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Principle of Microeconomics

Terms in this set (87)

Define: Business cycle
Fluctuations in economic activity, such as employment and production
Define: economics
the study of how society manages its scarce resources
Define: efficiency
the property of society getting the most it can from its scarce resources
Define: Equality
the property of distributing economic prosperity uniformly among the members of society
Define: Externality
the impact of one person's actions on the well-being of a bystander
Define: incentive
something that induces a person to act
Define: inflation
an increase in the overall level of prices in the economy
Define: marginal changes
small incremental adjustments to a plan of action
Define: market economy
an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
Define: market failure
a situation in which a market left on its own fails to allocate resources efficiently
Define: market power
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
Define: opportunity cost
whatever must be given up to obtain some item
Define: productivity
the quantity of goods and services produced from each unit of labor input
Define: property rights
the ability of an individual to own and exercise control over scarce resources
Define: rational people
people who systematically and purposefully do the best they can to achieve their objectives
Define: scarcity
the limited nature of society's resources
Government policies designed to promote efficiency:
a) usually do so at the expense of equality
b) tend to cause the economy to grow more slowly
c) usually don't work
d) tend to add a lot of bureaucracy to firms in the economy
a) usually do so at the expense of equality
All of the following can be considered a student's costs of going to college, EXCEPT
a) textbooks
b) tuition and fees
c) room and board (that cost her about the same as she was paying before entering college)
d) the student's time which can no longer be devoted to earning a salary
c) room and board (that cost her about the same as she was paying before entering college).
A plane from Los Angeles to New York is about to take off, but it still has a few seats empty. If the average cost per seat is $500, what price should the airline charge passengers in standby to fill in those remaining seats?
a) at least $1,000
b) exactly $500
c) any price that will cover the additional cost of an additional passenger to the airline
d) slightly more than $500
c) any price that will cover the additional cost of an additional passenger to the airline
the federal government enacted regulation in the 1960s requiring people to wear seatbelts in their cars. All of the following resulted from this regulation, EXCEPT:
a) overall deaths due to car accidents changed very little in the United States
b) fewer deaths occurred per accident
c) less pedestrians were killed in car accidents
d) the frequency of accidents increased
c) less pedestrians were killed in car accidents
when two individuals trade voluntarily:
a) one person always gains at the expense of the other
b) both persons generally gain from the exchange
c) one person generally gains at the expense of the other
d) the overall well-being of the two persons remains unchanged
b) both persons generally gain from the exchange
In a market economy, the decisions of what and how much to produce are generally made by:
a) voters in elections
b) all producers and consumers
c) the President and Congress
d) non-governmental agencies
b) all producers and consumers
Even though markets do a great job in organizing economic activity, governments are needed to do all of the following EXCEPT:
a) establish and enforce property rights
b) intervene when markets fail due to externalities
c) intervene when markets fail due to market power
d) decide what and how much should be produced
d) decide what and how much should be produced
Living standards in the united states have risen tremendously over the years, mainly due to:
a) increases in the productivity of labor over time
b) the efforts of labor unions
c) successive increases in the minimum wage
d) trade protection from competition from countries with low wages, such as China.
a) increases in the productivity of labor over time
Rapid and persistent inflation occurs mainly due to:
a) high wage increases demanded by labor unions
b) greedy firms that abuse consumers with higher-than-necessary prices
c) rapid increases in the quantity of money in the economy
d) trade with other countries
c) rapid increases in the quantity of money in the economy
A government that implements a policy designed to reduce inflation can expect unemployment to:
a) increase in the short run
b) decrease in the short run
c) increase in the long run
d) decrease in the long run
a) increase in the short run
Define: Circular-flow diagram
a visual model of the economy that shows how dollars flow through markets among households and firms
Define: Macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
Define: Microeconomics
the study of how households and firms make decisions and how they interact in markets
Define: Normative Statements
claims that attempt to prescribe how the world should be
Define: Positive Statements
claims that attempt to describe the world as it is
Define: Production Possibilities Frontier
a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
Define: absolute advantage
the ability to produce a good using fewer inputs than another producer
Define: comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
Define: exports
goods produced domestically and sold abroad
Define: imports
goods produced abroad and sold domestically
Define: Opportunity Cost
whatever must be given up to obtain some item
Define: competitive market
a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
Define: complements
two goods for which an increase in the price of one leads to a decrease in the demand for the other
Define: demand curve
a graph of the relationship between the price of a good and the quantity demanded
Define: demand schedule
a table that shows the relationship between the price of a good and the quantity demanded
Define: equilibrium
a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
Define: equilibrium price
the price that balances quantity supplied and quantity demanded
Define: equilibrium quantity
the quantity supplied and the quantity demanded at a equilibrium price
Define: inferior good
a good for which, other things equal, an increase in income leads to a decrease in demand
Define: law of demand
the claim that, other things equal, the quantity demanded of a good falls when the price of a good rises
Define: law of supply
the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
Define: law of supply and demand
the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
Define: market
a group of buyers and sellers of a particular good or service
Define: normal good
a good for which, other things equal, an increase n income leads to an increase in demand
Define: quantity demanded
the amount of a good that buyers are willing and able to purchase
Define: quantity supplied
the amount of a good that sellers are willing and able to sell
Define: shortage
a situation in which quantity demanded is greater than quantity supplied
Define: substitutes
two goods for which an increase in the price of one leads to an increase in the demand for the other
Define: supply curve
a graph of the relationship between the price of a good and the quantity supplied
Define: supply schedule
a table that shows the relationship between the price of a good and the quantity supplied
Define: surplus
a situation in which quantity supplied is greater than quantity demanded
What are the ten factors of making a decision?
people face trade-offs
the cost of something is what you give up to get it
rational people
people respond to incentives
trade can make everyone better off
markets are usually a good way to organize economic activity
how people react: governments sometimes improve market outcomes
a country's standard of living depends on its ability to produce goods and services
prices rise when the government prints too much money
society faces a short-run trade-off between inflation and unemployment
Define: entrepreneurship
risk taker, the talent to organize resources to produce goods and services
Define: capital
final goods produced in order to produce other goods, includes, factories, equipment, tools, etc.
What is Laissez Faire?
believe that there is no need for Government intervention and that free markets work best
What is the "invisible hand"?
Adam Smith 1776
buyers and sellers try to mazimize their self-interest.
What does high productivity imply?
a high standard of living
What concepts does the basic PPF model illustrate?
scarcity, choice, opportunity cost, and efficienty
When looking at a PPF, what do the points outside of the curve mean?
inefficient production and unused resources
When looking at a PPF, what do the points inside of the curve mean?
Trick question, points inside of the curve are not possible
What are the three basic economic decisions?
What to produce?
How to produce?
For whom to produce?
What are sources of economic growth?
increased quantity of resources and increased quality of resources. advances in technology
what is a market economy?
use markets to allocate resources
use supply and demand to answer the basic questions
what is a command economy?
use central authority to allocate resources
ex: china, north korea, cuba
leads to inefficient resource allocation because of a lack of incentives
what is a mixed economy?
use of market and non-market signals
According to the circular-flow diagram, what is the point of households?
buy and consume goods and services
own and sell factors of production
try to maximize their satisfaction (utility) given limited resources
According to the circular-flow diagram, what is the point of firms?
aka businesses
produce and sell goods and services
hire and use factors of production
try to maximize profits by using resources efficiently in producing goods
according to the circular-flow diagram, what are the product markets?
any place where finished goods and services (products) are bought and sold.
firms sell
households buy
What is microeconomics?
the focus on the "individual parts" of the economy.
study of decision-making by households and firms in the marketplace
how they interact in specific markets
What is macroeconomics?
looks at the economy "as a whole"
study of the forces and trends that affect the economy as a whole
ex: inflation, unemployment, economic growth
What is positive analysis?
the objective to make an attempt to describe the worlds as it is.
examines "what if"
can be proved true or false with evidence
What is normative analysis?
Subjective, based on value judgements
examines "what should be: or how the world "ought to be"
can not be proved true or false
Normative or Positive analysis:
An increase in the minimum wage will cause a decrease in employment among the least skilled
Positive
Normative or Positive analysis:
the income gains from a higher minimum wages are worth more than any slight reductions in employment
normative
What is absolute advantage?
the ability to produce a good with fewer resources than other producers
better at producing the good than other people
What is comparative advantage?
the ability to produce a good at a lower opportunity cost than others could
opportunity cost, whatever must be given up to obtain said item
What is the principle of comparative advantage?
everyone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is lowest
What are determinants of demand?
price
tastes
peferences
income
price of related goods
expectations about prices and income
number of buyers
what causes a movement along the demand curve?
Price of a product
What are some determinants of supply?
price
cost of inputs
technology
price of other pursuits
expectations about future prices
number of sellers
what cause the supply curve to shift?
number of sellers, new technology, everything but change of price.
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