Final Study Guide

Chapter 1:

1. If the marginal benefit of the next slice of pizza exceeds the marginal cost, you will eat the slice of pizza

2. The benefit of something is the gain or pleasure that it brings

3. Amy can study for an hour or spend that hour sleeping or going out for dinner. If she decides to study for an hour, the opportunity cost of the hour spent studying is sleeping or going out for dinner (whichever she preferred most).

4. EX of Normative statement?

5. EX of Positive statement?

6. The statement that “increases in the tax on gasoline increase the price of gasoline” is an example of a positive statement

7. The tendency for the values of 2 variables to move in a predictable and related way is known as correlation

8. Scarcity exists because human wants to exceed the resources available to satisfy them

9. Scarcity is the inability to satisfy all our wants

10. Scarcity requires that we make choices about what goods and services to produce.

11. Scarcity means that wants are greater than what we can produce with our  resources

12. Economics studies how we make choices in the face of scarcity

13. Scarcity forces people to choose among available alternatives

14. Scarcity means we must make choices

15. What is the reason that all economic issues and problems occur? Human wants exceed the resources available to satisfy them

16. The study of economics is best described as a study of coping with scarcity

17. Economics is the social science that studies how people make choices to cope with scarcity

18. Microeconomics includes the study of the choices made by individuals and business

19. Which of the following is a microeconomic issue? The price of gasoline increases in the US this year

20. Which of the following BEST describes macroeconomics? It analyzes the effects on the national economy of the choices made by individuals, firms, and gov

21. Which is studies in macroeconomic? The effect on economic growth if the gov raised taxes

22. Which is a macroeconomic topic? The federal gov’s decision to spend more on environmental protection

23. When you make the decision to spend your time attending class, what economic question are you answering? What?

24. Which is an example of a WHAT? Question? Should we make faster microprocessors or prest-resistant corn?

25. Which is an example of a HOW? Question? Should we collect tolls on turnpikes using human toll collectors or mechanized toll machines?

26. Choices that are best for individuals that make them are choices in pursuit of self-interest.

27. Self interest reflects choices that are best for the individual who makes them

28. Choices that are best for the society as a whole are choices in pursuit of the social interest

29. An incentive is a reward or a penalty that encourages or discourages an action

30. If the marginal benefit of getting a college degree rises, rational people will attend college in greater numbers

Summary of what to know:

Marginal cost/benefit

Benefit

opportunity cost - next best alternative

Normative statement

Positive statement

Scarcity?

Study of economics?

What?, How?, Whom? Questions

Self interest

Incentive

Chapter 2

Capital: Tools, instruments, machines, buildings, and other items that have been produced in the past and that business now use to produce goods and services

Capital goods: goods bought by businesses and governments to increase productive resources and to use over future periods to produce other goods and services

Circular flow model: a model of the economy that shows the circular flow of expenditures and incomes that result from decision makers’ choices and the way those choices interact to determine what, how, and for whom goods and services are produced

Consumption goods and services: goods and services that individuals and governments to increase productive resources and to use over future periods to produce other goods

Entrepreneurship: the human resource that organizes labor, land, and capital to produce goods and services

Factor markets: markets in which the services of factors of production are bought and sold

Factors of production: the productive resources that are used to produce goods and services-land, labor, capital, and entrepreneurship

Firms: Firms are the institutions that organize the production of goods ans services. The 28 million firms in the US choose the quantities of the factors of production to hire and the quantities of goods and services to produce.

Goods markets: markets in which goods and services are bought and sold

Households: Households are individuals or groups of people living together. The 128 million households in the US own the factors of production-land, labor, capital, and entrepreneurship- and choose the quantities of these resources to provide ro firs. Households also choose the quantities of goods and services to buy.

Human capital: the knowledge and skill that people obtain from education, on-the-job training, and work experience

Interest: income paid for the use of capital

Labor: the work time and work effort that people devote to producing goods and services

Land: The “gifts of nature”, or natural resources, that we use to produce goods and services

Market: any arrangement that brings buyers and sellers together and enables them to get information and do business with each other

Profit (or loss): income earned by an entrepreneur for running a business

Rent: income paid for the use of land

Wages: income paid for the use of capital

Chapter 3

• The table shows production possibilities of an island community. 

  • C. This community will waste resources if it produces 2 pounds of fish and 22 pounds of berries

  • If the community produces 3 pounds of fish and 22 pounds of berries, production is efficient but to produce more fish it faces a tradeoff

  • The community’s opportunity cost of producing 1 pound of fish increases as the quantity of fish caught increases

  • When the islanders discover a better way of catching fish, the islands PPF shifts outward

• Mary makes 10 pies and 20 cakes and her opportunity cost of producing a cake is 2 pies. Time makes 20 pies and 10 cakes and his opportunity cost of producing a cake is 4 pies . If they specialize in the good they have a comparative advantage in Mary produces only cakes while Tim produces only pies

• The Production Possibilities Frontier describes the limits to what can be produced by using all the available resources efficiently

• Points inside and on the PPF are attainable

• Production at any point on the PPF achieves production efficiency

  

• A is an inefficient combination, B is an unattainable combination, and c is an efficient combination

  

• 1 is efficient production, 2 is inefficient production, 3 tradeoff, 4 free lunch

Chapter 4

• When the local gas station raises the price of gasoline —> change in quantity demanded

• People purchase more new automobiles when their income rises —> change in demand

• Purchase of personal computers increase when retail stores slash prices —> change in quantity demanded

• 1 shows a decrease in the quantity demanded due to price

• 2 shows an increase in the quantity demanded due to price

• 3 shows a decrease in demand

• 4 shows an increase in demand

  

• If the line is high this shows surplus

• If she line is lower it shows shortage

At what quantity is equilibrium reached?

150

Law of Demand

• Other things remaining the same, a rise in the price of a good will decrease the quantity demanded of that good.

In the market for jeans, which of the following events increases the demand for a pair of jeans?

The price of a denim skirt (a substitute for jeans) rises.

Chapter 5

• When the price of ice cream rises from $3 to $5 a scoop, the quantity of ice cream bought decreases by 10 percent. The price elasticity of demand for ice cream is 0.2 

• In PioneerVille, the price elasticity of demand for bus rides is 0.5. When the price of a bus ticket rises by 5 percent, the quantity of bus rides demanded decreases by 2.5 percent.

• The price elasticity of demand for a good is 0.2. A 10 percent rise in the price will increase the total revenue from sales of the goods.

• If the price of a good falls and expenditure on the good rises, the demand for the good is elastic. 

• When the price of a good rises from $5 to $7 a unit, the quantity supplied increases from 110 to 130 units a day. The price elasticity of supply is 0.5. The supply of goods is inelastic.

• The cross elasticity of demand for good A with respect to good B is 0.2. A 10 percent change in the price of good B will lead to a 2 percent change in the quantity of good A demanded. Goods A and B are substitutes.

• A 2 percent increase in income increases the quantity demanded of a good by 1 percent. The income elasticity of demand for this good is ½. The good is a normal good.

Chapter 6

• Producer surplus is the price of the goods minus the marginal cost of producing it summed over the quantity produced

• Hester owns an ice cream shop. It costs her $2 per cone to make 10 ice cream cones. If she sells 10 cones for $4 each, her producer surplus $20

• In a competitive market with no externalities, at the equilibrium price, marginal benefit equals marginal cost.

• Efficiency occurs in a market when the sum of consumer surplus and producer surplus is maximized

• Value and price can be compared by noting that price is what we must pay and value is what we are willing to pay

• Consumer surplus exists when person buys something with a marginal benefit more than what they paid

• A marginal benefit curve is the same as a demand curve

• Which of the following describes the economic meanings of cost and price? Cost is what must be given up to produce a good, and price is what a seller receives when the good is sold

• The opportunity cost of producing one more unit of a good or service is the marginal cost

• A supply curve is the same as a marginal cost curve

• Walmart has limited special sale priced items. They open at 10PM on Wednesday. Walmart is using first come first serve allocation method

• If a city puts it pension plan decision up for a vote by citizens, resources will be determined by a majority rule method

• Drivers can choose to use toll lanes on 1-75. The Toll changes during the day depending on congestion and traffic flow. Toll lane resources are determined using market price method.

• Mandy bought 12 sodas but then her brother took 4. Sodas were allocated between mandy and her brother through force

• If a landlord only rents apartments to married couples, the landlord is using a personal characteristics allocation method

• Allocating resources by the order of authority is a command allocation method

• If an economy is allocatively efficient, it must be producing on its production possibilities frontier

• Marginal benefit is the benefit that a person receives from consuming one more unit of a good or service

• As more of a good is consumed, the marginal benefit of the good decreases

• The principle of decreasing marginal benefit explains why the marginal benefit curve is

• Marginal cost is the opportunity cost of producing one more unit of a good or service

• Moving upward along the marginal cost curve, the opportunity cost of one more unit increases

• As more of a good is consumed, marginal benefit decreases and as more of a good is produced, marginal cost increases

• In order to efficiently allocate goods and services, we have to compare marginal cost to marginal benefit

• Allocative efficiency is achieved when the production is such that marginal benefit is equal to marginal cost

• Value is the marginal benefit obtained and price is the dollars that must be paid

Chapter 13

Budget line: a line that describes the limits to consumption possibilities and that depends on a consumer’s budget and the prices of goods and services

Relative Price: the price of one good in terms of another good-an opportunity cost. It equals the price of one good divided by the price of another good

Utility: the pleasure or satisfaction that a person gets from the consumption of a good or service

Total utility: the utility that a person gets from the quantity of a good or service consumer. Total util;ity generally increases as the quantity consumer of a good increases

Marginal utility:the change in total utility that results from a one-unit increase in the quantity of a good consumed

Diminishing marginal utility: the general tendency for marginal utility to decrease as the quantity of a good consumed increases

Utility-maximizing rule: the rule that leads to the greatest total utility from all the goods and services consumed. The rule is 1. Allocate the entire available budget 2. Make the marginal utility per dollar equal for all goods

Marginal utility per dollar: the marginal utility from a good relative to the price paid for the good

Indifference curve: a line that shows combinations of goods among which a consumer is indifferent

Marginal rate of substitution: the rate at which a person will give up a good Y (the good measure on the y-axis) to get more of good X (the good measured on the x-axis) and at the same time remain on the same time remain on the same indifference curve

Diminishing marginal rate of substitution: the general tendency for the marginal rate of substitution to decrease as the consumer moves down along the indifference curve, increasing consumption of the good measure on the x-axis and decreasing consumption of the good measured on the y-axis

Chapter 14

TC = TFC + TVC

MC = change in TC/change in quantity

AFC = TFC/quantity

AVC = TVC/quantity

ATC = AFC + AVC