Ch. 1-3

Question 1

What is the definition of economics? What is the difference between macroeconomics and microeconomics?

Answer 1

The social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity (very few/limited).

Macroeconomics: Study of society as a whole. Examine the performance and behavior of the economy as a whole.
Microeconomics: Study of individuals. Economics concerned with the decision making by individuals, workers, households, and business firms.

Question 2

List and explain the three elements of the economic perspective. Define the word utility.

Answer 2

{looking at things from an economic perspective}
1. Scarcity and Choice: limited amount/ hard to find. There is no such thing as a free lunch.
opportunity cost: when you make choices, you’re passing up the opportunity to do something else.
2. Purposeful Behavior: Making a decision with a purpose We make the best decisions for themselves based on the information that they have.
3. Marginal Analysis: Comparing the marginal (extra/change in) benefits to the marginal costs of the decision making

Optimal: MB=MC
MB>MC: Want more.
MBs just not worth it.

Question 3

Define positive economics. Define normative economics.

Answer 3

Positive: Facts! Cause and Effects. Not good or bad. Just fact. Ex. 6.2% unemployment

Normative: Opinions. Value judgements about what the economy should be like. Ex. unemployment is to high.

Question 4

What are the two basic issues that make up the economizing problem? Does the concept of insatiable wants apply to the short-run or long-run?

Answer 4

Incomes are limited and wants are unlimited. In the long run, we become dissatisfied.

Question 5

What’s the difference between economic resources and free resources?

Answer 5

An economic resource is when someone can own and control a resource.
A free resource is so abundant that no one can charge you for it. Its always available. there are only two resources that people can’t charge you for. air and sunlight.

Question 6

List and define the four resource categories. Associate each resource category with its resource payment.

Answer 6

1. Land: Gifts of nature
2. Labor: Human Production
3. Capital: Manmade resources (Using a computer for work, tolls, machines, buildings.
4. Entrepreneurial ability: Someone who starts a business. risk taker, innovators, job providers.

Land- rent
Labor- wages
Capital: investments
EA: profit

Question 7

One person’s income is another person’s ____.

Answer 7

loss

Question 8

List the assumptions associated with the production possibilities table?

Answer 8

1. full employment: the economy is employing all of its available resources.
2. fixed resources: the quantity and the quality of the factors of production don’t change.
3. fixed technology: The state of technology is constant.
4. two goods: the economy is only producing two goods: pizzas and robots.
5. No foreign trade: closed economy.

Question 9

What does the production possibilities curve represent? What does it mean to be on the curve?

Answer 9

It lists the different combinations of two products that can be produces with a specific set of resources, assuming full employment. optimal?

Question 10

What is the condition required to achieve the optimal allocation of resources?

Answer 10

MB=MC

Question 11

What does it mean to be inside the production possibilities curve?

Answer 11

Unemployment or inefficiency problems. A shrinking economy.

Question 12

What can shrink or grow the economy and what does that do to the production possibilities curve?

Answer 12

1a. Increase in resource supplies- economy will grow.
1b. Decrease in resource supplies- economy will shrink.
2. Advances in technology will always lead to growth because you do more with what you have.
3. Our choices today will effect the curve in the future.
a. If we produce more capital goods, the economy will grow. we sacrifice consumer goods.
b. If we produce less capital goods, the economy shrinks.

Question 13

Is it possible for a society to consume outside its production possibilities curve?

Answer 13

No

Question 14

What is a graph? What is the difference between a direct relationship and an inverse relationship?

Answer 14

A thing. HAHA
Direct relationship: 2 variables move in the same direction. As income increases, consumption increases. as income decreases, consumption decreases.

Inverse relationships: 2 variables moving in opposite directions. As price increases, quantity decreases. As price decreases, quantity increases.

Question 15

Differentiate between capitalism, socialism, and communism. Which one tends to be the most efficient in practice?

Answer 15

• Capitalism: No government involvement.
• Socialism: The government owns and controls the most important resources and production and leaves everything else to the private sector. A mixture.
• Communism: A central economic planning board. The government owns and controls everything. All resources and production.
• • Capitalism tends to be the most efficient.

Question 16

List and briefly discuss the characteristics that are specific to capitalism (market system).

Answer 16

1. Private property: individuals can own and control private property.
2. Incentive: encourages you to do the right thing.
3. Freedom of enterprise (business) and choice:
   - - of owners [we can do what we want with our properties]
   - - of workers [you have the freedom of choice as to where you work]
   - - of consumers [you can choose what you buy]
   - - THE MOST IMPORTANT capitalism is consumer choice.
4. Self interest:
   - - of owner [maximize profit]
   - - of workers [maximize wages]
   - - of consumers [get lowest price]
5. Competition: 2 or more buyers and 2 or more sellers acting independently in a particular product or resource market. In capitalism, we want as much competition as possible.
6. Markets and Prices: a market is an institution that brings buyers and sellers into contact. A market is not a place. It is a situation where you have a buyer and a seller. You just have to have 1 buyer and 1 seller.
7. Active but Limited Government: Government is there, but limited in its economic involvement.

Question 17

List and briefly discuss the three characteristics that all economic systems tend to share or agree on.

Answer 17

• Technology and Capital Goods: All countries know that they need this. Capitalists get all this the easiest.
• Specialization: [EFFICIENCY] the more specialized, the more efficient. We (our culture) are specializing in certain things.
• Use of Money: medium of exchange, so you can buy goods and services. Money is convenient and is a means of specialization.
• • barter: exchange a good for a good.
• • trading on a day to day basis without money would be tough.

Question 18

In capitalism, how will society determine what is produced?

Answer 18

If something is profitable, it will be produced. 
TOTAL REVENUE (money coming in [price x quantity]) - TOTAL COST (money going out [land, labor, capital, EA]) = PROFIT or LOSS (economic)

Question 19

What is the difference between normal profit and economic profit?

Answer 19

• Normal profit: The amount the entrepreneur needs to keep them in the business and to keep them SATISFIED.
• Economic profit: You made more than what you wanted and this leads to industry expansion.

Question 20

What do economic profits and losses mean to an industry?

Answer 20

Profit: leads to industry expansion (more competition, start up business, prices go down). Expansion stops when economic profit = 0.
Loss: leads to industry decline because entr. will drop out. (less competition, prices go up, profit goes up). Decline stops when economic loss = 0.

Question 21

In capitalism, how will society determine the production method? What happens if resource prices or technology changes?

Answer 21

Use the least cost method of production. New techniques are developed to show that it is worth the time. Our techniques change because resources change.

Question 22

In capitalism, who gets the goods and services produced by society?

Answer 22

Those who are willing and able to pay.

Question 23

In capitalism, how do prices determine the changes in production? What does this have to do with Adam Smith’s “invisible hand” theory?

Answer 23

Expand where demand is. Sell less demand at higher price until industry shrinks. You must have more resources to expand.
- Capitalism is lik an invisible hand that pushes us into profitable production.

Question 24

In capitalism, how will the system promote progress?

Answer 24

The personal gain is the incentive. To make money and to enjoy.

Question 25

What does the circular flow model represent?

Answer 25

• Illustrates the flows of goods and services, resources, and money for a simplified economy which there is no government.
• • Resources flow from house to businesses through the resource market, and products flow from businesses to households through the product market. Opposite theses real flows are monetary flows. Households receive income from businesses (their costs) through the resource market, and businesses receive revenue from households (their expenditures) through the product market.

Question 26

What is a market? What type of competition do we assume in macroeconomics?

Answer 26

a situations with a buyer and a seller.

Question 27

Define demand. Why is demand an inverse relationship?

Answer 27

a schedule or curve showing people who are willing and able to purchase. When prices are high, we buy less. when prices are low, we buy more.

Question 28

What are the determinants of demand and which way does the curve shift?

Answer 28

1. Our tastes change:
   - We increase tastes, curve shift right.
   - We decrease tastes, curve shift left.
2. Number of buyers:
   - More buyers, higher demand.
   - Less buyers, lower demand.
3. Income:
   - If income increases, demand increases (if the good is normal or superior [luxury item])
   -If income decreases, demand decreases if the good is superior.
   - If income increases, demand decreases (if the good is inferior [good you buy because you can’t buy the good that you want to buy])
   - If income decreases, demand increases if the good is inferior.
   ALWAYS ASSUME that a good is normal is it isn’t specified.

Question 29

What is the difference in the phrases “change in quantity demanded” and “change in demand”?

Answer 29

*Change in Quantity Demanded: when there is a price change that caused the quantity to change.
*Change in demand: when price stayed the same, but quantity changed.
\ D3(decrease in demand) \D1 \ D2(increase in demand)

Question 30

Define supply. Why is supply a direct relationship?

Answer 30

A schedule or curve showing what the producers are “willing and able” to produce for sale.

• • If prices are higher, they will produce more.
• • If prices are lower, they will produce less.

Question 31

What are the determinants of supply and which way does the curve shift?

Answer 31

1. Resource prices (input prices):
   - If resource prices increase, supply decreases.
   - If resource prices decrease, supply increases.
2. Technology:
   - If technology increases, supply increases.
3. Business Taxes:
   - If business taxes increase, supply decreases.
   - If business taxes decrease, supply increases.
4. Subsidies (Gov. gives money to businesses):
   - If subsidies increase, supply increases.
   - If subsidies decrease, supply decreases.
5. Number of sellers or producers:
   - Number of sellers increase, supply increases.
   - Number of sellers decrease, supply decreases.

Question 32

What is the difference in the phrases “change in quantity supplied” and “change in supply”?

Answer 32

• Change in Quantity Supplied: There is a price change that causes the quantity to change.
• Change in Supply: Price stayed the same, but quantity changed.

Question 33

What does it mean when a market is at equilibrium?

Answer 33

The producers are producing the exact amount that the buyers are willing to buy. When lines intersect. They’re equal. You will always move toward equilibrium.

Question 34

What happens when the market (or actual) price is above equilibrium? How will the market adjust?

Answer 34

There is a surplus.

• as price goes down, quantity demand goes up.
• as price goes down, quantity supplied goes down.

Question 35

What happens when the market (or actual) price is below equilibrium? How will the market adjust?

Answer 35

There is a shortage.

• as price goes up, quantity demanded goes down.
• as price goes up, quantity supplied goes up.

Question 36

What happens to equilibrium when the demand curve shifts to the right? To the left?

Answer 36

Right: price and quantity both go up.
Left: price and quantity both go down.

Question 37

What happens to equilibrium when the supply curve shifts to the right? To the left?

Answer 37

Right: price goes down. quantity goes up.
Left: price goes up. quantity goes down.

Question 38

Define productive efficiency. Define allocative efficiency. What are the conditions associated with productive and allocative efficiency?

Answer 38

• Productive Efficiency: Production in the least costly way.
• • Price = Minimum Average Total Cost
• • P=minATC
• Allocative Efficiency: Society votes with its dollars. Society chooses what we want.
• • MB=MC
• • P=MC

Question 39

What is the rationing function of prices?

Answer 39

Selling and buying are consistent. We consider equilibrium to be consistent. Those willing and able to pay get the goods (rationed). The resources are also rationed properly.

Question 40

Describe what happens in the market when the government applies a price ceiling.

Answer 40

This is a below equilibrium price, and you cannot legally charge more than that price. Ceilings create shortages and black markets (things sold under the table). You cannot go above the ceiling.

Question 41

When demand increases, process and quantity do what? When demand decreases, pricing quantity day what?

Answer 41

Price increases and quantity increases. Price decreases and quantity decreases.

Question 41

When demand increases, process and quantity do what? When demand decreases, pricing quantity day what?

Answer 41

Price increases and quantity increases. Price decreases and quantity decreases.

Question 42

When supply increases, Price and quantity do what?

When supply decreases, price and quantity do what?

Answer 42

Price decreases and quantity increases.

Price increases and quantity decreases.