Ch 1. – Flashcard
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Economics is the social science that studies the choices that businesses, individuals, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile our choices
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Define Economics
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a. unlimited wants that exceed limited resources available to fulfill those wants
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Which of the following best describes scarcity? a. unlimited wants that exceed limited resources available to fulfill those wants b. prices of goods are very high c. markets cannot properly allocate resources d. wants can be fulfilled and thus all goods must be rationed
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d. every choice must involve an opportunity cost
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Scarcity is the central to study economics because it implies that a. economic agents are rational b. wants are unlimited c. society must make decisions at the margin d. every choice must involve an opportunity cost
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a simplified version of reality used to analyze real-world economic situations
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Define Economic Model
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a group of buyers and sellers of a good/service and the institution/arranegment by which they come together to trade
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define market
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1. people are rational 2. people respond to economic incentives 3. optimal decisions are made at the margin
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What are three key economic ideas?
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analysis that involves comparing marginal benefits (MB) and marginal costs (MC)
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Define marginal analysis
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Extra or additional
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What does marginal mean?
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When marginal benefits equal marginal costs or MB = MC
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When does optimal decision continue?
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I do not agree with the doctor's manager because he/she didn't take into account the marginal cost and marginal benefits of staying at 8 pm. What if the company is earning more by being open 8 hours than by being open 9 hours? I need info on MC and MB.
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Solved Problem 1 - "Doctor is considering keeping her office open 9 hour per day rather than 8 hours. Doctor's manager argues "keeping the office open an extra hour is a good idea because your practice will make a total of $300,000 per year when the office is open 9 hours per day." Assuming the calculations are correct, do you agree with the office manager's reasoning? What, if any, additional information do you need to decide whether it's a good or bad idea?
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d. compare marginal revenue to marginal cost of serving breakfast all day.
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McDonald's CEO was considering having breakfast all day rather than ending it at parts of the day. Several owners of McDonald's restaurants stated two logical issues - (1) burger and meats need to be cooked at a higher temperature than eggs, so it would be difficult to set the correct temperature for both; (2) scrambled eggs require employees to continuously stir, while hamburgers don't. Question A: From an economical standpoint, To determine whether to serve breakfast all day, McDonald's should a. compare average to total cost of serving breakfast all day. b. conduct customer surveys on serving breakfast all day. c. calculate whether serving breakfast all day is large. d. compare marginal revenue to marginal cost of serving breakfast all day. e. compare total revenue to total cost of serving breakfast all day
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b. No, McDonalds could evaluate serving items from the breakfast menu that could be cooked in better coordination with the dinner menu after 10:30 AM.
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Question b - Would McDonald have to be all or nothing - serve breakfast only up to 10:30 or only serve breakfast all day? a. Yes, because customers would want it to be all day. b. No, McDonalds could evaluate serving items from the breakfast menu that could be cooked in better coordination with the dinner menu after 10:30 AM. c. No. The employees could learn to adjust to the situation and serve breakfast all day as well as lunch and dinner. d. Yes, because it would be difficult to set the temperature for the grill correctly for both foods.
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Some decisions are all or nothing decisions; for example, if an entrepreneur decides to open up a restaurant, either he/she does or does not. It is an "all or nothing" situation. Therefore, this "all or nothing" phrase is typically referring to optimal decisions at the margin.
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What term does "all or nothing" refer to?
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the idea that because of scarcity, producing more of one good/service means producing less of another good/service.
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Define Trade-off
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The highest-valued alternative that must be given up to engage in an activity. Ex: The opportunity cost of attending a university rather than just applying to a job.
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Define Opportunity Cost
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False; many times it is an actual action rather than a physical monetary payment
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True or False - Opportunity cost often involves actual payments of money
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1. What goods and services will be produced? 2. How will they goods and services be produced? 3. Who will receive the goods and services produced?
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What are the three fundamental questions that trade-offs force society to makes choices with?
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The Government
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Centrally planned economies allocate resources based on decisions made by _________________
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households and firms
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Market economies allocate resources based on the decisions made by ________________
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Soviet Union; the government decided what goods to make, how to make them, and who will receive them. They allocated government employees to manage factories/stores. The point of this was to follow government orders rather than satisfy consumer wants.This resulted in a low economy. Currently, North Korea is the only CPE (centrally planned economy).
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Give an example of a centrally planned economy
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Privately owned firms
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What do market economies primarily rely on to produce goods?
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True
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True or False - Firms must produce goods/services that meet the wants of consumers in a market economy
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They attempt to provide the highest-quality product at the lowest price which requires them to have lowest-cost methods of production.
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How do firms in the market economy compete?
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An economy in which most economic decisions result from the interaction of buyers and sellers in markets, but in which the government plays a significant role in allocation of resources.
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Define Mixed Economy
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True
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True or False - Market economies tend to be more efficient than centrally planned economies.
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a situation in which a good/service is produced at the lowest possible cost
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Define Productive efficiency
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it is when goods and services, to the last unit, provides a marginal benefit to society which equals to the marginal cost of producing it.
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Define allocative efficiency
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a situation that occurs in the markets when both the buyer and the seller of a product are made better off by the transaction
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Define Voluntary Exchange
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maximize benefits to society; is fair
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Efficiency means that goods are distributed in a way that ______________________, while equity means that goods are distributed in a way that __________________.
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Market economy
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Would you expect the new and better machinery to be adopted more rapidly in a market economy or centrally planned economy?
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centrally planned; incentive; market
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The underlying reason that __________________ economies have been less efficient seems to be such that such economies do not give a great _________ for hard work and innovation as ___________ economy does.
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efficient; centrally planned; centrally planned; equitable.
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If market economies are more economically __________ than __________________ economies, there still maybe a reason to prefer having a ________________ economy if it is more __________.
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To analyze real world issues; they also assist in making ideas sufficiently explicit or more concrete so that firms, individuals, and the government can use them to make decisions.
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Why are economic theories/models used?
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1. decide on the assumptions to use in developing the model 2. formulate a testable hypotheses 3. use economic data to test the hypothesis 4. revise the model if it fails to explain the economic data well 5. retain the revised model to help answer similar economic questions in the future
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To develop a model, economists generally follow these steps
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Economic models make behavioral assumptions about motives of consumers and firms. Hence assumptions vs. predictive capabilities.
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Explain the role of assumptions in economic models
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a. normative analysis
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What type of economic analysis is concerned with what ought to be? a. normative analysis b. positive analysis c. rational behavior d. marginal analysis
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analysis concerned with what is
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Define positive analysis
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question a - positive analysis question b- normative analysis question c - positive analysis question d - normative analysis
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Indicate if it is a positive or normative analysis... question a: a fifty-cent-per-pack tax on cigarettes will reduce smoking by teenagers 12 percent. question b: the federal government should spend more money on AIDs research. question c: rising paper prices will increase textbook prices. question d: the price of coffee at starbucks is too high
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Positive analysis
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Positive or normative analysis - (a) The price of gas is too high (b) As the price of gas increases, fewer SUVs will be purchased (c) An increase in the minimum wage will impac the wages received by low-skilled workers. (d) Congress should enact legislation to incrase the minimum wage. (e) college students should maximize their involvement in internships given the high correlation between internship participation and permanent job salaries. (f) during drought conditions, the city council should enact water restrictions, because the cost of filtration increase as lake levels decrease (g) there is a strong correlation between education and earnings
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The study of how households and firms make choices, how they interact in the markets, and how the government attempts to influence their choices.
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Define Microeconomics
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The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.
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Define Macroeconomics
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the total amount received for selling a good.
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Define revenue
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Firms use factor of production to produce goods and services. The main factors of production are labor, capital, natural resources (including land), and entrepreneurial ability. Households earn income by supplying the factors of production to firms.
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Define factors of production, economic resources or inputs.
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change in value on vertical axis Slope = ______________________________________ change in value on the horizontal axis
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How to calculate slope
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d. all of the above
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Economics is a social science because - a. it applies the scientific method to study the interactions among individuals. b. it considers human behavior - particularly, decision making behavior. c. it is based on the studying actions of individuals. d. all of the above
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microeconomics examines individuals while macroeconomics examines the economy as a whole
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A primary difference between microeconomics and macroeconomics is
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question a - microeconomic issue question b - macroeconomic issue question c - macroeconomic issue question d - microeconomic issue
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Indicate whether it is a macroeconomic or microeconomic issue. question a: The effect of higher cigarette taxes on the quantity of cigarettes sold. question b: The effect of higher income taxes on the total amount of consumer spending question c: The reasons for the economies of East Asian countries growing faster than the sub-Saharan African countries. question d: the reason for low rates of profit in the airlines.
