ECON201 - Exam 1 - Review Flashcards
What is Economics best defined as?
A social science concerned with how individuals, institutions and society make optimal choices under conditions of scarcity.
The economizing problem is one of deciding how to make best use of what?
Limited resources to satisfy virtually unlimited wants.
The main function of the entrepreneur is to what?
Innovate
Macroeconomics approaches the study of economics from the viewpoint of what?
The entire economy
According to economists, economic self interest is what?
A reality that underlies economic behavior
The assertion that “there is no free lunch” means what?
That all production involves the use of scarce resources and thus the sacrifice of alternative goods.
A man buys a $1000 item and sells it a year later for $1000. Though he didn’t lose money he is upset because he could have earned a 3% interest rate if he put the money in a saving account. This analysis incorporates the idea of what?
Opportunity Costs
Economics is concerned with how _______ , _______, and ______ make _______ ________ under conditions of _________.
individuals, institutions, society, optimal choices, scarcity
Economic models emphasize what?
Basic economic relationships by purposefully simplifying the complexities of the real world.
The production possibilities curve illustrates what?
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.
What is an economic explanation for why college-age movie stars do not attend college?
The opportunity cost in terms of reduced income is too great.
A point inside of the production possibilities curve but illustrates what?
Unemployment
Does upgrading the quality of a nations human resources produce an outward shift of the production possibilities curve?
Yes
Does the reduction of unemployment produce an outward shift of the production possibilities curve?
No
Does an increase in the quality of a society’s labor force produce an outward shift of the production possibilities curve?
Yes
Does the improvement of a society’s technological knowledge produce an outward shift of the production possibilities curve?
Yes
The simple circular flow model shows what?
Households are on the buying side of both product and resource markets.
The two basic markets shown by the simple circular flow model are what?
Product and resource.
In terms of the circular flow diagram, businesses obtain revenue through the ______ market and make expenditures in the _____ market.
Product; resource
What is an example of a limitation of the simple circular flow model?
The determination of product and resource prices is not explained.
What is demand?
The quantity of a good that costumers are willing and able to purchase at a certain price during a specific period of time.
What is the Law of Demand?
All else equal, as the price falls the quantity demanded rises and vice versa.
Change in quantity demanded does what?
Involves movement along the demand curve due to change in price.
Change in demand does what?
Involves a shift of the entire demand curve to the right or left due to change in one or more of the determinate of demand.
Determinants of demand.
Changes in taste,
Number of buyers,
Consumer income,
Price of related goods, expectations
Definition of supply?
The quantity of goods that producers are willing and able to make available for sale at each of possible prices during a specific period of time.
Law of Supply
As the price rises the quantity supplied rise. As the price falls the quantity supplied falls.
Change in the quantity supplied does what?
Involves movement along the supply curve due to a change in the price.
Change in supply.
The key idea is that costs are a major factor underlying the supply curve. Therefore anything that affects cost usually shifts the supply curve.
Define Surplus
When price is greater than market clearing price, suppliers are willing to supply more than the customer are willing to buy; hence, market shortage with is also known as excess supply.
Define shortage
When price is less than market clearing price, customers are willing to purchase more than the producers are willing to supply; hence, market shortage which is also known as excess demand.
Define equilibrium
By trial and error, market participants will eventually arrive at market clearing price. Only at this market clearing price that the quantity the producers are willing to produce is identical to the quantity consumers are willing and able to purchase.
One reason that the quantity of a good demanded increases when its price falls is that the:
Lower price increases the real incomes of buyers enabling them to buy more.
Will a change in the price of close-substitute product J cause the demand for product K to change?
Yes
Will an increase in consumer incomes cause the demand for product K to change?
Yes
Will a change in the price of K cause the demand for product K to change?
No
Will a change in consumer tastes cause the demand for product K to change?
Yes
If products C & D are close substitutes, an increase in the price of C will:
Shift the demand curve of D to the right
If products A & B are complements and the price of B decreases the:
Demand for A will increase and the amount of B demanded will increase.
College students consume lots of ramen and macncheese. When they finish school their consumption of these goods frequently decline. This suggests ramen noodles and macncheese are:
Inferior Goods
By “increase in demand” we mean that:
The quantity demanded at each price in a set of prices is smaller.
The law of supply indicates that:
Consumers will offer more of a product at high prices than they will at low prices.
The law of demand states that
price and quantity demanded are inversely related
The location of the product supply curve spends on
Production technology
The relationship between quantity supplied and price is _______
Direct
The relationship between quantity demanded and price is
Inverse
Other things equal, an excise tax on a product will:
Increase its price
If supply increases and demand decreases
Equilibrium price will fall
GDP is the:
Monetary value of all final goods and services produced within the borders of a nation in a particular year
GDP can be calculated by summing
Investment, government purchases, consumption, and net exports
National income accountants can avoid multiple counting by:
Only counting final goods
Real GDP is
The nominal value of all goods and services produced in the domestic economy corrected for inflation or deflation.
Growth is advantageous to a nation because it:
Lessens the burden of scarcity
More than half the growth of real GDP in the U.S. is caused by:
Increases in the productivity of labor.
In the _____ phase of the business cycle, the economy will most likely experience rising real output and failing unemployment rates.
Expansion
The United States’ economy is considered to be at full employment when:
about 4-5% of the labor force is unemployed.
Assuming an economy has a total population of 300m people, 90m people are under 16/institutionalized, 60m people are not in the labor force and 9m people are unemployed. The unemployment rate is :
6%
The GDP gap measures the difference between
Actual GDP and potential GDP
For every 1 percentage point that the actual unemployment rate exceeds the natural rate, a 2 percentage point negative GDP gap occurs. This is a statement of:
Oakun’s Law
In the Consumer Price Index rises from 300 to 333 in a particular year, the rate of inflation in that year is:
11%
“Too much money chasing too few goods” best describes:
Demand-pull system
Suppose the nominal annual interest rate on a 1 year loan is 2% and lenders expect annual inflation to be 1%. The annual real rate of interest is:
1%
As a consequence of the condition of scarcity:
Individuals have to make choices from among alternatives
The idea in economics that “there is no free lunch” means that:
There are opportunity costs when scarce resources are used for free lunches
The opportunity cost of a new public highway is the:
Other goods and services that must be sacrificed to construct the new highway
Economic models do not reflect the full complexity of reality, but instead are based on:
Simplifications
The role of the entrepreneur in society is to:
Bring the factors of production together and take the risks of producing
The production possibilities curve represents:
Maximum combinations of products available with fixed resources and technology
The law of increasing opportunity costs says that:
Along a production possibilities curve, increases in the production of one type of good require larger and larger sacrifices of the other type of good
Increases in resources or improvements in technology will tend to cause a society’s production possibilities curve to:
Shift outward or to the right
Which statement best describes a command economy?
The production and allocation of goods and services is determined primarily through government
In a market system, well-defined property rights are important because they:
Encourage economic activity
In the circular economic flow diagram, households:
Make consumption expenditures and pay for land, labor, and capital
A market demand schedule for a product indicates that:
There is an inverse relationship between price and quantity demanded
If two goods are close substitutes:
An increase in the price of one will increase the demand for the other
The law of supply is illustrated by a supply curve that is:
Upward sloping
Which would cause a leftward shift in the supply curve for car washes?
An increase in the price of car washing equipment
With allocative efficiency:
There is production of that particular mix of goods and services most wanted by society
Which is most likely to be observed in a community where legal ceilings are imposed on residential rents?
People moving into the community will have difficulty locating residential space to rent
A definition of the gross domestic product (GDP) is:
The market value of final goods and services produced by the economy in one year
Nominal GDP differs from real GDP because:
Real GDP is adjusted for changes in the price level
The service a homeowner performs when she mows the yard is not included in the gross domestic product because:
This is a nonmarket transaction
Which is the single most important source of U.S. economic growth?
Increases in labor productivity
A recession is a decline in:
GDP that lasts six months or longer
Which industry or sector of the economy would least likely be affected by the business cycle?
Services
Which is the correct way to calculate the unemployment rate?
[(unemployed)/(labor force)] x 100
The natural rate of unemployment:
Is equal to the total of frictional and structural unemployment
If the natural rate of unemployment was 6 percent, the current unemployment rate was 12 percent, and the nominal GDP was $4,000 billion, then according to Okun’s law the economy would have sacrificed:
$480 billion in potential output
Inflation is a:
Sustained rise in the general level of prices
If the Consumer Price Index was 166.6 in one year and 172.2 in the next year, then the rate of inflation from one year to the next was:
3.4%
How large is the U.S. labor force?
Approx. 157m workers
Market What
Decision Makers , Scarcity , Consumption , Production , Voluntary Exchange
Market Why
Social Welfare, + Sum Gain, No deadweight loss, people are nicer to one another, We have limited capacity to love
What do we need Gov. for?
To enforce property rights
Why do we need Gov. to enforce property rights?
Because we are human with a human nature with tendencies toward Hobbian Jungle
Consumer good vs. Capital good
Consumer- Satisfies our wants directly
Capital - Used as a factor of production in process of producing other goods
What does the PPC model do?
Shows various combos of possibilities of goods an economy can possibly produce USING ALL OF ITS AVAILABLE RESOURCES during a period of time
PPC assumptions
full production & employment, fixed technology & resources, only consumer and capital goods
Point outside of PPC
Unattainable
Point inside of PPC
Attainable
U.S. Average growth rate
3.4%
U.S. 3.4% growth rate accounted for by what?
2/3 Technological progress
1/3 Increase in resources
Why do we really not need anything?
When the cost is expensive enough we no longer need it.
Does self interest equate to being selfish?
No
What determined the value of a good in exchange?
The degree of its relative scarcity
+ slope
Direct relation
- slope
Inverse relation
Model
simplistic representation of reality
What is a Pareto Superior Move
A policy that could make at least one person in society better off without making someone else worse off
Production Process
VALUE ADDED transformation of all resources into goods and services that people are willing to pay for
Economy problem
Having to make a choice and the consequences of said choice.
Increase in supply, Decrease in Supply
Shift to the right, shift to the left (price is constant)
Determinants of supply
Resource prices , # of sellers , Technology , Taxes and subsidies
Determinants of demand
Tastes (consumer preferences) , # of buyers , Avg. Income , Prices of related goods. (goods and substitutes - direct, Complimentary goods - inverse)
Equlibrium
Quantity produced = quantity supplied
Shortage
Price is held below equilibrium price
Surplus
Price held above equilibrium price
