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Macroeconomics can best be described as the

study of the large aggregates of the economy or the economy as a whole

For economists the word "utility" means

pleasure and satisfaction

Economics may be best defined as the

social science concerned with how individuals institutions and society make optimal choices under conditions of scarcity

Marginal costs exist because

the decision to engage in one activity means forgoing some other activity

In deciding whether to study for an economics quiz or go to a movie one is confronted by the idea(s) of

scarcity and opportunity costs

The two general types of economic systems that exist today are

market systems and capitalism

Economic scarcity

applies to all economies

Specialization in production is important primarily because it

results in greater total output

The division of labor means that

workers specialize in various production tasks

In a market economy the distribution of output will be determined primarily by

the quantities and prices of the resources that households supply

The law of demand states that

price and quantity demanded are inversely related

A demand curve

indicates the quantity demanded at each price in a series of prices

An increase in the price of a product will reduce the amount of it purchased because

consumers will substitute other products for the one whose price has risen

The income and substitution effects account for

the downward sloping demand curve

When the price of a product falls the purchasing power of our money income rises and thus permits consumers to purchase more of the product

the income effect

An improvement in production technology will

shift the supply curve to the right

Refer to the diagram on Price & Quantity with regard to decrease in demand. A decrease jin demand is depicted by a

shift from D1 to D2

Refer to the diagram regarding equilibrium price and quantity. The equilibrium price and quantity in this market will be

$1.00 and 200

Regarding diagram about supply and demand, shortages & surpluses. A price of $60 in this market will result in

a surplus of 100 units

Regarding diagram about supply and demand, shortages & surpluses. A price of $20 in this market will result in

a shortage of 100 units

What is the slope of a budget line on a graph (based on having $15 to spend on peanuts and candy bars w/ peanuts costing $1.50 and candy bars costing $.75)

The slope of the budget line measures the ratio of the price of candy bars (Pcb) to the price of peanuts (Ppeanuts) Pcb/ Ppeanuts = $-20/$ + 10 =-1/2 or -.5

Referring to graph on purchasing peanuts and candy bars: What is the opportunity cost of one or more candy bars?

The opportunity cost for two candy bars is one bag of peanuts

Referring to graph on purchasing peanuts and candy bars: What is the opportunity cost of one more bag of peanuts?

The opportunity cost for one bag of peanuts is two candy bars

Referring to graph on purchasing peanuts and candy bars: How, in general, would you decide which of the available combinations of candy bars and peanuts to buy?

By weighing marginal benefit and marginal cost

Referring to graph on purchasing peanuts and candy bars instead of having $15 to spend, you now have $30 to spend and after you show the $30 budget line on the same graph you showed the $15 budget line: Why would the $30 budget line be preferable to the $15 budget line?

The $30 budget line would be preferable to the $15 budget line because income increased by $15 which shifted the budget line out, thereby allowing one to purchase more peanuts and candy bars.

Suppose a firm is producing 400 loaves of banana bread daily. Also, assume that the least-cost combination of resources in producing those loaves is 5 units of labor, 7 units of land, 2 units of capital, and 1 unit of entrepreneurial ability, selling at prices of $40, $60, $60, and $20, respectively. If the firm can sell these 400 units at $2 per unit, will it continue to produce banana bread?

Yes, it will continue to produce banana bread because when the total cost of resources is subtracted from the total cost of the 400 units sold ($800 - $760 = $40), the firm made a profit of $40.

Regarding the firm producing 400 loaves of banana bread: If this firm's situation is typical for the other makers of banana bread, will resources flow to or away from this bakery good?

If the firm's situation is typical for other makers of banana bread, resources will flow to the bakery's good.

What is the law of demand?

The law of demand states that, other things equal, the quantity of a good purchased varies inversely with its price.

Why does a demand curve slope downward?

A demand curve slopes downward because it reflects the law of demand- - people buy more of a product, service, or resource as its price falls. This shows that the relationship between price and quantity demand in the inverse.

How is a market demand curve derived from individual demand curves?

A market demand curve is derived based on the knowledge that competition requires that more than one buyer to be present in each market and adding the quantities demanded by all consumers at each of the various possible prices.

What effect will the following statement have on the demand for small anotmobiles such as the Mini Cooper and Smart Car: SMALL AUTOMOBILES BECOME MORE FASHIONABLE.

Demand would increase due to the preference of the car being more fashionable

What effect will the following statement have on the demand for small anotmobiles such as the Mini Cooper and Smart Car: THE PRICE OF LARGE AUTOMOBILES RISES (WITH THE PRICE OF SMALL AUTOS REMAINING THE SAME).

Demand for small autos would increase due to decreasing affordability of the larger autos

What effect will the following statement have on the demand for small anotmobiles such as the Mini Cooper and Smart Car: INCOME DECLINES AND SMALL AUTOS ARE AN INFERIOR GOOD.

Even though incomes declined and small autos are an inferior good, demand would decrease because of the inverse affect of money incomes

What effect will the following statement have on the demand for small anotmobiles such as the Mini Cooper and Smart Car: CONSUMERS ANTICIPATE THE PRICE OF SMALL AUTOS WILL GREATLY COME DOWN IN THE NEAR FUTURE.

Demand for the smaller car would increase once it was certain that the price actually fell

What effect will the following statement have on the demand for small anotmobiles such as the Mini Cooper and Smart Car: THE PRICE OF GASOLINE SUBSTANTIALLY DROPS.

A substantial drop in the price of gas could cause demand for the smaller autos to go down because paying less for gas would free up additional income, thereby making the purchase of larger autos more attractive.

Regarding the total demand and total supply for wheat per month in the Kansas City grain market are as stated in Study Guide: WHAT IS THE EQUILIBRIUIM PRICE?

The equilibrium price if $4.00

Regarding the total demand and total supply for wheat per month in the Kansas City grain market are as stated in Study Guide: WHAT IS THE EQUILIBRIUM QUANTITY?

The equilibrium quantity is 75

Regarding the total demand and total supply for wheat per month in the Kansas City grain market are as stated in Study Guide: WHY WILL $3.40 NOT BE THE EQUILIBRIUM PRICE IN THIS MARKET?

The price of $3.40 would not be the equilibrium price in this market because this price discourages sellers from devoting resources and encourages consumers to desire more bushels of wheat than are available.

Regarding the total demand and total supply for wheat per month in the Kansas City grain market are as stated in Study Guide: WHY WILL $4.90 NOT BE THE EQUILIBRIUM PRICE IN THIS MARKET?

The price of $4.90 would not be the equilibrium price in this market because this price encourages sellers of offer lots of bushels of wheat but discourages many consumers from buying it.

Is the statement "Surpluses drive prices up; shortages drive them down." TRUE or FALSE?

The statement is false. The opposite is true -- surpluses drive prices down and shortages drive prices up.

What is demand?

A schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time.

Why does the demand curve shift? Name the five reasons

The command curve shifts because of 1. consumer tastes; 2. the number of buyers in the market; 3. consumer income; 4. the prices of substitute or complementary goods; 5. consumer expectations

What is a change in demand?

A shift of the demand curve

What is a change in quantity demanded?

A movement from one point to another on a fixed demand curve

Why does the inverse relationship between price and quantity demanded exists?

1. The law of demand is consistent with common sense. People ordinarily do buy more of a product at a low price than at a high price. 2. In any specific time period, each buyer of a product will derive less satisfaction (or benefit or utility) from each successive unit of the product consumed. 3. The law of demand can be explained in terms of income and substitution effects.

What is diminishing marginal utility?

When a particular product yields less and less marginal utility

What is "the income effect"?

It indicates that a lower price increases the purchasing power of a buyer's money income, enabling the buyer to purchase more of the product than before.

What is the substitution effect?

It suggests that at a lower price buyers have the incentive to substitute what is now a less expensive product for similar products that are now relatively more expensive.

What are determinants of demand?

Factors that have an influence on the amount of any product purchased

Basic determinants of demand are:

1. consumers' tastes (preferences), 2. the number of buyers in the market; 3. consumers' incomes, 4. the prices of related goods, 5. consumer expectations

Determinants of demand are sometimes called demand shifters because

when any of the determinants changes, the demand curve will shift to the right or left.

change in demand

a shift in the demand curve to the right (increase in demand) or to the left (decrease in demand)

decrease in demand

when consumers buy less product at each possible price than is indicated

What are superior goods, or normal goods?

Products whose demand varies directly with money income

Inferior goods are...

Goods whose demand varies inversely with money income

A substitute good

is one that can be used in place of another good

A complementary good

is one that is used together with another good

An increase in demand

the decision by consumers to buy larger quantities of a product at each possible price

What factors causes increases in demand?

A favorable change in consumer tastes. An increase in the number of buyers. Rising incomes if the product is a normal good. Falling incomes if the product is an inferior good. An increase in the price of a substitute good. A decrease in the price of a complementary good. A new consumer expectation that either prices or income will be higher in the future.

Factors that causes decreases in demand include...

the "reverse" of factors that causes increases in demand

Change in quantity demanded

is a movement from one point to another point--from one price-quantity combination to another--on a fixed demand schedule or demand curve.

Supply

is a schedule or curve showing the various amouonts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specified period.

The law of supply

states that, other things equal, producers will offer more of a product at a high price than at a low price.

The relationship between price and quantity supplied is...

positive or direct, and supplyis graphed as an upsloping curve

What is a market supply curve?

The horizontal summation of the supply curves of the indivudual producers of the product

The basic determinants of supply are:

1. Resource prices. 2. Technology. 3. taxes and subsidies. 4. prices of other goods. 5. producer expectations. 6. the number of sellers in the market

Another name for determinants of supply is...

supply shifters

Change in supply is

a change in the schedule and a shift of the curve

Change in quantity supplied is

a movement from one point to another on a fixed supply curve

Equilibrium price or (market-clearing price) is

the price where the intentions of buyers and sellers match.

What is the equilibrium quantity?

Where the quantity demanded and quantity supplied at the equilibrium price in a competitive market

A Surplus is

excess supply

A Shortage is

excess demand

What is productive efficiency?

The production of a any particular good in the least costly way.

What is allocative efficiency?

The particular mix of goods and services most highly valued by society (minimum-cost production assumed).

Demand essentially reflects

the marginal benefit (MB) of the good, based on the utility received.

Supply reflects

the marginal cost (MC) of producing the good.

At the intersection of the demand and supply curves,

MB equals MC and allocative efficiency results.

At the intersection of the demand and supply curves, economists say...

there is neither an "underallocation of resources" nor an "overallocation of resouces" to the product

When both supply and demand change,

the effect is a combination of the individual effects

If the increase in supply is larger than the decrease in demand,...

the equilibrium quantity will increase.

If the decrease in demand is larger than the decrease in supply,...

the equilibrium quantity will decrease.

Supply Increase; Demand Increase

this effect on equilibrium quantity is certain: The increases in supply and in demand each raises equilibrium quantity. Therefore, the equilibrium quantity will increase by an amount greater than that caused by either change alone.

A ceiling price...

sets the mzximum legal price a seller may charge for a product or service.

A price floor...

is a minimum price fixed by the government.

The functional distribution of income

indicates how the nation's income is apportioned among wages, rents, interst, and profits, that is, according to the function performed by the income receiver. The personal distribution of income is divided among families. (Wages are paid to labor; rents and interst are paid to owners of property resources; and profits are paid to the owners of corporations and unincorporated businesses.)

Three other types of income are:

1. Some households own corporate stock and receive dividend incomes on their holdings. 2. Many households own bonds and savings accounts that yield interest income. 3. Some households receive rental income by providing building and natural resources (including land) to businesses and other individuals.

The Personal Distribution of Income

indicates how the nation's total income is divided among individual households

Durable goods

products that have expected lives of three years or more (autos, furniture, personal computers)

Nondurable goods

products that havae lives of less than three years (food, clothing, gasoline).

Services

The work done for consumers by lawyers, barbers, doctors, lodging personnel, etc.

What are the major components of the functional distribution income?

Wages and salaries.

The personal distribution of income reveals...

considerable inequality

What percent of household income is consumed?

86%. The rest is saved or paid in taxes.

Consumer spending is directed...

to durable goods, nondurable goods, and services, with 60% going to services.

A plant

is a physical establishment--a factory, farm, mine, store, or warehouse--that performs one or more functions in fabricating and distributing goods and services

Real GDP

measures the value of final goods and services produced within the borders of a given country during a given a period of time

nominal GDP

totals the dollar value of all goods and services produced within the borders of a given country using their current prices during the year that they were produced

Unemployment

the state a person is in if he or she cannot get a job despite being willing to work and actively seeking work

Inflation

an increase in the overall level of prices

modern economic growth

in which output per person rises

Savings

are generated when current consumption is less than current output

Investment

happens when resources are devoted to increasing future output

financial investment

captures what ordinary people mean when they say investment, namely the purchase of assets like stocks, bonds, and real estate in the hope of recapping a financial gain

economic investment

the creation and expansion of business enterprises

expectations

the anticipation of consumers, firms, and others, about future economic conditions

shocks

sudden, unexpected changes in demand or supply

demand shocks

sudden, unexpected changes in demand

supply shocks

sudden, unexpected changes in aggregate supply

inventory

goods that have been produced but remain unsold

flexible prices

product prices that freely move upward or downward when product demand or supply changes

inflexible prices

product prices that remain in place even though supply or demand has changed

national income accounting

the techniques used to measure the overall production of the economy and other related variables for the nation as a whole

Gross Domestic Product (GDP)

the total market value of all final goods and services produced annually within the boundaries of the U.S., whether by U.S. or foreign-supplied resources

intermediate goods

products that are purchased for resale or further processing or manufactoring

final goods

goods that have been purchased for final use and not for resale or further processing or manufactoring

multiple counting

wrongly including the value of intermediate goods in the GDP; counting the same good or service more than once

value added

the value of the product sold by a firm less the value of products (materials) purchased and used by the firm to produce the product

expenditures approach

the method that adds all expenditures made for final goods and services to measure the GDP

income approach

the method that adds all the income generated by the production of final goods and services to measure the GDP

personal consumption expenditures

the expenditures of households for durable and nondurable consumer goods and services

gross private domestic investment

expenditures for newly produced capital goods and for additions to inventories

net private domestic investment

gross private domestic investment less consumption of fixed capitol; the addition to the nation's stock of capitol during a year

government purchases

expenditures by government for goods and services that government consumes in providing public goods and for public capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and services

net exports

exports minus imports

taxes on production and imports

A national income accounting category that includes such taxes as sales, excise, business property taxes, and tariffs which firms treat as costs of producing a product and pass on to buyers by charging a higher price

national income

the income earned by resource suppliers for their contributions to GDP plus taxes on production and imports; the sum of wages and salaries, rent interest, and profit, proprietors income, and such taxes

consumption of fixed capital

an estimate of the amount of capitol worn out or used up in producing the GDP; also called depreciation

net domestic product

GDP less the part of the year's output that is needed to replace the capital goods worn in producing output; the nation's total output availible for consumption or additions to the capitol stock

personal income

the earned and unearned income availible to resource suppliers and others before the payment of personal taxes

disposable income

personal income less personal taxes; income availible for personal consumption expenditures

nominal GDP

the GDP measured in terms if the price level at the time of measurement

real GDP

GDP adjusted for inflation; GDP in a year divided by the GDP price index for that year, the index expressed as a decimal

price index

an index number that shows how the waited average price of a "market basket" of goods changes over time

A firm

is an organaization that employs resources to produce goods and services for profit and operates one or more plants

An industry

is a group of firms that produce the same or similar, products

Multiplant firms

may be organized horizontally, with several plants performing much the same function (like coca-cola and Wal-Mart stores)

vertically integrated

firms that own plants that perform different functions in the various stages of the production process.

A sole proprietorship

a business owned and operated by one person. Usually, the proprietor (owner) personally supervises its operation.

The Partnership form of business organization

is a natural outgrowth of the sole proprietorship. In a partnership, two more individuals (the partners) agree to own and operate a business together. They share the risks and profits or losses.

A corporation

a legal creation that can acquire resources, own assets, produce and sell products, incur debts, extend credit, sue and be sued, and perform the functions of any other type of enterprise. A corporation is distinct and separate from the individual stockholders who own it. Hired managers run most corporations.

A common stock

represents a share in the ownership of a corporation

A corporate "bond"

does not bestow any corporate ownership on the purchaser. A bond purchased is simply lending money to a corporation

"Ease of sale"

where organized stock exchanges and bond markets simplify the transfer of securities from sellers to buyers

What are better risks and are more likely to become profitable clients of banks

Corporations

Limited Liability

Restriction of the maximum loss to a predetermined amount for the owners (stockholders) of a corporation. The maximum loss is the amount they paid for their shares of stock.

A principal-agent problem

may occur in corporations when the agents (mgrs.) hired to represent the interest of the principals (stockholders) pursue their own objectives to the detriment of the objectives of the principals.

How does the Government improve the operation of the market systems?

(a) by providing an appropriate legal and social framework and (b) by acting to maintain competition.

How can Government alter the distribution of income?

through the tax-transfer system and through market intervention.

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