Test 1

Question 1

What are the ten principles of economics?

Answer 1

1. People face tradeoffs
2. Opportunity cost
3. Rational people think on the margin
4. People respond to incentives
5. Trade can make everyone better off
6. Markets are a good way to organize economic activity
7. Government can sometimes improve market outcomes
8. A country’s living standard depends on its ability to produce goods/services
9. Prices rise when government prints too much money
10. Society faces a short-run trade-off between inflation and unemployment

Question 2

Microeconomics

Answer 2

study of household/firm behavior/interaction in markets

Question 3

Macroeconomics

Answer 3

study of economy-wide phenomena

Question 4

efficiency

Answer 4

getting the most out of scarce resources

Question 5

equity

Answer 5

distributing resources fairly

Question 6

efficiency vs. equity

Answer 6

can sacrifice efficiency for equity and vice versa
ex. handicap parking spaces

Question 7

Marginal Cost (MC)

Answer 7

extra cost of an action

Question 8

Marginal Benefit (MB)

Answer 8

extra benefit of an action

Question 9

Incentive

Answer 9

a change in the MB or MC; good institutions align private incentives with social goals. If prices rise, buyers consume less, and sellers produce more.

Question 10

Market economy

Answer 10

economy that allocates resources by a decentralized process with firms and households interacting in markets

Question 11

Prices are

Answer 11

driving force behind success of markets

Question 12

“invisible hand”

Answer 12

buyers and sellers are guided as if by an invisible hand to promote general economic wellbeing. Does NOT ensure that everyone has sufficient food, decent clothing, and adequate healthcare.

Question 13

Establish property rights

Answer 13

rights of individuals to continue resources

Question 14

Externalities

Answer 14

cost/benefits to third parties

Question 15

market power

Answer 15

one (or few) participants in a market dictate terms to others by control

Question 16

Economics

Answer 16

the study of how society manages its scarce resources

Question 17

Rational People

Answer 17

Systematically and purposefully do the best they can to achieve their objectives, given opportunity

Question 18

market failure

Answer 18

refers to a situation in which the market on its own fails to produce an efficient allocation of resources

Question 19

externality

Answer 19

one possible cause of market failure; the impact of one person’s actions on the well-being of a bystander. ex. pollution

Question 20

market power

Answer 20

another possible cause of market failure; refers to the ability of a single person/firm to unduly influence market price

Question 21

Productivity

Answer 21

the amount of goods and services produced by each unit of labor input. Increased productivity = increased standard of living.

Question 22

Inflation

Answer 22

an increase in the overall level of prices in the economy. Quantity of the nation’s money increases = decrease in value of the money

Question 23

Business Cycle

Answer 23

irregular and largely unpredictable fluctuations in economic activity, as measured by the production of goods and services or number of people employed.

Question 24

PPF

Answer 24

production possibilities frontier; set of all possible combination of goods than can be produced given current resources/tech

Question 25

Law of Increasing Opportunity Cost

Answer 25

as more is produced, opportunity cost is increased (all else equal). Sometimes constant opportunity cost is assumed.

Question 26

Positive statements

Answer 26

describes the way the world is based off statements of scientific judgement

Question 27

Normative statements

Answer 27

Describes how the world ought to be; statements of value

Question 28

Quantity supplied

Answer 28

Qs; the amount sellers are willing/able to sell

Question 29

Supply

Answer 29

relationship between price and quantity supplied

Question 30

Things that will SHIFT supply

Answer 30

input prices, technology, population, sellers' expectations (non-perishable goods)

Question 31

Elasticity of Demand equation

Answer 31

%△Qdemanded/%△P

Question 32

if Ed > 1

Answer 32

demand is elastic

Question 33

if Ed < 1

Answer 33

demand is inelastic

Question 34

if Ed = 1

Answer 34

unit elastic

Question 35

Quantity effect

Answer 35

change in revenue due to higher Q

Question 36

Price effect

Answer 36

change in total revenue due to lower P

Question 37

Quantity Demanded

Answer 37

amount consumers are willing and able to buy

Question 38

Demand

Answer 38

relationship between price and quantity demanded

Question 39

Law of Demand

Answer 39

-changes in price cause MOVEMENT along demand curve -changes in any other factor will SHIFT demand curve - if price increased, Q demanded decreases and vice versa

Question 40

Things that shift demand

Answer 40

-change in income -change in price of related goods (if complements' prices go up, demand goes down, but if substitutes' prices go up, demand goes up. -tastes and preferences -change in population -expectations

Question 41

Absolute advantage

Answer 41

ability to produce using less resources

Question 42

comparitive advantage

Answer 42

ability to produce at a lower opportunity cost

Question 43

Factors contributing to elasticity

Answer 43

-availability of substitutes (more subs = more elasticity) -necessity vs. luxury (necessities are less elastic) -definition of market (narrow = more elastic) -time horizon (longer time period = more elastic) -price/share of budget (lower price = less elastic)

Question 44

If macaroni and cheese is an inferior good, then an increase in: a. the price will cause the demand curve for M&C to shift left b. a consumer's income will cause the demand curve for M&C to shift to the left c. the price will cause the demand curve for M&C to shift to the right d. a consumer's income will cause the demand curve for M&C to shift right

Answer 44

b. an increase in the consumer's income will cause the demand curve for macaroni and cheese to shift to the left.

Question 45

Regan grows flowers and makes ceramic vases. Jayson also grows flowers and makes ceramic vases, but Regan is better at producing both goods. In this case, trade could: a. benefit Jayson, but not Regan b. benefit neither of them c. benefit Regan, but not Jayson d. benefit both Jayson and Regan

Answer 45

d. Benefit both Jayson and Regan

Question 46

If consumers often purchase muffins to eat while they drink their lattes at local coffee shops, what would happen to the equilibrium price and quantity of lattes if the price of muffins falls? a. the eq. price would increase, and the eq. quantity would decrease b. the eq. price would decrease, and the eq. quantity would increase c. both the eq. price and quantity would increase d. both the equilibrium price and quantity would decrease

Answer 46

c. both the equilibrium price and quantity would increase

Question 47

Sandra purchases 5 pounds of coffee and 10 gallons of milk per month when the price of coffee is $10 per pound. She purchases 6 pounds of coffee and 12 gallons of milk per month when the price of coffee is $8 per pound. Sandra's cross-price elasticity of demand for coffee and milk is:

Answer 47

-0.82 and they are complements

Question 48

If the price elasticity of demand for tuna is 0.7, then a 1.5% increase in the price of tuna will decrease the quantity demanded of tuna by_________ and tuna sellers' total revenue will ___________ as a result.

Answer 48

1.05% and increase