macro exam 1
T/F: the production possibilities frontier of a nation cannot shift outwards or inwards
false
T/F: when a good is an inferior good, an increase in income causes an increase in demand
false
T/F: when one country gains from trading, another must lose
false
"change in supply"
shift in the S curve caused by a change in a non-price determinant of supply (not on axes of graph)
"change in demand"
shift of the demand curve (for every price we now have a new Qd) caused by a change in a 'non-price' determinant of demand
demand schedule
shows how much of a good or service consumers will want to buy and different prices (price and quantity demanded)
supply schedule
shows how much of a good service would be supplied at different prices
T/F: even with trade, a country must still consume along its PPF
false
normal vs inferior goods
*normal good- when a rise in income increases the demand for a good (the normal case) *inferior good- when a rise in income decreases the demand for a good
quantity demanded vs demand
*quantity demanded refers to the specific amount of a good that is desired at each given price *demand refers to the relationship between price and quantity demanded
examples of movement along the S curve
1) as home prices rise, more people put out a for sale sign 2) college grads avoid teaching jobs as salaries fall 3) as the price of airline tickets rises, airlines add more flights
5 factors that shifts the supply curve
1) changes in input prices- if input prices increases, firms aren't able to supply as much at a given price vs before, so S shifts left 2) changes in the prices of related goods or services 3) changes in technology- technology improvement increases productivity, decreasing costs and shifts S right 4) changes in expectations- if suppliers expect future prices to be lower, they would try to sell more now 5) changes in the number of producers- an increase in numbers of producers shifts S right (and vise versa)
shifts of the demand curve
1) changes in the prices of related goods or services 2) changes in income 3) changes in tastes 4) changes in expectations of future prices changes can affect demand now 5) changes in the number of consumers
3 main sources of comparative advantage
1) international differences in climate (example- Canada doesn't make bananas but produces wheat) 2) factor endowments (examples- Russia has vast forests desert areas don't, and China has low-skilled labor) 3) technology (example- it may not last, and Japan in the 70's/80's had car production advantage over the US production process) *forestland is a factor of production- an input used to produce goods and services
examples of shifts in the demand curve
1) lack of snow keeps the skiers away 2) cutting cigs ads from TV causes cig smoking among teens to decrease 3) Nikes sales fall as sketchers gain popularity 4) mortgage rates are at an all-time low, and new home loan applications soar 5) a booming economy spurs home sales
examples of movement on the demand curve
1) mammoth mountain hikes the price for ski tickets and sales decrease 2) an increase in excise tax on cigs causes younger teens to quit 3) teens have had it with the high price of Jordans
examples of shifts in the S curve
1) personal bankruptcies rise with the recession, forcing homeowners to sell 2) worsening working conditions in urban schools chase away prospective teachers 3) the price of jet fuel drops and airlines expand the number of flights (input)
important concepts in macroeconomics
1) recessions- declines in economic activity and living standards 2) economic growth- growing ability of the economy to produce goods and services, leads to a better standard of living
additional PPF remarks
1) the PPF probably is not linear but bow shaped *bowed out shape illustrates non-constant opportunity cost, to get more of a good you must give up increasing amounts of the other 2) non-constant opportunity cost is more realistic as not all resources are equally productive at all tasks (humans included) 3) economic growth is a shift outwards of the PPF which could be caused by new technology or more resources (or both) 4) the PPF models efficiency, opportunity cost, and economic growth (shifting out)
math remarks (PPF)
1) the opportunity cost of the good on the x-axis is the slope of the line (should be negative) 2) the opportunity cost of the good on the y-axis is the reciprocal of the slope of the line
the production possibilities frontier, as shown in the text, involves how many goods at once?
2
The belief that importing goods from low-wage countries will hurt the standard of living of workers in the importing country is known as the: A) pauper labor fallacy. B) theory of absolute advantage. C) Heckscher-Ohlin theory. D) sweatshop labor fallacy.
A
the ability to produce a good at a lower opportunity cost than another producer is A) comparative advantage B) complete advantage C) absolute advantage D) none of the other options are correct
A
the law of demand states that, other things equal, as the price: A) increases, the quantity demanded will decrease B) decreases, the demand curve will shift to the right C) increases, demand will decrease D) increases, the quantity demanded will increase
A
which factor is not a determinant of supply? A) consumer tastes B) the technology of production C) the cost of production D) expectations regarding future prices
A
which statement illustrates the law of demand? A) consumers buy more personal computers because prices have fallen B) oil companies drill for new sources because prices are higher C) fewer people play golf because incomes are lower D) an increase in tuition encourages more students to enroll in college because the quality of education has risen
A
The market for corn in Kansas is considered to be competitive. This means there are _____ buyers and _____ sellers of corn in Kansas. A) many; few B) many; many C) few; few D) few; many
B
The term autarky refers to a situation when a country: A) trades goods and services based on the principle of comparative advantage. B) does not trade with other countries. C) trades goods and services based on the principle of Ricardian advantage. D) trades goods and services based on the principle of absolute advantage.
B
a good produced _____ and sold domestically is called an import A) domestically B) abroad C) all of the other answers are incorrect D) in the US
B
when a market is in equilibrium the quantity: A) demanded is equal to zero B) demanded is equal to quantity supplied C) supplied is zero D) demanded is greater than quantity supplied
B
Goods and services purchased from abroad are _____, while goods and services sold abroad are _____. A) quotas; factors B) exports; imports C) imports; exports D) exports; quotas
C
_____ illustrates a positive relationship between price and quantity. A) A demand curve B) Equilibrium C) A supply curve D) A production possibility frontier
C
gains from trade A) are not possible, we shouldn't trade B) are based off of absolute advantage C) are based off of comparative advantage D) none of the above are correct
C
the belief that trade must be bad for exporting countries because the foreign workers are paid very low wages by our standard is the _________ fallacy A) third-world country B) pauper labor C) sweatshop labor D) Nike
C
the models that economists construct: A) often rely on physical constructs, such as those used by architects B) attempt to precisely replicate the real world C) usually make simplifying assumptions D) rarely use mathematical equations or graphs.
C
which of the following can influence the demand for a good? A) changes in the number of consumers B) changes in the prices of related goods C) changes in income D) all of the other answer choices are correct
D
T/F: a shortage of a good can also be called excess supply
false
comparative advantage
a country has a comparative advantage in producing a good or service if the opportunity cost of producing the good or service is lower for that country than for other countries
competitive markets
a market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold (not all markets are competitive)
the production possibilities frontier (PPF)
a model that shows the possible combinations of 2 goods and services an economy can produce with its current available resources and technology *"resources" means factors of production like land, labor, physical and human capital
model
a simplified representation of a real situation that is used to better understand real-life situations *keep the important parts, trim the rest away *when using and building models, we are often using the "all else equal" assumption to isolate the factor we wish to examine (an increase in demand for example)
where can you produce on the PPF?
along the linear line or on the inside of the curve *remarks on the PPF- A,B,C (on and inside the curve) are 3 of infinitely many options *we can produce anywhere along the line (feasible and efficient), inside the curve (feasible, inefficient) *points outside the curve (linear) are not feasible with current resources and technology *if we move down the linear line we forego 2000 tons of wheat for 200 computers, which is an opportunity cost of 200 computers is 2000 tons wheat
T/F: because Tom Brady is faster at mowing his lawn than others, he should always mow his own lawn
false
surplus
example: at $4 Qs>Qd as Qs=15 and Qd=6 there is a surplus of 9 which is excess supply *suppliers would cut prices until we reach equilibrium and the surplus is eliminated
T/F: a nation's production possibilities frontier is always linear in reality
false
imports
goods and services from abroad
exports
goods and services sold abroad
microeconomics
he branch of economics that studies how people make decisions and how these decisions interact *Key theme is the validity of Adam Smith's insight: individuals pursuing their own interests often do promote the interests of society as a whole
normal good
if income increases, this leads to an increase in demand (shift)
shortage
if the price were $2, Qd>Qs so there is a shortage (excess demand) *sellers would raise prices until equilibrium is reached and the shortage is eliminated
movements along the demand curve
increase in demand at any price = rightward and vise versa
quantity supplied
is the actual amount of a good or service people are willing to sell at some specific price
macroeconomics
is the branch of economics that is concerned with overall ups and downs in the economy *how economics explain recessions and how government policies can be used to minimize the damage from economic fluctuations
market demand
is the sum of the individual demand for a product from buyers in the market. If more buyers enter the market and they have the ability to pay for items on sale, then market demand at each price level will rise *how the market demand curve is constructed- negative sloped because as price increases, the demand decreases
"change in Qd"
move along the demand curve, caused by a change in price (on the vertical axis/ Y)
"change in Qs"
movement along supply curve caused by a change in price
what causes surplus?
price is too high, would consist if in a competitive market
what causes a shortage?
price is too low
factor abundance
refers to how large a country's supply of a factor is relative to it's supply of other factors
factor intensity
refers to the ranking of goods according to which factor is used in relatively greater quantities in production, compared to other factors
law of demand
says that a higher price for a good or service, other things equal, leads people to demand a smaller quantity of that good or service
market supply curve
shows how the combined total quantity supplied by all individual producers in the market depends on the market price of that good *is the horizontal sum of the individual supply curves of all producers
why is the production possibility graph negatively sloped?
signifies that you are losing something, theres a cost
opportunity cost is...
slope: y1-y2/x1-x2 (usually negative)
the fundamental economic problem
society has virtually unlimited wants and desires, but only a finite amount of resources to meet its wants and desires *Ex: many ways to spend $100
absolute advantage
the advantage conferred on an individual or country in an activity if the individual or country can do it better than others. A country with an absolute advantage can produce more output per worker than other countries.
law of supply
the claim that as price increases, quantity supplied increases (all else equal) as price increases, firms are able to supply more due to cost structure
scarcity
the limited nature of societies resources *remark- we don't have enough resources to meet all of our wants, thus they are scarce and we must choose between alternatives
why is the production possibility graph bowed out from the origin?
the opportunity cost is non-constant
globalization
the phenomenon of growing economic linkages among countries
equilibrium price
the price that matches the quantity supplied and the quantity demanded
equilibrium quantity
the quantity bought and sold at that price
economics
the social science that studies the production, distribution, and consumption of goods and services
T/F: differences in factor endowments is one source of comparative advantage
true
T/F: economists use different terms to refer to a shift of the demand curve vs. a movement along a demand curve
true
T/F: for a normal good a decrease in income would cause a decrease in demand
true
T/F: similar to demand, economists have different terms for a shift of the supply curve and a movement along the supply curve
true
T/F: the equilibrium price can also be called the market-clearing price
true
T/F: the production possibilities frontier shows that if we are producing efficiently, in order to produce more of one good, we must give up some of the other
true
T/F: when analyzing a specific relationship in economics it is important to hold other factors constant
true
T/F: when countries trade with the US, the US can be better off and its trading partners can be better off too
true
opportunity cost
what you give up to get an item *example 1- spend $1000 on shoes, its what you can't get with the $1000 *example 2- attending college costs tuition (explicit/monetary cost) but also foregone wages (implicit/non-monetary cost)
Heckscher-Ohlin Model
where the relationship between comparative advantage and factor ability is found *two key concepts- factor abundance and factor intensity *countries with an abundance of a particular factor of production will have a comparative advantage in producing goods that use a lot of that factor of production
