Exam One

Question 1

What is economics defined as?

Answer 1

Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices.

Question 2

What is macroeconomics?

Answer 2

Macroeconomics is the study of the performance of the national economy and the global economy.

Question 3

What is the economic resource called entrepreneurship?

Answer 3

The human resource that organizes labor, land, and capital. Entrepreneurs are the drivers of economic progress. They develop new ideas about what and how to produce, make business decisions, and bear the ricks that arise from these decisions.

Question 4

What is scarcity?

Answer 4

Our inability to get everything we want is called scarcity. Scarcity is universal. It confronts all living things.

Question 5

What does Adam Smith’s invisible hand refer to?

Answer 5

An invisible hand leads decisions made in pursuit of self-interest to unintentionally promote the social interest.

Smith was referring to how a free market will seem to correct itself by some unseen force. In reality, prices reflect the changes of supply and demand. It often appears as if someone is intervening in this natural occurrence. Hence, the term the invisible hand.

Question 6

What are economic models?

Answer 6

An economic model is a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand.

Question 7

What are the factors of production?

Answer 7

Factors of production are the resources used to produces goods and services. They are grouped into four categories:
Land
Labor
Capital
and
Entrepreneurship

Question 8

What is human capital?

Answer 8

Human capital is the knowledge and skill that people obtain from education, on-the-job training, and work experience.

Question 9

What is capitalism?

Answer 9

Market capitalism is an economic system in which individuals own all the land and capital and are free to buy and sell land, capital, and goods and services in markets.

Question 10

What is centrally planned socialism?

Answer 10

Centrally planned socialism is an economic system in which the government owns all the land and capital, directs workers to jobs, and decides what, how, and for whom to produce.

Question 11

What are the three big economic questions?

Answer 11

• How do choices end up determining what, how, and for whom goods and services are produced?
• Do the choices that people make in the pursuit of their own self-interest unintentionally promote the broader social interest?

-What, How, and For Whom?

Question 12

What is a positive/normative statement?

Answer 12

A positive statement is about what is. It says what is currently believed about the way the world operates. A positive statement might be right or wrong, but we can test it by checking it against the facts.

A normative statement is about what ought to be. It depends on values and can not be tested. Policy goals are normative statements.

Question 13

What is opportunity cost?

Answer 13

The opportunity cost of something is the highest valued alternative that must be given up to get it.

Question 14

CHAPTER

Answer 14

TWO

Question 15

What does a production possibilities frontier represent?

Answer 15

The production possibilities frontier is the boundary between those combinations of goods and services that can be produced and those that cannot. To illustrate the PPF, we look at a model economy in which the quantities produced of only two goods change, while the quantities produced of all the other goods and services remains the same.

Question 16

When does production efficiency occur using a production possibilities frontier model?

Answer 16

We achieve production efficiency if we produce goods and services at the lowest possible cost. This outcome occurs at all the points on the PPF.

Question 17

What is allocative efficiency and when does it occur?

Answer 17

When goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit, we have achieved allocative efficiency.

Question 18

How is economic growth shown using a production possibilities frontier?

Answer 18

Economic growth is demonstrated by an outward shift of the production possibilities curve

Question 19

What is the key factor for economic growth?

Answer 19

Trade-offs

Question 20

How is opportunity cost shown using a production possibilities frontier?

Answer 20

The opportunity cost of an action is the highest-valued alternative forgone. The PPF makes this idea precise and enables us to calculate opportunity cost. ALong the PPF, there are only two goods, so there is only one alternative forgone: some quantity of the other good. Opportunity cost is a ratio. It is the decrease in the quantity produced of one good divided by the increase in the quantity produced of another good as we move along the production possibilities frontier.

Question 21

What is a market?

Answer 21

In economics, a market is any arrangement that enables buyers and sellers to get information and to do business with each other.

Question 22

Why do tradeoffs exist when production is along a production possibilities frontier?

Answer 22

A choice along the PPF involves a tradeoff. At any given time, we have a fixed amount of labor, land, capital, and entrepreneurship and a given state of technology. We can employ these resources and technology to produce goods and services, but we are limited in what we can produce.

Question 23

What do points outside a production possibilities frontier represent?

Answer 23

The PPF illustrates scarcity because the points outside the frontier are unattainable. These points describe wants that can’t be satisfied.

Question 24

What is marginal benefit?

Answer 24

The marginal benefit from a good or service is the benefit received from consuming one more unit of it.

Question 25

What does a point inside a production possibilities frontier represent?

Answer 25

At points inside the PPF, the production is inefficient because we are giving up more than necessary of one good to produce a given quantity of the other good. Production inside the PPF is inefficient because resources are either unused or misallocated or both.

Question 26

What does a point on the production possibilities frontier represent?

Answer 26

We achieve production efficiency if we produce goods and services at the lowest possible cost. This outcome occurs at all the points on the PPF.

Question 27

What does increasing opportunity cost mean?

Answer 27

The opportunity cost of an item increases as the quantity of the item produced increases. The outward-bowed shape of the PPF reflects increasing opportunity cost.

Question 28

Why is a production possibilities frontier bowed out?

Answer 28

The PPF is bowed outward because resources are not all equally productive in all activities.

Question 29

When does a country possess comparative advantage?

Answer 29

A country is said to have a comparative advantage in whichever good has the lowest opportunity cost. That is, it has a comparative advantage in whichever good it sacrifices the least to produce.

Thus, the good in which a comparative advantage is held is the good that the country produces most efficiently (for Switzerland, its chocolate). Therefore, if given a choice between producing two goods (or services), a country will make the most efficient use of its resources by producing the good with the lowest opportunity cost, the good for which it holds the comparative advantage. The country can trade with other countries to get the goods it did not produce (Switzerland can buy cheese from someone else).

A country has a comparative advantage in that product with the lowest opportunity cost of production.

Question 30

CHAPTER

Answer 30

THREE

Question 31

What factors lead to a movement along a demand curve?

Answer 31

If the price of the food changes, but no other influence on buying plans changes, we illustrate the effect as a movement along the demand curve. A fall in the price of a good increases the quantity demanded of it. We illustrate the effect of a fall in price as a movement down along the demand curve. A rise in the price of a good decreases the quantity demanded of it. We illustrate the effect of a rise in price as a movement up along the demand curve.

Question 32

What are substitute goods?

Answer 32

A substitute is a good that can be used in place of another good. For example, a bus ride is a substitute for a train ride; a hamburger is a substitute for a hot dog; and an energy drink is a substitute for an energy bar. If the price for a substitute for an energy bar rises, people buy less of the substitute and more energy bars. For example, if the price of an energy drink rises, people buy fewer energy drinks and more energy bars. The demand for energy bars increases.

Question 33

What is a shortage and when does it occur?

Answer 33

A shortage occurs if the price is below equilibrium.
The rising price reduces the shortage because it decreases the quantity demanded and increases the quantity supplied. A shortage forces the price up.

Question 34

What factors lead to a shift of the demand curve?

Answer 34

If the price of a good remains constant but some other influence on buying plans changes, there is a change in demand for that good. We illustrate a change in demand as a shift of the demand curve. There is a change in demand and the demand curve shifts when any influence on buying plans changes, other than the price of the good. Demand increases and the demand curve shifts rightward if the price of a substitute rises, the price of a complement falls, the expected future price of the good rises, income increases (for a normal good), expected future income or credit increases, or the population increases.
Demand decreases and the demand curve shits leftward if the price of a substitute falls, the price of a complement rises, the expected future price of the food falls, income decreases (for a normal good), expected future income or credit decreases, or the population decreases.
(For an inferior good, the effects of changes in income are in the opposite direction to those described above.)

Question 35

What factors lead to a shift of the supply curve?

Answer 35

A change in any influence on selling plans other than the price of the good itself results in a new supply schedule and a shift of the supply curve.
An increase in supply shifts the supply curve rightward, and a decrease in supply shifts the supply curve leftward.
The prices of factors of production, the prices of related goods produced, expected future prices, the number of suppliers, technology, state of nature.

Question 36

What are complementary goods?

Answer 36

A complement is a good that is used in conjunction with another good. The quantity of energy bars that people plan to buy also depends on the prices of complements with energy bars. Hamburgers and fries are complements, and so are energy bars and exercise. If the price of an hour at the gym falls, people buy more gym time and more energy bars.

Question 37

What are relative prices?

Answer 37

The ratio of one price to another is called a relative price, and a relative price is an opportunity cost.

Question 38

What are normal goods?

Answer 38

A normal good is one for which demand increases as income increases.

Question 39

What are inferior goods?

Answer 39

An inferior good is one for which demand decreases as income increases.

Question 40

What is equilibrium quantity?

Answer 40

The equilibrium quantity is the quantity bought and sold at the equilibrium price.

A market moves toward its equilibrium because price regulates buying and selling plans, prices adjusts when plans don’t match.

Question 41

What is equilibrium price?

Answer 41

The equilibrium price is the price at which the quantity demanded equals the quantity supplied.

Question 42

What is surplus and when does it occur?

Answer 42

A surplus is when the price is above equilibrium. The falling price decreases the surplus because it increases the quantity demanded and decreases the quantity supplied. A surplus forces the price down.

Question 43

What does the law of supply state?

Answer 43

The law of supply states:
Other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied.

Question 44

What does the law of the demand state?

Answer 44

The law of demand states:
Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the greater is the quantity demanded.

Question 45

What is the difference between demands and wants?

Answer 45

Wants are the unlimited desires or wishes that people have for goods and services.
Demand reflects a decision about about which wants to satisfy.
Scarcity guarantees that many—perhaps most—of our wants will never be satisfied.

Question 46

What is income effect?

Answer 46

When a price rises, other things remaining the same, the price rises relative to income. Faced with a higher price and an unchanged income, people cannot afford to buy all the things they previously bought. They must decrease the quantities demanded of at least some goods and services. Normally, the good whose price has increased will be one of the goods that people buy less of.

Question 47

What is substitution effect?

Answer 47

When the price of a good rises, other things remaining the same, its relative price—its opportunity cost— rises. Although each good is unique, it has substitutes—other goods that can be used in its place. As the opportunity cost of a good rises, the incentive to economize on its use and switch to a substitute becomes stronger.

Question 48

What relationship does the supply curve show?

Answer 48

A supply curve shows the relationship between the quantity supplied of a good and its priced when all other influences on producers’ planned sales remains the same. The supply curve is a graph of a supply schedule.

Question 49

What are the determinants of supply?

Answer 49

• The prices of factors of production.
• The prices of related goods.
• Expected future prices.
• The number of suppliers.
• Technology.
• The state of nature.