Macroeconomics: Chapters 1 thru 3
Chapters 1 thru 3
Terms in this set (213)
In economics, the pleasure, happiness, or satisfaction received from a product.
Joe sold gold coins for $1000 that he bought a year ago for $1000. He says, "At least I didn't lose any money, because he could have received a 3 percent return on the $1000 if he had bought a bank certificate of deposit instead of the coins. The economist's analysis in this case incorporates the idea of:
In response to the terrorist attacks of September 11, 2001, the government decided to allocate more resources toward defense goods. The government's decision reflects their assessment that:
The marginal benefits of additional defense goods outweighed the marginal cost.
Economics may best be defined as the:
Social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity.
Are generalizations based on a careful observation of facts.
The term "ceteris paribus" means:
Other things equal -- the assumption that factors other than those being considered do not change.
Which of the following is a normative statement?
It is too hot to play tennis today.
Which of the following is a positive statement?
The temperature is 92 degrees today.
The problems of aggregate inflation and unemployment are:
major topics of macroeconomics.
Which of the following is a macroeconomic statement?
The gross profits of all U.S. business were $182 billion last year.
is concerned with individual economic units and specific markets.
The scarcity problem:
persists because economic wants exceed available productive resources.
The four factors of production are:
land, labor, capital, and entrepreneurial ability.
Money is not an economic resource because:
money, as such, is not productive.
The process of producing and accumulating capital goods is called:
The production possibilities curve illustrates the basic 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.
Which of the following will not produce an outward shift of the production possibilities curve?
the reduction of unemployment.
A nation's production possibilities curve is bowed out from the origin because:
resources are not equally efficient in producing every good.
Refer to the above table. If the economy is producing at a production alternative C, the opportunity cost of the tenth unit of consumer goods will be.
1/3 of a unit of capital goods.
Refer to the above table. As compared to production alternative D, the choice of alternative C would:
tend to generate a more rapid growth rate.
Assume that a change in government policy results in greater production of both consumer goods and investment goods. We can conclude that:
the economy was not empoying all of its resources before the policy change.
Assume an economy is operating at some point on its production possibilities curve, which shows civilian and military goods. If the output of military goods is increased, the output of civilian goods:
must be decreased.
Refer to the above diagram. Other things equal, this economy will achieve the most rapid rate of growth if:
it chooses point A.
Refer to the above diagram. This economy will experience unemployment if it produces at point:
Assume an economy is incurring unemployment. The effect of resolving this problem will be to:
move the level of actual output to the economy's production possibilities curve.
The social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity.
Economic way of thinking.
To obtain more of one thing, society forgoes the opportunity of getting the next best thing.
The pleasure, happiness, or satisfaction obtained from consuming a good or service.
Comparisons of marginal benefits and marginal costs, usually for decision making.
Observing real-world behavior and outcomes. Based on those observations, formulating a possible explanation of cause and effect (hypothesis). Testing this explanation by comparing the outcomes of specific events to the outcome predicted by the hypothesis. Accepting, rejecting, and modifying the hypothesis, based on these comparisons. Continuing to test the hypothesis against the facts. If favorable results accumulate, the hypothesis evolves into a theory.
A statement about economic behavior or the economy that enables prediction of the probable effects of certain actions.
"Other-Things-Equal" Assumption. A prediction, or a statement about causal or logical connections between two states of affairs, is qualified by ceteris paribus in order to acknowledge, and to rule out, the possibility of other factors that could override the relationship between the antecedent and the consequent.
Examines either the economy as a whole or its basic subdivisions or aggregates, such as the government, household, and business sectors.
A collection of specific economic units treated as if they were one unit.
Part of economics concerned with decision making by individual customers, workers, households, and business firms.
Focuses on facts and cause-and-effect relationships.
Incorporates value judgments about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal.
The need to make choices because economic wants exceed economic means.
A schedule or curve that shows various combinations of two products a consumer can purchase with a specific money income.
All natural, human, and manufactured resources that go into the production of goods and services.
All natural resources ("gifts of nature") used in the production process.
The physical actions and mental activities that people contribute to the production of goods and services.
All manufactured aids used in producing consumer goods and services.
Spending that pays for the production and accumulation of capital goods.
The entrepreneur performs several socially useful functions including:
a. taking the initiative in combining the resources of land, labor, and capital to produce a good or a service.
b. Making the strategic business decisions that set the course of an enterprise.
c. Commercializing new products, new production techniques, or even new forms of business organization.
d. Bears risk devoting their time, effort, and ability - as well as their own money and the money of others - to commercializing new products and ideas that may enhance society's standard of living.
Factors of Production:
Land, labor, capital, and entrepreneurial ability are combined to produce goods and services are called "inputs."
Products that satisfy our wants directly.
Products that satisfy our wants indirectly by making possible more efficient production of consumer goods.
Production Possibilities Curve:
Displays the different combinations of goods and services that society can produce in a fully employed economy, assuming a fixed availability of supplies of resources and fixed technology.
Law of Increasing Opportunity Costs:
As the production of a particular good increase, the opportunity cost of producing an additional unit rises.
A larger total output.
The study of how people make choices under conditions of scarcity and of the results of those choices for society
The Scarcity Principle
(AKA No-Free-Lunch): Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another.
An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.
Someone with well-defined goals who tries to fulfill those goals as best he or she can
The benefit of taking an action minus its cost
The value of what must be forgone in order to undertake the activity
Pitfall I (%)
Measuring costs and benefits as proportions rather than absolute dollar amounts
Pitfall II (hidden)
Ignoring implicit costs
Pitfall III (edge)
Failure to think at the margin
A cost that is beyond recovery at the moment a decision is made
The increase in total cost that results from carrying out one additional unit of an activity
The increase in total benefit that results from carrying out one additional unit of an activity
The total cost of undertaking n units of an activity divided by n
The total benefit of undertaking n units of an activity divided by n
Normative Economic Principle
A principle that tells how people SHOULD behave
Positive Economic Principle
A principle that tells how people WILL behave
The Incentive Principle
A person (or a firm or a society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises. In short, incentives matter.
The study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets
The study of the performance of national economies and the policies that governments use to try to improve that performance
A person who takes fewer hours to perform a task compared to another
A person whose opportunity cost of performing a task is lower than that of another's
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
Production possibilities curve
Describes the maximum amount of one good that can be produced for every possible level of production of the other good
Any combination of goods that can be produced using currently available resources
Any combination of goods that cannot be produced using currently available resources
Any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other
Any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the other
Principle of Increasing Opportunity Cost
(AKA Low-Hanging-Fruit Principle): In expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs
A term increasingly used to connote having services performed by low-wage workers overseas
Shows the quantity of a good that buyers wish to buy at each price
The change in the quantity demanded of a good that results because buys switch to or from substitutes when the price of the good changes
The change in the quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power
Buyer's reservation price
Largest dollar amount the buyer would be willing to pay for a good
Shows the quantity of a good that sellers wish to sell at each price
Seller's reservation price
Smallest dollar amount for which a seller would be willing to sell an additional unity, generally equal to marginal cost
A system in which there is no tendency for it to change
Equilibrium price and quantity
Values of price for which quantity supplied and quantity demanded are equal
Occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price
Amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price
Amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price
A maximum allowable price, specified by law
Change in quantity demanded
Movement along the demand curve that occurs in response to a change in price
Change in demand
A shift of entire demand curve
Change in supply
A shift of entire supply curve
Change in quantity supplied
Movement along the supply curve that occurs in response to a change in price
An increase in the price of one good causes a leftward shift in the demand curve for the other good (or a decrease causes a rightward shift)
An increase in the price of one good causes a rightward shift in the demand curve for the other good (or a decrease causes a leftward shift)
One whose demand curve shifts rightward when the incomes of buyers increase and leftward when the incomes decrease
One whose demand curve shifts leftward when the incomes of buyers increase and rightward when incomes of buyers decrease
Difference between buyer's reservation price and price he or she actually pays
Difference between the price received by the seller and his or her reservation price
Difference between buyer's reservation price and seller's reservation price
"Cash on the Table"
Economic metaphor for unexploited gains from exchange
Socially optimal quantity
Quantity of a good that results in maximum possible economic surplus from producing and consuming the good
(AKA Economic efficiency): occurs when all goods and services are produced and consumed at their respective socially optimal levels
Efficiency is an important social goal because when the economic pie grows larger, everyone can have a larger slice.
(AKA "No-Cash-on-the-Table" Principle): A market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action
An economic system:
is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.
The term laissez-faire suggests that:
government should not interfere with the operation of the economy.
Economic systems differ according to what two main characteristics?
Who owns the factors of production, and the methods used to coordinate economic activity.
A fundamental difference between the command system and the market system is that, in command systems:
the division of output is decided by central planning rather than by individuals operating freely through markets.
Which of the following is a fundamental characteristic of the market system?
The pursuit of self-interest:
gives direction to the market system.
The regulator mechanism of the market system is:
The division of labor means that:
workers specialize in various production tasks.
Specializaiton in production is important primarily because it:
results in greater total output.
The presence of market failures implies that:
there is an active role for government, even in a market system.
From society's point of view the economic function of profits and losses is to:
reallocate resources from less desired to more desired uses.
Economic profits in an industry suggest the industry:
should be larger to better satisfy consumers' desire for the product.
In a market system scarce goods are allocated htrough the operation of:
market prices that are determined by consumers and producers acting in their own self-interest.
The competitive market system.
encourages innovation because successful innovators are rewarded with economic profits.
The market system's answer to the fundamental question "What will be produced?" is essentially:
"Goods and services that are profitable."
The market system's answer to the fundamental question "How will the goods and services be produced? is essentially:
"Using the least-cost production techniques."
The market system's answer to the fundamental question "Who will get the goods and services? is essentially:
"Those willing and able to pay for them."
The market system's answer to the fundamental question "how will the system accomodate change?" is essentially:
"Though the guiding function of prices and the incentive function of profits."
Consumer sovereignty refers to the
idea that the decisions of producers must ultimately conform to consumer demands.
The emergence of the MP3 (iPod) technology is an examle of "creative destruction" because:
it has replaced compact discs as a technology used for the storage and transfer of music.
The market system:
effectively harnesses the incentives of workers and entrepreneurs.
According to the concept of the "invisible hand," if Susie opens and operates a profitable childcare center, then:
she has served society's interests by providing a desired good or service.
The use of capital in the production process:
improves efficiency, increases output, and provides for growth.
Some large hardware stores such as Home Depot boast of carrying as many as 20,000 different products in each store. This volume of goods is the result of:
the choice of consumers regarding what to purchase to satisfy their wants and the choice of producers regardign what to produce to maximize profits.
A particular set of instititonal arrangements and a coordinating mechanism--to respnd to the economizing problem.
Also known as socialism or communnism. Government owns most property resources and economic decision makking occurs through a central economic plan.
Also known as capitalism. The system is characterized by the private ownership of resources and the use of markets and prices to coordinate and direct economic activity.
In a market system, private individuals and firms, not the government, own most of the property resources (land and capital).
Freedom of Enterprise
Ensures that entrepreneus and private businesses are free to obtain and use economic resources to produce their choice of goods and services and to sell them in their chosen markets.
Freedom of Choice
enables owners to employ or dispose of their property and money as they see fit.
the motivating force of the various economic units as they express their free choices.
Two or more buyers and two or more sellers acting independently in a particular product and resource market. Freedom of sellers and buyers to enter or leave markets on the basis of their economic self-interest.
an institution or mechanism that brings buyers ("demanders") and sellers ("suppliers") into contact.
means using the resouorces of an individual, firm, region, or nation to produce one or a few goods or services rather than the entire range of goods and services.
Division of Labor
human specialization contributes to a society's output in several ways: makes use of differences in ability, fosters learning by doing, and saves time.
Medium of Exchange
Money performs several functions, including making trade easier.
Swapping goods for goods.
A convenient social invention to facilitate exchanges of goods and services.
is crucial in determining the types and quantities of goods produced.
consumers spend their income on the goods they are most willing and able to buy -- they register their wants in the market.
The creation of new products and production methods completely destroys the market positions of firms that are wedded to existing products and older ways of doing business.
We have seen that in a competitive environment, businesses seek tobuild new and improved products to increase profits. Those enhanced products increase society's well-being.
Circular Flow Diagram
divides the economy into two sectors: "businesses" and "households." Additionally, we divide this economy's markets into the "resource market" and the "product market."
One or more persons occupying a housing unit.
Commercial establishments that attempt to earn profits for their owners by offering goods and services for sale.
A business owned and manged by a single person.
Two or more individuals (the partners) agree to own and operate a business together.
An independent legal entity that can--on its own behalf--acquire resources, own assets, produce and sell products, incur debts, extend credit, sue and be sued, and otherwise engage in any legal business activity.
The place where the goods and services produced by businesses are bought and sold.
Households sell resources to businesses.
The law of demand states that:
price and quantity demanded are inversely related.
Economists use the term demand to refer to:
a schedule of various combinations of market prices and amounts demanded.
The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____.
When the price of a product increaes, a consumer is able to buy less of it with a given money income. This describes:
the income effect.
When the price of a product rises, consumers shift their purchases to other products whose prices are now relatively lower. This statement describes:
the substitution effect.
Which of the following would not shift the demand curve for beef?
a reduction in the price of cattle feed.
A rightward shift in the demand curve for product C might be caused by:
a decrease in the price of a product that is complementary to C.
If X is a normal good, a rise in money income will shift the:
demand curve for X to the right.
College students living off-campus frequently consume large amounts of beans and weiners and boxed macaroni and cheese. When they finish school and start their careers, their consumption of these goods frequently declines. This suggests that beans and weiners and boxed macaroni and cheese are:
Refer to the above diagram. A decrease in supply is depicted by a:
shift from S2 to S1.
A leftward shift of a product supply curve might be caused by:
some firms leaving an industry.
An improvement in production technology will:
shift the supply curve to the right.
Suppose product X is an input in the production of product Y. Product Y in turn is a substitute for product Z. An increase in the price of X can be expected to:
increase the demand for Z.
An increase in the excise tax on cigarettes raises the price of cigarettes by shifting the:
supply curve for cigarettes leftward.
Refer to the above data. Equilibrium price will be:
$2 price per bushel.
Refer to the above data. If price was initially $4 and free to fluctuate, we would expect:
the quantity of wheat supplied to decline as a result of the subsequent price change.
If a product is in surplus supply, its price:
is above the equilibrium level.
At the equilibrium price:
there are no pressures on price to either rise or fall.
Refer to the above diagram. A price of $20 in this market will result in:
a shortage of 100 units.
If we say that a price is too high to clear the market, we mean that:
quantity supplied exceeds quantity demanded.
If the supply and demand curves for a product both decrease, then equilibrium:
quantity must decline, but equilibrium price may either rise, fall, or remain unchanged.
A price floor means that:
government is imposing a minimum legal price that is typicallly above the equilibrium price.
Refer the to above diagram. Rent controls are best illustrated by:
An effective price floor on wheat will:
result in a surplus of wheat.
Price ceilings and price floors:
interfere with the rationing function of prices.
A schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of aseries of possible prices during a specified period of time.
Reveals the relationship between the various prices of corn and the quantity of corn a particular consumer would be willing and able to purchase each of these prices.
Law of Demand
If supply is held constant, an increase in demand leads to an increased market price, while a decrease in demand leads to a decreased market price.
Diminishing Marginal Utility
the law that for a single consumer the marginal utility of a commodity diminishes for each additional unit of the commodity consumed.
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.
suggests that at a lower price buyers have the incentive to substitute what is now a less expensive product for other products that are now relatively more expensive.
a downward slope that reflects the law of demand--people buy more of a product, service, or resource as its price falls.
Determinants of Demand
When price changes, quantity demanded will change. That is a movement along the same demand curve. When factors other than price changes, demand curve will shift. These are the determinants of the demand curve, i.e., income, consumer preferences, number of buyers, and prices of related goods.
Products whose demand varies directly with money income.
Goods whose demand varies inversely with money income.
is one that can be used in place of another good.
is one that is used together with another good.
Change in Demand
is a shift of the demand curve to the right (an increase in demand) or to the left (a decrease in demand). It occurs because the consumer's stte of mind about purchasing the product has been altered in response to a change in one or more of the determinants of 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 curve. The cause of such a change is an increase or a decrease in the price of the product under consideration.
is a schedule or curve showing the various amounts of a product aht producers are willing and able to make available for sale at each of a series of possible prices during a specific period.
It shows the quantities of corn that will be supplied at various prices, other things equal.
Law of Supply
A supply schedule tells us that, other things equal, firms will produce and offer for sale more of their product at a high price than at a low price. This, again, is basically common sense.
A graph showing the hypothetical supply of a product or service that would be available at different price points.
Determinants of Supply
are (1) resource prices, (2) technology, (3) taxes and subsidies, (4) prices of other goods, (5) producer expectations, and (6) the number of sellers in the market.
Change in Supply
means a change in the schedule and a shift of the curve. In increase in supply ***** the curve to the right; a decrease in supply shifts it to the left. The cause of a change in supply is a change in one or more of the determinants of supply.
Change in Quantity Supplied
is a movement from one point to another on a fixed supply curve. The cause of such a movement is a change in the price of the specific product being considered.
the quantitiy at which the intentions of buyers and sellers match, so that the quantity demanded and the quantity supplied are equal.
the quantity at which the intentions of buyers and sellres match, so that the quantity demanded and the quantity supplied are equal.
quantity demanded exceeds quantity supplied at that price.
the production of any particular good in the least costly way.
the particular mix of goods and services most highly valued by society (minimum-cost production assumed).
is a government-imposed limit on how high a price is charged for a product. Governments intend price ceilings to protect consumers from conditions that could make necessary commodities unattainable.
is a government- or group-imposed limit on how low a price can be charged for a product.