ECO 111 Units 1-4

What can be said about the models that economists use to make predictions or to explain economic phenomenon

The models are based on observed behavior (data) of how people and businesses have actually behaved in the past

Economics is called an empirical science because

economists study real-world evidence (data) to test and revalidate their models to ensure that their models are accurate and predictive.

How do economists ensure that their models are useful?

Economists continuously validate their economic models i.e. continuously obtain evidence to test the usefulness of the model i.e. does it yield accurate predictions

why do we call Economics an empirical science

Empirical means that evidence (data) is looked at to see whether the model is right

The highest value next best alternative sacrificed to obtain something you want is referred to as

opportunity cost

In the figure below, which of the following points indicates the efficient use of resources?

b

In the figure below, which of the following points is impossible given the level of resources?

h

In the figure below, which of the following points indicates an inefficient use of resources?

f

Economic growth shifts the production possibilities curve outward

true

When a nation invests in Capital Goods, it is usually true that

it must forego some current consumption in the present

whenever the economy is operating on the PPC we say its production is

efficient

A point outside of the PPC is

impossible

what are the fundamental assumptions that underlie economic theory?

self - interest, rationale, incentives

macroeconomics

big picture/broad effects

microeconomics

small economic units, behaviors of individual households/firms

how do nations achieve economic growth?

investment in capital goods

examples of capital goods?

office equipment, computers, human capital (education)

consumption goods

goods produced for personal satisfaction (in the present)

capital goods

goods used to produce other goods (for future consumption)

What is the result of foregoing current consumption and instead investing in Capital Goods ?

Economic Growth - more of all goods may be produced and consumed in the future

Economic growth shifts the production possibilities curve

outward

Generally, specialization and division of labor leads to

greater productivity and economic growth.

The Law of Demand states

As price increases, quantity demanded decreases, all other things equal

The law of demand implies that the demand curve

has a negative slope

Which change causes a movement along the demand curve

price changes

5 “non-price” factors that impact demand

consumers income, tastes/preferences, price of related goods, expectations of future prices/incomes, market size

increased income

Demand Curve Shifts Right (Normal Good)

decreased income

Demand Curve Shifts Left (Normal Good)

Tastes Change in favor of product

Demand Curve Shifts Right

Tastes Change disfavoring of product

Demand Curve Shifts Left

price of related good substitute increase

demand curve shifts right

price of related good compliment increase

demand curve shifts left

price of related good substitute decrease

demand curve shifts right

price of related good compliment decrease

demand curve shifts right

expect future prices to increase

demand curve shifts right

expect future prices to decrease

demand curve shifts left

increase # of buyers

demand curve shifts right

decrease # of buyers

demand curve shifts left

normal goods

Goods for which demand rises as income rises; most goods are normal goods e.g. steak 

inferior goods

Goods for which demand falls as income rises e.g. beans

What are the two types of Related Goods ?

substitutes and compliments

substitutes

a change in the price of one good cause the demand for the two products to go in the opposite direction

compliments

change in the price of one good cause the demand for the 2 products to go in the same direction

The Law of Supply states that ____

there is a positive relationship between the price of any good and the quantity supplied, holding all other factors constant

Non-Price Factors that shift Supply:

cost of inputs, tech/productivity, taxes/substitutes, # of firms in industry

If the cost of cotton (an input cost) used in making blue jeans decreases, which of the following will occur?

The supply curve for jeans will shift rightward.

Which of the following causes a movement along a supply curve?

a change in price

If government sets the maximum legal price of gasoline at $2 per gallon, then the $2 limit acts as

a price ceiling

a price ceiling occurs

when the government sets the price below the equilibrium price

The Imposition of a Price Ceiling results in

shortages

The Imposition of a Price floor results in

surpluses

If the Gov’t raises the min wage to $8, how many people will companies be willing to employ ?

100

Therefore, at $8 how many people will lose their jobs ?

300

At $8, how many new workers would choose to work, but now cannot find work ?

300

Thus, total unemployment created by the min wage of $8 is ?

600

Demand for labor with law of demand 

If minimum wage increases the quantity of labor decreases 

Supply of labor with law of supply 

If minimum wage increases the quantity of labor increases 

If the QD<QS, then you have a

surplus

If the QD>QS, then you have a

shortage