Exam 1: Lessons 1, 2, 3, 4, 5, 6, 7

Economics is the study of how people make c_____. Economists study how people make decisions in order to maximize their well-being given l_____ t_____ and r_____choices limited time resourcesEconomics isn't about vaguely defined firms, corporations, households, or government entities. It is about p_____.peopleFrequently people work for f_____ or for c_____ or for "the g_____" or organize themselves into g_____ (households, clubs, nonprofit groups) but ultimately all decisions are made by p_____firms corporations government groups peopleScarcity exists because our w_____ exceed our available resources.wantsScarcity implies that we have to make c______ (trade-offs) when we use our resources. A r______ d______ is any tool that helps us make choices. The p______ s______ is an example of a particularly useful rationing device.choices rationing device price systemMicroeconomics The study of decision-making undertaken by i_____, h_____, and by f_____individuals households firmsMacroeconomics The study of the behavior of the economy as a w_____, including such economywide phenomena as changes in u_____, the g_____ p_____ level, and n_____ i_____whole unemployment general price national incomeUnder command and control, a c_____ a_____ decides w_____ items to produce and h_____ m_____, determines how the s_____ r_____ will be organized in the items' production, and identifies who will be able to o_____ the items.centralized authority what how many scarce resources obtainThe price system Under a pure price system, i_____ and f_____ own all of the scarce resources used in production. Choices about w_____ and h_____ m_____ items to produce are left to p_____ parties to determine on their own initiative, as are decisions about how to go about p_____ those items.individuals families what how many private producingPositive economics Analysis that is strictly limited to making either p_____ d_____ statements or s_____ p_____purely descriptive scientific predictionsNormative economics Analysis involving v_____ j_____ about economic policies; relates to whether outcomes are g_____ or b_____value judgements good badThe nature of scientific model building is that the model should capture only the e_____ r_____ that are sufficient to analyze the particular problem.essential relationshipsProduction Any activity that results in the conversion of resources into p____ that can be used in consumptionproductsFactors of production: L____d L____r P____ c____ H____ c____ E____Land Labor Physical capital Human capital EntrepreneurshipLand The natural resources that are available from n_____. Land as a resource includes l_____, o_____ f_____ and m_____ d_____, t_____, c_____, w_____, and v_____nature location original fertility mineral deposits topography climate water vegetationLabor Productive contributions of humans who w____workPhysical capital All manufactured resources, including b____, e____, m____, and i____ to land that are used for production.buildings equipment machines improvementsHuman capital The accumulated t_____ and e_____ of workerstraining educationEntrepreneurship The component of human resources that performs the functions of r_____ c_____; o_____, m_____, and a_____ other factors of production; making basic b_____ p_____ decisions; and taking r_____raising capital organizing managing assembling business policy risksOpportunity cost is the cost paid for one product in terms of the c_____ (or p_____) of another product that must be foregone. The definition in your textbook is "the h_____-v_____, n_____-b_____ alternative that must be sacrificed to obtain something or to satisfy a want."consumption production highest-valued next-bestThere is an opportunity cost to e_____ (in order to c_____ or p_____ one thing you have to give up something else).everything consume produceIf you spend your lunch money for pizza, then you can't spend it for a different meal. The o_____ c_____ of pizza is that you can't eat your second choice (in this example, the taco). You eat the pizza and you give up the opportunity to eat the taco. The v_____, or b_____, of eating pizza is the satisfaction that you get from the pizza and the opportunity cost of eating pizza is the satisfaction that you would have received from eating the taco.opportunity cost value benefitNotice that the opportunity cost of pizza is not the s_____ of the values you would have received from the taco (your second choice) plus the hamburger (your third choice) plus the banh mi sandwich (your fourth choice). This is because you are c_____ by your budget: either you don't have enough money to buy more than one lunch item or you have decided not to spend more money for lunch.sum constrainedTrade corrects mistakes in allocation because it moves things to h____-v____ uses and makes both parties b____ o____. We end up with the s____ amount of goods and services that we started with, and yet people are h____higher-value better off same happierScenarios in which trade improves the overall outcome: Initial distribution is the s_____; preferences d_____ Initial distribution is d_____; preferences are the s_____ Initial distribution is d_____; preferences d_____same differ different same different differHow many people does it take to make a pencil? T____ of peopleThousandsWhat brings people together and induces them to make a pencil (or anything else)? The p____ system (or the m____ system).price marketWho benefits from free exchange? Both sides become b____ o____better offHow are a nation's resources drawn to produce what its citizens value most highly? As people struck b_____ with each other, the nation's resources would be drawn automatically to the ends and purposes that people valued most highly.bargainsWhen is self-interest a force for good? Self-interest may drive the economy, but that is a force for good - provided there is genuinely o_____ com_____ and no c_____open competition coercionProductive efficiency is the ability to produce a good with m_____ w_____ r_____minimum wasted resourcesWhy was Smith's book, "An Inquiry into the Nature and Causes of the Wealth Of Nations" (1776), important? The Wealth of Nations deeply influenced the p_____ of the time and provided the intellectual foundation of the great nineteenth-century era of f_____ t_____ and ec_____ ex_____politicians free trade economic expansionWhy did Smith believe that free trade benefited buyers and sellers? Quite simply, nobody would trade if they expected to l_____ from it. The b_____ profits, just as the s_____ does.lose buyer sellerWas Smith a protectionist or not?He was notRonald Coase concluded that business firms come into existence when t_____ c_____ are lowtransaction costsIn the presence of transaction costs, firms will grow l_____ as long as they can benefit from doing tasks in-house rather than incurring the transaction costs of having to g_____ o_____ and s_____, b_____ and e_____ a contract in the market. They will expand or shrink until the cost of making it in the firm equals the cost of b_____ it on the market.larger go out search bargain enforce buyingThe lower the transaction costs are, the more e_____ markets will be, and the _____ firms will be.efficient smallerTransaction costs: Tri______ T______r T______tTriangulation Transfer TrustTriangulation How hard it is to find and measure the q_____ of a servicequalityTransfer How hard it is to bargain and agree on a c____ for the good or servicecontractTrust Whether the counterparty is t_____ or you have r_____ if they aren't.trustworthy recourseMechanical clocks broadcast by bell towers provided a fair (_____ t_____t costs) and fungible [7] (_____ t_____r costs) measure of time. Each hour rung on the bell tower could be trusted to be the same length as another hour.lower trust lower transferSmith saw the main cause of prosperity as increasing d_____ of l_____. Using the famous example of pins, Smith asserted that ten workers could produce 48,000 pins per day if each of eighteen s_____ tasks was assigned to particular workers.division labor specializedSmith used this insight on e_____ of r_____ to explain why wage rates differed. Wage rates would be higher, he argued, for trades that were more d_____ to learn, because people would not be willing to learn them if they were not compensated by a _____ wage. His thought gave rise to the modern notion of h_____ c_____. Similarly, wage rates would also be higher for those who engaged in d_____ or u_____ occupations, such as coal mining and butchering; and for those, like the hangman, who performed o_____ jobs. In short, differences in work were compensated by differences in p_____. Modern economists call Smith's insight the theory of c_____ w_____ d_____equality returns difficult higher human capital dirty unsafe odious pay compensating wage differentialsLike most modern believers in free markets, Smith believed that the government should enforce con______ and grant p______ and cop______ to encourage inventions and new ideas. He also thought that the government should provide p______ w______, such as roads and bridges, that, he assumed, would not be worthwhile for individuals to provide.contracts patents copyrights public worksSmith believed that economic development was best fostered in an environment of f____ c____ that operated in accordance with universal "n____ l____."free competition natural lawsSmith thought society improved itself by controlling certain h____ a____, rather than by trying to achieve some u____ b____ through collective action.hurtful actions utopian benefitThe f_____ e_____ s_____ is an economic system based on private (not government) ownership of resources, where pr_____ pa_____ (not government) determine on their own initiative wh_____ to produce, h_____ to produce, and f_____ w_____ to produce, based on the signals they receive from markets.free enterprise system private parties what how for whomMarkets also provide s_____ to buyers, guiding them about what to buy. P_____ are signals, as are p_____ and l_____.signals Prices profits lossesBuyers and sellers have i_____ f_____—they are "free to choose" how much and what to buy and/or sell, as they wishindividual freedomM____ bring buyers and sellers together so they can interact and transact with each other.MarketsS_____ occur when buyers want to buy more units than are available for sale at the current price.ShortagesShortages are signals for buyers and sellers to _____ the price of the good in questionraiseIf the price rises then both buyers and sellers will react. Buyers will want to buy ____ units. Sellers will try to supply ____ units. These behavioral changes will ____ the shortage.fewer more reduceS_____ occur when buyers want to buy fewer units than are available for sale at the current price.SurplusesSurpluses are signals for buyers and sellers to ____ the price of the good in question.lowerIf the price falls then both buyers and sellers will react. Buyers will want to buy ____ units. Sellers will no longer want to s____ as many units. These behavioral changes will r____ the surplus.more supply reduceWhat happens if buyers want to buy the same number of units as are available for sale at the current price? In this case there is n____ s____ for price changes. The market is in equilibrium where the number of units d____ by buyers equals the number of units s____ by sellers.no signal demanded suppliedSurpluses and shortages generally lead to p____ c____.price changesWhat causes shortages or surpluses to occur? Changes in m_____ c_____.market conditionsHere is a list of some of the market conditions that economists study. 1. Number of b_____ 2. Prices of s_____ 3. I_____ 4. Ta_____ and pre_____ 5. Prices of c_____ 6. Expectations of f_____ p_____ and a_____ changes 7. Number of f_____ in the industry 8. Te_____ and pro_____ 9. S_____ 10. Prices of i_____ 11. Prices of other goods that use the s_____ i_____ 12. T_____buyers substitutes income tastes preferences complements future price availability firms technology productivity subsidies inputs same inputs taxesMarkets work best when they are allowed to respond to sh____ and su____shortages surplusesThe Essential Features of the Price System (the Market System): 1. Signaling: p_____ provide information to buyers and sellers about what to b_____ and s_____ 2. No coercion: exchange takes place v_____ 3. Lower transaction costs: markets lower the cost of e_____, sometimes through m_____prices buy sell voluntarily exchange middlemenBy growing the crop that produces the greater profit, farmers can: Solve the s_____ Meet the d_____ Satisfy the requirements of i_____shortage demand innovationPrices transit e____ i____economic informationProducers don't need to (and usually can't) know w_____ prices have gone up... only that they can charge _____.why moreProfit-seeking producers see rising prices and are encouraged to _____ their outputincreaseWhen prices go up, people limit their c_____consumptionProducers and consumers alter their behavior to account for new market conditions as a response to the change in p_____pricePrices generate, aggregate, and transmit k_____knowledgeIn a f_____ m_____, prices automatically adjust to changes in conditions, preferences, and technologyfree marketPrices help coordinate the a____ of both producers and consumersactionsGovernment can distort the price system: - C____ pl____ - Pr____ c____central planning price controlsThe pursuit of p____ and the avoidance of l____ provides firms and individuals with the incentive to respond to the flow of information provided by prices.profits lossesProfits and losses inform producers if they are using s____ resources to create goods and services that consumers v____scarce valueProfits foster the pursuit of n____ o____ They encourage people to take the risks necessary to create n____ productsnew opportunities newProfit-seeking is an attempt to produce goods and services people v____ with as few r____ as possible. This frees up both r____ and l____ to be used for other purposesvalue resources resources laborThe desire to avoid losses encourages p____prudenceLosses counter the incentive for p____-seeking and discourages excessive r____-t____profit risk-takingB____ clears out businesses which make poor economic decisionsBankruptcyPrices help us to allocate resources towards their h____ v____ usehighest valuedBankruptcy is not a f_____ of the market. It is the market w_____failure workingIf you attempt to mitigate the effects of bankruptcy, you severely diminish the incentive for p____ and encourage e____ r____-t____. This is what economists call m____ h____.prudence excessive risk-taking moral hazardRisky investments are encouraged by guaranteed b____. Tax-payers ____ and well-connected bankers ____bailouts lose winAttempts to curb profits through p_____ t_____ or to mitigate losses through s_____ and "t_____ b_____ to f_____" significantly impairs the important function of pricesprogressive taxation subsidization too big failIf the price in a market is above the equilibrium price, this creates a s___________surplusWhen the price is above the equilibrium price, greed (in other words, self-interest) tends to push the price ______downJon is on eBay, bidding for a first edition of the influential Frank Miller graphic novel Batman: The Dark Knight Returns. In this market, who is Jon competing with? The o____ b____other biddersNow, Jon is in Japan, trying to get a job as a full-time translator; he wants to translate English TV shows into Japanese and vice versa. He notices that the wage for translators is very low. Who is the "competition" that is pushing the wage down? O____ t______Other translatorsOur market economy is called the p____ system. There are two sides to each market: the d____ side and the s____ side.price system demand supplyP_____ communicate a lot of information to would-be buyers and sellers. They are signals that tell buyers and sellers h_____ m_____ to buy and sell in any given market.Prices how muchIn the market system, changes in market conditions (which we will study in detail later) lead to sh_____ and su_____.shortages surplusesShortages and surpluses lead to p_____ c_____, which in turn lead to changes in how much buyers and sellers will b_____ and s_____. This leads to efficient changes in the amount of o_____ produced.price changes buy sell outputDemand The maximum amount of a good or service that b____ are willing and able to offer to b____ at each and every price during a specific time period, ceteris paribusbuyers buyThe Law of Demand: Ceteris paribus, as price increases, quantity demanded _____, and as price decreases, quantity demanded _____. (This is because people will substitute towards relatively c_____ products.)falls rises cheaperA change in market conditions leads to a shortage leads to a price _____ which in turn causes quantity demanded to _____.increase fallSimilarly, a change in market conditions leads to a surplus leads to a price _____ which in turn causes quantity demanded to _____.decrease rise"Quantity d____" is a number on the horizontal axis. "D____" refers to the entire demand curve. Notice that when the price of the good changes, d____ does not change.demanded Demand demandEconomists call movements along the demand curve "changes in q____ d____" (because the number on the horizontal axis changed).quantity demandedSupply The maximum amount of a good or service that s_____ are willing and able to offer to p_____ at each and every price during a specific time period, ceteris paribussellers provideThe Law of Supply: Ceteris paribus, as price increases, quantity supplied _____, and as price decreases, quantity supplied _____. (This is because the higher the price, the greater the potential for h_____ p_____ and thus the greater the incentive for firms to p_____ and s_____ more products.)rises falls higher profits produce sellA change in market conditions leads to a shortage leads to a price ____ which in turn causes quantity supplied to ____.increase riseSimilarly, a change in market conditions leads to a surplus leads to a price ____ which in turn causes quantity supplied to ____.decrease fallWhen the price of this good changes we slide along the existing supply curve—notice that s____ doesn't change.supplyMarket Disequilibrium: Markets that are in disequilibrium will not r____ in disequilibrium. Markets tend to move towards e____.remain equilibriumSometimes changes in market conditions create a surplus Surplus = e____ s____excess supplyWhenever a surplus occurs it sends buyers and sellers a signal that the current price is too _____. Notice on the graph below that the price is _____ the equilibrium price, and quantity supplied is _____ than the quantity demanded.high above greaterParticipants will respond by offering to buy or sell at some ____ price. Notice that the price starts to ____. We see the market respond with an increase in quantity ____ and a decrease in quantity ____. That is, we see movement along the d____ curve and movement along the s____ curve!! This process continues until the surplus is e____.lower fall demanded supplied demand supply eliminatedSometimes changes in market conditions create a shortage Shortage = e____ d____excess demandWhenever a shortage occurs it sends buyers and sellers a signal that the current price is too _____. Notice on the graph above that the price is _____ the equilibrium price, and quantity supplied is _____ than the quantity demanded.low below lessParticipants will respond by offering to buy or sell at some _____ price. Notice that the price starts to _____. We see the market respond with a decrease in quantity _____ and an increase in quantity _____. That is, we see movement along the d_____ curve and movement along the s_____ curve! This process continues until the shortage is e_____.higher rise demanded supplied demand supply eliminatedMarket Equilibrium: Markets that are in equilibrium tend to r____ t____, ceteris paribus.remain thereAt P* (e____) the quantity demanded by buyers equals the q_____ s_____ by s_____. All market participants are h_____. There are no sh_____ or su_____ so there is no signal for anyone to change their behavior.equilibrium quantity supplied sellers happy shortages surplusesSurplus amount = Q____ s____ - q____ d____Quantity supplied quantity demandedShortage amount = q____ d____ - q____ s____quantity demanded quantity suppliedWhen will people search harder for substitutes for oil? when the price of oil is _____highDemand Shifters (Determinants of Demand): These are things, other than the p____ of the good shown on the graph, which change consumer willingness to b____ that good.price buyWhen a demand shifter changes, the position of the demand curve s_____. Economists call these shifts c_____ in d_____ (because the entire demand curve s_____).shifts changes demand shiftsGenerally, anything that makes buyers more inclined to buy the product (other than a change in the p____ of it) will ____ demand and anything that makes buyers less inclined to buy the product (other than a change in the p____ of it) will ____ demand.price increase price decreasePositive relationship: When any of these increase then demand will _____ (shift _____). When any of these decrease then demand will _____ (shift _____). a. Number of b_____ b. Prices of _____ c. Income if _____ good d. T_____ and p_____increase rightward decrease leftward buyers substitutes normal tastes preferencesNegative relationship: When any of these increase then demand will _____ (shift _____). When any of these decrease then demand will _____ (shift _____). e. Prices of _____ f. Income if _____ gooddecrease leftward increase rightward complements inferiorPositive or negative? It depends on the particular situation: g. Expectations of f____ p____ and a____ changesfuture price availabilitySupply Shifters (Determinants of Supply): These are things, other than the p____ of the good shown on the graph, which change seller willingness to s____ that good.price supplyWhen a supply shifter changes, the position of the supply curve s____. Economists call these shifts c____ in s____ (because the entire supply curve s____).shifts changes supply shiftsGenerally, anything that makes sellers more inclined to sell the product (other than a change in the p____ of it) will ____ supply and anything that makes sellers less inclined to sell the product (other than a change in the p____ of it) will ____ supply.price increase price decreasePositive relationship: When any of these increase then supply will ____ (shift ____). When any of these decrease then supply will ____ (shift ____). a. Number of f____ in the industry b. T____ and p____ c. S____increase rightward decrease leftward firms technology productivity subsidiesNegative relationship: When any of these increase then supply will decrease (shift leftward). When any of these decrease then supply will increase (shift rightward). d. Prices of i_____ e. Prices of other goods that use the s_____ i_____ f. T_____decrease leftward increase rightward inputs same inputs taxesPositive or negative? It depends on the particular situation: g. Expectations of f____ p____ and a____ changesfuture price availabilityWhen market conditions change, either the demand curve or the supply curve (or both) will s____. The shift creates a sh____ or a su____shift shortage surplusIf everyone thinks that the price of tomatoes will go up next week, what is likely to happen to demand for tomatoes today? a. The demand for tomatoes _____increasesImagine that a market is in equilibrium. It will tend to stay there because there are no signals for p____ c____. But if demand shifter or supply shifter changes, the market is knocked out of e____ and must regain its balance.price changes equilibriumWhen the price rises, the people who place the lowest value on the good e____, leaving the good available for the people who value it more ____. As would-be buyers and sellers respond to the price change, the s_____ disappears! A new e_____ prevails.exit highly shortage equilibriumWhen demand increases, the equilibrium price will _______ and the equilibrium quantity will _______.increase increaseWhen demand increases a _____ occurs at P1, causing quantity demanded to _____________ and quantity supplied to ____________, until the market reaches a new equilibriumshortage decrease increaseWhen demand decreases, the equilibrium price will _______ and the equilibrium quantity will _______.decrease decreaseWhen demand decreases a ______ occurs at P1, causing quantity demanded to _____________ and quantity supplied to ____________, until the market reaches a new equilibriumsurplus increase decreaseWhen supply increases, the equilibrium price will _______ and the equilibrium quantity will _______.decrease increaseWhen supply increases a ______ occurs at P1, causing quantity demanded to _____________ and quantity supplied to ____________, until the market reaches a new equilibriumsurplus increase decreaseWhen supply decreases, the equilibrium price will _______ and the equilibrium quantity will _______.increase decreaseWhen supply decreases a ______ occurs at P1, causing quantity demanded to _____________ and quantity supplied to ____________, until the market reaches a new equilibrium at P2Q2.shortage decrease increaseIf you know which curve shifted the most, you can ignore the ____ shift and base your predictions on the _____ shift.smaller largerWhen demand rises and supply falls and the demand shift is larger than the supply shift, we can accurately predict that the equilibrium price will ____ and the equilibrium quantity will ____.rise riseWhen demand rises and supply falls and the demand shift is smaller than the supply shift, we can accurately predict that the equilibrium price will ____ and the equilibrium quantity will ____.rise fallWhen demand rises and supply rises and the demand shift is larger than the supply shift, we can accurately predict that the equilibrium price will ____ and the equilibrium quantity will ____.rise riseWhen demand rises and supply rises and the demand shift is smaller than the supply shift, we can accurately predict that the equilibrium price will _____ and the equilibrium quantity will _____.fall riseIf you know the curves shifted by equal amounts, circle the c____ p____. Both forces are reinforcing that particular change. For the other thing, the two forces exactly offset each other and so that thing stays the s____.common prediction sameIf you don't know the relative sizes of the shifts, circle the c____ p____. Both forces are reinforcing that particular change. For the other thing, the two forces may or may not exactly offset each other and so the best you can say is that it will rise, fall, or stay the same (be i____).common prediction indeterminateMarkets are usually efficient mechanisms for a_____ r_____ This means that markets usually produce exactly the r_____ a_____ of a good and that they don't waste r_____allocating resources right amount resourcesBut markets aren't always p____ Sometimes freely functioning markets fail to provide the optimal amount of goods and services. When this happens, we say that m____ f____ occurs.perfect market failure"Market failure" occurs when markets settle into an e_____ where the quantity of output provided is s____-o____equilibrium sub-optimal"Institutional failure" occurs when one of our institutions (e____ system, l____ system, g____), not m____, gives us an undesirable outcome.educational legal government marketsFor example, a lot of people see income inequality in America as a problem, and blame it on "capitalism," or "markets," when some (a lot?) of income inequality is due i____ f____institutional failureOne example of institutional failure would be that some schools aren't as good as others so that some children don't have e____ a____ to education.equal accessAnother example of institutional failure occurs when "crony capitalism" occurs—this is when the friends and donors of elected officials get p____ t____ and/or p____n from competition.preferential treatment protectionThe Five Major Reasons for Market Failure 1. Not Enough C____ 2. The Existence of C____ P____ R____ 3. The Existence of E____ B____ or C____ 4. I____ F____ 5. The Existence of the F____ R____ D____competition common property resources external benefits costs information failures free rider dilemmaIf there is one or only a few firms in a market then a firm can raise its p____ above P* without worrying about losing m____ s____. If there is one or only a few buyers in a market then a buyer can force p____ c____ from the sellers. We are talking about n____-o____ situations; not m____ created by the government.price market share price concessions naturally-occurring monopoliesMarkets without enough competition will produce ____ ____ output.too littleCommon property resources (o____ f____, r____, c____ g____ l____) are owned by the c____ at large and tend to be o____ocean fish rivers common grazing lands community overused"The tragedy of the commons" is the fact that markets that use common property resources as their inputs produce ____ ____ output.too muchExamples of markets that use common property resources include f____ s____, b____ w____, a____ (it takes a lot of water to grow a____), l____ c____.fish sticks bottled water almonds almonds lamb chopsThe absence of e____ is required in order for markets to produce the efficient quantity of a good. If externalities exist then a market won't produce the e____ q____ of the good.externalities efficient quantityMarkets with external benefits will produce ____ ____ output.too littleMarkets with external costs will produce ____ ____ output.too muchExternal benefits (also called p____ e____) are defined as benefits that are conferred on t____ p____ when a trade occurs. The buyers and sellers in the market are h____ and some third parties also b____ from the trade and wish more t____ took place.positive externalities third parties happy benefit tradesMarkets don't produce enough goods with e____ ____ since they don't take the t____ p____' w____ into account when determining how much to produce.external benefits third parties' wishesExternal costs (also called n____ e____) are defined as costs that are imposed on t____ p____ when a trade occurs. The buyers and sellers in the market are h____ but some third parties are h____ by the trade and wish fewer t____ took place.negative externalities third parties happy hurt tradesMarkets produce too many goods with e____ ____ since they don't take the t____ p____' w____ into account when determining how much to produce.external costs third parties' wishesG____ i____ is required in order for markets to produce the efficient quantity of a good. If there is inc____ or ina____ information then a market won't produce the right amount of the good.good information incomplete inaccurateA____ i____ is the problem where one side to a transaction has more information than the other side. Asymmetric information leads to ____ than the optimal number of trades.Asymmetric information fewerThere are two different types of asymmetric information problems: A____ s____ M____ h____Adverse selection Moral hazardAdverse selection occurs ____ the market transaction.beforeAdverse selection is the problem that arises when the people or firms who are most eager to make a transaction are the l_____ d_____ to parties on the other side of the transaction.least desirableThe people or firms on one side of the transaction can't tell "the b____ apples" from "the g____ apples" on the other side, so they treat everyone on the other side as "b____ apples." This leads to ____ than the optimal number of trades. Markets won't p____ e____ goods when adverse selection occurs.bad good bad fewer produce enoughMoral hazard occurs ____ the market transaction.afterMoral hazard is the problem that arises when one party to a transaction changes their b_____ in a way that h____ the other party.behavior harmsThe people or firms on one side of the transaction expect the parties on the other side of the transaction to change their b____, so they p____ their product accordingly. This leads to ____ than the optimal number of trades. Markets won't p____ e____ goods when moral hazard occurs.behavior price fewer produce enoughPublic goods are n____ (consumption of the good by one person doesn't p_____ c_____ of the same good by another person) and n______ (you can't keep a n_____r from using the good). This creates the f____ r____ d____: each of us prefers that someone else p____ for the good, because once it is provided, we each know that we cannot be e____ from using it. Consequently, no one will v____ p____ for it. Without customers, firms won't offer it for s____nonrival preclude consumption nonexcludable nonpayer free rider dilemma pay excluded voluntarily pay saleIn a free market we would each wait for our neighbors to buy n____ d____ or to build a h____ s____. We know that once they pay for it we can use it at n____ c____ to ourselves and at n____ a____ c____ to them. Markets where the free-rider dilemma exists will produce ____ ____ output.national defense highway system no cost no additional cost too littleMarkets for public goods will produce ____ ____ output.too littlescarce good: a good that has more quantity ____ than quantity ____ at a price of $____.demanded supplied 0

Exam 1: Lessons 1, 2, 3, 4, 5, 6, 7

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