Unit 01: Basic Economic Concepts

Question 1

01.02 Economic Basics

What is a Market Economy?

Answer 1

Questions are answered by the forces of supply and demand

• individuals own factors of productoin
• freedom to buy and sell

ex: USA

Question 2

01.02 Economic Basics

What is a Command Economy?

Answer 2

Government makes decisions and own all factors of production

• no incentives take risks
• ex: Cuba, USSR

Question 3

01.02 Economic Basics

What is the Traditional Economy?

Answer 3

Economic decisions dicated by traditions

• market forces not a factor
• third world nations

Question 4

01.02 Economic Basics

What is a mixed economy?

Answer 4

Two or more types economies exist in one nation

Question 5

01.02 Economic Basics

What is postitive and normative economics?

Answer 5

Positive Economics: way to look at economy → “what goods are produced”

Normative Economics: how things should be

Question 6

01.02 Economic Basics

What are the factors of Production?

Answer 6

Hard answer questions → unlimited wants & scarce resources

Economics: study allocation scarce resources

Question 7

01.03 Scarcity and Opportunity cost

What is scarcity and opportunity cost?

Answer 7

Economics → study overcome scarcity

• economic goods (hold value) are scarce (limited)

Scarcity → force make decisions and trade-offs = opportunity cost

“cost of choice make”

thing give up = opportunity cost (next best alternative)

• 3 options: second best → opportunity cost

Question 8

01.04 Production Possibilities Curves

What is th Law of Increasing Opportunity cost?

Answer 8

Increase production of one goods, must give up increasing units of other

Question 9

01.04 Production Possibilities Curves

Define Resource Sustainability

Answer 9

Resources in economy not adaptable to produce both goods

Question 10

01.04 Production Possibilities Curves

What are the three types of curves of a PPC Curve?

Answer 10

Concave (bowing): indicates opportunity costs between two goods

• due to Law of Increasing Costs

Diagnonal Line: constant opportunity costs

Straight Line: no opportunity cost

• good parallel to line = free

Question 11

01.04 Production Possibilities Curves

According to the production possibilities curve above, if the economy moves from point B to point E, the opportunity cost of each additional guava jelly

1. increases.
2. decreases.
3. remains the same.

Answer 11

Increase

Question 12

01.04 Production Possibilities Curves

According to the production possibilities curve above, which letter best represents an economy whose resources are not being fully utilized?

1. A
2. B
3. C
4. D
5. E

Answer 12

4. D

Question 13

01.04 Production Possibilities Curves

According to the production possibilities curve above, what is the opportunity cost of adding an additional 75 fishing boats in an economy that is already producing 75 fishing boats?

50 fishing boats

100 fishing boats

50 jars of guava jelly

100 jars of guava jelly

200 jars of guava jelly

Answer 13

1. 200 jars of guava jelly

Question 14

01.04 Production Possibilities Curves

4. If the production possibilities curve is concave from the origin, then economists say that

resources are scarce in the economy.

economic growth is occurring in the economy.

resources are not equally suited for the production of both goods.

resources are being inefficiently used in the economy.

resources are equally suited for the production of either good.

Answer 14

3. resources are not equally suited for the production of both goods.

Question 15

01.04 Production Possibilities Curves

According to the production possibilities frontier above, a movement from the inside curve to the outside curve represents

• inefficiency in the economy.
• an unattainable point in the economy.
• economic growth in the economy.
• a decrease in resources
• a change from unemployment to full employment of resources in the economy.

Answer 15

3. economic growth in the economy.

Question 16

01.04 Production Possibilities Curves

7. If the production possibilities curve is a vertical line, then economists say that
8. there are constant opportunity costs associated with these goods.
9. resources are equally suited for the production of either good.
10. the good on the X axis is a free good.
11. the good on the Y axis is a free good.
12. there are increasing opportunity costs for producing both goods.

Answer 16

4. the good on the Y axis is a free good.

Question 17

01.04 Production Possibilities Curves

If an economy is operating at a point on the production possibilities curve, economists say that it is operating

below the full employment level of output.

above the full employment level of output.

at a level that is inefficient given the resources available.

at the full employment level of output.

at a level that is attainable but inefficient.

Answer 17

4. at the full employment level of output.

Question 19

01.04 Production Possibilities Curves

Correct

All of the following will cause an outward shift of the production possibilities curve except:

New technology

Increased education of workers

An increase in productive resources

A decrease in population

Software advances

Answer 19

4.

A decrease in population

Question 20

An example of an economic inefficiency in a nation is

1. full employment.
2. unemployment.
3. opportunity cost.
4. production possibilities.
5. resources.

Answer 20

2. unemployment

Question 21

01.05 Absolute and Comparative Advantage

Define Absolute and comparative advantage?

Answer 21

Absolute Advantage

Better at both tasks; who produces the most goods the fastest

Comparative Advantage

Lowest opportunity cost to produce something

Question 22

01.05 Absolute and Comparative Advantage

What are the steps to determine comparative advantage?

Answer 22

Step 01: Divide the number of each product by number of product I for company A

Step 02: Divide the number of each product by number of product I for company B

Step 03: Divide the number of each product by number of product II for company A

Step 04: Divide the number of each product by number of product II for company B

Step 05: Determine which has to lowest opportunity cost for each product

Question 23

01.06 Demand

Define Demand:

Answer 23

Demand: when an entity is both (1)willing and (2)able to purchase an item.

Question 24

01.06 Demand

What is Quantity Demaded?

Answer 24

Law of Demand:

Inverse relationship between price and quantity demanded (QD)

Influencing Factor: PRICE

• Determine if consumers buy more or less

What: Quantity demanded

• only moved point on curve (not curve as a whole)
• Inverse relationship with price

Question 25

01.06 Demand

What are the Determinants of Demand? (5)

Answer 25

• shifts entire demand curve*
  1. Tastes and Preferences
  what: any number things change → make consumers buy more
  example: celebrity endorsement, accusation racism, health concerns
  2. Related goods and services

what:

1. Less willing buy if substitutes are cheaper
2. Pay more if any complements are cheaper

example: salsa demand increase, so does chips
3. Income

what:

1. Normal goods: direct relationship increase in income and demand
2. Inferior goods: inverse relationship between increase in income and demand
3. Buyers (amount of)
   what: more people demand goods → curve shift right (opposite if people decrease)
4. Expectations of price

what:

1. believe price about to go up → shift right
2. believe price go down soon → shift left

Question 26

01.06 Demand

What are the reasons for downwards sloping demand curve?

Answer 26

1. Willing and able as price decreases
2. Income Effect:

buy more if the price decreases

3. Substitute Effect:

substitute the less expensive good

Question 27

01.06 Demand

What are complements and subsitutes?

Answer 27

Complements: demand dependent upon change in price other good (inverse relationship)

Substitutes: the price of one increases the demand for substitute good increases (direct relationship)

Question 28

01.06 Demand

What are normal and inferior goods?

Answer 28

Complements: demand dependent upon change in price other good (inverse relationship)

Substitutes: the price of one increases the demand for substitute good increases (direct relationship)

Question 29

01.05 Absolute and Comparative Advantage

Assume the Macro Islands can produce 25 fishing boats or 150 jars of guava jelly in one hour. The Micro Islands can produce 30 fishing boats or 300 jars of guava jelly in the same time period. This data tells an economist that

1. the Macro Islands have an absolute advantage in producing fishing boats and the Micro Islands have an absolute advantage in producing guava jelly.
2. the Micro Islands have an absolute advantage in producing fishing boats and the Macro Islands have an absolute advantage in producing guava jelly.
3. the Macro Islands have a comparative advantage in producing fishing boats and the Micro Islands have a comparative advantage in producing guava jelly.
4. the Micro Islands have a comparative in producing fishing boats and the Macro Islands have a comparative advantage in producing guava jelly.
5. the Micro Islands have a comparative and absolute advantage in producing fishing boats.

Answer 29

3. the Macro Islands have a comparative advantage in producing fishing boats and the Micro Islands have a comparative advantage in producing guava jelly.

Question 30

01.05 Absolute and Comparative Advantage

2.

Assume the Macro Islands can produce 25 fishing boats or 150 jars of guava jelly in one hour. The Micro Islands can produce 30 fishing boats or 300 jars of guava jelly in the same time period. The opportunity cost of producing 1 fishing boat in the Micro Islands is

1. 1/10 jar of guava jelly.
2. 1/6 jar of guava jelly.
3. 6 jars of guava jelly.
4. 10 jars of guava jelly.
5. indeterminate with the information given.

Answer 30

4. 10 jars of guava jelly.

Question 31

01.05 Absolute and Comparative Advantage

The production possibilities frontiers above show the production possibilities for two goods produced in the Macro and Micro Islands using the same resources. From these curves, we can determine that

1. the Micro Islands have an comparative advantage in producing suntan lotion and sun glasses.
2. the Micro Islands have an absolute advantage in producing sun glasses and suntan lotion.
3. the Macro Islands have a comparative advantage in producing suntan lotion.
4. the Macro Islands have an comparative advantage in producing sun glasses.
5. The Macro Islands have a comparative advantage in producing suntan lotion and the Micro Islands have a comparative advantage in producing sun glasses.

Answer 31

4. the Macro Islands have an comparative advantage in producing sun glasses.

Question 32

01.05 Absolute and Comparative Advantage

Two nations are negotiating a trade agreement for two goods. Both nations have the same amount of resources available to produce the two goods. Using the production possibilities curves above, you can determine that the opportunity cost of one unit of good B is

1. 4 units of good A for Nation X and 2 units of good A for Nation Y.
2. 4 units of good A for Nation X and 1/2 unit of good A for Nation Y.
3. 1/4 unit of good A for Nation X and 2 units of good A for Nation Y.
4. 1/4 unit of good A for Nation X and 1/2 unit of good A for Nation Y.
5. 200 units of good A for Nation X and 50 units of good A for Nation Y.

Answer 32

2. 4 units of good A for Nation X and 1/2 unit of good A for Nation Y.

Question 33

01.05 Absolute and Comparative Advantage

Refer to the graph above of a country’s production possibilities curve. If three automobile tires are currently being produced, the opportunity cost of producing the fourth automobile tire would be

1. 60 car radios.
2. 50 car radios.
3. 45 car radios.
4. 35 car radios.
5. 25 car radios.

Answer 33

4. 35 car radios.

Question 34

01.05 Absolute and Comparative Advantage

Meagen and Jim both produce pies and loaves of bread for bakeries in the Macro Islands. The table above shows some of the combinations of the two products that can be produced using the same resources.

Use the table above to answer the following questions:

1. What is Meagen’s opportunity cost for producing 1 pie and 1 loaf of bread?
2. What is Jim’s opportunity cost for producing 1 pie and 1 loaf of bread?
3. Who has the comparative advantage in the production of each good?

Answer 34

Part a:

Megan can produce 20 pies (and 0 bread) or 60 bread (and 0 pies). Therefore, the opportunity cost of pies is as follows:

1. 20 pies ÷ 20 pies = 1 pie
2. 60 bread ÷ 20 pies = 3 bread

However, the opportunity cost of the production of bread is as follows:

1. 60 bread ÷ 60 bread = 1 bread
2. 20 pies ÷ 60 bread = 1/3 pies

Part b:

Jim can produce 80 pies (and 0 bread) or 40 bread (and 0 pies). Therefore, the opportunity cost of pies is as follows:

1. 80 pies ÷ 80 pies = 1 pie
2. 40 bread ÷ 80 pies = 1/2 bread

However, the opportunity cost of producing bread is as follows:

1. 40 bread ÷ 40 bread = 1 bread
2. 80 pies ÷ 40 bread = 2 pies

Part c:

The opportunity cost for Megan to produce 1 pie is 3 bread, while Jim’s opportunity cost to produce a pie is equal to only 1/2 bread; therefore, Jim has the comparative advantage in the production of pies. However, where it takes Jim 2 pies to produce 1 bread, it only takes Megan 1/3 pie to produce a loaf of bread, meaning that Megan has the comparative advantage in bread production.

Question 35

01.06 Demand

If the price of papayas increases from $1.00 each to $1.25, will this cause a change in demand or quantity demanded?

1. Quantity Demanded
2. Demand
3. Demand is the entire curve.

Answer 35

1. Quantity Demanded

Question 36

01.06 Demand

Use the table above showing three demand curves (D1, D2, and D3) to answer the following question.

Given the demand curve D2 for papayas and a price of $2.50, if more consumers move to the Macro Islands how many papayas are consumers now willing and able to purchase at $2.50?

1. 200
2. 150
3. 100
4. 250
5. 300

Answer 36

1. 200

Question 37

01.06 Demand

If more consumers move to the area, will this cause a change in demand or quantity demanded?

1. Quantity Demanded
2. Demand

Answer 37

2. Demand

Question 38

01.06 Demand

4. If a new technology made it easier to draw crude oil out of the ground, how would demand for crude oil change as a result?
5. Decreases
6. Increases
7. Remains the same

Answer 38

3. Remains the same

Question 39

01.06 Demand

When Mrs. Edwards raises the price of Grad Nite tickets,

1. the demand for movie tickets increases because of the increase in the number of buyers.
2. the quantity demanded for movie tickets increases because the price of Grad Nite tickets increases.
3. the demand for movie tickets increases because student incomes change.
4. the demand for movie tickets increases because they are cheaper than Grad Nite tickets.
5. the quantity demanded for movie tickets increases because the number of buyers increases.

Answer 39

4. the demand for movie tickets increases because they are cheaper than Grad Nite tickets.

Question 40

01.06 Demand

The demand for Grad Nite tickets would decrease if

1. your income decreased and the price of tickets decreased.
2. your income decreased and Grad Nite tickets were a normal good.
3. your income decreased and Grad Nite tickets were an inferior good.
4. the price of Grad Nite tickets increased.
5. your income increased and Grad Nite tickets were a normal good.

Answer 40

2. your income decreased and Grad Nite tickets were a normal good.

Question 41

01.06 Demand

Suppose people like tuna salad and chicken salad equally well. If the price of tuna salad increases, which of the following statements is true?

1. The quantity demanded of chicken salad will decrease.
2. The quantity demanded of tuna salad will decrease.
3. The demand for tuna salad will increase.
4. The demand for tuna salad will decrease.
5. The demand for chicken salad will decrease.

Answer 41

2. The quantity demanded of tuna salad will decrease.

Question 42

01.06 Demand

8. If the demand for pineapple rises when people’s income rises, then pineapple is a(n)
9. normal good.
10. inferior good.
11. substitute good.
12. complementary good.
13. preferred good.

Answer 42

1. normal good.

Question 43

01.06 Demand

If demand for flash drives increases when the price of cell phones increases, we can say that cell phones and flash drives are

1. normal goods.
2. inferior goods.
3. substitute goods.
4. complementary goods.
5. preferred goods.

Answer 43

3. substitute goods.

Question 44

If the price of energy drinks increases, then the

1. demand for energy drinks increases.
2. quantity demanded for energy drinks increases.
3. demand for energy drinks decreases.
4. quantity demanded for energy drinks decreases.
5. supply of energy drinks increases.

Answer 44

4. quantity demanded for energy drinks decreases.

Question 45

01.07 Supply

Define Supply:

Answer 45

Suppliers are (1) willing and (2) able to produce goods and services

Price → main factor determines whether producer willing to sell

only change with quantiy suppied

Law of Supply: Direct relationship between price and quantity supplied

• if price for a commodity is low, firm will produce less

Question 46

01.07 Supply

Define the Determinants of Supply: (6)

Answer 46

1. Resources: cost and availability
   what: resources necessary become more expensive → curve move left (opposite if resources more available)
2. Other good’s price

what:

1. Left: suppliers easily switch prouction to another good for more probability
2. Right: cannot make as much producing other good, supply curve move back
3. Taxes, subsidies, and government regulations

what:

1. subsidy effectively lower cost of production → right
2. regulations or tax increase cost of production → left
3. Technology (productivity)
   what: new tech generally lowers resources costs (right)
4. Expectations of the producer
   what: expect demand increase/decrease = adjust production
5. Number of the firms in industry
   what: number firms in industry increase (ceteris paribus) = supply right

Question 47

01.07 Supply

Use the table above showing three supply curves (S1, S2, and S3) to answer the following question.
Given the supply curve S2 for papayas above, if the price of papayas increases from $2.50 each to $3.00, how many papayas are producers willing and able to supply?

1. 350
2. 250
3. 200
4. 300
5. 150

Answer 47

2. 250

Question 48

01.07 Supply

If the price of papayas increases from $1.00 each to $1.25, will this cause a change in supply or quantity supplied?

1. supply
2. quantity supplied

Answer 48

2. quantity supplied

Question 49

01.07 Supply

If a new lemon juicer is produced that is more efficient than human laborers, what will happen to supply of lemonade as a result?

1. increases
2. remains the same
3. decreases

Answer 49

1. increases

Question 50

01.07 Supply

4. If the minimum wage that all businesses pay their employees increases, what happens to the supply of consumer goods as a result?
5. increases
6. remains the same
7. decreases

Answer 50

3. decreases

Question 51

01.07 Supply

When Mrs. Edwards lowers the price of Grad Nite tickets, the

1. the supply of Grad Nite tickets increases because of the increase in the number of sellers.
2. the supply for Grad Nite tickets increases because there are more resources.
3. the supply for Grad Nite tickets increases because there is a decrease in regulations.
4. the quantity supplied for Grad Nite tickets decreases because the price decreases.
5. the quantity supplied for Grad Nite tickets increases because the price decreases.

Answer 51

4. the quantity supplied for Grad Nite tickets decreases because the price decreases.

Question 52

01.07 Supply

The market for flip-flops is in equilibrium. If a new machine is created to mold the shoes, then we would expect to see a/an

1. increase in supply.
2. increase in quantity supplied.
3. decrease in supply.
4. decrease in quantity supplied.
5. shortage in the market.

Answer 52

1. increase in supply.

Question 53

01.07 Supply

The market for flip-flops is in equilibrium. If the price increases from $4.00 to $5.00, then we would expect to see a/an

1. increase in supply.
2. increase in quantity supplied.
3. decrease in supply.
4. decrease in quantity supplied.
5. shortage in the market.

Answer 53

2. increase in quantity supplied.

Question 54

01.07 Supply

The market for orchids is in equilibrium. If the price decreases from $10.00 to $5.00, then we would expect to see a/an

1. increase in supply.
2. increase in quantity supplied.
3. decrease in supply.
4. decrease in quantity supplied.
5. surplus in the market.

Answer 54

4. decrease in quantity supplied.

Question 55

01.07 Supply

The market for orchids is in equilibrium. If a freeze in the southeast causes the rose growers to begin growing orchids, then we would expect to see a/an

1. increase in supply of orchids.
2. increase in quantity supplied of orchids.
3. decrease in supply of orchids.
4. decrease in quantity supplied of orchids.
5. surplus in the market of orchids.

Answer 55

1. increase in supply of orchids.

Question 56

01.07 Supply

The market for orchids is in equilibrium. If the government decreases business taxes, then we would expect to see a/an

1. increase in supply.
2. increase in quantity supplied.
3. decrease in supply.
4. decrease in quantity supplied.
5. shortage in the market.

Answer 56

1. increase in supply.

Question 57

01.08 Equilibrium

Define Equilibrium:

Answer 57

Point where the demand and supply curve intercepts

• Price suppliers charge for their product & price consumers should pay for product

Question 58

01.09 Price Ceilings and Floors

Define Price Floors:

Answer 58

Government sets lowest price a business allowed charge for a good

QS > QD

Result: SURPLUS

• more goods than people want to buy
• waste of goods

Question 59

01.09 Price Ceilings and Floors

Define Price Ceilings;

Answer 59

Legal price maximum is placed on a good

QD > QS

Result: SHORTAGE

• less goods than people willing to bue
• result: discrimination, black markets, poor maintenance

Question 60

01.09 Price Ceilings and Floors

Which of the following will occur if the government institutes an effective price floor on ice cream?

1. There will be an increase in supply of ice cream.
2. There will be an increase in demand for ice cream.
3. There will be a decrease in demand for and an increase in supply of ice cream.
4. The quantity demanded will be greater than the quantity supplied of ice cream.
5. The quantity supplied will be greater than the quantity demanded for ice cream.

Answer 60

5. The quantity supplied will be greater than the quantity demanded for ice cream.

Question 61

01.09 Price Ceilings and Floors

When the government sets an effective price floor

1. there will be an increase in supply.
2. there will be an increase in demand.
3. there will be a decrease in supply.
4. there will be a decrease in demand.
5. neither supply nor demand will change.

Answer 61

5. neither supply nor demand will change.

Question 62

01.09 Price Ceilings and Floors

When the government sets an effective price floor

1. suppliers are helped and consumers are helped.
2. suppliers are hurt and consumers are helped.
3. suppliers are helped and consumers are hurt.
4. This is an incorrect answer. Have a nice day!
5. supply increases due to the increase in price.

Answer 62

3. suppliers are helped and consumers are hurt.

Question 63

01.09 Price Ceilings and Floors

According to the table above, if the government sets an effective price floor of $100,

1. market forces will cause the quantity demanded to drop and the quantity supplied to rise.
2. a shortage will exist.
3. a surplus will exist.
4. market forces will cause demand to drop and supply to rise.
5. market forces will cause supply to drop and demand to rise.

Answer 63

3. a surplus will exist.

Question 64

According to the table above, if the government sets an effective price floor of $100,

1. the supply will decrease to create equilibrium.
2. the demand will decrease to create equilibrium.
3. the quantity supplied will increase to create equilibrium.
4. the quantity demanded will be 250.
5. the market will be in equilibrium.

Answer 64

4. the quantity demanded will be 250.

Question 65

What two factors causes the PPF to shift?

Answer 65

1. Amount of resources in the economy
2. Changes in technology or productivity

Question 66

What is the Law of Increasing Costs?

Answer 66

More of a product is produced, the opportunity cost will increase

(illustrated in concave curves)