Exam 1

Question 1

What is Economics?

Answer 1

the study of decision making in the face of scarcity/ how people use resources and respond to incentive

Question 2

What is Macroeconomics?

Answer 2

deals with the performance, structure, behavior of the economy as a whole

Question 3

What is the supply and demand model?

Answer 3

a model that shows the quantity of each good produced and the price at which it’s sold

Question 4

What are the assumptions of the supply and demand model?

Answer 4

• many buyers and sellers
• All firms selling identical products
• No barriers to entry or leaving

Question 5

What determines consumer demand for a product?

Answer 5

• price of product
• income
• price of related goods
• population and demographics
• Preferences
• Natural Disasters

Question 6

Law of Demand

Answer 6

the higher the price the less demanded. the lower the price the more demanded

Question 7

Substitution Effect

Answer 7

consumers replace more expensive goods with less expensive alternatives

Question 8

Income Effect

Answer 8

the change in quantity demanded when a consumers income changes

Question 9

Normal Goods

Answer 9

Goods you buy more of as income increases

Question 10

Inferior Goods

Answer 10

Goods you buy less of as your income increases

Question 11

Factors that effect quantity supplied

Answer 11

• price of product
• price of inputs
• Changes in Technology
• Number of firms
• Expected future prices
• natural disasters

Question 12

What is a supply schedule?

Answer 12

shows relationship between price and product supplied

Question 13

What is the Law of Supply?

Answer 13

As price increases, supply increases

Question 14

What are some factors that shift the supply curve to the left?

Answer 14

• Price of inputs
• Technological change

Question 15

What is market equilibrium?

Answer 15

A situation where quantity supplied equals quantity demanded

Question 16

What is a price ceiling?

Answer 16

Legal maximum price

Question 17

What is a price floor?

Answer 17

Legal minimum price

Question 18

What is consumer surplus?

Answer 18

the difference between highest price consumers are willing to pay and the price a consumer actually pays

Question 19

What is producer surplus?

Answer 19

the difference between the lowest price a firm would accept and the price you actually receive

Question 20

What is marginal cost?

Answer 20

the additional cost to a firm by producing one more good

Question 21

How can you tell if a market is efficient?

Answer 21

• if all trades take place where the marginal benefit equals marginal cost and no other trades take place
• if it maximizes the sum of consumer and producer surplus

Question 22

What is GDP?

Answer 22

a measure of a countries total production

Question 23

What is a business cycle?

Answer 23

Alternating periods of economic expansion and reduction

Question 24

What is an inflation rate?

Answer 24

the percentage increase in price level from one year to the next

Question 25

What is an intermediate good?

Answer 25

a good that is used to make something else (ex. flour, sugar)

Question 26

What are government purchases?

Answer 26

Spending by the federal, state, or local government on goods and services

Question 27

What is the underground economy?

Answer 27

buying and selling goods and services concealed from the government

Question 28

What are the shortcomings of measuring GDP?

Answer 28

• Doesn’t measure the value of leisure
• Pollution
• Crime and other social problems
• Distribution of income