UARK ECON 2013 Exam 1

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Economics

is the study of the choices people make to attain their goals, given their scarce resources.

Economic Models

Simplified versions of reality used to analyze real-world economic situations.

Market

A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

In analyzing markets, we generally assume

1.People are rational.

2.People respond to economic incentives.

3.Optimal decisions are made at the margin.

(M C and M B)

the additional cost or benefit associated with a small amount extra of some action.

Marginal Analysis

Analysis that involves comparing marginal benefits and marginal costs is called

Trade-off

The idea that, because of scarcity, producing more of one good or service means producing less of another good or service.

Opportunity Cost

The highest-valued alternative that must be given up in order to engage in some activity is known as the

Centrally planned economy

An economy in which the government decides how economic resources will be allocated.

Market economy

An economy in which the decisions of households and firms interacting in markets allocate economic resources.

Mixed economy

An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.

Productive efficiency

a situation in which a good or service is produced at the lowest possible cost

Allocative efficiency

a state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.

Voluntary exchange

A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction.

Equity

The fair distribution of economic benefits.

Building an economic model often follows these steps

1.Decide on the assumptions to use.

2.Formulate a testable hypothesis.

3.Use economic data to test the hypothesis.

4.Revise the model if it fails to explain the economic data well.

5.Retain the revised model to help answer similar economic questions in the future.

Behavioral Assumptions

•Consumers will buy goods and services to maximize their well-being.

•Firms act to maximize their profits.

Economic variables

Something measurable that can have different values, such as the number of people employed in manufacturing.

Positive analysis

Analysis concerned with what is.

Normative analysis

Analysis concerned with what ought to be.

Tariffs

taxes on imports

Microeconomics

•How households and firms make choices,

•How they interact in markets, and

•How the government attempts to influence their choices.

Macroeconomics

the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Technology

The processes a firm uses to produce goods and services.

Capital

Manufactured goods that are used to produce other goods and services.

Percentage change

the change in some economic variable, usually from one period to the next, expressed as a percentage.

Economics is the study of

how society manages its scarce resources.

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Candice is planning her activities for a hot summer day. She would like to go to the local swimming pool and see the latest blockbuster movie, but because she can only get tickets to the movie for the same time that the pool is open she can only choose one activity. This illustrates the basic principle that

people face tradeoffs.

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1. The terms equality and efficiency are similar in that they both refer to benefits to society. However they are different in that

equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits from scarce resources.

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High-school athletes who skip college to become professional athletes

understand that the opportunity cost of attending college is very high.

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Suppose that you have received $300 as a birthday gift. You can spend it today or you can put the money in a bank account for a year and earn 5 percent interest. The opportunity cost of spending the money today, in terms of what you could have after one year, is

$315.

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Melody decides to spend three hours working overtime rather than going to the park with her friends. She earns $20 per hour for overtime work. Her opportunity cost of working is

the enjoyment she would have received had she gone to the park.

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Hamid spends an hour studying instead of watching TV with his friends. The opportunity cost to him of studying is

the enjoyment he would have received if he had watched TV with his friends.

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People are willing to pay more for a diamond than for a bottle of water because

the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.

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The Get-There-Safe Bus company incurs an average cost of $45 for each passenger it carries on its trip from Atlanta to Chattanooga. In advance of a particular trip, four seats remain unsold. The bus company could increase its profit only if it

charged any ticket price above $0 for the four remaining seats.

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Central planning refers to

government guiding economic activity. Today many countries that had this system have abandoned it.

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One way to characterize the difference between positive statements and normative statements is as follows:

Positive statements offer descriptions of the way things are, whereas normative statements offer opinions on how things ought to be.

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Which of the following is an example of a positive, as opposed to normative, statement?

Prices rise when the government prints too much money.

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Which of the following areas of study typifies macroeconomics as opposed to microeconomics?

the effect on the economy of changes in the nation's unemployment rate

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production possibilities frontier (P P F)

a curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology.

Opportunity cost

The highest-valued alternative that must be given up to engage in an activity.

The more resources already devoted to an activity

the smaller the payoff to devoting additional resources to that activity

Economic growth

the ability of the economy to increase the production of goods and services

Trade

the action of buying and selling

Absolute advantage

The ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources

Comparative advantage

The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors

The basis for trade is

comparative advantage

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market

a group of buyers and sellers of a good or service, and the institution or arrangement by which they come together to trade.

Households

consist of individuals who provide the factors of production

factors of production

labor, capital, natural resources, and other inputs used to make goods and services.

Households receive payments for these factors by selling them to firms in

factor markets

Firms supply goods and services to

product markets; households buy these products from the firms.

Labor

All types of work, from the part-time labor of teenagers working at McDonald's to the work of senior managers in large corporations.

Natural resources

Land, water, oil, iron ore, and other raw materials (or "gifts of nature") that are used in producing goods.

entrepreneur

someone who operates a business.

Entrepreneurial ability

the ability to bring together the other factors of production to successfully produce and sell goods and services.

Circular-flow diagram

A model that illustrates how participants in markets are linked.

•Households provide factors of production to firms.

•Firms provide goods and services to households.

•Firms pay money to households for the factors of production.

•Households pay money to firms for the goods and services.

free market

one with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed

Adam Smith argued for free markets in his

1776 treatise, An Inquiry into the Nature and Causes of the Wealth of Nations.

Property rights

The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.

Enforcement of contracts and property rights

•Important for transactions across time to occur.

•An independent court system is critical for this.

An economic theory about international trade that is based on the assumption that there are only two countries trading two goods

can be useful in helping economists understand the complex world of international trade involving many countries and many goods.

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In the simple circular-flow diagram, households

own the factors of production.

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Factors of production are

inputs into the production process.

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Which of the following is an example of a capital input?

a computer

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Suppose an economy only produces two goods, robots and ice cream. Last month, the economy produced 10 robots and 200 gallons of ice cream. This month, the same economy produced 15 robots and 240 gallons of ice cream. Which of the following statements could explain this change?

All of the above are correct.

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Which of the following trade-offs does the production possibilities frontier illustrate?

Once an economy has reached the efficient points on its production possibilities frontier, the only way of getting more of one good is to get less of the other.

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If an economy is producing efficiently, then

there is no way to produce more of one good without producing less of another good.

The opportunity cost of obtaining more of one good is shown on the production possibilities frontier as the

amount of the other good that must be given up.

The "invisible hand" refers to

how the decisions of households and firms lead to desirable market outcomes.

If the government were to intervene and set the rent for apartments in New York City below the market rent, then we would expect, relative to the market outcome,

an increase in the number of people wanting to live in apartments in New York City.

Which of the following is not a reason people choose to depend on others for goods and services?

to allow people to produce outside their production possibilities frontiers

Abby bakes brownies and Liam grows flowers. In which of the following cases is it impossible for both Abby and Liam to benefit from trade?

Abby does not like flowers and Liam does not like brownies.

An economy's production possibilities frontier is also its consumption possibilities frontier

when the economy is self-sufficient.

Ken and Traci are two woodworkers who both make tables and chairs. In one month, Ken can make 3 tables or 18 chairs, whereas Traci can make 8 tables or 24 chairs. Given this, we know that

Traci has an absolute advantage in chairs.

Both Dave and Caroline produce sweaters and socks. If Dave's opportunity cost of 1 sweater is 3 socks and Caroline's opportunity cost of 1 sweater is 5 socks, then

Dave has a comparative advantage in the production of sweaters.

perfectly competitive market

(1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.

Demand schedule

A table that shows the relationship between the price of a product and the quantity of the product demanded

Quantity demanded

The amount of a good or service that a consumer is willing and able to purchase at a given price

Demand curve

A curve that shows the relationship between the price of a product and the quantity of the product demanded.

Market demand

the demand by all the consumers of a given good or service.

ceteris paribus

The requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held

Law of demand

The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.

Implication: Demand curve slopes downward

substitution effect

The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes.

income effect

The change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power.

Income of consumers

Increase in income increases demand if product is normal, decreases demand if product is inferior

Prices of related goods

Increase in price of related good increases demand if products are substitutes, decreases demand if products are complements

Normal good

A good for which the demand increases as income rises, and decreases as income falls.

Examples: Clothing

Restaurant meals

Vacations

Inferior good

A good for which the demand decreases as income rises, and increases as income falls.

Examples: Second-hand clothing

Ramen noodles

Substitutes

Goods and services that can be used forthe same purpose.

Examples: Big Mac and Whopper

Ford F-150 and Dodge Ram

Jeans and Khakis

Complements

Goods and services that are used together.

Examples: Big Mac and McDonald’s fries

Hot dogs and hot dog buns

Left shoes and right shoes

Tastes

If consumers’ tastes change, they may buy more or less of the product.

Example:

If consumers become more concerned about eating healthily, they might decrease their demand for fast food.

Population and demographics

Increases in the number of people buying something will increase the amount demanded.

Example:An increase in the elderly population increases the demand for medical care

Supply schedule

A table that shows the relationship between the price of a product and the quantity of the product supplied

Quantity supplied

The amount of a good or service that a firm is willing and able to supply at a given price

Supply curve

A curve that shows the relationship between the price of a product and the quantity of the product supplied.

The law of supply

The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

Implication: supply curves slope upward.

decrease in supply

An increase in the price of an input decreases the profitability of selling the good

increase in supply

A decrease in the price of an input increases the profitability of selling the good