question

In economics, the pleasure, happiness, or satisfaction received from a product.

answer

Utility

question

Joe sold gold coins for $1000 that he bought a year ago for $1000. He says, "At least I didn't lose any money, because he could have received a 3 percent return on the $1000 if he had bought a bank certificate of deposit instead of the coins. The economist's analysis in this case incorporates the idea of:

answer

Opportunity Costs

question

In response to the terrorist attacks of September 11, 2001, the government decided to allocate more resources toward defense goods. The government's decision reflects their assessment that:

answer

The marginal benefits of additional defense goods outweighed the marginal cost.

question

Economics may best be defined as the:

answer

Social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity.

question

Economic theories:

answer

Are generalizations based on a careful observation of facts.

question

The term "ceteris paribus" means:

answer

Other things equal -- the assumption that factors other than those being considered do not change.

question

Which of the following is a normative statement?

answer

It is too hot to play tennis today.

question

Which of the following is a positive statement?

answer

The temperature is 92 degrees today.

question

The problems of aggregate inflation and unemployment are:

answer

major topics of macroeconomics.

question

Which of the following is a macroeconomic statement?

answer

The gross profits of all U.S. business were $182 billion last year.

question

Microeconomics

answer

is concerned with individual economic units and specific markets.

question

The scarcity problem:

answer

persists because economic wants exceed available productive resources.

question

The four factors of production are:

answer

land, labor, capital, and entrepreneurial ability.

question

Money is not an economic resource because:

answer

money, as such, is not productive.

question

The process of producing and accumulating capital goods is called:

answer

investment.

question

The production possibilities curve illustrates the basic principle that:

answer

if all the resources of an economy are in use, more of one good can be produced only if less of another good is produced.

question

Which of the following will not produce an outward shift of the production possibilities curve?

answer

the reduction of unemployment.

question

A nation's production possibilities curve is bowed out from the origin because:

answer

resources are not equally efficient in producing every good.

question

Refer to the above table. If the economy is producing at a production alternative C, the opportunity cost of the tenth unit of consumer goods will be.

answer

1/3 of a unit of capital goods.

question

Refer to the above table. As compared to production alternative D, the choice of alternative C would:

answer

tend to generate a more rapid growth rate.

question

Assume that a change in government policy results in greater production of both consumer goods and investment goods. We can conclude that:

answer

the economy was not empoying all of its resources before the policy change.

question

Assume an economy is operating at some point on its production possibilities curve, which shows civilian and military goods. If the output of military goods is increased, the output of civilian goods:

answer

must be decreased.

question

Refer to the above diagram. Other things equal, this economy will achieve the most rapid rate of growth if:

answer

it chooses point A.

question

Refer to the above diagram. This economy will experience unemployment if it produces at point:

answer

D.

question

Assume an economy is incurring unemployment. The effect of resolving this problem will be to:

answer

move the level of actual output to the economy's production possibilities curve.

question

Economics.

answer

The social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity.

question

Economic Perspective:

answer

Economic way of thinking.

question

Opportunity Cost:

answer

To obtain more of one thing, society forgoes the opportunity of getting the next best thing.

question

Utility:

answer

The pleasure, happiness, or satisfaction obtained from consuming a good or service.

question

Marginal Analysis:

answer

Comparisons of marginal benefits and marginal costs, usually for decision making.

question

Scientific Method:

answer

Observing real-world behavior and outcomes. Based on those observations, formulating a possible explanation of cause and effect (hypothesis). Testing this explanation by comparing the outcomes of specific events to the outcome predicted by the hypothesis. Accepting, rejecting, and modifying the hypothesis, based on these comparisons. Continuing to test the hypothesis against the facts. If favorable results accumulate, the hypothesis evolves into a theory.

question

Economic Principle:

answer

A statement about economic behavior or the economy that enables prediction of the probable effects of certain actions.

question

Ceteris paribus:

answer

"Other-Things-Equal" Assumption. A prediction, or a statement about causal or logical connections between two states of affairs, is qualified by ceteris paribus in order to acknowledge, and to rule out, the possibility of other factors that could override the relationship between the antecedent and the consequent.

question

Macroeconomics:

answer

Examines either the economy as a whole or its basic subdivisions or aggregates, such as the government, household, and business sectors.

question

Aggregate:

answer

A collection of specific economic units treated as if they were one unit.

question

Microeconomics:

answer

Part of economics concerned with decision making by individual customers, workers, households, and business firms.

question

Positive Economics:

answer

Focuses on facts and cause-and-effect relationships.

question

Normative Economics:

answer

Incorporates value judgments about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal.

question

Economizing Problem:

answer

The need to make choices because economic wants exceed economic means.

question

Budget Line:

answer

A schedule or curve that shows various combinations of two products a consumer can purchase with a specific money income.

question

Economic Resources:

answer

All natural, human, and manufactured resources that go into the production of goods and services.

question

Land:

answer

All natural resources ("gifts of nature") used in the production process.

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Labor:

answer

The physical actions and mental activities that people contribute to the production of goods and services.

question

Capital:

answer

All manufactured aids used in producing consumer goods and services.

question

Investment:

answer

Spending that pays for the production and accumulation of capital goods.

question

Entrepreneurial Ability:

answer

The entrepreneur performs several socially useful functions including: a. taking the initiative in combining the resources of land, labor, and capital to produce a good or a service. b. Making the strategic business decisions that set the course of an enterprise. c. Commercializing new products, new production techniques, or even new forms of business organization. d. Bears risk devoting their time, effort, and ability - as well as their own money and the money of others - to commercializing new products and ideas that may enhance society's standard of living.

question

Factors of Production:

answer

Land, labor, capital, and entrepreneurial ability are combined to produce goods and services are called "inputs."

question

Consumer Goods:

answer

Products that satisfy our wants directly.

question

Capital Goods:

answer

Products that satisfy our wants indirectly by making possible more efficient production of consumer goods.

question

Production Possibilities Curve:

answer

Displays the different combinations of goods and services that society can produce in a fully employed economy, assuming a fixed availability of supplies of resources and fixed technology.

question

Law of Increasing Opportunity Costs:

answer

As the production of a particular good increase, the opportunity cost of producing an additional unit rises.

question

Economic Growth:

answer

A larger total output.

question

Economics

answer

The study of how people make choices under conditions of scarcity and of the results of those choices for society

question

The Scarcity Principle

answer

(AKA No-Free-Lunch): Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another.

question

Cost-Benefit Principle

answer

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

question

Rational person

answer

Someone with well-defined goals who tries to fulfill those goals as best he or she can

question

Economic surplus

answer

The benefit of taking an action minus its cost

question

Opportunity cost

answer

The value of what must be forgone in order to undertake the activity

question

Pitfall I (%)

answer

Measuring costs and benefits as proportions rather than absolute dollar amounts

question

Pitfall II (hidden)

answer

Ignoring implicit costs

question

Pitfall III (edge)

answer

Failure to think at the margin

question

Sunk cost

answer

A cost that is beyond recovery at the moment a decision is made

question

Marginal cost

answer

The increase in total cost that results from carrying out one additional unit of an activity

question

Marginal benefit

answer

The increase in total benefit that results from carrying out one additional unit of an activity

question

Average cost

answer

The total cost of undertaking n units of an activity divided by n

question

Average benefit

answer

The total benefit of undertaking n units of an activity divided by n

question

Normative Economic Principle

answer

A principle that tells how people SHOULD behave

question

Positive Economic Principle

answer

A principle that tells how people WILL behave

question

The Incentive Principle

answer

A person (or a firm or a society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises. In short, incentives matter.

question

Microeconomics

answer

The study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets

question

Macroeconomics

answer

The study of the performance of national economies and the policies that governments use to try to improve that performance

question

Absolute advantage

answer

A person who takes fewer hours to perform a task compared to another

question

Comparative advantage

answer

A person whose opportunity cost of performing a task is lower than that of another's

question

Principle of Comparative Advantage

answer

Everyone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is lowest

question

Production possibilities curve

answer

Describes the maximum amount of one good that can be produced for every possible level of production of the other good

question

Attainable point

answer

Any combination of goods that can be produced using currently available resources

question

Unattainable point

answer

Any combination of goods that cannot be produced using currently available resources

question

Inefficient point

answer

Any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other

question

Efficient point

answer

Any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the other

question

Principle of Increasing Opportunity Cost

answer

(AKA Low-Hanging-Fruit Principle): In expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs

question

Outsourcing

answer

A term increasingly used to connote having services performed by low-wage workers overseas

question

Demand curve

answer

Shows the quantity of a good that buyers wish to buy at each price

question

Substitution effect

answer

The change in the quantity demanded of a good that results because buys switch to or from substitutes when the price of the good changes

question

Income effect

answer

The change in the quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power

question

Buyer's reservation price

answer

Largest dollar amount the buyer would be willing to pay for a good

question

Supply curve

answer

Shows the quantity of a good that sellers wish to sell at each price

question

Seller's reservation price

answer

Smallest dollar amount for which a seller would be willing to sell an additional unity, generally equal to marginal cost

question

Equilibrium

answer

A system in which there is no tendency for it to change

question

Equilibrium price and quantity

answer

Values of price for which quantity supplied and quantity demanded are equal

question

Market equilibrium

answer

Occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price

question

Excess supply

answer

Amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price

question

Excess demand

answer

Amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price

question

Price ceiling

answer

A maximum allowable price, specified by law

question

Change in quantity demanded

answer

Movement along the demand curve that occurs in response to a change in price

question

Change in demand

answer

A shift of entire demand curve

question

Change in supply

answer

A shift of entire supply curve

question

Change in quantity supplied

answer

Movement along the supply curve that occurs in response to a change in price

question

Complements

answer

An increase in the price of one good causes a leftward shift in the demand curve for the other good (or a decrease causes a rightward shift)

question

Substitutes

answer

An increase in the price of one good causes a rightward shift in the demand curve for the other good (or a decrease causes a leftward shift)

question

Normal good

answer

One whose demand curve shifts rightward when the incomes of buyers increase and leftward when the incomes decrease

question

Inferior good

answer

One whose demand curve shifts leftward when the incomes of buyers increase and rightward when incomes of buyers decrease

question

Buyer's surplus

answer

Difference between buyer's reservation price and price he or she actually pays

question

Seller's surplus

answer

Difference between the price received by the seller and his or her reservation price

question

Total surplus

answer

Difference between buyer's reservation price and seller's reservation price

question

"Cash on the Table"

answer

Economic metaphor for unexploited gains from exchange

question

Socially optimal quantity

answer

Quantity of a good that results in maximum possible economic surplus from producing and consuming the good

question

Efficiency

answer

(AKA Economic efficiency): occurs when all goods and services are produced and consumed at their respective socially optimal levels

question

Efficiency Principle

answer

Efficiency is an important social goal because when the economic pie grows larger, everyone can have a larger slice.

question

Equilibrium Principle

answer

(AKA "No-Cash-on-the-Table" Principle): A market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action

question

An economic system:

answer

is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.

question

The term laissez-faire suggests that:

answer

government should not interfere with the operation of the economy.

question

Economic systems differ according to what two main characteristics?

answer

Who owns the factors of production, and the methods used to coordinate economic activity.

question

A fundamental difference between the command system and the market system is that, in command systems:

answer

the division of output is decided by central planning rather than by individuals operating freely through markets.

question

Which of the following is a fundamental characteristic of the market system?

answer

property rights.

question

The pursuit of self-interest:

answer

gives direction to the market system.

question

The regulator mechanism of the market system is:

answer

competiiton.

question

The division of labor means that:

answer

workers specialize in various production tasks.

question

Specializaiton in production is important primarily because it:

answer

results in greater total output.

question

The presence of market failures implies that:

answer

there is an active role for government, even in a market system.

question

From society's point of view the economic function of profits and losses is to:

answer

reallocate resources from less desired to more desired uses.

question

Economic profits in an industry suggest the industry:

answer

should be larger to better satisfy consumers' desire for the product.

question

In a market system scarce goods are allocated htrough the operation of:

answer

market prices that are determined by consumers and producers acting in their own self-interest.

question

The competitive market system.

answer

encourages innovation because successful innovators are rewarded with economic profits.

question

The market system's answer to the fundamental question "What will be produced?" is essentially:

answer

"Goods and services that are profitable."

question

The market system's answer to the fundamental question "How will the goods and services be produced? is essentially:

answer

"Using the least-cost production techniques."

question

The market system's answer to the fundamental question "Who will get the goods and services? is essentially:

answer

"Those willing and able to pay for them."

question

The market system's answer to the fundamental question "how will the system accomodate change?" is essentially:

answer

"Though the guiding function of prices and the incentive function of profits."

question

Consumer sovereignty refers to the

answer

idea that the decisions of producers must ultimately conform to consumer demands.

question

The emergence of the MP3 (iPod) technology is an examle of "creative destruction" because:

answer

it has replaced compact discs as a technology used for the storage and transfer of music.

question

The market system:

answer

effectively harnesses the incentives of workers and entrepreneurs.

question

According to the concept of the "invisible hand," if Susie opens and operates a profitable childcare center, then:

answer

she has served society's interests by providing a desired good or service.

question

The use of capital in the production process:

answer

improves efficiency, increases output, and provides for growth.

question

Some large hardware stores such as Home Depot boast of carrying as many as 20,000 different products in each store. This volume of goods is the result of:

answer

the choice of consumers regarding what to purchase to satisfy their wants and the choice of producers regardign what to produce to maximize profits.

question

Economic System

answer

A particular set of instititonal arrangements and a coordinating mechanism--to respnd to the economizing problem.

question

Command System

answer

Also known as socialism or communnism. Government owns most property resources and economic decision makking occurs through a central economic plan.

question

Market System

answer

Also known as capitalism. The system is characterized by the private ownership of resources and the use of markets and prices to coordinate and direct economic activity.

question

Private Property

answer

In a market system, private individuals and firms, not the government, own most of the property resources (land and capital).

question

Freedom of Enterprise

answer

Ensures that entrepreneus and private businesses are free to obtain and use economic resources to produce their choice of goods and services and to sell them in their chosen markets.

question

Freedom of Choice

answer

enables owners to employ or dispose of their property and money as they see fit.

question

Self-interest

answer

the motivating force of the various economic units as they express their free choices.

question

Competition

answer

Two or more buyers and two or more sellers acting independently in a particular product and resource market. Freedom of sellers and buyers to enter or leave markets on the basis of their economic self-interest.

question

Market

answer

an institution or mechanism that brings buyers ("demanders") and sellers ("suppliers") into contact.

question

Specialization

answer

means using the resouorces of an individual, firm, region, or nation to produce one or a few goods or services rather than the entire range of goods and services.

question

Division of Labor

answer

human specialization contributes to a society's output in several ways: makes use of differences in ability, fosters learning by doing, and saves time.

question

Medium of Exchange

answer

Money performs several functions, including making trade easier.

question

Barter

answer

Swapping goods for goods.

question

Money

answer

A convenient social invention to facilitate exchanges of goods and services.

question

Consumer Sovereignty

answer

is crucial in determining the types and quantities of goods produced.

question

Dollar Votes

answer

consumers spend their income on the goods they are most willing and able to buy -- they register their wants in the market.

question

Creative Destruction

answer

The creation of new products and production methods completely destroys the market positions of firms that are wedded to existing products and older ways of doing business.

question

"Invisible Hand"

answer

We have seen that in a competitive environment, businesses seek tobuild new and improved products to increase profits. Those enhanced products increase society's well-being.

question

Circular Flow Diagram

answer

divides the economy into two sectors: "businesses" and "households." Additionally, we divide this economy's markets into the "resource market" and the "product market."

question

Housholds

answer

One or more persons occupying a housing unit.

question

Business

answer

Commercial establishments that attempt to earn profits for their owners by offering goods and services for sale.

question

Sole Proprietorship

answer

A business owned and manged by a single person.

question

Partnership

answer

Two or more individuals (the partners) agree to own and operate a business together.

question

Corporation

answer

An independent legal entity that can--on its own behalf--acquire resources, own assets, produce and sell products, incur debts, extend credit, sue and be sued, and otherwise engage in any legal business activity.

question

Product Market

answer

The place where the goods and services produced by businesses are bought and sold.

question

Resource Market

answer

Households sell resources to businesses.

question

The law of demand states that:

answer

price and quantity demanded are inversely related.

question

Economists use the term demand to refer to:

answer

a schedule of various combinations of market prices and amounts demanded.

question

The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____.

answer

direct, inverse

question

When the price of a product increaes, a consumer is able to buy less of it with a given money income. This describes:

answer

the income effect.

question

When the price of a product rises, consumers shift their purchases to other products whose prices are now relatively lower. This statement describes:

answer

the substitution effect.

question

Which of the following would not shift the demand curve for beef?

answer

a reduction in the price of cattle feed.

question

A rightward shift in the demand curve for product C might be caused by:

answer

a decrease in the price of a product that is complementary to C.

question

If X is a normal good, a rise in money income will shift the:

answer

demand curve for X to the right.

question

College students living off-campus frequently consume large amounts of beans and weiners and boxed macaroni and cheese. When they finish school and start their careers, their consumption of these goods frequently declines. This suggests that beans and weiners and boxed macaroni and cheese are:

answer

inferior goods

question

Refer to the above diagram. A decrease in supply is depicted by a:

answer

shift from S2 to S1.

question

A leftward shift of a product supply curve might be caused by:

answer

some firms leaving an industry.

question

An improvement in production technology will:

answer

shift the supply curve to the right.

question

Suppose product X is an input in the production of product Y. Product Y in turn is a substitute for product Z. An increase in the price of X can be expected to:

answer

increase the demand for Z.

question

An increase in the excise tax on cigarettes raises the price of cigarettes by shifting the:

answer

supply curve for cigarettes leftward.

question

Refer to the above data. Equilibrium price will be:

answer

$2 price per bushel.

question

Refer to the above data. If price was initially $4 and free to fluctuate, we would expect:

answer

the quantity of wheat supplied to decline as a result of the subsequent price change.

question

If a product is in surplus supply, its price:

answer

is above the equilibrium level.

question

At the equilibrium price:

answer

there are no pressures on price to either rise or fall.

question

Refer to the above diagram. A price of $20 in this market will result in:

answer

a shortage of 100 units.

question

If we say that a price is too high to clear the market, we mean that:

answer

quantity supplied exceeds quantity demanded.

question

If the supply and demand curves for a product both decrease, then equilibrium:

answer

quantity must decline, but equilibrium price may either rise, fall, or remain unchanged.

question

A price floor means that:

answer

government is imposing a minimum legal price that is typicallly above the equilibrium price.

question

Refer the to above diagram. Rent controls are best illustrated by:

answer

price A

question

An effective price floor on wheat will:

answer

result in a surplus of wheat.

question

Price ceilings and price floors:

answer

interfere with the rationing function of prices.

question

Demand

answer

A schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of aseries of possible prices during a specified period of time.

question

Demand Schedule

answer

Reveals the relationship between the various prices of corn and the quantity of corn a particular consumer would be willing and able to purchase each of these prices.

question

Law of Demand

answer

If supply is held constant, an increase in demand leads to an increased market price, while a decrease in demand leads to a decreased market price.

question

Diminishing Marginal Utility

answer

the law that for a single consumer the marginal utility of a commodity diminishes for each additional unit of the commodity consumed.

question

Income Effect

answer

indicates that a lower price increases the purchasing power of a buyer's money income, enabling the buyer to purchase more of the product than before.

question

Substitution Effect

answer

suggests that at a lower price buyers have the incentive to substitute what is now a less expensive product for other products that are now relatively more expensive.

question

Demand Curve

answer

a downward slope that reflects the law of demand--people buy more of a product, service, or resource as its price falls.

question

Determinants of Demand

answer

When price changes, quantity demanded will change. That is a movement along the same demand curve. When factors other than price changes, demand curve will shift. These are the determinants of the demand curve, i.e., income, consumer preferences, number of buyers, and prices of related goods.

question

Normal Goods

answer

Products whose demand varies directly with money income.

question

Inferior Goods

answer

Goods whose demand varies inversely with money income.

question

Substitute Good

answer

is one that can be used in place of another good.

question

Complementary Good

answer

is one that is used together with another good.

question

Change in Demand

answer

is a shift of the demand curve to the right (an increase in demand) or to the left (a decrease in demand). It occurs because the consumer's stte of mind about purchasing the product has been altered in response to a change in one or more of the determinants of demand.

question

Change in Quantity Demanded

answer

is a movement from one point to another point--from one price-quantity combination to another--on a fixed demand curve. The cause of such a change is an increase or a decrease in the price of the product under consideration.

question

Supply

answer

is a schedule or curve showing the various amounts of a product aht producers are willing and able to make available for sale at each of a series of possible prices during a specific period.

question

Supply Schedule

answer

It shows the quantities of corn that will be supplied at various prices, other things equal.

question

Law of Supply

answer

A supply schedule tells us that, other things equal, firms will produce and offer for sale more of their product at a high price than at a low price. This, again, is basically common sense.

question

Supply Curve

answer

A graph showing the hypothetical supply of a product or service that would be available at different price points.

question

Determinants of Supply

answer

are (1) resource prices, (2) technology, (3) taxes and subsidies, (4) prices of other goods, (5) producer expectations, and (6) the number of sellers in the market.

question

Change in Supply

answer

means a change in the schedule and a shift of the curve. In increase in supply ***** the curve to the right; a decrease in supply shifts it to the left. The cause of a change in supply is a change in one or more of the determinants of supply.

question

Change in Quantity Supplied

answer

is a movement from one point to another on a fixed supply curve. The cause of such a movement is a change in the price of the specific product being considered.

question

Equilibrium Price

answer

the quantitiy at which the intentions of buyers and sellers match, so that the quantity demanded and the quantity supplied are equal.

question

Equilibrium Quantity

answer

the quantity at which the intentions of buyers and sellres match, so that the quantity demanded and the quantity supplied are equal.

question

Surplus

answer

Excess supply.

question

Shortage

answer

quantity demanded exceeds quantity supplied at that price.

question

Productive Efficiency

answer

the production of any particular good in the least costly way.

question

Allocative Efficieny

answer

the particular mix of goods and services most highly valued by society (minimum-cost production assumed).

question

Price Ceiling

answer

is a government-imposed limit on how high a price is charged for a product. Governments intend price ceilings to protect consumers from conditions that could make necessary commodities unattainable.

question

Price Floor

answer

is a government- or group-imposed limit on how low a price can be charged for a product.

Macroeconomics: Chapters 1 thru 3 – Flashcards

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