Exam 1 - Practice Problems & Notes Flashcards
Which of the following exemplifies a microeconomic question?
Will a new type of electronic reader or tablet increase the number of buyers?
Which of the following do economists consider to be capital?
A construction crane
In deciding whether to study for an economics quiz or go to a movie, one is confronted by the idea of
scarcity and opportunity costs
From and economic perspective, when consumers leave a fast-food restaurant because the lines to be served are too long, they have concluded that the
marginal cost of waiting is greater than the marginal benefit of being served
Which of the following is consistent with the law of demand?
An increase in the price of hamburgers causes buyers to buy fewer hamburgers
Which of the following would most likely increase the demand for gasoline?
The expectation by consumers that gasoline prices will be higher in the future
Suppose that goods A and B are close substitutes. If the price of good A falls, then we would expect an
increase in the quantity of A demanded and a decrease in the demand for B
If a subsidy is provided for the production of good X, this will shift the:
supply curve for X to the right
Farmers withholding some of their current corn harvest from the market because they anticipate a higher price of corn in the near future would cause a
leftward shift in the current supply of corn
Which one of the following would not affect the position of the supply curve for cranberries?
Popularity of cranberry drinks
An increase in demand for oil along with a simultaneous increase in supply of oil will
increase quantity, but whether it increases price depends on how much each curve shifts
The two reasons why bankruptcy is a false concern about the public debt are
refinancing and taxation
Which one of the following is not an example of final goods in national income accounting?
lumber and steel beams purchased by a construction company
A business buys $5,000 worth of inputs from other firms in order to produce a product. The business makes 100 units of the product and each of them sells for $65. The value added by the business to these products is
1,500
Which of the following is included in GDP?
Fees received by stockbrokers
In November 2009, Econland Motors produced an automobile that was delivered to a local dealership in December 2009. The auto was then sold to Sharon Smith for personal use in February of 2010. Following national income accounting practices, this auto would be counted as part of
investment in 2009 and negative investment in 2010
The following are national income account data for a hypothetical economy in billions of dollars: gross private domestic investment ($320), imports ($35), exports ($22), personal consumption expenditures ($2,460), and government purchases ($470). What is GDP in this economy?
$3,237 billion
A large underground economy results in an
understated GDP
Economic growth in the U.S. since 1950 has been characterized by an
average growth rate in real GDP that is faster than the growth rate of the population
Use the list below to answer the next question.
1. Improvements in technology.
2. Increases in the supply (stock) of capital goods.
3. Purchases of expanding output.
4. Obtaining the optimal combination of goods, each at least-cost production.
5. Increases in the quantity and quality of natural resources.
6. Increases in the quantity and quality of human resources.
Which set of items in the list would shift an economy’s production possibilities curve outward?
1, 2, 5, and 6.
Suppose there are two economies, Alpha and Beta, that have the same production possibilities curves. If Beta devotes more resources to produce capital goods than consumer goods as compared to Alpha, then in the future
Beta will experience greater economic growth than Alpha.
A nation’s real GDP was $250 billion in 2013 and $265 billion in 2014. Its population was 120 million in 2013 and 125 million in 2014. What is its real GDP growth rate in 2014?
6.0%
A nation’s average annual real GDP growth rate is 3%. Based on the “rule of 72,” the approximate number of years that it would take for this nation’s real GDP to double is
24 years
The study of decision making at its core.
Economics
Looking at the economy on a small scale level.
Microeconomics
Looking at the economy on a large scale level.
Macroeconomics
The foundation of all productive activity.
Resources
Any item whether it is a gift of nature, results of production, or results of human effort that is used to produce goods and services.
Factors of Production
Resources (4)
Land
Labor
Capital
Entrepreneurial Ability
Any natural resource used in production.
Land
Any physical or mental activity used to produce goods or services.
Labor
Any tool, machine, infrastructure, or knowledge used to produce goods and services.
Capital
Any tangible item that can increase productivity.
Physical Capital
The knowledge and the skills that people acquire in order to increase their productivity
Human Capital
The talent or ability to combine land, labor, and capital to produce goods and services.
Entrepreneurial Ability
Having unlimited wants and having limited resources.
Scarcity
The value of your next best forgone alternative.
Opportunity Cost
Assumptions for Decision Making
Self-Interest
Marginal Decision Making
Optimization (Getting the most benefit)
Shown in a production frontier
Straight line production
Tradeoff is the same
Constant Opportunity Cost
The advantage to produce a good or service at a lower relative opportunity cost than another producer.
Comparative Advantage
A model that describes how goods, services, resources, and money flow back and forth in an economy.
Circular Flow Model
Land, Labor, Capital, and Entrepreneurial Ability is bought and sold
Resource Market
Brings together buyers and sellers for goods and services
Product Market
Any place where or any mechanism by which buyers and sellers will interact to trade any goods, services or resources.
Market
___ sets the price
The market
A prince in economics which states that as the price of a good, service, or resource rises, the quantity demanded will decrease, and vice versa, all else held constant.
The law of demand
3 factors of law of demand
Marginal benefit
Purchasing Power
Substitutes
Increased preference for the good or service
Taste and Preferences
A good for which there is a direct relationship for the demand for the good and income
Normal Good
A good for which there is an inverse relationship for the demand for the good and income
Inferior Good
If there is an increase in the number of buyers, it will shift the demand curve to the right and vice versa
Market size
If you expect prices to go up in the future, demand now will increase
Expectations
A good, service, or resource that is viewed as a replacement for one another
Substitutes
A good, service, or resource that is used or consumed together
Complements
A principle in economics that states that as the price of a good, service, or resource rises, the quantity supplied will increase, and vice versa, all else held constant
The law of supply
A payment by businesses or firms to the government
Tax
A payment by the government that the business doesn’t have to pay anything in return
Subsidy
A minimum legal price at which a good, service, or resource can be sold
Price floor
Taxes on quantities
Excise Tax
A situation in which a government receives more revenue than it spends in a given fiscal year
Budget Surplus
A situation in which a government receives less revenue than it spends in a given fiscal year
Budget Deficit
A situation in which the government spends exactly what it collects in revenue in a given fiscal year
Balanced Budget
Accumulation of all budget deficits and surpluses by a government
National Debt
The market value of all final goods and services produced in an economy in a fixed period of time
Gross Domestic Product (GDP)
The GDP measure in which quantities produced are valued at current year prices
Nominal Gross Domestic Product
Any good or service that are sold to the end user and not used to produce something else for subsequent sale
Final Goods and Services
Goods that are used to make or build another product that are subsequently sold
Intermediate Good
GDP Formula
Consumption + Gross Investment + Government Purchases + Net Exports
All expenditures made by households on goods and services, like clothing, food, electronics and recreation, during a given time period
Consumption
Goods that have an average useful life of 3 years or more
Consumer Durables
Goods that have an average useful life of less than 3 years
Consumer Nondurables
Output often intangible of direct activities of another person
Services
All final goods purchased by federal, state, and local governments during a given time period, as well as all final services purchased from labor resources
Government Purchases
The dollar value of all new capital purchased (as investment) and the expansion of inventories in an economy during a fixed time period
Gross Investment
Purchases by firms of new capital goods
Business Fixed Investments
The purchases of new homes
Residential Investment
Changes in inventories from one year to the next
Inventory Investment
Inventory Investment
Postive if..
Negative if..
Positive if firms produce more than they sell
Negative if firms sell more than they produce
The consumption of physical capital, or the value of capital that wears out, is used up, or becomes obsolete during a year
Depreciation
The dollar value of all new capital purchased during a given time period.
Gross Investment
Net investment =
Gross investment - Depreciation
The difference between exports (goods made domestically and purchased by foreign consumers) and imports (goods made in other countries and purchased domestically).
Net Exports
A positive net exports value:
A negative net exports value:
Exports are greater than imports
Imports are greater than exports
An approach to measuring GDP that measures the value of all final goods and services in an economy during a time period using income generated
Income Approach
Using the income approach you calculate GDP by including:
Indirect business taxes
Depreciation
Net foreign factor income
National income
Total payments to owners of resources plus profits and losses; the sum of rent, wages, interest, and profits and losses to sole proprietors and firms
National Income
The difference between payments received from resources owned in foreign countries and income earned by people in foreign countries from resources own domestically
Net Foreign Factor Income
The consumption of physical capital, or the value of capital that wears out, is used up, or becomes obsolete during a year
Depreciation
Taxes paid by businesses, such as property taxes, sales taxes, excise taxes, license fees, and tariffs
Indirect Business Taxes
A general increase in prices of goods and services
Inflation
A metric that we use to keep prices constant and compare prices over time
Real GDP
How do you calculate real prices?
Use the prices from year one with the year two quantities to be able to compare real production changes
The profits and losses earned by individual proprietors
Proprietors Income
Profits and losses of corporations
Corporate Income
A price index based on all the goods and services that are counted as part of GDP
GDP Price Index
Calculate GDP price index?
(Nominal GDP 1 / Real GDP 1)
x 100
Problems with GDP
Home production Underground economy Intangibles Resource Depletion Externalities
The level of overall well-being enjoyed by an average individual, group, or society
Standard of Living
An increase in real GDP or an increase in real GDP per capita
Economic Growth
Economic Growth can occur if:
We obtain additional resources
We invent new technologies
Existing resources become more productive
The rate of change of a variable over a specific period of time; usually expressed as a percentage change
Growth Rate
Growth rate formula
(GDP2-GDP1)/GDP1
x 100
