macro chapter 1
Scarcity implies that every society and every individual face trade-offs because scarcity means that
human wants are greater than what available resources can produce.
Marginal Analysis
involves comparing marginal benefits and marginal costs.
Centrally planned economy
an economy in which the government decides how economic resources will be allocated
How are economic resources allocated in a market economy?
by the decisions of households and firms interacting in markets.
Building an economic model
1. Decide on the assumptions to use in developing the model 2. Formulate a testable hypothesis 3. Use economic data to test the hypothesis 4. Revise the model if it fails to explain the economic data well 5. Retain the revised model to help answer similar economic questions in the future
Which of the following statements about a hypothesis is correct? A. A hypothesis is another name for a model. B. A hypothesis is a statement that could in principle turn out to be incorrect. C. A hypothesis will always incorporate a value judgment. D. To be called a hypothesis, a statement must first be shown to be correct.
A hypothesis is a statement that could in principle turn out to be incorrect.
When does allocative efficiency occur?
Allocative efficiency occurs when production is in accordance with consumer preferences.
Which of the following statements about an economic variable is correct? A. An economic variable must either be the price of a good or service or the quantity of a good or service. B. An economic variable is something measurable that can have different values. C. An economic variable must always be a positive number. D. An economic variable is always measured in dollars.
An economic variable is something measurable that can have different values.
Trade-Off
An idea that because of scarcity producing more of one good or service means producing less of another good or service.
People respond to economic incentives
As incentives change, so do the actions that people will take
According to the FBI Bank Crime Statistics, there were more than 3,900 bank robberies in the United States in 2017. The FBI claims that banks have made themselves easy targets by refusing to install clear acrylic partitions, called bandit barriers, that separate bank tellers from the public. According to a special agent with the FBI, "Bandit barriers are a great deterrent. We've talked to guys who rob banks, and as soon as they see a bandit barrier, they go find another bank." Sources: U.S. Department of Justice, Federal Bureau of Investigation, "Bank Crime Statistics 2017"; and Richard Cowen, "FBI: Banks Are to Blame for Rise in Robberies," NorthJersey.com, March 10, 2009. Despite this finding, many banks have been reluctant to install these barriers. Wouldn't banks have a strong incentive to install bandit barriers to deter robberies? Why, then, do so many banks not do so? A. Banks would not receive any benefits from installing the barriers. B. Banks have no economic incentive to install the barriers. C. Banks are not rational. D. Banks are not interested in the safety of their customers and employees.
Banks have no economic incentive to install the barriers.
Consider the following statement: "The problem with economics is that it assumes that consumers and firms always make the correct decisions. But we know that everyone makes mistakes." What is the most correct response to this statement? A. Economics has a lot of problems such as those that caused the Great Recession. B. Economics is a proven field of study, and it has already solved this problem. C. Economics does assume that consumers and firms always make the correct decisions. D. Economics assumes that consumers and firms are rational, not that they always make the right decisions.
Economics assumes that consumers and firms are rational, not that they always make the right decisions.
Which of the following statements about economics as a social science is correct? A. Economics is not useful in analyzing the effects of government policy. B. Economics uses normative analysis but not positive analysis. C. Economics considers human behavior only in the context of business. D. Economics studies the actions of individuals.
Economics studies the actions of individuals.
Why might studying economics be particularly good preparation for being the top manager of a corporation or a leader in government? A. Economics is less of an issue as you climb the corporate ladder because you usually hire accountants to handle your money. B. Management and politics have more to do with public relations than economics. C. Economics teaches us how to look at the tradeoffs involved in every decision. D. Economics is just as valuable to a cashier as it is for a CEO.
Economics teaches us how to look at the tradeoffs involved in every decision.
Economists assume that the only reason people take the actions they do is in response to economic incentives. True or False
False
In a market system, what determines how goods and services will be produced?
Firms determine how goods and services will be produced.
Why would the columnist argue that the act was more likely to hurt than help low-income families? A. Firms that might otherwise have hired a low-wage worker may now be reluctant to do so because the firms could be liable for paying the tax. B. Employees who were previously receiving assistance from government benefits would automatically lose those benefits because they had a job. C. In effect, the act would lower the cost of employing low-income workers who receive government benefits. D. All of the above.
Firms that might otherwise have hired a low-wage worker may now be reluctant to do so because the firms could be liable for paying the tax.
An opinion columnist in the Washington Post argues that the Stop Bad Employers by Zeroing Out Subsidies Act is "virtually guaranteed to hurt the very low-income working families its sponsors want to help." Source: Catherine Rampell, "Tax Bezos. Help Workers. But Not Like This." Washington Post, September 6, 2018. What was the main provision of this act? A. Firms with more than 200 full-time employees must offer health insurance to its employees and must automatically enroll them in the plan. B. Every resident of the United States had to have health insurance that met certain basic requirements. Individuals who did not acquire health insurance were subject to a fine. C. Firms with 50 or more full-time employees must offer health insurance that meets certain requirements or pay a fee to the federal government for every employee who receives a tax credit from the federal government for obtaining health insurance through a health insurance marketplace. D. Firms whose employees received assistance from government benefits, including Medicaid and the Supplemental Nutrition Assistance Program (SNAP), would be required to pay a tax equal to cost of the assistance.
Firms whose employees received assistance from government benefits, including Medicaid and the Supplemental Nutrition Assistance Program (SNAP), would be required to pay a tax equal to cost of the assistance.
Mixed economy
In which most economic decisions result from interaction of buyers and sellers in markets but the government plays a significant role in the allocation of resources, an example would be the United States.
Market economy
In which the decision of households and firms interacting in markets allocate economic resources.
Which of the following areas of economics studies issues such as whether government intervention is capable of reducing the severity of recessions? A. Microeconomics B. Macroeconomics C. Both microeconomics and macroeconomics give equal emphasis to these problems. D. This cannot be determined by the information given.
Macroeconomics
People are rational
Rational individuals weigh the benefits and costs of each action, and they choose an action only if the benefits outweigh the costs.
Which of the following areas of economics studies issues such as ways to reduce teenage smoking? A. Microeconomics B. Macroeconomics C. Both microeconomics and macroeconomics give equal emphasis to these problems. D. This cannot be determined by the information given.
Microeconomics
A primary difference between macroeconomics and microeconomics is A. Microeconomics is concerned with present decisions while macroeconomics is concerned with future decisions. B. Microeconomics is concerned with market economies while macroeconomics is concerned with centrally-planned economies. C. There are no true differences between microeconomics and macroeconomics. D. Microeconomics examines individual markets while macroeconomics examines the economy as a whole.
Microeconomics examines individual markets while macroeconomics examines the economy as a whole.
Optimal decisions are made at the margin
Most decisions in life involve doing a little more or a little less. Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost—in symbols, where MB = MC.
What type of economic analysis is concerned with the way things ought to be?
Normative Analysis
Which of the following statements about normative analysis is correct? A. Normative analysis is concerned with what is. B. Normative analysis should not involve value judgments. C. Normative analysis is concerned with what ought to be. D. Normative analysis measures the costs and benefits of different courses of action.
Normative analysis is concerned with what ought to be.
Today, which of the following countries has a centrally planned economy?
North Korea
Which of the following statements about positive analysis is correct? A. Positive analysis involves value judgments. B. Positive analysis can be used to determine whether policies are good or bad. C. Positive analysis is concerned with what is. D. Positive analysis is concerned with what ought to be.
Positive analysis is concerned with what is.
When does productive efficiency occur?
Productive efficiency occurs when a good or service is produced at the lowest possible cost.
Which of the following statements about the idea that people are rational is correct? A. The idea assumes that consumers and firms use all available information as they act to achieve their goals. B. The idea assumes that consumers and firms take into account the costs of their actions but ignore the benefits. C. The idea assumes that consumers and firms always make correct decisions. D. The idea assumes that consumers and firms take into account the benefits of their actions but ignore the costs.
The idea assumes that consumers and firms use all available information as they act to achieve their goals.
Scarcity
Unlimited wants exceed the limited resources available
The three economic questions that every society must answer are
What goods will be produced, how will they be produced, and who will receive the goods?
Productive efficiency means that
a good or service is produced at the lowest possible cost.
There is a trade-off between equality and efficiency because
a more equal distribution of income reduces incentives to work and invest. An economist can write an entire book on the subject because the trade-off involves complicated normative and positive issues.
Scarcity is central to the study of economics because it implies that
every choice involves an opportunity cost
Allocative efficiency means that
every good or service is produced up to the point where marginal benefit is equal to marginal cost.
What do economists mean by the word "marginal"?
extra or additional
Microeconomics is the study of
how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
Macroeconomics is the study of
the economy as a whole, including topics such as inflation, unemployment, and economic growth.
Economists believe that an activity should be continued up to the point where
the marginal benefit from the activity is equal to the marginal cost.
Economists assume that people are rational in the sense that
they use all available information as they take actions intended to achieve their goals
Economists use models
to answer questions and analyze issues.
The U.S. Postal Service (USPS) charges Amazon about $2 to deliver a package. The USPS argues that its contract with Amazon allows it to reduce the loss it suffers on its overall operations. A business writer for the Washington Post observes: "Looked at from the standpoint of incremental revenue (huge) minus these incremental expenses (modest), the Postal Service could very easily have come to the conclusion that, even at $2 a package, the Amazon contract was likely to be highly profitable." Sources: Eli Rosenberg, "Trump Said Amazon Cost The the USPS 'Billions.' But the Post Office Has a Different Explanation." Washington Post, May 11, 2018. What does the writer mean by "incremental revenue" and "incremental cost"? Why would he focus on incremental revenue and incremental cost rather than on total revenue and total cost? "Incremental" means the same thing as A. "marginal." If the marginal revenue exceeds the marginal cost, the USPS's profit will increase. If the marginal cost exceeds the marginal revenue, the USPS's profit will decrease. B. "marginal." If the marginal revenue exceeds the marginal cost, the USPS's profit will decrease. If the marginal cost exceeds the marginal revenue, the USPS's profit will increase. C. "extra." Since this is an "all or nothing" decision, incremental revenue and incremental cost rather than total revenue and total cost must be examined. D. "additional." Since this is an "all or nothing" decision, incremental revenue and incremental cost rather than total revenue and total cost must be examined.
"marginal." If the marginal revenue exceeds the marginal cost, the USPS's profit will increase. If the marginal cost exceeds the marginal revenue, the USPS's profit will decrease.
In a market system, how does society decide what goods and services will be produced?
Consumers, firms, and the government determine what goods and services will be produced by the choices they make.