Economics: Key Concepts, Models, and Trade-offs for Students

What is economics best defined as?

The study of how people, businesses, governments, and societies make choices to cope with scarcity.

What methods do economists use to test predictions of economic models?

Natural experiments, statistical investigations, and economic experiments.

What is a rational choice in economics?

A decision that maximizes benefits based on individual preferences and available information.

What type of economic issue is indicated by expectations on US inflation?

A macroeconomic issue.

What type of economic issue is raised by proposed tax hikes on tobacco firms?

A microeconomic issue.

What is the opportunity cost of a trip to Hawaii for Pam and Pat?

The opportunity cost is a cruise, while for Pru it is skiing.

What does opportunity cost represent?

The highest-valued alternative that is forgone when making a choice.

What is an example of scarcity in decision-making?

Deciding whether to take a part-time job or an extra course this term.

What is a benefit of attending summer school?

Easier access to the professor due to smaller class sizes.

When is attending summer school considered a rational decision?

When the benefit of the summer school course is greater than its cost.

How did the success of Guardians of the Galaxy influence the opportunity cost of hiring Chris Pratt?

It increases the opportunity cost, leading to more incentive for producers to hire him.

What was scarce when Kanye West offered free concert tickets?

The seats available for the concert.

What does it mean if a country must decrease production of one good to increase another?

It must be producing on its production possibilities frontier.

What is the marginal cost of Hassan's decision to skate for an additional hour?

The marginal cost exceeded the marginal benefit due to a drop in his economics grade.

What is the significance of positive and normative statements in economics?

They help economists to disentangle cause and effect in economic models.

What is the opportunity cost for Pru when going to Hawaii?

The opportunity cost is the skiing trip she preferred.

What is the relationship between scarcity and choice?

Scarcity necessitates making choices, leading to trade-offs.

What does the term 'marginal benefit' refer to?

The additional benefit received from consuming one more unit of a good or service.

What does it mean if a decision has a zero opportunity cost?

It implies that the alternative not chosen has no value or consequence.

What is the implication of a rational choice in economics?

It reflects a decision that maximizes individual satisfaction based on available options.

What does the term 'trade-off' mean in economics?

The concept of giving up one thing to gain another.

What is an example of a microeconomic issue?

Will proposed tax hikes on tobacco firms reduce smoking?

What is an example of a macroeconomic issue?

Expectations on US inflation.

What must a country do to increase the production of one good at the expense of another?

It must be producing on its production possibilities frontier.

When can a nation produce at a point outside its production possibilities frontier (PPF)?

When it trades with other nations.

What does a point inside a production possibilities frontier indicate?

It could indicate that some resources are unemployed.

What does a tradeoff illustrate in relation to the PPF?

The negative slope of the PPF.

What characterizes an efficient allocation of resources?

It occurs when we cannot produce more of a good without giving up some other good that we value more highly.

What is an expansion of the production possibilities frontier called?

Economic growth.

What does the increasing production of health care services in the U.S. due to an aging population represent?

A movement upward along the PPF.

In the circular flow model, what do households receive income from?

The sale of factors in the goods markets.

What does it mean if the U.S. cannot produce more jets without giving up corn?

The U.S. has achieved production efficiency.

When is resource use considered allocatively efficient?

When marginal benefit is equal to marginal cost.

How did Covid-19 affect U.S. production possibilities in 2020?

Covid-19 decreased U.S. production possibilities and shifted the PPF inward.

What defines a person with a comparative advantage in producing a good?

They can produce it at a lower opportunity cost than anyone else.

What must individuals or countries do to gain from comparative advantage?

They must trade.

What does the U.S. having a large export of pop culture suggest?

The U.S. has a lower opportunity cost of producing pop culture compared to other countries.

What is Kim's opportunity cost of producing a pie if she can produce 40 pies or 400 cakes per hour?

Kim's opportunity cost of producing a pie is 10 cakes.

Who has a comparative advantage in producing pies and cakes between Kim and Liam?

Kim has a comparative advantage in producing pies and Liam has a comparative advantage in producing cakes.

Who has a comparative advantage in producing snowboards and skis, Tony or Patty?

Tony has a comparative advantage in producing snowboards.

If Tony and Patty specialize and trade, who specializes in snowboards?

Patty specializes in snowboards and produces 18 snowboards.

If Tony and Patty specialize and trade, who specializes in skis?

Tony specializes in skis and produces 8 skis.

What are the gains from trade if Tony and Patty trade 1 snowboard for 1 ski?

The gains from trade refer to the total number of snowboards or skis produced before trade.

What is the total number of snowboards produced before trade between Tony and Patty?

13 (4 from Tony and 9 from Patty)

What is the effect of specialization on the total production of snowboards and skis?

Total snowboards produced increases by 10, and total skis produced increases by 7.

What is economic growth primarily driven by?

Capital accumulation and technological advance.

What is the expected outcome of President Obama's education policy?

It would increase the future production of consumption goods and services.

What happens to the demand for chocolate chip cookies when their price rises?

There is a movement upward along the demand curve.

What factors can shift the demand curve for hamburgers?

A fall in the price of french fries, an increase in the number of hamburger restaurants, or an increase in the price of the meat used to produce hamburgers.

What defines a substitute good?

A good that can be used in place of another good.

What is the effect of an increase in the number of consumers on the demand curve?

It shifts the demand curve rightward.

What happens to the demand for gloves during an unusually warm winter?

The demand curve for gloves shifts leftward.

What is the impact of a poor sugar harvest on the price of coffee?

There will be a decrease in the demand for coffee.

Which factor influences buying plans but does not shift the demand curve?

The price of the good.

What caused the price of saccharin to drop dramatically?

The demand for saccharin decreased after it was found to cause cancer.

What is the effect of an increase in the number of fast-food restaurants?

It increases the supply of fast-food meals.

How does an increase in the price of jet fuel affect airline travel?

It decreases the supply of airline travel.

What happens when the price of cheese used to produce pizza increases?

It shifts the supply curve of pizza leftward.

How does an increase in the price of steel affect the demand curve for cars?

There is not enough information to determine how it shifts the demand curve.

What occurs when a market is in equilibrium?

There is no shortage and no surplus at the equilibrium price.

What is the result of a price of $15 per dozen roses?

A surplus that will cause the price of roses to fall.

What happens to the price of bicycles if the price of steel increases?

There will be an increase in the price of a bicycle.

What was the effect of advances in PC production technology between 2000 and 2015?

The price of a PC fell and the quantity sold increased.

What happens to equilibrium quantity when demand increases and supply decreases?

The equilibrium quantity will decrease, and the price outcome is uncertain.

What happens when demand for a good increases while its supply decreases?

The equilibrium price increases.

What occurs when demand for a good decreases and supply increases?

The equilibrium price decreases.

What is the effect on equilibrium price and quantity when both demand and supply decrease?

The equilibrium quantity decreases, but the effect on price is ambiguous.

If the equilibrium price of bottled water rises from $1.00 to $2.00 and quantity increases, what type of shift occurs?

A rightward shift of the demand curve.

What happens to the price and quantity of jelly if the demand for peanut butter increases?

The demand for jelly increases, leading to an increase in both the price and quantity of jelly.

What does a rise in the price of bananas, a substitute for oranges, indicate in the market for oranges?

An increase in the demand for oranges.

What is the effect on gasoline equilibrium price and quantity if the price of crude oil falls?

The equilibrium price of gasoline falls and the equilibrium quantity increases.

What shift occurs in the demand for airline tickets during a recession?

A shift from D0 to D1, indicating a decrease in demand.

What does a rise in jet fuel prices indicate for the supply of airline tickets?

A shift from S0 to S1, indicating a decrease in supply.

What does GDP exclude in its calculation?

Intermediate goods and services to avoid double counting.

What does the circular flow diagram illustrate?

The flows between different sectors of the economy.

What is depreciation in the context of capital goods?

The reduction in value of an asset over time.

What is the impact of an increase in exports on GDP?

It increases GDP.

What does consumption expenditure include?

Payments by households for goods and services.

How can GDP be computed?

As the total expenditures of consumption, investment, government expenditure, and net exports.

Why does GDP count only final goods and services?

To avoid double counting of goods going through several stages of production.

What is the formula for calculating GDP?

C + I + G + (X - M).

What does GDP equal besides aggregate expenditure?

Aggregate income.

What is typically true about nominal GDP compared to real GDP?

Nominal GDP is greater than real GDP due to price increases.

Which component of GDP is the largest?

Personal consumption expenditure.

What is nominal GDP?

The value of final goods and services at the prices of that year.

What defines real GDP?

The value of total production measured at the prices of a single year.

What happens to nominal GDP when production increases?

Nominal GDP increases with rising prices.

What does potential GDP measure?

The maximum production possible without causing inflation.

What is a common definition of a recession?

A decrease in real GDP for two or more successive quarters.

What does real GDP omit that affects economic welfare?

Household production, leisure time, and environmental quality.