Econ. - Final Exam Study Guide

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Introduction to Economics and the Economy

Chapter 1

the social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity.

economics

a viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions.

economic perspective

the amount of other products that must be forgone or sacrificed to produce a unit of a product.

opportunity cost

the want-satisfying power of a good or service; the satisfaction of pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services).

utility

the comparison of marginal ("extra" or "additional") benefits and marginal costs, usually for decision making.

marginal analysis

the procedure for the systematic pursuit of knowledge involving the observation of facts and the formulation and testing of hypotheses to obtain theories, principles, and laws.

scientific method

a widely accepted generalization about the economic behavior of individuals or institutions.

economic principle

the assumption that factors other than those being considered are held constant; ceteris paribus assumption.

other-things-equal assumption

the part of economics concerned with decision making by individual units such as a household, a firm, or an industry and with individual markets, specific goods and services, and product and resource prices.

microeconomics

the part of economics concerned with the economy as a whole; with such major aggregates as the household, business, and government sectors; and with measures of the total economy.

macroeconomics

a collection of specific economic units treated as if they were one. for example, all prices of individual goods and services are combined into a price level, or all units of output are aggregated into gross domestic product.

aggregate

the analysis of facts or data to establish scientific generalizations about economic behavior.

positive economics

the part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics.

normative economics

the choices necessitated because society's economic wants for goods and services are unlimited but the resources available to satisfy these wants are limited (scarce).

economizing problem

a line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products' prices.

budget line

the land, labor, capital, and entrepreneurial ability that are used in the production of goods and services; productive agents; factors of production.

economic resources

natural resources ("free gifts of nature") used to produce goods and services.

land

people's physical and mental talents and efforts that are used to help produce goods and services.

labor

human-made resources (buildings, machinery, and equipment) used to produce goods and services; goods that do not directly satisfy human wants; also called capital goods.

capital

spending for the production and accumulation of capital and additions to inventories.

investment

the human resource that combines the other resources to produce a product, makes nonroutine decisions, innovates, and bears risks.

entrepreneurial ability

economic resources: land, capital, labor, and entrepreneurial ability.

factors of production

products and services that satisfy human wants directly.

consumer goods

(see capital.)

capital goods

a curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.

production possibilities curve

the principle that as the production of a good increases, the opportunity cost of producing an additional unit rises.

law of increasing opportunity costs

(1) an outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology; (2) an increase of real output (gross domestic product) or real output per capita.

economic growth

Demand, Supply, and Market Equilibrium

Chapter 3

a schedule showing the amounts of a good or service that buyers (or a buyer) wish to purchase at various prices during some time period.

demand

(see demand.)

demand schedule

the principle that, other things equal, an increase in a product's price will reduce the quantity of it demanded, and conversely for a decrease in price.

law of demand

the principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases.

diminishing marginal utility

a change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price.

income effect

*(1) a change in the quantity demanded of a consumer good that results from a change in its relative expensiveness caused by a change in the product's price; (2) the effect of a change in the price of a resource on the quantity of the resource employed by a firm, assuming no change in its output.

substitution effect

a curve illustrating demand.

demand curve

factors other than price that determine the quantities demanded of a good or service.

determinants of demand

a good or service whose consumption increases when income increases and falls when income decreases, price remaining constant.

normal goods

a good or service whose consumption declines as income rises, prices held constant.

inferior goods

products or services that can be used in place of each other. when the price of one falls, the demand for the other product falls; conversely when the price of one product rises, the demand for the other product rises.

substitute good

products and services that are used together. when the price of one falls, the demand for the other increases (and conversely).

complementary good

a movement of an entire demand curve or schedule such that the quantity demanded changes at every particular price; caused by a change in one or more of the determinants of demand.

change in demand

a change in the quantity demanded along a fixed demand curve (or within a fixed demand schedule) as a result of a change in the product's price.

change in quantity demanded

a schedule showing the amounts of a good or service that sellers (or a seller) will offer at various prices during some period.

supply

(see supply.)

supply schedule

the principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for a price decrease.

law of supply

a curve illustrating supply.

supply curve

factors other than price that determine the quantities supplied of a good or service.

determinants of supply

a movement of an entire supply curve or schedule such that the quantity supplied changes at every particular price; caused by a change in one or more of the determinants of supply.

change in supply

a change in the quantity supplied along a fixed supply curve (or within a fixed supply schedule) as a result of a change in the product's price.

change in quantity supplied

the price in a competitive market at which the quantity demanded and the quantity supplied are equal, there is neither a shortage nor a surplus, and there is no tendency for price to rise or fall.

equilibrium price

(1) the quantity at which the intentions of buyers and sellers in a particular market match at a particular price such that the quantity demanded and the quantity supplied are equal; (2) the profit-maximizing output of a firm.

equilibrium quantity

the amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above-equilibrium) price.

surplus

the amount by which the quantity demanded of a product exceeds the quantity supplied at a particular (below-equilibrium) price.

shortage

*the production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum and marginal product per dollar's worth of input is the same for all inputs.

productive efficiency

*the apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized.

allocative efficiency

a legally established maximum price for a good or service.

price ceiling

a legally determined minimum price above the equilibrium price.

price floor

Elasticity

Chapter 4

the ratio of the percentage change in quantity demanded of a product or resource to the percentage change in its price; a measure of the responsiveness of buyers to a change in the price of a product or resource.

price elasticity of demand

a method for calculating price elasticity of demand or price elasticity of supply that averages the two prices and two quantities as the reference points for computing percentages.

midpoint formula

product or resource demand whose price elasticity is greater than 1. this means the resulting change in quantity demanded is greater than the percentage change in price.

elastic demand

product or resource demand for which the elasticity coefficient for price is less than 1. this means the resulting percentage change in quantity demanded is less than the percentage change in price.

inelastic demand

demand or supply for which the elasticity coefficient is equal to 1; means that the percentage change in the quantity demanded or supplied is equal to the percentage change in price.

unit elasticity

product or resource demand in which price can be of any amount at a particular quantity of the product or resource demanded; quantity demanded does not respond to a change in price; graphs as a vertical demand curve.

perfectly inelastic demand

product or resource demand in which quantity demanded can be of any amount at a particular product price; graphs as a horizontal demand curve.

perfectly elastic demand

*the total number of dollars received by a firm (or firms) from the sale of a product; equal to the total expenditures for the product produced by the firm (or firms); equal to the quantity sold (demanded) multiplied by the price at which it is sold.

total revenue (TR)

a test to determine elasticity of demand between any two prices: demand is elastic if total revenue moves in the opposite direction from price; it is inelastic when it moves in the same direction as price; and it is of unitary elasticity when it does not change when price changes.

total-revenue test

the ratio of the percentage change in quantity supplied of a product or resource to the percentage change in its price; a measure of the responsiveness of producers to a change in the price of a product or resource.

price elasticity of supply

a period in which producers of a product are unable to change the quantity produced in response to a change in its price and in which there is a perfectly inelastic supply.

market period

*(1) in microeconomics, a period of time in which producers are able to change the quantities of some but not all of the resources they employ; a period in which some resources (usually plant) are fixed and some are variable. (2) in macroeconomics, a period in which nominal wages and other input prices do not change in response to a change in the price level.

short run

*(1) in microeconomics, a period of time long enough to enable producers of a product to change the quantities of all the resources they employ; period in which all resources and costs are variable and no resources or costs are fixed. (2) in macroeconomics, a period sufficiently long for nominal wages and other input prices to change in response to a change in a nation's price level.

long run

the ratio of the percentage change in quantity demanded of one good to the percentage change in the price of some other good. a positive coefficient indicates the two products are substitute goods; a negative coefficient indicates they are complementary goods.

cross elasticity of demand

the ratio of the percentage change in the quantity demanded of a good to a percentage change in consumer income; measures the responsiveness of consumer purchases to income changes.

income elasticity of demand

Market Failures: Public Goods and Externalities

Chapter 5

the inability of a market to bring about the allocation of resources that best satisfies the wants of society; in particular, the overallocation or underallocation of resources to the production of a particular good or service because of externalities or informational problems or because markets do not provide desired public goods.

market failures

underallocations of resources that occur when private demand curves understate consumers' full willingness to pay for a good or service.

demand-side market failures

overallocations of resources that occur when private supply curves understate the full cost of producing a good or service.

supply-side market failures

*the difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price; the triangular area below the demand curve and above the market price.

consumer surplus

*the difference between the actual price a producer receives (or producers receive) and the minimum acceptable price; the triangular area above the supply curve and below the market price.

producer surplus

reductions in combined consumer and producer surplus caused by an underallocation or overallocation of resources to the production of a good or service.

efficiency losses (or deadweight losses)

a good or service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude nonpayers from receiving the benefits.

private goods

(1) the characteristic of a private good, the consumption of which by one party excludes other parties from obtaining the benefit; (2) the attempt by one firm to gain strategic advantage over another firm to enhance market share or profit.

rivalry

the characteristic of a private good, for which the seller can keep nonbuyers from obtaining the good.

excludability

a good or service that is characterized by nonrivalry and nonexcludability; a good or service with these characteristics provided by government.

public goods

the idea that one person's benefit from a certain good does not reduce the benefit available to others; a characteristic of a public good.

nonrivalry

the inability to keep nonpayers (free riders) from obtaining benefits from a certain good; a characteristic of a public good.

nonexcludability

the inability of potential providers of an economically desirable good or service to obtain payment from those who benefit, because of nonexcludability.

free-rider problem

a comparison of the marginal costs of a government project or program with the marginal benefits to decide whether or not to employ resources in that project or program and to what extent.

cost-benefit analysis

a good or service to which excludability could apply but that has such a large positive externality that government sponsors its production to prevent an underallocation of resources.

quasi-public goods

a cost or benefit from production or consumption, accruing without compensation to someone other than the buyers and sellers of the product.

externality

a cost imposed without compensation on third parties by the production or consumption of sellers or buyers. example: a manufacturer dumps toxic chemicals into a river, killing fish prized by sports fishers; an external cost or a spillover cost.

negative externality

a benefit obtained without compensation by third parties from the production or consumption of sellers or buyers. example: a beekeeper benefits when a neighboring farmer plants clover. an external benefit or spillover benefit.

positive externality

the idea, first stated by economist Ronald Coase, that some externalities can be resolved through private negotiations of the affected parties.

Coase theorem

the reduction of a negative externality such as pollution to the level at which the marginal benefit and marginal cost of reduction are equal.

optimal reduction of an externality

Midterm 1

Practice Questions

tea to be positive, but negative for cream

compared to coffee, we would expect the cross elasticity of demand for:

toothpaste

which of the following goods will least likely suffer a decline in demand during a recession?

there is a forgone opportunity from resource use

when an economist states that "there is no free lunch," the economist means that:

simplify the complex world

the ceteris paribus assumption is employed in economic analysis to:

the individual units that make up the whole of the economy

microeconomics focuses on:

2 bananas

assume that a consumer has $12 in income and she can buy only two goods, apples or bananas. the price of an apple is $1.50 and the price of a banana is $0.75. for this consumer, the opportunity cost of buying another apple is:

1 unit of steel is given up to get 15 more units of wheat

refer to the above table. a change from possibility C (steel - 2, wheat - 75) to B (steel - 1, wheat - 90) means that:

as the production of a good increases, there is an increase in opportunity cost.

the production possibilities curve for two products is concave because:

beta will experience greater economic growth than alpha

suppose there are two economies, alpha and beta, which have the same production possibilities curves and initially, they are on the same point on each curve. if beta then devotes more resources to investment goods than consumer goods when compared to alpha, then in the future:

a particular price and the corresponding quantity demanded by consumers.

a point on a demand curve indicates:

supply

a schedule which shows various amounts of a product producers are willing and able to produce at each price in a series of possible prices during a specified period of time is called:

up and quantity supplied up

in a competitive market, if the existing price is below the equilibrium price, market forces will drive the price:

the market price of the good

which is not a determinant of supply?

an increase in the price of one will increase the demand for the other.

if two goods are close substitutes:

increase in the price of lettuce and decrease in quantity purchased

a headline reads "storms destroy half of the lettuce crop." this situation would lead to a(n):

increase quantity demanded by 5 percent

if the price elasticity of demand for a product is equal to 0.5, than a 10 percent decrease in price will:

.33 and inelastic

block's sells 500 bottles of perfume a month when the price is $7. a huge increase in resource costs causes price to rise to $9 and block's only manages to sell 460 bottles of perfume. the price elasticity of demand is:

inelastic

if the price elasticity of demand for a good is .75, the demand for the good can be described as:

decrease

if a business decreased the price of its product from $10 to $9 when the demand for the product was inelastic, then total revenues would:

8 percent

suppose the price elasticity of supply for crude oil is 2.5. how much would price have to rise to increase production by 20 percent?

two products are substitute goods

a positive cross elasticity of demand coefficient indicates that:

decrease because of a percentage fall in price greater than the percentage increase in quantity sold

if demand for farm crops is inelastic, a good harvest will cause farm revenues to:

the marginal cost and marginal benefit of the policies

from an economist's perspective, an important consideration for policies to address global warming is:

resources are currently underallocated to the provision of holiday lighting in anytown

suppose that the anytown city government asks private citizens to donate money to support the town's annual holiday lighting display. assuming that the citizens of anytown enjoy the lighting display, the request for donations suggests that:

Questions

Midterm 1

decrease in the supply of corn

if farmers withhold some of their current corn harvest from the market because they anticipate a higher price of corn in the future, then this would cause a(n):

there are a large number of good substitutes for the good

which is not characteristic of a product with relatively inelastic demand?

complements

if the price of gasoline increases and car dealers suffer a decrease in demand for sport utility vehicles, then gasoline and sport utility vehicles are:

increase in the quantity of A demanded and a decrease in the demand for B

suppose that goods A and B are close substitutes. if the price of good A falls, then we would expect an:

unattainable because of limited resources

a point outside the production possibilities curve is:

8 percent

suppose the price elasticity of supply for crude oil is 2.5. how much would price have to rise to increase production by 20 percent?

can't be provided to one person without making it available to others as well

a public good:

higher prices and a smaller quantity sold

a decrease in supply, holding demand constant, will cause:

when supply increases and demand increases

what combination of changes in supply and demand would most likely increase the equilibrium quantity?

providing a subsidy to correct for an underallocation of resources

if the production of a product or service involves external benefits, then the government can improve efficiency in the market by:

the product is an inferior good

a negative income elasticity of demand coefficient indicates that:

this administration needs to raise taxes to pay for childcare programs

which would be a normative economic statement?

$1

charlie is willing to pay $10 for a T-shirt that is priced at $9. if charlie buys the T-shirt, then his consumer surplus is:

substitutes

a remote island nation is discovered, and on this island the cross elasticity of demand for coconut milk and fruit punch is +1.0. this indicates that the two goods are:

individuals have to make choices from among alternatives

as a consequence of the problem of scarcity:

8 apples or 16 bananas

assume that a consumer has $12 in income and she can buy only two goods, apples or bananas. the price of an apple is $1.50 and the price of a banana is $0.75.

if the consumer spent all of her money on either apples or bananas, how many apples or how many bananas would she be able to buy?

sets a price floor for the product above the current equilibrium price

a government will create a surplus of a product when it:

simplify the theory

the role of an assumption in an economic theory is to:

increasing and the quantity decreasing

by requiring car producers to install emission control devices on cars, the government forces these producers to internalize some of the external costs of auto pollution. this will lead to the equilibrium price of cars:

Businesses and the Costs of Production

Chapter 7

a payment that must be made to obtain and retain the services of a resource; the income a firm must provide to a resource supplier to attract the resource away from an alternative use; equal to the quantity of other products that cannot be produced when resources are instead used to make a particular product.

economic cost

*the monetary payment a firm must make to an outsider to obtain a resource.

explicit costs

*the monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market; equal to what the resource could have earned in the best-paying alternative employment; includes a normal profit.

implicit costs

the total revenue of a firm less its explicit costs; the profit (or net income) that appears on accounting statements and that is reported to the government for tax purposes.

accounting profit

*the payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm.

normal profit

*the total revenue of a firm less its economic costs (which include both explicit costs and implicit costs); also called "pure profit" and "above-normal profit."

economic profit

the total output of a particular good or service produced by a firm (or a group of firms or the entire economy).

total product (TP)

*the additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in the quantity of a resource employed.

marginal product (MP)

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