Economics 101: Principles of Microeconomics Ch 1. Introduction to Microeconomics

Economics

the allocation of resources available to fulfill people’s needs and wants for goods and services

Market economy

where most resources are held in the hands of individuals who have the right to decide what to do with them

Microeconomics

the study of how consumers and businesses make economic decisions

Law of supply and demand

• the price for a good or service will be high if the demand for it is high and the supply of it is low

• if the demand for it is low and the supply of it is high, the price will tend to be low

Macroeconomics

studies the entire economy

Economic growth

increasing the economy’s ability to produce more goods and services

Sustainable economic growth

an attempt to create economic growth in a way that is sustainable and limits the damage to the environment

As Rosa considers where to build her new bakery, she also factors in the number of other bake shops in the area. If she builds in an area where she is one of many bakeries, she will be forced to charge lower prices in order to compete with the other bakeries already in the neighborhood. This is an example of which economic theory?

1. The law of consumer behavior

2. The law of microeconomics

3. The law of supply and demand

4. The law of macroeconomics

The law of supply and demand

Which of the following BEST explains sustainable economic growth?

1. Economic growth that increases at the same rate year over year

2. Economic growth that can be sustained with minimally adverse effects on agriculture and livestock

3. Environmental growth that can be sustained with minimally adverse effects on the global economy

4. Economic growth that can be sustained with minimally adverse effects on the environment

Economic growth that can be sustained with minimally adverse effects on the environment

What is economics?

1. The study of consumers' spending habits

2. The study of a society's allocation of resources

3. The study of a government's distribution of resources

4. The study of buying and selling in the stock market

The study of a society's allocation of resources

Which of the following is NOT a subject in the study in macroeconomics?

1. Unemployment

2. Fiscal policy

3. Inflation

4. Local real estate

Local real estate

_____ is the study of business and consumers, while _____ is the study of the economy as a whole.

1. Macroeconomics; microeconomics

2. Microeconomics; macroeconomics

3. Consumer economics; macroeconomics

4. Microeconomics; inflation

Microeconomics; macroeconomics

Microeconomics

• studies the behavior of individuals and businesses and how decisions are made based on the allocation of limited resources

• study of how we make decisions because we know we don’t have all the money and time in the world to purchase and do everything

Macroeconomics

study of economy-wide things such as growth, inflation and unemployment

Supply and Demand

fundamental tools of economic analysis

Elasticity

determine the change in consumer demand (how much you want of something) as a result of a change in the good’s price

opportunity cost

value of the best foregone alternative

equilibrium

condition where the pressure for higher prices is exactly balanced by the pressure for lower prices

Perfect Competition

there are many businesses with identical products, no barriers to entry (such as political barriers or large up front investments), and good pricing information

Oligopoly

situation in which a particular market is controlled by a small group of firms

Monopoly

single seller, selling a unique product in the market

Profit Maximization

process by which a firm determines the price and output level that returns the greatest profit

Mark has $15 that he wants to spend on something that entertains him. He was planning to buy a book with this money, but then he decided to watch a new movie with this money. The fact that Mark cannot read the book because he opted for the film is an example of _____.

1. opportunity cost

2. equilibrium

3. elasticity

4. profit maximization

opportunity cost

All of these are common topics studied in microeconomics, EXCEPT:

1. Forms of competition

2. Supply and demand

3. Elasticity

4. Globalization

Globalization

Which of these BEST defined an oligopoly?

1. A situation in which a particular market is controlled by one firm, such as an utility company

2. A situation in which a particular market is controlled by a small group of firms, such as the gasoline industry

3. A market structure characterized by a single seller, selling a unique product in the market

4. The process by which a firm determines the price and output level that returns the greatest profit

A situation in which a particular market is controlled by a small group of firms, such as the gasoline industry

Which of these is the BEST definition of microeconomics?

1. The study of how individuals and businesses behave and make decisions based on limited resources

2. The study of how countries interchange products and services in a globalized world

3. The study of why interest rates rise and how this affects a country's economic decisions

4. The study of how employment (or unemployment) affects the household economy

The study of how individuals and businesses behave and make decisions based on limited resources

When the pressure for higher prices is exactly matched by a pressure for lower prices, a state of _____ has been reached.

1. market equilibrium

2. perfect competition

3. market saturation

4. monopoly

market equilibrium

consumer

someone who uses economic products

producer

transform raw materials into a finished economic good

Consumer Choice

• roles of consumers and producers

• experiencing scarcity

• have a desire to use their limited resources to gain the greatest possible utility

• plan for increased (or decreased) production

• governments ensure that infrastructure is in place

How do governments plan for greater consumer demand?

1. New regulatory agencies

2. New roads

3. New taxes

4. New economic policies to generate spending

New roads

How does the idea of utility influence producers in the products they create for consumers?

1. They know their price point must be the lowest because utility states that people will gravitate towards the cheapest option.

2. They know they must create useful products because utility states that consumers will always pay for things which give them the most use.

3. They know they must have fast service because utility states that consumers will prioritize their time above everything else.

4. They know they must create complementary products because utility states that consumers will be drawn to products with complements.

They know they must create useful products because utility states that consumers will always pay for things which give them the most use.

Which of the following is an ethereal or intangible added utility to a consumer?

1. The amount of coffee

2. The smell of espresso

3. The quality of coffee

4. The low price of coffee

The smell of espresso

Which of the following is NOT a producer?

1. A farmer

2. An unemployed college student

3. A college lecturer

4. A steel mill

An unemployed college student

How do producers try to better understand their consumers?

1. Social Media

2. Loyalty cards

3. Surveys

4. All of these

All of these

scarcity

nothing exists in infinite quantities → absolutely essential to understanding economics

efficiency

our ability to make more of something with a given amount of inputs 

utility

the usefulness of something to someone

You are overseeing the construction of buildings on an island. Why would you want to build high-rises?

1. High-rises are less efficient but more valuable.

2. Land is very scarce but materials are not.

3. High-rises have nice views, which offer low utility.

4. Land is very scarce but air space is not.

Land is very scarce but air space is not.

Which of the following gives an example of utility changing depending on the circumstances?

1. The oxygen that you breathe on land is the same oxygen you breathe while scuba diving in the ocean.

2. Take-out that is good enough for your friend may not make the impression you want on your date.

3. The amount of electricity you used last month is different from the month before, but the yearly average is the same.

4. This is untrue; utility doesn't change depending on the circumstances.

Take-out that is good enough for your friend may not make the impression you want on your date.

You have an economics test tomorrow that you would like to pass. Which of the following activities has the greatest utility?

1. Watching TV

2. Studying Spanish

3. Driving around aimlessly

4. Studying economics

Studying economics

What is the utility of a good?

1. Its average market price.

2. The total number of it in the world.

3. Its ability to produce power or energy.

4. The total usefulness it has for someone.

The total usefulness it has for someone.

Which of the following allows us to cope with scarcity of resources?

1. Increased efficiency, or getting more outputs from the same inputs

2. Decreased demand, or reducing the number of people who want the scarce resource

3. Increased supply, or creating more of the resource to reduce its scarcity

4. Decreased utility, or reducing how useful the resource is to prevent it from being consumed

Increased efficiency, or getting more outputs from the same inputs

scarcity

no resource is infinite

Utility

how useful something is

Allocative Efficiency

effort to make sure that resources are efficiently allocated

Equity

available resources are distributed fairly

Contributive Standard

people should only get resources based on their ability to contribute

Needs Standard

provides resources to the people who need them most

Equality Standard

everyone to have the same amount of resources, regardless of contribution or need

Odetta is a middle-aged woman who is disabled and on a fixed income. Which standard of allocation is relevant to her situation?

1. Needs standard

2. Distributive standard

3. Equality standard

4. Contributive standard

Needs standard

Carlos is examining the processes Haystraw Farms uses to generate crops. He notices that the money the farm is spending and the use of labor are not maximized to produce as much crop as possible. Carlos has found a problem in the farm's _____.

1. contributive standard of allocation

2. distributive standard of allocation

3. allocative efficiency

4. resource efficiency

allocative efficiency

Ethan oversees a large company that produces a significant amount of both goods and services as well as economic profit. Which system of allocation is relevant to Ethan's situation?

1. Contributive standard

2. Needs standard

3. Equality standard

4. Wealth standard

Contributive standard

Which of the following represents the basic concept of economics?

1. Scarcity is always a function of a resource exceeding demand.

2. Utility exists and scarcity is a reliable measure of how useful something is to someone.

3. Utility is a measure of how much someone will pay for a particular good based on need.

4. Scarcity exists and utility is a reliable measure of how useful something is to someone.

Scarcity exists and utility is a reliable measure of how useful something is to someone.

What is the term for determining how resources are used?

1. Equity allocation

2. Utility distribution

3. Resource allocation

4. Allocative efficiency

Resource allocation

Productivity

the amount of output that gets produced per unit of input

Labor Productivity

the rate of a worker’s output per unit of input in a certain amount of time

Physical Capital

• the equipment and structures used to produce goods and services

• workers are more productive when they have more tools to help them produce

Technology

a nation’s understanding of how the world works

Human Capital

the knowledge and skills that workers acquire through education, training, and their experience

Natural Resources

the inputs to production that come

Human capital refers to which of the following?

1. New equipment purchased by businesses.

2. The technology that is available to workers.

3. Investments used by individuals to fund a business.

4. The education and experience of the labor force.

The education and experience of the labor force.

How is labor productivity, measured as output per worker, affected by economic drivers?

1. It rises with increases in technology.

2. It falls with increases in technology.

3. It falls with increases in physical capital.

4. It rises with decreases in natural resources.

It rises with increases in technology.

Which of the following is NOT a determinant of the productivity of a nation?

1. Physical capital

2. Human capital

3. Price controls

4. Technology

Price controls

Economists call the equipment and structures used to produce goods and services:

1. Physical capital

2. Investment capital

3. Equities

4. New construction permits

Physical capital

Which of the following will most likely occur as a result of an increase in labor productivity?

1. Higher interest rates and lower investment.

2. Higher economic output and lower inflation.

3. A lower savings rate and higher money supply.

4. Lower exports and higher prices.

Higher economic output and lower inflation.

Utility

the real value of something is in its usefulness, not anything implicit

Why would a company ever consider utility if it meant a significant up front cost or short-term loss of profits?

1. Utility may improve efficiency in your company in the long-term which will increase the potential profit ceiling compared to what it was in a lower efficiency process.

2. Utility is ultimately about easing the burden on your employees, and that is a high value because without employees you can't make a profit.

3. Utility is only worth it for the company if the short-term loss of profits does not exceed a period of 60 days, anything longer that makes utility not justifiable.

4. A company would never prioritize utility over profits, it would not make fiscal sense.

Utility may improve efficiency in your company in the long-term which will increase the potential profit ceiling compared to what it was in a lower efficiency process.

Which country did not make use of utility to build its road network in the 1970s?

1. South Africa

2. Ghana

3. Algeria

4. Nigeria

Nigeria

Which of these is often acceptable to increase utility?

1. Short-term loss

2. Temporary unethical practices

3. Long-term loss

4. Bankruptcy

Short-term loss

Who used utility to transform car manufacturing?

1. John Rockefeller

2. The Dodge brothers

3. Kiichiro Toyoda

4. Henry Ford

Henry Ford

What is the definition of utility?

1. The real value of something in its production, not anything implicit.

2. The real value of something and its purpose, not anything implicit.

3. The real value of something is in its quantity, not anything implicit.

4. The real value of something in its usefulness, not anything implicit.

The real value of something in its usefulness, not anything implicit.

Economic Man

hypothetical human who can be depended upon to act rationally and with self-interest

How does the precision of inputs affect a model?

1. The model becomes more accurate.

2. The model becomes less accurate.

3. The model becomes less complex.

4. The model becomes more complex.

The model becomes more accurate.

Why is the Economic Man a flawed model of human behavior?

1. He is rational.

2. He makes too few purchases.

3. He makes too many purchases.

4. He lacks humanity.

He lacks humanity.

Which one of the following pursuits will the Economic Man always pursue as a consumer?

1. Profit

2. Utility

3. The common good

4. Scarcity

Utility

Which functions does the Economic Man fulfill in an economy?

1. Financier and consumer

2. Producer, financier, and consumer

3. Producer and consumer

4. Producer and financier

Producer and consumer

Whom was Economic Man invented to portray?

1. Producers

2. Consumers

3. Selfish people

4. The typical human

The typical human

Correlation

the compared items mirror each other but may not have anything to do with actual causality

Bias

the model in question is somehow shaped by what the economist wants to find

Loaded Terminology

words that carry a meaning beyond their mere definition

Post Hoc Ergo Propter Hoc

since something came first, it caused something else afterwards

Fallacy

if a part of something has an outcome, so too will the whole

The word comfortable meaning different things to different people is an example of _____.

1. fallacy of composition

2. post hoc ergo propter hoc

3. loaded terminology

4. correlation vs. causation

loaded terminology

Which of the following is an example of Post Hoc Ergo Propter Hoc?

1. A teacher claiming credit for the school's athletic performance since his arrival.

2. Conflicting definitions of the word comfortable.

3. Determining that there is a correlation between two events, but not proving how one causes the other.

4. Since one child misbehaves, the whole class must misbehave.

A teacher claiming credit for the school's athletic performance since his arrival.

Why do economists designing new models to test economic ideas often fall victim to bias?

1. They cannot understand the difference between correlation and causation.

2. The model is not specified with variables that are understandable to policy-makers.

3. The model is specified based on what the economist hopes to find.

4. They assume that previous models are incorrect.

The model is specified based on what the economist hopes to find.

What is the Fallacy of Composition?

1. The whole will dictate how a part will act

2. A little of something will dictate how more will act

3. A part of something dictates how the whole will act

4. A great deal of something will dictate how a small part will act

A part of something dictates how the whole will act

Which of the following is an example of causation?

1. Increased consumption of hot chocolate during cold weather

2. Increased sale of hot dogs during the winter holidays

3. Increased sale of hot dogs during baseball games

4. Increased consumption of hot chocolate near the holidays

Increased consumption of hot chocolate during cold weather

Scarcity

there are finite supplies of everything

Microeconomics

the study of how scarcity causes the actions of individuals, families, and companies

Utility

a measure of how useful something is to you

Marginal Cost

how much it would cost to do just 1 more unit of something

Macroeconomics

the study of how scarcity causes the actions of whole economics, especially on an international level

Efficiency

using scarce resources effectively, and unemployment is a massive inefficiency

Inflation

when money loses its value

In economics, scarcity means that:

1. Resources will never run out.

2. There is a finite amount of resources.

3. There are not enough resources to go around.

4. The world is rapidly running out of resources.

There is a finite amount of resources.

What is the primary difference between microeconomics and macroeconomics?

1. Microeconomics looks at scarcity for individuals, while macroeconomics looks at it for entire companies.

2. Microeconomics looks at scarcity for companies, while macroeconomics looks at it for entire economies.

3. Microeconomics looks at utility, while macroeconomics examines scarcity.

4. Microeconomics looks at scarcity for non-profit groups, while macroeconomics looks at its effect on for-profit groups.

Microeconomics looks at scarcity for companies, while macroeconomics looks at it for entire economies.

Which of these statements about inflation is NOT true?

1. Inflation is when money loses its value.

2. Too little inflation leads people to invest most of their money.

3. High inflation can quickly destroy an economy.

4. Too little inflation leads people to hold on to their money.

Too little inflation leads people to invest most of their money.

Economists maintain that _____ is central to the actions of individuals, families and companies.

1. marginal cost

2. scarcity

3. innovation

4. inflation

scarcity

When deciding to buy a home instead of renting an apartment, you are demonstrating that the extra expense is worth the amount of _____.

1. marginal cost

2. utility

3. scarcity

4. risk

utility