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199 terms

Homework 1

STUDY
PLAY
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.
Externalities, or spillovers
cause the equilibrium output of certain goods to vary from the socially efficient output.
Negative externalities
result in an overallocation of resources, which can be corrected by legislation or by specific taxes.
Positive externalities
are accompanied by an underallocation of reources, which can be corrected by government subsidies to consumers or products.
What are the main categories of Federal spending?
pensions and income security, national defense, health, and interest on the public debt.
Where do Federal revenues come from?
Primarily from personal income taxes, payroll taxes, and coporate income taxes
Where do states derive their revenue from?
Primarily from sales and excise taxes aknd personal income taxes
What are states' major expenditures?
Education, public welfare, health and hospials, and highways.
Local communities derive most of their revenue from...
property taxes
The most important expenditure for local communities is...
education
State and local tax revenues are supplemented by...
sizable revenue grants from the Federal government.
Government can correct the overallocation of resources associated with negative externalities by what two ways?
LEGISLATION and SPECIFIC TAXES
Monopoly
Where a single seller controls an industry
The US Government has attempted to control a monopoly through
regulation and antitrust
Examples of "regulated monopolies" include...
firms that provide local electricity, telephone and transportation services
Society chooses to redistribute a part of total income through a variety of government pollicies and programs. They are:
Transfer payments; Market intervention, Taxation
Transfer payments
such as food stamps, welfare checks, provide relief to the desititute, the dependent, the disabled, and older citizens. Unemployment compensation payments provide aid to the unemployed.
Market Intervention
acting to modify prices that are or would be established by market forces.
Taxation
Where the Government uses the personal income tax to take a larger proportion of the income of the rich than of the poor, thus narrowing the after-tax income difference between high-income and low-income earners
Redistribution involves
both benefits and costs
The purported benefits are
greater "fairness" or "economic justice"
The purported costs are
reduced incentives to work, save, invest, and produce
The purported benefits and costs results in...
a loss of total output and income
Market failure occurs
when the competitive market system (1) produces the "wrong" amounts of certain goods and services or (2) fails to allocate any resources whatsoever to the production of certain goods and services whose output is economically justified.
Two types of market failures are...
Externalities or spillovers and public goods
An externality occurs
when some of the costs or the benefits of a good are passed on to or "spill over to" someone other than the immediate buyer or seller.
Spillovers are called externalities because...
they are the benefits or costs that accrue to some thrid party that is external to the market transaction.
How might the government deal with the underallocation of resources resulting from positive externalities?
Either to subsidize consumers (to increase demand), to subsidize suppliers (to increase supply), or, in the extreme, to have govenment produce the product
Private Goods
are produced through the competitive market system
What are athe two characteristics of private goods?
Rivalry and excludability
Rivalry means...
that when one person buys and consumes a product, it is not available for purchase and consumption by another person.
Excludability means...
that buyers who are willing and able to pay the market price for the product obtain its benefits, but those unwilling or unable to pay that price do not. This characteristic enables profitable production by a private firm.
Public goods
have the opposite characteristics -- nonrivalry and nonexcludability. Everyone can simultaneously obtain the benefit from a public good (exa. street lighting, national defense, environmental protection). One person's benefit does not reduce the benefit available to others. More important, there is no effective way of excluding individuals from the benefit of the good once it comes into existence.
Free-rider problem
The inability to exclude. People can receive benefits from a public good without having to pay for it.
Quasi-Public Goods
Goods and services that are produced by the Government in such a way that exclusion would be possible (such as libraries, museums, preventive medicine, education, streets and highways, fire and police protection, sewage disposal)
Fiscal policy
government taxing and spending policy
Monetary policy
central bank interest rate policy
Unemployment
the failure to use all availablae economic resources to produce desired goods and services; the failure of the economy to fully employ its labor force (when private sector spending is too low)
Inflation
a general increase in the level of prices. Prices of goods and services rise when the amount of spending in the economy espands more rapidly than the supply of goods and services.
Government purchases
are exhaustive; the products purchased directly absorb (require the use of) resources and are part of the domestic output. (exa. the purchase of a missle absorbs the labor of physicists and engineers along with steel, explosives, and a host of other inputs.)
Transfer Payments
are nonexhaustive; they do not directly absorb resources or create output. The key characteristic is that recipients make no current contribution to domestic output in return for them. (soc. sec. benefits, welfare payments, veterans' benefits, and unemployment compensation are examples of transfer payments.)
We can get an idea of the size of government's economic role by what two outlays.
by examining government purchases of goods and services, and government transfer payments
Regarding Federal Expenditures, what four areas of Federal spending stand out?
1. pensions and income security; 2. national defense; 3. health; and 4. interest on the public debt
What is personal income tax?
A tax that is levied on the taxable income of the incomes of households and unincorporated businesses after certain exemptions and deductions are taken into account.
A marginal tax rate
is the rate at which the tax is paid on each additional unit of taxable income.
The average tax rate
is the total tax paid divided by total taxable income
Payroll taxes
taxes based on wages and salaries--used to finance two compulsory Federal programs for retired workers:Soc Sec (an income enhancement program) and Medicare (which pays for medical services)
Corporate Income Tax
levied on a corporation's profit--the difference between its total revenue and its total expenses.
The diffencene between sales and excise taxes is
one of coverage
Sales taxes
fall on a wide range of products
Excise taxes
are levied individually on a small, select list of commodities (exa., the federal gov'mt collects excise taxes on the sale of alcoholic beverages, tobacco, and gasolline).