have reduced deaths from auto crashes less than we had hoped?

The cost of an accident was lowered. This changed incentives, so people drive faster and have more accidents.

When we use the model of supply and demand to analyze a tax that is collected from the buyers, which way do we shift the demand curve? Why?

The demand curve is shifted downward by the size of the tax because the amount the buyer is willing to offer the seller has been reduced precisely by the size of the tax.

tax wedge

The difference between what the buyer pays and the seller receives after a tax has been imposed

Suppose suppliers of corn expect the price of corn to rise in the future. How would this affect the supply and demand for corn and the equilibrium price and quantity of corn?

The supply of corn in today's market would decrease (shift left) as sellers hold back their offerings in anticipation of greater profits if the price rises in the future. If only suppliers expect higher prices, demand would be unaffected. The equilibrium price would rise and the equilibrium quantity would fall.

What are the variables that should affect the amount of a good that producers wish to sell, other than its price?

The variables are input prices, technology, expectations, and number of sellers in the market.

What is the impact on the price and quantity in a market if a price ceiling is set above the equilibrium price? Why?

There is no impact because the price can move to equilibrium without restriction. That is, the price ceiling is not a binding constraint.

What is the impact on the price and quantity in a market if a price floor is set below the equilibrium price? Why?

There is no impact because the price can move to equilibrium without restriction. That is, the price floor is not a binding constraint.

What are some of the problems created by a binding price ceiling?

There will be a shortage, buyers may wait in lines, sellers may be able to discriminate among buyers, the quality of the product may be reduced, and bribes may be paid to sellers.

Suppose there is an increase in consumers' incomes. In the market for automobiles (a normal good), does this event cause an increase in demand or an increase in quantity demanded? Does this cause an increase in supply or an increase in quantity supplied? Explain.

There would be an increase in the demand for automobiles, which means that the entire demand curve shifts to the right. This implies a movement along the fixed supply curve as the price rises. The increase in price causes an increase in the quantity supplied of automobiles, but there is no increase in the supply of automobiles.

Suppose there is an advance in the technology employed to produce automobiles. In the market for automobiles, does this event cause an increase in supply or an increase in the quantity supplied? Does this cause an increase in demand or an increase in the quantity demanded? Explain.

There would be an increase in the supply of automobiles, which means that the entire supply curve shifts to the right. This implies a movement along the fixed demand curve as the price falls. The decrease in price causes an increase in the quantity demanded of automobiles, but there is no increase in the demand for automobiles.

Suppose one country is better at producing agricultural products (because they have land that is more fertile), while another country is better at producing manufactured goods (because they have a better educational system and more engineers). If each country produced their specialty and traded, would there be more or less total output than if each country produced all of their agricultural and manufacturing needs? Why?

There would be more total output if the two countries specialize and trade because each is doing what it does most efficiently.

Who is more self-interested, the buyer or the seller?

They are equally self-interested. The seller will sell to the highest bidder, and the buyer will buy from the lowest offer.

Evaluate this statement: A technologically advanced country, which is better than its neighbor at producing everything, would be better off if it closed its borders to trade because the less productive country is a burden to the advanced country.

This is not true. All countries can gain from trade if their opportunity costs of production differ. Even the least productive country will have a comparative advantage at producing something, and it can trade this good to the advanced country for less than the advanced country's opportunity cost.

You are watching the PBS NewsHour on public television. The first focus segment is a discussion of the pros and cons of free trade (lack of obstructions to international trade). For balance, there are two economists present—one in support of free trade and one opposed. Your roommate says, "Those economists have no idea what's going on. They can't agree on anything. One says free trade makes us rich. The other says it will drive us into poverty. If the experts don't know, how is the average person ever going to know whether free trade is best?" Suppose you discover that 93 percent of economists believe that free trade is generally best (which is the greatest agreement on any single issue). Could you now give a more precise answer as to why economists might disagree on this issue?

Those opposed to free trade are likely to have different values than the majority of economists. There is not much disagreement on this issue among the mainstream economics profession.

What is the role of assumptions in any science?

To simplify reality so that we can focus our thinking on what is actually important.

Your car needs to be repaired. You have already paid $500 to have the transmission fixed, but it still doesn't work properly. You can sell your car "as is" for $2,000. If your car were fixed, you could sell it for $2,500. Your car can be fixed with a guarantee for another $300. Should you repair your car? Why?

Yes, because the marginal benefit of fixing the car is , and the marginal cost is $300. The original repair payment is not relevant.

Suppose the Daily Newspaper estimates that if it raises the price of its newspaper from $1.00 to $1.50 then the number of subscribers will fall from 50,000 to 40,000. If the Daily Newspaper's only concern is to maximize total revenue, should it raise the price of a newspaper from $1.00 to $1.50? Why or why not?

Yes. Because the price elasticity of demand is less than one (inelastic), an increase in price will increase total revenue.

You are watching a national news broadcast. It is reported that an early snowstorm is heading for Washington state and that it will likely destroy much of this year's apple crop. Your roommate says, "If there are going to be fewer apples available, I'll bet that apple prices will rise. We should buy enormous quantities of apples now and put them in storage. Later we will sell them and make a killing." Suppose a friend of yours works for the U.S. Weather Bureau. She calls you and provides you with inside information about the approaching storm—information not available to the public. Can you "beat the market" with inside information? Why or why not?

Yes. In this case, you can make your purchase before the market responds to the information about the storm.

You are watching the PBS NewsHour on public television. The first focus segment is a discussion of the pros and cons of free trade (lack of obstructions to international trade). For balance, there are two economists present—one in support of free trade and one opposed. Your roommate says, "Those economists have no idea what's going on. They can't agree on anything. One says free trade makes us rich. The other says it will drive us into poverty. If the experts don't know, how is the average person ever going to know whether free trade is best?" What if you later discovered that the economist opposed to free trade worked for a labor union. Would that help you explain why there appears to be a difference of opinion on this issue?

Yes. It suggests that impediments to international trade may benefit some groups (organized labor), but these impediments are unlikely to benefit the public in general. Supporters of these policies are promoting their own interests.

You are watching an election debate on television. A candidate says, "We need to stop the flow of foreign automobiles into our country. If we limit the importation of autos, our domestic auto production will rise and the United States will be better off." Will anyone in the United States be better off if we limit auto imports? Explain.

Yes. Those associated with the domestic auto industry—stockholders of domestic auto producers and autoworkers.

If the price of soda doubles from $1.00 per can to $2.00 per can and you buy the same amount, what is your price elasticity of demand for soda, and is it considered elastic or inelastic?

Zero, therefore it is considered perfectly inelastic.

circular flow diagram

a diagram of the economy that shows the flow of goods and services, factors of production and monetary payments between households and firms

inferior good

a good for which, other things equal, an increase in income leads to a decrease in demand

normal good

a good for which, other things equal, an increase in income leads to an increase in demand

demand curve

a graph of the relationship between the price of a good and the quantity demanded

supply curve

a graph of the relationship between the price of a good and the quantity supplied

production possibilities frontier

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

market

a group of buyers and sellers of a particular good or service

Food Electronics Australia 20 5 Korea 8 4 The following table shows the units of output a worker can produce per month in Australia and Korea The opportunity cost of 1 unit of electronics in Korea is a. 2 units of food. b. 1/2 of a unit of food. c. 4 units of food. d. 1/4 of a unit of food.

a. 2 units of food.

In making which of the following statements is an economist acting more like a scientist? a. A reduction in unemployment benefits will reduce the unemployment rate. b. The unemployment rate should be reduced because unemployment robs individuals of their dignity. c. The rate of inflation should be reduced because it robs the elderly of their savings. d. The state should increase subsidies to universities because the future of our country depends on education.

a. A reduction in unemployment benefits will reduce the unemployment rate.

Food Electronics Australia 20 5 Korea 8 4 The following table shows the units of output a worker can produce per month in Australia and Korea Which of the following statements about comparative advantage is true? a. Australia has a comparative advantage in the production of food while Korea has a comparative advantage in the production of electronics. b. Korea has a comparative advantage in the production of food while Australia has a comparative advantage in the production of electronics. c. Australia has a comparative advantage in the production of both food and electronics. d. Korea has a comparative advantage in the production of both food and electronics. e. Neither country has a comparative advantage

a. Australia has a comparative advantage in the production of food while Korea has a comparative advantage in the production of electronics.

Which of the following statements is true about a market economy? a. Market participants act as if guided by an "invisible hand" to produce outcomes that promote general economic well-being. b. Taxes help prices communicate costs and benefits to producers and consumers. c. With a large enough computer, central planners could guide production more efficiently than markets. d. The strength of a market system is that it tends to distribute resources evenly across consumers.

a. Market participants act as if guided by an "invisible hand" to produce outcomes that promote general economic well-being.

Suppose a frost destroys much of the Florida orange crop. At the same time, suppose consumer tastes shift toward orange juice. What would we expect to happen to the equilibrium price and quantity in the market for orange juice? a. Price will increase; quantity is ambiguous. b. Price will increase; quantity will increase. c. Price will increase; quantity will decrease. d. Price will decrease; quantity is ambiguous. e. The impact on both price and quantity is ambiguous.

a. Price will increase; quantity is ambiguous.

Which of the following statements about microeconomics and macroeconomics is not true? a. The study of very large industries is a topic within macroeconomics. b. Macroeconomics is concerned with economy-wide phenomena. c. Microeconomics is a building block for macroeconomics. d. Microeconomics and macroeconomics cannot be entirely separated.

a. The study of very large industries is a topic within macroeconomics.

t/f If a demand curve is linear, the price elasticity of demand is constant along it.

demand will be price elastic in its upper portion and price inelastic in its lower portion.

Suppose consumer tastes shift toward the consumption of apples. Which of the following statements is an accurate description of the impact of this event on the market for apples? a. There is an increase in the demand for apples and an increase in the quantity supplied of apples. b. There is an increase in the demand and supply of apples. c. There is an increase in the quantity demanded of apples and in the supply for apples. d. There is an increase in the demand for apples and a decrease in the supply of apples. e. There is a decrease in the quantity demanded of apples and an increase in the supply for apples.

a. There is an increase in the demand for apples and an increase in the quantity supplied of apples.

A binding price ceiling creates a. a shortage. b. a surplus. c. an equilibrium. d. a shortage or a surplus depending on whether the price ceiling is set above or below the equilibrium price.

a. a shortage.

foreign trade a. allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home. b. allows a country to avoid trade-offs. c. makes the members of a country more equal. d. increases the scarcity of resources. e. is none of the above.

a. allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home.

An increase (rightward shift) in the demand for a good will tend to cause a. an increase in the equilibrium price and quantity. b. a decrease in the equilibrium price and quantity. c. an increase in the equilibrium price and a decrease in the equilibrium quantity. d. a decrease in the equilibrium price and an increase in the equilibrium quantity. e. none of the above.

a. an increase in the equilibrium price and quantity.

Which of the following takes place when a tax is placed on a good? a. an increase in the price buyers pay, a decrease in the price sellers receive, and a decrease in the quantity sold b. an increase in the price buyers pay, a decrease in the price sellers receive, and an increase in the quantity sold c. a decrease in the price buyers pay, an increase in the price sellers receive, and a decrease in the quantity sold d. a decrease in the price buyers pay, an increase in the price sellers receive, and an increase in the quantity sold

a. an increase in the price buyers pay, a decrease in the price sellers receive, and a decrease in the quantity sold

All of the following shift the supply of watches to the right except a. an increase in the price of watches. b. an advance in the technology used to manufacture watches. c. a decrease in the wage of workers employed to manufacture watches. d. manufacturers' expectations of lower watch prices in the future. e. All of the above cause an increase in the supply of watches.

a. an increase in the price of watches.

The surplus caused by a binding price floor will be greatest if a. both supply and demand are elastic. b. both supply and demand are inelastic. c. supply is inelastic and demand is elastic. d. demand is inelastic and supply is elastic.

a. both supply and demand are elastic.

The burden of a tax falls more heavily on the buyers in a market when a. demand is inelastic and supply is elastic. b. demand is elastic and supply is inelastic. c. both supply and demand are elastic. d. both supply and demand are inelastic.

a. demand is inelastic and supply is elastic.

t/f Self-sufficiency is the best way to increase one's material welfare.

false. restricting trade eliminates gains from trade.

Suppose two economists are arguing about policies that deal with unemployment. One economist says, "The government could lower unemployment by one percentage point if it would just increase government spending by 50 billion dollars." The other economist responds, "That's ridiculous. If the government spent an additional 50 billion dollars, it would reduce unemployment by only one-tenth of 1 percent, and that effect would only be temporary!" These economists a. disagree because they have different scientific judgments. b. disagree because they have different values. c. really don't disagree at all. It just looks that way. d. do none of the above.

a. disagree because they have different scientific judgments.

Points on the production possibilities frontier are a. efficient. b. inefficient. c. unattainable. d. normative. e. none of the above.

a. efficient

A tax placed on a good that is a necessity for consumers will likely generate a tax burden that a. falls more heavily on buyers. b. falls more heavily on sellers. c. is evenly distributed between buyers and sellers. d. falls entirely on sellers.

a. falls more heavily on buyers.

If a nation has a comparative advantage in the production of a good, a. it can produce that good at a lower opportunity cost than its trading partner. b. it can produce that good using fewer resources than its trading partner. c. it can benefit by restricting imports of that good. d. it must be the only country with the ability to produce that good. e. none of the above is true.

a. it can produce that good at a lower opportunity cost than its trading partner.

A monopolistic market has a. only one seller. b. at least a few sellers. c. many buyers and sellers. d. firms that are price takers. e. none of the above

a. only one seller.

In general, a flatter demand curve is more likely to be a. price elastic. b. price inelastic. c. unit price elastic. d. none of the above.

a. price elastic.

Technological improvements in agriculture that shift the supply of agricultural commodities to the right tend to a. reduce total revenue to farmers as a whole because the demand for food is inelastic. b. reduce total revenue to farmers as a whole because the demand for food is elastic. c. increase total revenue to farmers as a whole because the demand for food is inelastic. d. increase total revenue to farmers as a whole because the demand for food is elastic.

a. reduce total revenue to farmers as a whole because the demand for food is inelastic.

Because people respond to incentives, we would expect that if the average salary of accountants increases by 50 percent while the average salary of teachers increases by 20 percent, a. students will shift majors from education to accounting. b. students will shift majors from accounting to education. c. fewer students will attend college. d. None of the above is true.

a. students will shift majors from education to accounting.

If an increase in the price of blue jeans leads to an increase in the demand for tennis shoes, then blue jeans and tennis shoes are a. substitutes. b. complements. c. normal goods. d. inferior goods. e. none of the above

a. substitutes.

Which of the following statements regarding the circular-flow diagram is true? a. the factors of production are owned by households. b. If Susan works for IBM and receives a paycheck, the transaction takes place in the market for goods and services. c. If IBM sells a computer, the transaction takes place in the market for factors of production. d. The factors of production are owned by firms. e.None of the above is true.

a. the factors of production are owned by households.

Suppose a country's workers can produce 4 watches per hour or 12 rings per hour. If there is no trade, a. the opportunity cost of 1 watch is 3 rings. b. the opportunity cost of 1 watch is 1/3 of a ring. c. the opportunity cost of 1 watch is 4 rings. d. the opportunity cost of 1 watch is 1/4 of a ring. e. the opportunity cost of 1 watch is 12 rings.

a. the opportunity cost of 1 watch is 3 rings.

If a supply curve for a good is price elastic, then a. the quantity supplied is sensitive to changes in the price of that good. b. the quantity supplied is insensitive to changes in the price of that good. c. the quantity demanded is sensitive to changes in the price of that good. d. the quantity demanded is insensitive to changes in the price of that good. e. none of the above.

a. the quantity supplied is sensitive to changes in the price of that good.

You have spent $1,000 building a hot-dog stand based on estimates of sales of $2,000. The hot-dog stand is nearly completed, but now you estimate total sales to be only $800. You can complete the hot-dog stand for another $300. Should you complete the hot-dog stand? (Assume that the hot dogs cost you nothing.) a. yes b. no c. there is not enough info Your decision rule should be to complete the hot-dog stand as long as the cost to complete the stand is less than a. $100 b. $300 c. $500 d. $800 e. none of the above

a. yes d. $800

If a fisherman must sell all of his daily catch before it spoils for whatever price he is offered, once the fish are caught, the fisherman's price elasticity of supply for fresh fish is a. zero. b. one. c. infinite. d. unable to be determined from this information.

a. zero.

For each pair of goods listed below, which good would you expect to have the more elastic demand? Why? an AIDS vaccine over the next month; an AIDS vaccine over the next five years

an AIDS vaccine over the next five years because there are likely to be more substitutes (alternative medications) developed over this time period and consumers' behavior may be modified over longer time periods

inflation

an increase in the overall level of prices

For each pair of goods listed below, which good would you expect to have the more elastic demand? Why? insulin; aspirin

aspirin because there are many substitutes for aspirin but few substitutes for insulin

Suppose that at a price of $30 per month, there are 30,000 subscribers to cable television in Small Town. If Small Town Cablevision raises its price to $40 per month, the number of subscribers will fall to 20,000. At which of the following prices does Small Town Cablevision earn the greatest total revenue? a. either $30 or $40 per month because the price elasticity of demand is 1.0 b. $30 per month c. $40 per month d. $0 per month

b. $30 per month

If consumers always spend 15 percent of their income on food, then the income elasticity of demand for food is a. 0.15. b. 1.00. c. 1.15. d. 1.50. e. none of the above.

b. 1.00.

Food Electronics Australia 20 5 Korea 8 4 The following table shows the units of output a worker can produce per month in Australia and Korea The opportunity cost of 1 unit of food in Korea is a. 2 units of electronics. b. 1/2 of a unit of electronics. c. 4 units of electronics. d. 1/4 of a unit of electronics.

b. 1/2 of a unit of electronics.

Which of the following activities is most likely to produce an externality? a. A student sits at home and watches television. b. A student has a party in her dorm room. c. A student reads a novel for pleasure. d. A student eats a hamburger in the student union.

b. A student has a party in her dorm room.

Suppose the world consists of two countries—the United States and Mexico. Furthermore, suppose there are only two goods—food and clothing. Which of the following statements is true? a. If the United States has an absolute advantage in the production of food, then Mexico must have an absolute advantage in the production of clothing. b. If the United States has a comparative advantage in the production of food, then Mexico must have a comparative advantage in the production of clothing. c. If the United States has a comparative advantage in the production of food, it must also have a comparative advantage in the production of clothing. d. If the United States has a comparative advantage in the production of food, Mexico might also have a comparative advantage in the production of food. e. None of the above is true.

b. If the United States has a comparative advantage in the production of food, then Mexico must have a comparative advantage in the production of clothing.

Suppose both buyers and sellers of wheat expect the price of wheat to rise in the near future. What would we expect to happen to the equilibrium price and quantity in the market for wheat today? a. The impact on both price and quantity is ambiguous. b. Price will increase; quantity is ambiguous. c. Price will increase; quantity will increase. d. Price will increase; quantity will decrease. e. Price will decrease; quantity is ambiguous.

b. Price will increase; quantity is ambiguous.

In the short run, a. an increase in inflation temporarily increases unemployment. b. a decrease in inflation temporarily increases unemployment. c. inflation and unemployment are unrelated. d. the business cycle has been eliminated. e. None of the above is true.

b. a decrease in inflation temporarily increases unemployment.

Economic growth is depicted by a. a movement along a production possibilities frontier toward capital goods. b. a shift in the production possibilities frontier outward. c. a shift in the production possibilities frontier inward. d. a movement from inside the curve toward the curve.

b. a shift in the production possibilities frontier outward.

For a price ceiling to be a binding constraint on the market, the government must set it a. above the equilibrium price. b. below the equilibrium price. c. precisely at the equilibrium price. d. at any price because all price ceilings are binding constraints.

b. below the equilibrium price.

Economic models are a. created to duplicate reality. b. built with assumptions. c. usually made of wood and plastic. d. useless if they are simple

b. built with assumptions.

The law of demand states that an increase in the price of a good a. decreases the demand for that good. b. decreases the quantity demanded for that good. c. increases the supply of that good. d. increases the quantity supplied of that good. e. does none of the above.

b. decreases the quantity demanded for that good.

Within the supply-and-demand model, a tax collected from the buyers of a good shifts the a. demand curve upward by the size of the tax per unit. b. demand curve downward by the size of the tax per unit. c. supply curve upward by the size of the tax per unit. d. supply curve downward by the size of the tax per unit.

b. demand curve downward by the size of the tax per unit.

The burden of a tax falls more heavily on the sellers in a market when a. demand is inelastic and supply is elastic. b. demand is elastic and supply is inelastic. c. both supply and demand are elastic. d. both supply and demand are inelastic.

b. demand is elastic and supply is inelastic.

economics is the study of how a. to fully satisfy our unlimited wants b. society manages its scarce resources c. to reduce our wants until we are satisfied d. to avoid having to make trade-offs e. society manages its unlimited resources

b. society manages its scarce resources

Suppose two economists are arguing about policies that deal with unemployment. One economist says, "The government should fight unemployment because it is the greatest social evil." The other economist responds, "That's ridiculous. Inflation is the greatest social evil." These economists a. disagree because they have different scientific judgments. b. disagree because they have different values. c. really don't disagree at all. It just looks that way. d. do none of the above.

b. disagree because they have different values.

For which of the following products would the burden of a tax likely fall more heavily on the sellers? a. food b. entertainment c. clothing d. housing

b. entertainment

Suppose there is an increase in both the supply and demand for personal computers. Furthermore, suppose the supply of personal computers increases more than demand for personal computers. In the market for personal computers, we would expect the a. equilibrium quantity to rise and the equilibrium price to rise. b. equilibrium quantity to rise and the equilibrium price to fall. c. equilibrium quantity to rise and the equilibrium price to remain constant. d. equilibrium quantity to rise and the change in the equilibrium price to be ambiguous. e. change in the equilibrium quantity to be ambiguous and the equilibrium price to fall.

b. equilibrium quantity to rise and the equilibrium price to fall.

If a nation has an absolute advantage in the production of a good, a. it can produce that good at a lower opportunity cost than its trading partner. b. it can produce that good using fewer resources than its trading partner. c. it can benefit by restricting imports of that good. d. it will specialize in the production of that good and export it. e. none of the above is true.

b. it can produce that good using fewer resources than its trading partner.

If supply is price inelastic, the value of the price elasticity of supply must be a. zero. b. less than 1. c. greater than 1. d. infinite. e. none of the above.

b. less than 1.

If a small percentage increase in the price of a good greatly reduces the quantity demanded for that good, the demand for that good is a. price inelastic. b. price elastic. c. unit price elastic. d. income inelastic. e. income elastic.

b. price elastic.

If there is excess capacity in a production facility, it is likely that the firm's supply curve is a. price inelastic. b. price elastic. c. unit price elastic. d. none of the above.

b. price elastic.

In general, a steeper supply curve is more likely to be a. price elastic. b. price inelastic. c. unit price elastic. d. none of the above.

b. price inelastic.

The scientific method requires that a. scientists use test tubes and have clean labs. b. scientists be objective. c. scientists use precision equipment. d. only incorrect theories are tested. e. only correct theories are tested.

b. scientists be objective.

A price floor a. sets a legal maximum on the price at which a good can be sold. b. sets a legal minimum on the price at which a good can be sold. c. always determines the price at which a good must be sold. d. is not a binding constraint if it is set above the equilibrium price.

b. sets a legal minimum on the price at which a good can be sold.

If the price of a good is above the equilibrium price, a. there is a surplus, and the price will rise. b. there is a surplus, and the price will fall. c. there is a shortage, and the price will rise. d. there is a shortage, and the price will fall. e. the quantity demanded is equal to the quantity supplied, and the price remains unchanged.

b. there is a surplus, and the price will fall.

suppose you find $20. If you chose to use the $20 to go to the football game, your opportunity cost of going to the game is a. nothing, because you found the money. b. $20 (because you could have used the $20 to buy other things). c. $20 (because you could have used the $20 to buy other things) plus the value of your time spent at the game. d. $20 (because you could have used the $20 to buy other things) plus the value of your time spent at the game plus the cost of the dinner you purchased at the game. e. none of the above.

c. $20 (because you could have used the $20 to buy other things) plus the value of your time spent at the game.

Food Electronics Australia 20 5 Korea 8 4 The following table shows the units of output a worker can produce per month in Australia and Korea The opportunity cost of 1 unit of electronics in Australia is a. 5 units of food. b. 1/5 of a unit of food. c. 4 units of food. d. 1/4 of a unit of food.

c. 4 units of food.

Which of the following statements is true? a. Self-sufficiency is the road to prosperity for most countries. b. A self-sufficient country consumes outside its production possibilities frontier. c. A self-sufficient country at best can consume on its production possibilities frontier. d. Only countries with an absolute advantage in the production of every good should strive to be self-sufficient.

c. A self-sufficient country at best can consume on its production possibilities frontier.

Food Electronics Australia 20 5 Korea 8 4 The following table shows the units of output a worker can produce per month in Australia and Korea. Which of the following statements about absolute advantage is true? a. Australia has an absolute advantage in the production of food while Korea has an absolute advantage in the production of electronics. b. Korea has an absolute advantage in the production of food while Australia has an absolute advantage in the production of electronics. c. Australia has an absolute advantage in the production of both food and electronics. d. Korea has an absolute advantage in the production of both food and electronics.

c. Australia has an absolute advantage in the production of both food and electronics.

Joe is a tax accountant. He receives $100 per hour doing tax returns. He can type 10,000 characters per hour into spreadsheets. He can hire an assistant who types 2,500 characters per hour into spreadsheets. Which of the following statements is true? a. Joe should not hire an assistant because the assistant cannot type as fast as he can. b. Joe should hire the assistant as long as he pays the assistant less than $100 per hour. c. Joe should hire the assistant as long as he pays the assistant less than $25 per hour. d. None of the above is true

c. Joe should hire the assistant as long as he pays the assistant less than $25 per hour.

Which of the following situations describes the greatest market power? a. a farmer's impact on the price of corn b. Volvo's impact on the price of autos c. Microsoft's impact on the price of desktop operating systems d. a student's impact on college tuition

c. Microsoft's impact on the price of desktop operating systems

Which of the following statements is normative? a. Printing too much money causes inflation. b. People work harder if the wage is higher. c. The unemployment rate should be lower. d. Large government deficits cause an economy to grow more slowly.

c. The unemployment rate should be lower.

Which of the following shifts the demand for watches to the right? a. a decrease in the price of watches b. a decrease in consumer incomes if watches are a normal good c. a decrease in the price of watch batteries if watch batteries and watches are complements d. an increase in the price of watches e. none of the above

c. a decrease in the price of watch batteries if watch batteries and watches are complements

Which of the following will not shift a country's production possibilities frontier outward? a. an increase in the capital stock b. an advance in technology c. a reduction in unemployment d. an increase in the labor force

c. a reduction in unemployment

Which of the following is most likely to produce scientific evidence about a theory? a. an economist employed by the AFL/CIO doing research on the impact of trade restrictions on workers' wages b. a radio talk show host collecting data on how capital markets respond to taxation c. a tenured economist employed at a leading university analyzing the impact of bank regulations on rural lending d. a lawyer employed by General Motors addressing the impact of air bags on passenger safety

c. a tenured economist employed at a leading university analyzing the impact of bank regulations on rural lending

A decrease (leftward shift) in the supply for a good will tend to cause a. an increase in the equilibrium price and quantity. b. a decrease in the equilibrium price and quantity. c. an increase in the equilibrium price and a decrease in the equilibrium quantity. d. a decrease in the equilibrium price and an increase in the equilibrium quantity. e. none of the above.

c. an increase in the equilibrium price and a decrease in the equilibrium quantity.

If the income elasticity of demand for a good is negative, it must be a. a luxury good. b. a normal good. c. an inferior good. d. an elastic good.

c. an inferior good.

If the cross-price elasticity between two goods is negative, the two goods are likely to be a. luxuries. b. necessities. c. complements. d. substitutes.

c. complements.

Studies show that a 10 percent increase in the minimum wage a. decreases teenage employment by about 10 to 15 percent. b. increases teenage employment by about 10 to 15 percent. c. decreases teenage employment by about 1 to 3 percent. d. increases teenage employment by about 1 to 3 percent.

c. decreases teenage employment by about 1 to 3 percent.

If demand is linear (a straight line), then price elasticity of demand is a. constant along the demand curve. b. inelastic in the upper portion and elastic in the lower portion. c. elastic in the upper portion and inelastic in the lower portion. d. elastic throughout. e. inelastic throughout.

c. elastic in the upper portion and inelastic in the lower portion.

High and persistent inflation is caused by a. unions increasing wages too much. b. OPEC raising the price of oil too much. c. governments increasing the quantity of money too much. d. regulations raising the cost of production too much.

c. governments increasing the quantity of money too much.

Productivity can be increased by a. raising minimum wages. b. raising union wages. c. improving the education of workers. d. restricting trade with foreign countries.

c. improving the education of workers.

An increase in the price of beef provides a. information that tells consumers to buy more beef. b. information that tells consumers to buy less pork. c. information that tells producers to produce more beef. d. no information because prices in a market system are managed by planning boards.

c. information that tells producers to produce more beef.

A perfectly competitive market has a. only one seller. b. at least a few sellers. c. many buyers and sellers. d. firms that set their own prices. e. none of the above.

c. many buyers and sellers.

Trade-offs are required because wants are unlimited and resources are a. efficient b. economical c. scarce d. unlimited e. marginal

c. scarce

Which of the following is an example of a price floor? a. rent controls b. restricting gasoline prices to $2.00 per gallon when the equilibrium price is $3.00 per gallon c. the minimum wage d. All of the above are price floors.

c. the minimum wage

The price elasticity of demand is defined as a. the percentage change in price of a good divided by the percentage change in the quantity demanded of that good. b. the percentage change in income divided by the percentage change in the quantity demanded. c. the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good. d. the percentage change in the quantity demanded divided by the percentage change in income. e. none of the above.

c. the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good.

Which side of the market is more likely to lobby government for a price floor? a. Neither buyers nor sellers desire a price floor. b. Both buyers and sellers desire a price floor. c. the sellers d. the buyers

c. the sellers

When a tax is collected from the buyers in a market, a. the buyers bear the burden of the tax. b. the sellers bear the burden of the tax. c. the tax burden on the buyers and sellers is the same as an equivalent tax collected from the sellers. d. the tax burden falls most heavily on the buyers.

c. the tax burden on the buyers and sellers is the same as an equivalent tax collected from the sellers.

If the price of a good is below the equilibrium price, a. there is a surplus, and the price will rise. b. there is a surplus, and the price will fall. c. there is a shortage, and the price will rise. d. there is a shortage, and the price will fall. e. the quantity demanded is equal to the quantity supplied, and the price remains unchanged.

c. there is a shortage, and the price will rise.

If an increase in the price of a good has no impact on the total revenue in that market, demand must be a. price inelastic. b. price elastic. c. unit price elastic. d. all of the above.

c. unit price elastic.

Within the supply-and-demand model, a tax collected from the sellers of a good shifts the a. demand curve upward by the size of the tax per unit. b. demand curve downward by the size of the tax per unit. c.supply curve upward by the size of the tax per unit. d. supply curve downward by the size of the tax per unit.

c.supply curve upward by the size of the tax per unit.

Suppose that at a price of $30 per month, there are 30,000 subscribers to cable television in Small Town. If Small Town Cablevision raises its price to $40 per month, the number of subscribers will fall to 20,000. Using the midpoint method for calculating the elasticity, what is the price elasticity of demand for cable television in Small Town? a. 0.66 b. 0.75 c. 1.0 d. 1.4 e. 2.0

d. 1.4

Food Electronics Australia 20 5 Korea 8 4 The following table shows the units of output a worker can produce per month in Australia and Korea The opportunity cost of 1 unit of food in Australia is a. 5 units of electronics. b. 1/5 of a unit of electronics. c. 4 units of electronics. d. 1/4 of a unit of electronics.

d. 1/4 of a unit of electronics.

Which of the following statements is true if the government places a price ceiling on gasoline at $4.00 per gallon and the equilibrium price is $3.00 per gallon? a. There will be a shortage of gasoline. b. There will be a surplus of gasoline. c. A significant increase in the supply of gasoline could cause the price ceiling to become a binding constraint. d. A significant increase in the demand for gasoline could cause the price ceiling to become a binding constraint.

d. A significant increase in the demand for gasoline could cause the price ceiling to become a binding constraint

Which of the following statements about the burden of a tax is correct? a. The tax burden generated from a tax placed on a good consumers perceive to be a necessity will fall most heavily on the sellers of the good. b. The tax burden falls most heavily on the side of the market (buyers or sellers) that is most willing to leave the market when price movements are unfavorable to them. c. The burden of a tax lands on the side of the market (buyers or sellers) from which it is collected. d. The distribution of the burden of a tax is determined by the relative elasticities of supply and demand and is not determined by legislation.

d. The distribution of the burden of a tax is determined by the relative elasticities of supply and demand and is not determined by legislation.

Which of the following statements is true about the impact of an increase in the price of lettuce? a. The demand for lettuce will decrease. b. The supply of lettuce will decrease. c. The equilibrium price and quantity of salad dressing will rise. d. The equilibrium price and quantity of salad dressing will fall. e. Both a and d are true.

d. The equilibrium price and quantity of salad dressing will fall.

Which of the following would cause a demand curve for a good to be price inelastic? a. There are a great number of substitutes for the good. b. The good is inferior. c. The good is a luxury. d. The good is a necessity.

d. The good is a necessity.

Food Electronics Australia 20 5 Korea 8 4 The following table shows the units of output a worker can produce per month in Australia and Korea Prices of electronics can be stated in terms of units of food. What is the range of prices of electronics for which both countries could gain from trade? a. The price must be greater than 1/5 of a unit of food but less than 1/4 of a unit of food. b. The price must be greater than 4 units of food but less than 5 units of food. c. The price must be greater than 1/4 of a unit of food but less than 1/2 of a unit of food. d. The price must be greater than 2 units of food but less than 4 units of food.

d. The price must be greater than 2 units of food but less than 4 units of food.

Suppose the equilibrium price for apartments is $800 per month and the government imposes rent controls of $500. Which of the following is unlikely to occur as a result of the rent controls? a. There will be a shortage of housing. b. Landlords may discriminate among apartment renters. c. Landlords may be offered bribes to rent apartments. d. The quality of apartments will improve. e. There may be long lines of buyers waiting for apartments.

d. The quality of apartments will improve.

Which of the following statements about a binding price ceiling is true? a. The surplus created by the price ceiling is greater in the short run than in the long run. b. The surplus created by the price ceiling is greater in the long run than in the short run. c. The shortage created by the price ceiling is greater in the short run than in the long run. d. The shortage created by the price ceiling is greater in the long run than in the short run.

d. The shortage created by the price ceiling is greater in the long run than in the short run.

In which of the following cases is the assumption most reasonable? a. To estimate the speed at which a beach ball falls, a physicist assumes that it falls in a vacuum. b. To address the impact of money growth on inflation, an economist assumes that money is strictly coins. c. To address the impact of taxes on income distribution, an economist assumes that everyone earns the same income. d. To address the benefits of trade, an economist assumes that there are two people and two goods.

d. To address the benefits of trade, an economist assumes that there are two people and two goods.

Which of the following statements about trade is true? a. Unrestricted international trade benefits every person in a country equally. b. People who are skilled at all activities cannot benefit from trade. c. Trade can benefit everyone in society because it allows people to specialize in activities in which they have an absolute advantage. d. Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.

d. Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.

If an increase in consumer incomes leads to a decrease in the demand for camping equipment, then camping equipment is a. a complementary good. b. a substitute good. c. a normal good. d. an inferior good. e.none of the above.

d. an inferior good.

According to the principle of comparative advantage, a. countries with a comparative advantage in the production of every good need not specialize. b. countries should specialize in the production of goods that they enjoy consuming. c. countries should specialize in the production of goods for which they use fewer resources in production than their trading partners. d. countries should specialize in the production of goods for which they have a lower opportunity cost of production than their trading partners.

d. countries should specialize in the production of goods for which they have a lower opportunity cost of production than their trading partners.

An inferior good is one for which an increase in income causes a(n) a. increase in supply. b. decrease in supply. c. increase in demand. d. decrease in demand.

d. decrease in demand.

A decrease in supply (shift to the left) will increase total revenue in that market if a. supply is price elastic. b. supply is price inelastic. c. demand is price elastic. d. demand is price inelastic.

d. demand is price inelastic.

A tax of $1.00 per gallon on gasoline a. increases the price the buyers pay by $1.00 per gallon. b. decreases the price the sellers receive by $1.00 per gallon. c. increases the price the buyers pay by precisely $0.50 and reduces the price received by sellers by precisely $0.50. d. places a tax wedge of $1.00 between the price the buyers pay and the price the sellers receive.

d. places a tax wedge of $1.00 between the price the buyers pay and the price the sellers receive

Positive statements are a. microeconomic. b. macroeconomic. c. statements of prescription that involve value judgments. d. statements of description that can be tested

d. statements of description that can be tested

a rational person does not act unless a. the action makes money for the person. b. the action is ethical. c. the action produces marginal costs that exceed marginal benefits. d. the action produces marginal benefits that exceed marginal costs. e. None of the above is true.

d. the action produces marginal benefits that exceed marginal costs.

Which of the following issues is related to microeconomics? a. the impact of money on inflation b. the impact of technology on economic growth c. the impact of the deficit on saving d. the impact of oil prices on auto production

d. the impact of oil prices on auto production

The demand for which of the following is likely to be the most price inelastic? a. airline tickets b. bus tickets c. taxi rides d. transportation

d. transportation

Workers in the United States enjoy a high standard of living because a. unions in the United States keep the wage high. b. we have protected our industry from foreign competition. c. the United States has a high minimum wage. d. workers in the United States are highly productive. e. None of the above is true.

d. workers in the United States are highly productive.

raising taxes and increasing welfare payments a.proves that there is such a thing as a free lunch. b. reduces market power. c. improves efficiency at the expense of equality. d.improves equality at the expense of efficiency. e.does none of the above

d.improves equality at the expense of efficiency.

Which of the following products would be least capable of producing an externality? a. cigarettes b. stereo equipment c. inoculations against disease d. education e. food

e. food

If the price of a good is equal to the equilibrium price, a. there is a surplus, and the price will rise. b. there is a surplus, and the price will fall. c. there is a shortage, and the price will rise. d. there is a shortage, and the price will fall. e. the quantity demanded is equal to the quantity supplied, and the price remains unchanged.

e. the quantity demanded is equal to the quantity supplied, and the price remains unchanged.

t/f Talented people who are the best at everything have a comparative advantage in the production of everything.

false. a low opportunity cost of producing one good implies a high opportunity cost of producing the other good.

(t/f) An auto manufacturer should continue to produce additional autos as long as the firm is profitable, even if the cost of the additional units exceeds the price received.

false. a manufacturer should produce as long as the marginal benefit exceeds the marginal cost.

t/f A perfectly competitive market consists of products that are all slightly different from one another.

false. a perfectly competitive market consists of goods offered for sale that are all exactly the same.

t/f If the equilibrium price of gasoline is $3.00 per gallon and the government places a price ceiling on gasoline of $4.00 per gallon, the result will be a shortage of gasoline.

false. a price ceiling set above the equilibrium price is not binding.

(t/f) In the short run, a reduction in inflation tends to cause a reduction in unemployment.

false. a reduction in inflation tends to raise unemployment.

(t/f) An individual farmer is likely to have market power in the market for wheat.

false. a single farmer is too small to influence the market.

t/f If Japan has an absolute advantage in the production of an item, it must also have a comparative advantage in the production of that item.

false. absolute advantage compares the quantities of inputs used in production while comparative advantage compares the opportunity costs.

t/f If there is a shortage of a good, then the price of that good tends to fall.

false. an excess demand causes the price to rise

t/f An increase in the price of steel will shift the supply of automobiles to the right.

false. an increase in the price of an input shifts the supply curve for the output to the left.

t/f If the quantity demanded of a good is sensitive to a change in the price of that good, demand is said to be price inelastic.

false. demand would be price elastic

T/F Economic models must mirror reality or they are of no value.

false. economic models are simplifications of reality.

(t/f) A tax on liquor raises the price of liquor and provides an incentive for consumers to drink more.

false. higher prices reduce the quantity demanded.

t/f A 10 percent increase in the minimum wage causes a 10 percent reduction in teenage employment.

false. it causes a 1 to 3 percent reduction in employment.

t/f A price ceiling set below the equilibrium price causes a surplus.

false. it causes a shortage

t/f When the price of a good is below the equilibrium price, it causes a surplus.

false. it causes an excess demand

t/f A price floor in a market always creates a surplus in that market.

false. it creates a surplus only if the floor is set above the equilibrium price.

T/F The production possibilities frontier is bowed outward because the trade-off between the production of any two goods is constant.

false. it is bowed outward because the trade-offs are not constant.

t/f When a country removes a specific import restriction, it always benefits every worker in that country.

false. it may harm those involved in that industry

t/f If apples and oranges are substitutes, an increase in the price of apples will decrease the demand for oranges.

false. it will increase the demand for oranges

t/f An advance in technology that shifts the market supply curve to the right always increases total revenue received by producers.

false. it will increase total revenue only if demand is price elastic.

T/F Macroeconomics is concerned with the study of how households and firms make decisions and how they interact in specific markets.

false. macroeconomics is the study of economy-wide phenomena.

T/F Normative statements can be refuted with evidence.

false. normative statements cannot be refuted

T/F Points outside the production possibilities frontier are attainable but inefficient.

false. points outside the production possibilities frontier cannot yet be attained.

Determine which result was the intended result and which was the unintended consequence The government declares marijuana and cocaine illegal. The price of illegal drugs increases, creating more gangs and gang warfare. Due to the high price of illegal drugs, fewer street drugs are consumed.

intended: fewer street drugs are consumed unintended: more gangs and gang warfare

Determine which result was the intended result and which was the unintended consequence The government bans imports of sugar from South America. South American sugar beet growers can't repay their loans to U.S. banks and turn to more profitable crops such as coca leaves and marijuana. U.S. sugar beet growers avoid a financial crisis.

intended: improve the financial condition of US sugar beet growers unintended: cause South American growers to grow marijuana and coca leaves

Determine which result was the intended result and which was the unintended consequence The government prohibits the killing of wolves. The wolf population increases. Sheep and cattle herds suffer losses.

intended: increase the wolf population unintended: damage to sheep and cattle herds

Determine which result was the intended result and which was the unintended consequence The government places rent controls on apartments restricting rent to $300 per month. Few landlords are willing to produce an apartment at this price causing more homelessness. Some low-income renters are able to rent an apartment more cheaply

intended: low-income renters get a cheap apartment. unintended: some people find no aparetment at all causing more homelessness

Determine which result was the intended result and which was the unintended consequence The government raises the minimum wage to $15 per hour. Some workers find jobs at the higher wage making these workers better off. Some workers find no job at all because few firms want to hire low-productivity workers at this high wage.

intended: raise the wage of low-productivity workers. unintended: some workers are unemployed at the higher wage\

Determine which result was the intended result and which was the unintended consequence The government raises the tax on gasoline by $2 per gallon. The deficit is reduced, and people economize on their use of gasoline. There is a boom in bicycle sales.

intended: reduce the deficit and use less gasoline unintended: bicycle sales increase.

factors of production

land, labor, capital

Scarcity

limited resources and unlimited wants

Scientific Method

objective development and testing of theories

incentive

something that induces a person to act

opportunity cost is what you give up to get an item. What would likely be given up to obtain this item? Susan can work full time or go to college. She chooses work.

susan gives up a college degree and the increase in income through life that it would have brought her (but doesn't have to pay tuition)

opportunity cost is what you give up to get an item. What would likely be given up to obtain this item? Susan can work full time or go to college. She chooses college.

susan gives up income from work (and must pay tuition)

rational people

systematically and purposefully do the best they can to achieve their objectives

property rights

the ability of an individual to own and exercise control over scarce resources

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

absolute advantage

the ability to produce a good using fewer inputs than another producer

quantity demanded

the amount of a good that buyers are willing and able to purchase

quantity supplied

the amount of a good that sellers are willing and able to sell

total revenue

the amount paid by buyers and received by sellers of a good, computed as the price of the good * the quantity sold

law of supply and demand

the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

law of demand

the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises

law of supply

the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises

t/f The demand for aspirin this month should be more elastic than the demand for aspirin this year.

the longer the time period considered, the more price elastic the demand curve because consumers have an opportunity to substitute or change their behavior

tax incidence

the manner in which the burden of a tax is shared among participants in a market