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EC exam 2
Terms in this set (85)
Every wealthy society the world has ever known is characterized by
extensive specialization or division of labor.
The basic problem that a market system handles is achieving cooperation and plan coordination among people despite
In commercial societies, the plans of buyers and sellers are negotiated primarily
through monetary bids and offers.
Why do most exchanges in the United States occur by using money?
The use of money lowers transaction costs.
The easy availability in retail stores of most items that we want when we want them
depends on the continuing achievement of a long series of balances between willingness to sell and desire to buy.
Plan coordination on the scale regularly displayed by the U. S. economy depends on
an extensive and continuous exchange of information.
Relative prices formed in a competitive market process
provide clues about the relative scarcity of goods and services
Extensive and productive exchanges among people who barely know one another
require that the prices be freely negotiated by the people involved in trade.
A system of prices promotes mutually beneficial exchanges
because prices established by supply and demand help clarify people's options.
Using the economic way of thinking, what does a pencil, stick of gum, and balloon have in common?
The production of any one of the goods mentioned above requires the voluntary cooperation of millions of producers and traders.
Suppose the market for guitars "clears" at a price of $500 per guitar. What does the above statement mean?
Market plans are coordinated.
Suppose the quantity of oranges demanded is less than the quantity supplied. Then
none of the above are true.
A. the market still clears, because consumers can buy all the oranges they wish at the prevailing market price.
B. the market still clears, because producers can sell all the oranges they wish at the prevailing market price.
C. the market clears, but is not fully coordinated.
D. oranges are no longer scarce goods.
When shortages or surpluses persist for any extended period of time, they
represent a failure to allow prices to perform their coordinating function.
According to your authors, overall market clearing
is an unintended consequence of people pursuing their own plans.
Suppose corn farmers encounter a "bumper" corn crop, which results in a significant increase in the market supply curve for corn. Increases in supply will tend to
decrease the price of corn.
Suppose the market clearing price for apples falls from $3.00 to $2.00 per pound, and the overall market clearing output increases from 1 million to 2 million pounds. How can we explain the fall in price and increase in market output?
Demand remained unchanged and supply increased.
The price of credit (a loan) has a particular name -- the interest rate. When the demand for credit increases while the supply of credit remains unchanged,
the interest rate will increase and the amount of credit provided in the market will increase.
The existence of a shortage means
people cannot buy as much as they plan to buy at the prevailing price.
Here's a graphical question. (Hint: it might help if you actually drew a graph for this and the rest of the questions). Suppose the demand for CDs decreases while the supply (curve) remains unchanged. Then
CD prices would fall and the market output would fall.
Suppose Spaghetti is an inferior good, and income in the economy falls during a recession. Other things constant, this would tend to
increase the price and output.
Come to think of it, the supply and demand questions are so fundamental, we should do a few more. Which of the following would occur if the demand for accounting professors increases?
Salaries would increase and so would the quantity supplied.
Fill in the blanks: If Ford cut their prices, the ________ for GM vehicles would __________ and GM sales would __________.
demand; fall, fall
Michigan State and University of Michigan are competitors, not only on the field but also - of course -- as providers of higher education. Suppose State increases its tuition while Michigan leaves theirs unchanged. Other things constant, this would tend to
A. reduce the quantity demanded at State.
B. increase the demand at Michigan.
increase the quantity supplied at Michigan
Which of the following would lead to a higher price for Monster HDMI cables and a higher output as well?
An increase in the price of competitor's cables.
If universal healthcare insurance were to increase demand for hospital services it would also tend to
increase the price of those services.
Under a system of rent controls, landlords are more likely to
discriminate against students.
Suppose the market clearing rent is $1500 per month, but a rent control is established at $1000 per month. Which is most likely to emerge?
The quantity of apartments demanded would exceed quantity supplied.
Beer and wine were difficult to find during the prohibition on alcohol, but whisky and gin were plentiful. Why?
Criminals found it much more efficient to produce hard liquor.
Consider the market for credit, where the interest rate is the "price" of a loan. A legal interest rate ceiling set below the market-clearing interest rate would tend to
create a shortage of loans.
Suppose the market-clearing wage for pizza delivery workers is $7.50 per hour, and $9.00 per hour minimum wage is enacted. Other things constant, this tends to unintentionally cause unemployment by
decreasing the quantity demanded for these workers.
Suppose the market clearing price of wheat is $2.25 per bushel. At a price below that,
quantity supplied would be less than quantity demanded.
Suppose the market-clearing price of orange juice is $3.50 per gallon, but consumer groups persuade the government to set and enforce a maximum price of $2.50 per gallon. This tends to
create a shortage of orange juice.
If a surplus of a good exists and persists for a long time, we can probably expect that
something is preventing the price of the good from declining.
A geologist tells the ACME Mining Company that she's certain there is a gold vein one thousand feet below the surface of its property, but ACME still decides not to mine for that gold. How would an economist explain their decision?
The owners of ACME feel the additional costs of mining for this gold outweigh the additional benefits.
What is the most likely relationship between the salaries of professional basketball players and the prices charged for tickets to professional basketball games?
High demand to see the teams allows for high ticket prices and therefore high salaries.
Let's go way back in the day. During the 1980s both the price and the purchases of BMWs increased dramatically. In the economic way of thinking,
the demand curve for BMWs shifted to the right.
The prediction that there will be permanent, growing shortages of oil by the year 2020 implicitly assumes that
changes in oil prices won't work to coordinate the plans of buyers and sellers.
People commonly believe that sudden price spikes (so called "price gouging") are unjustified because they probably think that
A. prices ought to be based strictly on costs of production.
B. in certain situations voluntary exchange is no longer mutually beneficial.
C. prices are not really influenced by the prevailing demands of consumers.
D. businesses suddenly become more greedy during emergency situations when households need more of their goods and services.
Suppose a deep freeze on the East Coast leads to higher home heating oil prices in that region. In the economic way of thinking, those prices
send information signals to others across the economy that home heating oil is more highly valued in this region compared to others.
Pick the true statement regarding price supports ("floors") and price caps ("ceilings"):
A cap is intended to create more wealth for consumers, but unintentionally makes many of them worse off.
Why do agricultural price supports involve the government buying a large part of the output?
Because without the government purchases of surplus output, price supports would not work to serve the profit-seeking interests of the producers.
What elementary process was at work that explains why the well-intentioned redemption of Sudanese slaves actually generated more slaves?
The increase in demand led to an increase in quantity supplied.
Which is an example of an unintended consequence?
Price caps that create shortages.
B. Price supports that create surpluses.
C. The pursuit of self-interest among businesses and households in the free market that creates well-coordinated market-clearing outcomes.
Some economists argue that we should consider lowering or even eliminating the minimum wage during our current recession. What's the logic?
It would increase employment among tens of thousands of unskilled workers.
The levels of prices, wages, and interest rates formed in free markets reflect conditions in
both the supply and demand.
is the residual sought after by entrepreneurs, but never guaranteed in contracts.
The most popular definition of "profit" is
total revenue minus total cost.
How does the economist's measure of profit differ from the accountant's measure?
Economists include the entrepreneur's opportunity costs, accountants don't.
Typically a firm's "economic profit" will be
less than its accounting profit.
If losses are unavoidable in an uncertain world, then
so, too, are profits.
The claim that successful entrepreneurs in a free market have a comparative advantage in arbitrage activity means
they are efficient at discovering opportunities to buy goods low and sell them at higher prices.
"Gacy's can sell clothing at lower prices than Mimbel's because Gacy's owns their own building, but Mimbel's has to pay rent." This statement is
misleading in its suggestion that there is no opportunity cost to Gacy's of using the building it owns.
In the broadest sense, the "entrepreneur" is someone who generally
seeks economic profit by exposing himself to greater financial uncertainty.
The entrepreneur receives the "residual" from a project because he
offers other participants in the project already-known and agreed-upon compensation through contracts while he accepts greater degrees of risk and uncertainty
When profits or losses regularly go to the people whose decisions led to those profits or losses
people have an incentive to exercise more care in the making of decisions
Profit is to entrepreneur as
wage is to labor.
If an entrepreneur incurs opportunity costs in her business, then, if she enjoys a positive economic profit, that economic profit must be
less than the accounting profit.
An English professor had earned $40,000 per year, but quit and now owns a greeting card store. Pick the correct statement:
The $40,000 is an implicit cost that will be calculated into his economic profit.
I was earning 5% from a certificate of deposit. I cashed the CD and invested it in shares of stock. If the stock rose 7%, what's my rate of economic profit?
Pick the false statement.
As long as an entrepreneur owns all the resources used in the firm, there are no opportunity costs of production.
Suppose Don Trepreneur enjoys an accounting profit as a local computer retailer. He might therefore
be enjoying an economic profit.
B. suffering an economic loss.
C. getting a zero economic proft.
Middlemen who engage in arbitrage tend to
lower transaction costs for both consumers and producers.
An open economy that fosters entrepreneurship on the basis of the profit and loss principle tends to create
incentives to add value to society's scarce resources and use them more productively.
Entrepreneurial innovators who enjoy profits in a free market unintentionally generate
an inflow of imitators who compete for the similar profit opportunities and spur further cost-cutting techniques.
Sure, sometimes profit emerges out of pure luck. But if profits were always the result of good luck (and losses the result of bad luck) then
entrepreneurship would be a random and haphazard process.
B. the supply and demand process would not work nearly as well your authors claimed in Chapter 5.
C. free markets would not systematically generate long-term economic growth.
D.entrepreneurship would not serve its function as an "error detection" process
The text maintains that elected and appointed government officials
interpret the public interest in the light of private or personal interests.
The text maintains that competition exists in government
between people, parties, policy advocates, and program defenders.
Using the economic way of thinking is very helpful to explain or predict government policies when
participants in the political process are influenced by costs and benefits to themselves.
Our claim that elected and appointed government officials are influenced by prevailing property rights means that
those rights shape and influence their perception of personal costs and benefits.
What is the relationship between government and coercion (force)?
Government is the institution in a society to which most people assign an exclusive right to use coercion.
How does the text distinguish between coercion and persuasion?
Coercion induces cooperation by threatening to reduce options, persuasion by promising to expand options
Is coercion capable of expanding the freedom of all the people in a society?
Yes, because it can sometimes expand everyone's options by denying a few particular options to anyone
A "free rider" in economic theory is someone who
can obtain a desired good without paying for it and therefore has no incentive to contribute to the costs of making it available
Police protection is a good usually provided by government because
it is a good that is hard to finance through voluntary contributions.
The fact that everyone wants a particular good produced and is willing, if necessary, to pay a proportionate cost of its production
does not assure that anyone will in fact contribute toward paying for its production
Governments usually provide national defense from tax funds because
it is hard to supply national defense exclusively to those who volunteer to pay for it.
A judicial system for resolving disputes among the members of a society creates benefits even for people who never use it because
judicial decisions generate uniform rules that everyone can count on
The argument for using coercion or force rather than relying entirely upon voluntary gift giving to assist very poor people is that
people may be willing to contribute only if they are assured that others are also contributing their appropriate share
Citizens typically cast their ballots without acquiring complete information about the candidates or the issues because they
believe that the information they acquire will have no effect on the outcome of the election.
Fact: Legislators usually acquire more information on an issue before they vote on it. Citizens typically aren't fully informed on the issues. Why do legislators tend to be more fully informed?
Their individual votes are much more likely to affect the outcome.
B. They are provided with information-gathering resources at public expense.
C. Constituents hold them accountable for their actions.
An interest in being reelected encourages politicians to support policies that
confer short-run benefits with deferred costs.
If a city council holds hearings on a proposed law that would require all restaurants to provide segregated tables for nonsmokers, the people most likely to be well represented at the hearings are
The millions of taxpayers who must pay for a federal government bail-out of the financial giant AIG will not be well represented at the hearings on the issue, because
no single taxpayer has a large enough stake in the issue to justify the cost of attending the hearings.
The existence of "positive externalities" in the democratic political process makes it more likely that government policies will
lean toward programs that help a few people a great deal but cost a lot of people only a little.
"The prisoners' dilemma" is a concept that helps us understand why
social behavior sometimes fails to produce results that everyone in the society genuinely desires.
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