Test 1 Review Questions Flashcards
(90 cards)
1
Q
What is economics?
A
the social science concerned with making optimal choices under conditions of scarcity
2
Q
What is opportunity cost?
A
what you give up to get something; every choice involves a sacrifice
3
Q
How are economic theories defined?
A
generalizations based on hypothesis tested and supported with observations
4
Q
which topics are studies in macro/microeconomics?
A
macroeconomics- study of the entire economy; studies economy wide unemployment, income, inflation, and business cycle patterns
microeconomics- study of the individual consumer, firm or market, studies the behavior of specific economic units; how do businesses react to rising interest rates; change in price of laptops, smartphones, oranges, apples
5
Q
what is normative economics?
A
deals with value judgements - opinion statements; ‘ought’ ‘should’
6
Q
what is positive economics?
A
deals with factual statements, not opoinions, or value judgements
7
Q
example of normative economics
A
when interest rates decline, stock market should soar
8
Q
example of positive economics
A
dc is the capital of the us
federal reserve is the central bank of the us
9
Q
what is the economizing problem?
A
the need to make choices because economic wants exceed economic means; i.e. how do we use our resources to satisfy unlimited wants?
10
Q
what is the inidividual’s economizing problem?
A
Adhering to a budget line; limited income and unlimited wants
11
Q
what is the societal economizing problem?
A
adhering to the PPC
12
Q
What does the budget line show?
A
Illustrates the maximum number of two goods that can be purchased, given money income;
13
Q
How does the budget line shift?
A
A change in income
14
Q
What do points to the left of the budget line indicate? TO the right?
A
Left - attainable but not maximize the number of two goods
Right - not attainable with the current income
15
Q
What does the slope of the budget line indicate?
A
The ratio price of 2 goods (will always be negative)
- (value on y axis/value on x axis)
16
Q
What are the factors of production?
A
Land, labor, capital, entrepreneurial ability
17
Q
What does the PPC illustrate?
A
Shows different combinations of two goods that can be produced with a specific set of resources; illustrates the principle that if all the resources of an economy are in use, more of one good can be produced only if less of another good is produced
18
Q
What are the assumptions behind the model of the production possibilities?
A
Full employment, fixed technology, and fixed resources
19
Q
What do points inside, on and outside of the PPC represent?
A
Inside - attainable but inefficient; not using all of its abatible resources
On - efficient and utilizing all available resources
Outside - unattainable with current technology
20
Q
Define law of increasing opportunity cost
A
If society wants to produce more of a particular good, it must sacrifice larger and larger amounts of another good to do so
21
Q
What shifts the PPC chart outwards?
A
Tech improvements
22
Q
What does not shift the PPC chart?
A
Recession (bc economy will function in the curve)
23
Q
What shifts the PPC chart inwards?
A
Earthquake, nuclear attack, pandemic (bc quantity of resources are destroyed)
24
Q
How do you find the optimal point on the PPC?
A
Where mb = mc
25
When mb = mc is there any incentive to change course?
No
26
If you look to the left of a point on a graph where mb = mc?
Mb > mc
27
If you look to the right of a point on the graph where mc = mb?
MC > MB
28
What is demand?
Shows various quantities of an output that would be bought at different prices
29
What is the law of demand?
States that there is an inverse (or negative) relationship between price and quantity demanded
Price goes up and quantity demanded goes down
30
What are the factors that describe the negative slope of the demand curve?
Law of diminishing marginal utility, income effect, and substitution effect
31
Define the law of diminishing marginal utility
The more we consume, the less satisfaction we receive; successive units of a goods produce less and less additional satisfaction to the consumer so the price must fall to encourage a buyer to purchase more units of a good; when prices declines r the quantity demanded increases
32
Define the income effect
When the price of a product falls, the purchasing power of our money income rises and this permits us to purchase more of the product; when price level decreases purchasing power increases and quantity demanded goes up
33
Define the substitution effect
When the price of X falls, consumers purchase more of X and less of substitute good Y, holding other things constant
34
How do you calculate the market demand?
Horizontal summation of individual demand curve table
35
What are the determinants of demand/factors that increase or decrease the demand curve?
Change in buyer taste, change in number of buyers, change in income, change in the prices of related goods, and change in consumer expectations
36
What is supply and the supply curve?
Supply - shows various quantities of an output that producers are willing and able to produce at different prices
Supply curve- shows the post it I’ve relationship between price and quantity supplied
37
What is the law of supply?
States that there is a direct or positive relationship between price and quantities supplied. When price increases, quantity supplied increases and when price decreases, quantity supplied decreased, other things equal.
38
Why is the supply curve positively sloped?
States that there is a direct or positive relationship between price and quantities supplied. When price increases, quantity supplied increases and when price decreases, quantity supplied decreased, other things equal.
39
What are the determinants of supply / factors /factors which increase and decrease the supply curve
Change in resource prices, change in technology, changes in taxes and subsidies, changes in prices of other goods, change in producer expectations, change in number of suppliers
40
Why do the income effect and substitution effect work together?
When the price of something changes, first substitution effect takes place and then income effect
41
What is the law of increasing opportunity cost? Why is it shaped like a curve?
As you move down your chart, you give up more and more; as you give up more of y you get more of x;
42
What is the law of increasing opportunity cost? Why is it shaped like a curve?
As you move down your chart, you give up more and more; as you give up more of y you get more of x; shape is due to having scarce resources
43
What is the difference between change in quantities supplied and change in supply curve?
The supply curve shows the pos relationship between price and quantity supplied
When price increases, quantity supplied increases. When quantity supplied decreases other things equal.
44
How do you find the equilibrium price and quantity?
When price and quantity demanded intersects; when demand curve intersects with supply curve; no incentive to change course; at equilibrium price quantity demanded and supply are equal; allocative and productive efficiency are both satisfied at equilibrium price
45
How do we measure a surplus and shortage?
Any price greater than the equilibrium generates a surplus
Any price less than the equilibrium generates a shortage
46
What is allocative efficiently?
When producing the combination of goods and services most desired, or valued by society
47
What is productive efficiency?
Use of the least cost method of production using the best technology and the right mix of resources
48
How do we achieve productive or allocative efficiency?
When quantities demanded is equal to quantity supplied (at market equilibrium) when marginal court and benefit are equal to one another
49
What happens to the equilibrium price and quantity when there is a change in demand?
Demand increases - equilibrium price and quantity increases
Demand decreases - equilibrium price and quantity decreases
50
What happens to the equilibrium price and quantity when there is a change in supply?
Supply increases - equilibrium price decreases but quantity increases
Supply decreases - equilibrium price increases and equilibrium quantity decreases
51
Define price ceiling
Represents the maximum legal price producers are allowed to charge; relative to equillibrium price; there will be a shortage
52
Define price floor
The minimum legal price that producers are allowed to charge relative to equilibrium price; there will be a surplus
53
When does the government decide to impose a price ceiling?
When it finds the equilibrium marker price too high
54
When does the government decide to impose a price floor?
When it determines the equilibrium market price is too low
55
Consequences of price ceilings and price floors?
Price ceilings - generates a shortage in the market price since the price ceiling is always less than the equilibrium maker price
Price floors - generates a surplus in the market since it is always more than the market equilibrium price
56
Define gdp
Measures the value of all final goods and services produced within the borders of a country within a given period of time
57
What type of goods are included in the calculation of GDP?
Final goods - purchased by final users
58
What type of goods are not included in the calculation of GDP?
Intermediate goods - need further processing ; Purely financial transactions (ie. Buying a second hand car, buying used clothes, etc.)
58
What type of goods are not included in the calculation of GDP?
Second hand sales (ie. Buying a second hand car, buying used clothes, etc.); public and private transfer payments
59
What are nonproduction transactions that are excluded from GDP?
Financial transactions - public and private transfer payments; Secondhand sales`
60
How do we measure value added?
The market value of a firm’s output - the value of the inputs that the firm purchased from others
61
Which variables are included in the expenditure approach to the GDP? Which variable is largest and which variable is smallest For the US economy?
Approaches GDP as the sum of all the money spent in buying the output; consumption by households, investment by businesses, government purschases and expenditure by foreigners; Smallest - net exports largest - consumption spending by households
62
What is the difference between gross and net investment?
If gross private domestic investment and depreciation are equal then net investment would be 0; if depreciation is greater than gross investment than net investment would be negative; if gross investment is larger than depreciation then net investment would be positive; gross investment consists of net investment and depreciation
63
How is investment defined by an economist?
Money spent on machinery, tools etc. In production process
64
How do we measure GDP using the income approach? Which variables are included in the income approach to GDP?
We look at GDP in terms of income derived, created from producing goods and services. Wages, rents, interest, profits and statistical adjustments are included
65
How do we measure GDP using the expenditures approach? What variables are included?
Measures GDP as the sum of all the money spent in buying the output; the variables included are consumptions expenditures by households, investment expenditures by businesses, government purchases of goods and services and expenditures by foreigners
66
How do we measure net domestic product and national income?
NDP = GDP - depreciation
NI = NDP - statistical discrepancy + net foreign factor income
67
What is the difference between nominal GDP and real GDP?
Nominal GDP - the prices that were in effect when the output was produced; uses current market prices
Real GDP - a GDP that has been deflated or inflated to reflect changes in price levels; uses current market prices from a base year but output of current year
68
What is the formula for GDP price index and how do we calculate real GDP using price index?
GDP price index = nominal GDP / real GDP or
Price index 2019 = price per unit 2019 / price per unit base year
Real GDP = Nominal GDP/ price index
69
Example of price floor
Minimum wage
70
Example of price ceiling
Rent control
71
NGDP could go up because of a change in quantity or production
Both
72
RGDP could go up because of because of
Change in quantity
73
How is economic growth measured?
Growth rate in real GDP and growth rate in real GDP per capita
74
How do we calculate the growth rate in real GDP and real GDP per capita?
Growth rate of real GDP2018-19 = [(real GDP2019-real GDP2018)/real GDP 2018] x100
Real GDP per capita = Real GDP / Population
75
What is the best measure for comparing living standards?
Growth of RGDP per capita
76
What is the rule of 70 and how do you calculate it?
Tells the number of years required to double RGDP
70/annual percentage of real GDP growth
77
How did modern economic growth effect cultural, social and political arrangements?
Social - difference in the wealth of nations that have experienced modern economic growth and those that’s have not; increases in standard of living; doubling in lifespans;
Cultural- people experience leisure time and the arts; technological advances
Political arrangements - more democratic forms of government
78
Which economic regions experienced the most and least growth in real GDP per capita?
Most - Western world
Least - africa and Asia
79
What are institutional structures that promote modern economic growth?
Strong property rights, free trade, a competitive market system, patents & copyrights, efficient financial institutions and literacy and widespread education
80
Define supply factors
Increases in the quantity and quality of natural resources, increases in the quantity and quality of Human Resources, increases in the supply (stock) of capital goods and improvements in technology
81
Define demand factor
The fifth determinant of economic growth; to achieve the higher production potential created by supply factos, households, businesses, and government must also expand their purchases of goods and services
82
Define efficiency factor
The issue that the economy must achieve economic efficiency as well as full employment
83
How can we calculate real GDP using labor productivity and hours of work?
RGDP = hours of work x labor productivity
84
What is the largest contributor to labor productivity in the US?
Technological improvements
85
What is meant by infrastructure and human capital?
Infrastructure - public capital goods such as highways and sanitation systems
Human capital - refers to the skills and knowledge that enable a worker to be productive
86
What is simultaneous consumption and network effects?
Network effects are increases in the value of a product to each user as the total number of users rises
Simultaneous consumption products and services that can satisfy large number of customers at the same time
87
What are anti-growth and pro-growth arguments?
Anti growth - industrialization and growth come with environmental problems; growth has led to higher standards of living but not necessarily a better life
Pro growth - growth improves living standards and education, recreation, medical care, etc.
88
How do we calculate the market demand?
The horizontal summation of individual demand schedules at each price level
89
What is the difference between change in quantity demand and change in demand curve?
Change in quantity demand is a movement on a given demand curve due to a change in the price (which is on the Y-axis) whereas change in demand is a shift of the demand curve either to the right (increase in demand) or to the left (decrease in demand). A change in any one of the determinants of demand would change the demand curve. In other words, it would either increase or decrease demand.
