Eco 2023 Final UCF Tarek

Microeconomics

focuses on how governments, individuals, and businesses make decisions when faced with scarcity

Macroeconomics

the study of the economy at the large-scale level, examining total output, the price level, and other aggregate measures in the economy

Resources are

relatively scarce in all countries and the foundation of all productive activity

Resource categories

land, labor, capital, and entrepreneurial ability

Land

natural resources used in production and referred to as gifts of nature

Labor

all physical and mental activity devoted to producing goods and services

Capital

the tools, machinery, infrastructure, and knowledge used to produce goods and services

Entrepreneurial Ability

the talent or ability to combine land, labor, and capital to produce goods and services

A recurring theme in economics is that

people have unlimited economic wants but limited resources

Scarcity

a condition that results from the inability of limited resources to satisfy unlimited wants

Opportunity Cost

the value of the next best forgone alternative; the value of the opportunity that you gave up when you chose one activity or opportunity instead of another

Economic reasoning is based on the premise that:

all decisions or actions have a cost associated with them

Role of Incentives

shape the behavior of people, economists believe that if a behavior receives a reward people will do more of it and vice versa

To say that people respond to incentives is to say that

changes in benefits or changes in costs influence people's decisions and their behavior

Assumptions for Decision Making

Self-interest, marginal decision making, and optimization

Self-Interest

the idea that people choose to do the things that interest them

Marginal Decision Making

The process of making choices in increments by evaluating the additional, or marginal, benefit against the additional, or marginal cost of an action.

Optimization

The idea that people make choices in order to maximize the overall benefit, or utility, of an action subject to its cost

A rational decision

results from the comparison of marginal benefit and marginal cost

Marginal Benefit

the additional benefit associated with one more unit of an activity

Marginal Cost

the additional cost associated with one more unit of an activity

When studying human behavior, economists assume rational self-interest. This means that:

people make decisions based on some desired outcome

Michelle wants to purchase a new phone. Michelle will purchase the new phone if:

the marginal benefit of the phone is greater than it's marginal cost

The main significance of the equilibrium between marginal benefit and marginal cost is:

a rational decision has been made

A production possibilities frontier (PPF) illustrates which of the following concepts?

opportunity cost

If Angela spends all her time making pies she can make 20 each day, whereas if she spends all her time making cakes she can only make 10 each day. What is the opportunity cost of making a cake?

2 pies

Absolute Advantage is found by comparing different producers:

input requirements per unit of output

Suppose Lou gives up the production of 50 bikes to make 1 car and Sally gives up the production of 75 bikes to make 1 car. Who has the comparative advantage in making cars?

Lou (because Lou has a lower opportunity cost of making a car)

The theory of comparative advantage states that countries gain from trade because:

if each country specializes in producing the products it is best suited to produce, the world output can rise

Which of the following influence the terms of trade?

different opportunity costs of the parties involved

Specialization

results in a more efficient use of resources

In the circular flow diagram, which of the following flows is correct?

goods and services (products) flow from businesses to the goods and services market

The most important purpose of a market is to

bring buyers and sellers together so they can trade

Suppose you have only $20 to spend on gasoline each week. If the price of gasoline is $2 a gallon how many gallons can you purchase?

10 gallons (20/2=10)

Now suppose the price of gasoline rises from $2 per gallon to $4. You still have $20 to spend on gas each week, but now how many gallons can you purchase?

5 gallons (10/2=5, 10 because of the price increase so the amount of gallons decreases)

When the Economics Department serves all you can eat ice cream at its annual spring student recruiting event, you eat three ice cream cones. You enjoy the first, the second is just okay and the third is tasteless. This is an example of

Diminishing Marginal Utility

In understanding and analyzing market demand, we focus on how much all buyers are

willing and able to buy at different prices

When economists say that the demand for a product has decreased, they mean that

consumers are now willing and able to buy less of this product at each possible price

Inferior Good

as income increases, demand decreases

Normal Good

as income decreases, demand also decreases

On Tuesday a movie theater discounts tickets to all shows. What would we expect to see happen to popcorn on Tuesday's?

Increased demand for popcorn

An increase in the price of dinners at fancy restaurants would likely cause the demand for babysitters to ________. This is because fancy dinners and babysitting services are likely ________.

decrease; complements

How does market supply differ from individual supply?

market supply is the sum of all individual suppliers

Which of the following describes the relationship between price and quantity supplied

it is a direct relationship

Which of the following scenarios will not cause an increase in supply

the price of the product decreases

Which of the following statements does not describe equilibrium?

equilibrium is a goal that is seldom achieved in the real world

For a price ceiling to be binding it must:

be lower than the equilibrium price

For a price floor to be binding it must:

be higher than the equilibrium price

Taxes on products:

increase the marginal cost for producers

Michael buys a handmade sweater for $60, although he was willing to pay $85. The minimum acceptable price to the seller, Susan, was $45. Michael experiences a:

consumer surplus of $25 (85-60) and Susan experiences a producer surplus of $15 (60-45)

Deadweight Loss (DWL)

occurs when the price paid by buyers or received by sellers does not equal the equilibrium price

A deadweight loss __________ as tax rates change.

changes

Suppose the equilibrium price is $50. If the actual price paid by the buyer is $60 for one item and the minimum acceptable price to the seller is $40 then:

there is a deadweight loss

Productive Efficiency

means producing goods and services at the lowest average total cost

Allocative Efficiency

means producing the right amount of a good or service and it occurs where the marginal benefit equals the marginal cost

Which of the following is not correct when describing allocative efficiency?

it occurs when firms produce at the lowest possible average total cost

If the market is in equilibrium, which of the following occurs?

gains from trade are maximized m, economic surplus is maximized, allocative efficiency is achieved and productive efficiency is achieved

Which of the following correctly describes the social welfare impact of a price ceiling

a deadweight loss occurs

If a price ceiling is instituted then

total surplus decreases

If a price floor is instituted then

total surplus decreases

Which of the following correctly describes the social welfare impact of a price floor?

total surplus is decreased

An excise tax is

fixed

Without taxes, a market moves to ________ and ________ surplus is maximized

equilibrium; economic

Elasticity

is a term economists use to measure the sensitivity or responsiveness to a change in price

How is the slope of a linear demand curve different from its elasticity

along a linear demand curve, elasticity changes

If the change in price is 20% and the change in quantity demanded is 10% what type of elasticity is present

inelastic (10%/20%=.5 if less than 1 then it's inelastic)

If the price of elasticity of demand for a product is _________ it is considered elastic

greater than 1

Which of the following statements is correct when the price elasticity of demand is inelastic

the elasticity coefficient is less than 1

Consumers can be ________ in their demand for a product when many substitutes exist

elastic

The demand for necessities tends to be

inelastic

Which is more elastic in demand

having cable television service (luxury not a need)

Cross-price elasticity identifies goods as substitutes when:

the sign of the coefficient or result of the calculation is positive

Cross-price elasticity identifies goods as complements when:

the sign of the coefficient or result of the calculation negative

Which of the following is not correct regarding income elasticity of demand

it measures the response of consumer demand to changes in the price of a related good

If the change in price is 2% and the change in quantity supplied is 10% supply is

elastic (10%/2%=5 greater than 1)

The most important determinant of price elasticity of supply is:

the length of time is available to the producer to make adjustments

Which of the following is not true for the price elasticity of supply

it has the same determinants as price elasticity of demand

Which of the following is true for suppliers in the short run

suppliers can change employees and raw materials

The price elasticity of supply measures:

how responsive the quantity of a good supplied is to changes in its own price

Explicit Costs

are monetary payments made by individuals, firms, and governments for the use of land, labor, capital and entrepreneurial ability owned by others

Implicit Costs

are the opportunity costs of using owned resources and costs for which no monetary payment is explicitly made

Generally, accounting profits are

greater than economic profits, because accounting profits do not consider implicit costs.

Marginal Product:

usually increases then decreases and may become negative

When total product is rising:

marginal product is positive

Average fixed cost

declines continually as output expands

Average total cost is _______ divided by the number of units of output

total cost

Marginal cost describes a change in _______ when output is expanded by one more unit

total cost

Average total cost

is the sum of average fixed cost and average variable cost or total cost divided by the number of units of output produced

Marginal cost

is the extra or additional cost associated with producing an additional unit of output

Average variable cost

is total variable cost divided by the number of units of output produced

The marginal cost curve crosses the

average variable and average total cost curves at their lowest points

Which of the following scenarios does not illustrate a long run adjustment

a local Starbucks hires two new employees

Which of the following statements describes a difference between the short run and long run

some resources are fixed in the short run and all resources are variable in the long run

One reason a firm may experience economies of scale is:

the firm experienced specialization in labor and management

A firm is experiencing diseconomies of scale if

costs increase as output expands

Characteristics of a perfect competition

1. Many buyers and many sellers.

2. The goods offered for sale are largely the same.

3. Firms can freely enter or exit the market.

Which of the following statements does not describe a perfectly competitive market

price is greater than marginal revenue

A perfectly competitive firm:

can sell as much output as it wants at the equilibrium price

Price for a perfectly competitive seller equals:

marginal revenue

In the short run a perfectly competitive firm calculates the profit maximizing production output by equating:

marginal revenue and marginal cost