Flashcards and Answers – Econ Chapter 1
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Which one of the following states a central element of the economic way of thinking? a. The realism of the assumptions is the best test of an economic theory. b. Incentives matter--human choice is influenced in predictable ways by changes in personal costs and benefits. c. When deciding how to allocate time, the concept of opportunity cost is meaningless. d. Scarce goods are priceless.
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b. Incentives matter--human choice is influenced in predictable ways by changes in personal costs and benefits.
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The economic way of thinking stresses that: a. changes in personal costs and benefits generally fail to exert much impact on behavior. b. incentives matter--individuals respond in predictable ways to changes in personal costs and benefits. c. if one individual gains from an economic activity, then someone else must lose and in the same proportion. d. if a good is provided by the government, its production will not consume valuable scarce resources.
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b. incentives matter--individuals respond in predictable ways to changes in personal costs and benefits.
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Which of the following is not consistent with the basic postulate of economics that incentives matter? a. People drive less because of higher gas prices. b. Farmers produce fewer bushels of wheat in response to an increase in the price of wheat. c. A politician votes against a proposal because most of his constituents oppose it. d. People buy more milk in response to a reduction in the price of milk.
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b. Farmers produce fewer bushels of wheat in response to an increase in the price of wheat.
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Economic analysis assumes that: a.people act only out of selfish motives. b. people are motivated by a variety of forces; however, changes in personal benefits and costs affect behavior only when individuals are motivated by selfishness. c. people are basically unselfish, and their actions are, therefore, difficult to predict. d. changes in the personal benefits and costs associated with an activity will exert a predictable influence on the behavior of both those who are selfish and those who are unselfish.
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d. changes in the personal benefits and costs associated with an activity will exert a predictable influence on the behavior of both those who are selfish and those who are unselfish.
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If a decision maker uses marginal analysis, then the relevant costs are the: a. additional costs of a particular activity or product. b. profits obtained on the activity or product. c. fixed costs which do not vary with the extra activity or output. d. full costs of a particular activity or product. average costs for a particular activity or product.
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a. additional costs of a particular activity or product.
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People are more likely to purchase a consumer ratings magazine that reviews new automobiles before buying a new car than they are to purchase a consumer ratings magazine that reviews pens and pencils before buying a new pen or pencil. Which of the following best explains this behavior? a. None of the above explain this behavior. b. Because the value of the information, in terms of avoiding a mistake on the purchase, is much higher for an automobile than for a pen or pencil, it is more worthwhile to gather this information. c. Because the consumer ratings magazine must have a higher price for the issue reviewing pens and pencils. d. Because people generally do not know which products are reviewed by these consumer magazines.
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b. Because the value of the information, in terms of avoiding a mistake on the purchase, is much higher for an automobile than for a pen or pencil, it is more worthwhile to gather this information.
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Economists are generally opposed to tariffs or other restrictions on imported goods because of the negative secondary effects they create that more than offset the benefits to employment in the domestic industry. Which of the following could be considered a secondary effect of these trade restrictions? a. Because there is a link between a country's imports and its exports, less imports from other countries will result in lower domestic employment in export industries. b. All of the above. c. As consumers must spend more money to purchase the good, there will be employment losses in other domestic industries as consumers cut back on their spending on other things. d. The price to consumers of the good in question will be higher as a result of the restriction, meaning consumers will be worse off.
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b. All of the above.
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The fact that some people love tomatoes while others dislike them illustrates that a. the value created by a good does not depend on who consumes it. b. the value of a good is subjective. c. the value of a tomato cannot be determined by the person consuming it. d. tomatoes have a value that is determined by their cost of production rather than by the value to the consumer of the tomatoes.
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b. the value of a good is subjective.
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What is the best test of an economic theory? a. Its eloquence b. its ability to predict real-world events, patterns, and changes c. whether it produces implications that are favored by the researcher d. the plausibility of its assumptions
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b. its ability to predict real-world events, patterns, and changes
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The difference between positive economic statements and normative economic statements is that a. positive statements are often false and normative statements are true b. both b and d. c. positive statements are true and normative statements are often false d. positive statements are based on opinion while normative statements are based on fact e. positive statements are based on fact while normative statements are based on opinion
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e. positive statements are based on fact while normative statements are based on opinion
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Which of the following is a positive economic statement? a. Too much government spending is the biggest problem facing the U.S. economy. b. Creating jobs is the most serious problem facing the U.S. economy. c. If taxes are over 50 percent of national income, job creation falls. d. Raising taxes provides additional revenue that should be used to finance health care.
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c. If taxes are over 50 percent of national income, job creation falls.
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Economics is primarily the study of a.the choices people make as the result of scarcity. b. why people like to make money. c. the management of a business. d. how to make money in the stock market.
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a.the choices people make as the result of scarcity.
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Which of the following represents a positive statement? a. A decrease in tax rates is needed to help the poor. b. We should raise the standard of living for the elderly. c. A higher income tax rate will reduce the amount of time that people spend working. d. Teenage unemployment should be reduced.
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c. A higher income tax rate will reduce the amount of time that people spend working.
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The term ceteris paribus means that a. the basic postulate of economics does not apply for the case being considered. b. all variables except those specified are constant. c. everything is changing. d. no one knows which variables will change and which will remain constant.
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b. all variables except those specified are constant.
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Economists use the term ceteris paribus to indicate that a. their conclusions are based on normative economics rather than positive economic analysis. b. other things are assumed to be constant. c. the analysis is true for the individual but not for the economy as a whole. d. supply and demand are in balance.
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b. other things are assumed to be constant.
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Which of the following best illustrates the fallacy of composition? a. If Mr. Johnson had more money, he could afford to buy more goods. b. If the price of bread rose, consumers would buy less; if consumers bought less bread, the price of bread would rise. c. If Ms. Dawes stood up at a basketball game, she could get a better view of the game; if everyone stood up at a basketball game, everyone could have a better view of the game. d. High housing prices cause people to buy less housing, but an increase in income might cause them to buy more housing.
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c. If Ms. Dawes stood up at a basketball game, she could get a better view of the game; if everyone stood up at a basketball game, everyone could have a better view of the game.
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Which of the following is a guidepost to economic thinking? a. The value of a good can be objectively measured. b. Goods are scarce for the poor but not for the rich. c. Incentives matter. d. Individuals should never make a decision without having complete information.
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c. Incentives matter.
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People make decisions at the margin. Thus, when deciding whether to purchase a second car, they would compare: a. the dollar cost of the two cars with the potential income that the two cars will generate. b. the total benefits expected from two cars with the costs of the two cars. c. the additional benefits of the second car with the additional costs of the second car. d. the additional benefits expected from a second car with the total cost of the two cars.
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b. the total benefits expected from two cars with the costs of the two cars.
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If Susan bought nine gallons of gasoline at $1.50 per gallon, the car wash cost $1, but if she bought 10 gallons of gasoline, the car wash was free. Given that Susan is going to get the car wash, the marginal cost of the tenth gallon of gasoline is a. $.50. b. $1.50. c. zero. d. $1.00.
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a. $.50.
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The economic way of thinking stresses that a. changes in personal costs and benefits will exert a predictable influence on the choices of human decision makers. b. secondary effects are not important to consider when making decisions. c. if a good is provided free to an individual, its production will not consume valuable scarce resources. d. only direct monetary costs matter in making decisions.
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a. changes in personal costs and benefits will exert a predictable influence on the choices of human decision makers.
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Ralph wants to buy some milk and a box of cereal. If Ralph buys 4 gallons of milk at $3.00 per gallon, the box of cereal costs $2.00. If he buys 5 gallons of milk, the box of cereal is free. For Ralph, the marginal cost of buying a fifth gallon of milk is: a. $3.00. b. $1.00. c. zero. d. $2.00.
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b. $1.00.
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If a good is scarce, a. there will be enough of the good freely available from nature to satisfy the human desire for it. b. there will be shortages of it if the good is rationed by markets. c. all of the above are true. d. the good will have a price in a market setting.
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d. the good will have a price in a market setting.
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Adam Smith believed that if people were free to pursue their own interests, a. they would generally apply their talents to unproductive activities that would generate little value to society. b. they would have little incentive to undertake productive activities. c. less would be produced than if altruism were the guiding principle. d. public interest would be served quite well.
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d. public interest would be served quite well.
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Household production is more likely to occur when a. it requires many specialized resources b. less control over the final product is desirable c. the opportunity cost of household work is relatively small d. technology makes it more costly than market production e. tax avoidance is undesirable
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c. the opportunity cost of household work is relatively small
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The opportunity cost of an action is a. the monetary payment the action required. b. the cost of all alternative actions that could have been taken, added together. c. the value of the best opportunity that must be sacrificed in order to take the action. d. the total time spent by all parties in carrying out the action.
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c. the value of the best opportunity that must be sacrificed in order to take the action.
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If the government provides free schooling for all students, an economist would say education is a. scarce even though its cost is paid by taxpayers rather than by students. b. all of the above. c. a free good, having no cost. d. an example of a good that is no longer scarce.
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a. scarce even though its cost is paid by taxpayers rather than by students.
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Deciding how to make the best use of limited resources to satisfy virtually unlimited wants is known in economics as a. the fallacy that good intentions do not guarantee the desired outcome. b. ceteris paribus. c. the fallacy of composition. d. economizing behavior.
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d. economizing behavior.
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Which of the following is most consistent with economizing behavior? a. If you get the same satisfaction from going to the opera and going to an art museum, it makes no difference which you choose. b. Even if you know how to paint, hiring someone to do the job is consistent with economizing behavior, if your opportunity cost is high enough. c. If you get the same satisfaction from a hamburger and a fish sandwich, you should purchase the one that costs the most. d. If the government provides a good free to citizens, the opportunity cost of the good is zero.
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b. Even if you know how to paint, hiring someone to do the job is consistent with economizing behavior, if your opportunity cost is high enough.
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When an individual weighs her options and makes a choice that maximizes her benefit at the minimum cost, economists refer to this as a process of a. objective decision making because the value of goods is determined objectively. b. rational decision making. c. marginal management analysis. d. random decision making.
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b. rational decision making.
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*Scarcity
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= Fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like.
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*Choice
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= The act of selecting among alternatives. o The logical consequence of scarcity o To make a choice is to leave another need go in favor of the one being chosen
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*Scarcity (define when compared to poverty)
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=an objective (a fact based on observable phenomena that is not influenced by differences in personal opinion) concept that describes a factual situation in which the limited nature of our resources keeps us from being able to completely fulfill our desires for goods and services.
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*Poverty =
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Pa subjective (an opinion based on personal preferences and value judgments) concept that refers to a personal opinion of whether someone meets an arbitrarily defined level of income
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*Price rationing
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= based on first come, first serve so time is wasted waiting in line for things
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*Political rationing
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= time wasted on trying to influence others in political process
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*Economic Theory
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= A set of definitions, postulates, and principles assembled in a manner that makes clear the "cause-and-effect" relationships.
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Explain the guidepost: 1.) The Use of Scare Resources is Costly, so Decision-Makers Must Make Trade-Offs
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o NO option is free of cost - there's always a trade-off o *Opportunity Cost = The highest valued alternative that must be sacrificed as a result of choosing an option. o Use of scare resources is ALWAYS costly, doesn't matter who pays for it
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Example of opportunity cost
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- You have the option of going to class at 8:00am or sleeping in. Either way you're giving up something, and that's the opportunity cost (as long as it's the highest item on your list).
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Explain the guidepost: 2.) Individuals Choose Purposefully - They Try to Get the Most from Their Limited Resources:
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o *Economizing Behavior = Choosing the option that offers the greatest benefit at the least possible cost. • When choosing things of equal benefit, economizer will choose least expensive option • SIMILARLY, when choosing things of equal cost, economizing decision makers will choose option with the most benefit. o Remember that a rational choice is subjective to the individual. It may be rational to them, but not to others. o MAIN POINT = When people weigh the benefits they receive from an activity against its cost, they are making a rational choice (just doesn't mean it's rational to others, but they're decision making process is rational)
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*Economizing Behavior =
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Choosing the option that offers the greatest benefit at the least possible cost.
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Explain the guidepost: 3.) Incentives Matter - Changes in Incentives Influence Human Choices in a Predictable Way. Both Monetary and Nonmonetary Incentives Matter (Basic Postulate of Economics):
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o If personal cost of an option increases, people less likely to choose it (affects everything, like if it rains people won't go outside) o Non economist think people only respond to incentives because they are selfish and greedy. NOT TRUE. We have both selfish and humanitarian incentives
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Explain the guidepost 4.) Individuals Make Decisions at the Margin
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o *Marginal Decision-Making = Term used to describe the effects of a change in the current situation. For example, a producer's marginal cost is the cost of producing an additional unit of a product, given the producer's current facility and production rate. o Marginal choices ALWAYS involve effects of net additions to or subtractions from current conditions o Difference between maginal and average Ex. Producing automobiles *Average cost of producing cars is total cost of production divided by how many cars produced and ='s $45000 *Marginal cost of producing another car, or an additional 1,000 cars may be way lower, like $20,000 per car. o MAIN POINT = Decisions are made at the margin. They almost always involve additions to or subtractions from current conditions.
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*Marginal Decision-Making =
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Term used to describe the effects of a change in the current situation. For example, a producer's marginal cost is the cost of producing an additional unit of a product, given the producer's current facility and production rate.
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Explain the guidepost: 5.) Although Information Can Help us Make Better Choices, Its Acquisiton is Costly
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o Info we need to make better choices is very valuable, but the time and sometimes $ it costs to get that info can make is it less valuable. So we must economize (best value for buck concept) our decision to gather information just like any other decision.
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Explain the Guidepost 6.) Beware of Secondary Effects: Economic Actions Often Generate Indirect as well as Direct Effects
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*Secondary Effects = The indirect impact of an event or policy that may not be easily and immediately observable. In the area of policy, these effects are often both unintended and overlooked. • Difference between good economit and bad economist, must think into future of decisions o Government changes policies that change incentives. And when change alters invectives, unintended consequences may occur.
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Explain the Guidepost 7.) The Value of a Good or Service is Subjective
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o The value of any good or service is totally subjective to who is buying or using it.
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Explain the guidepost: 8.) The Test of a Theory is Its Ability to Predict
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• If events in real world are consistent with the theory, then we say the theory has predictive value o If impossible to test theoretical relationships of a discipline, then the discipline doesn't qualify as a science
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*Positive economics
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= The scientific study of "what is" among economic relationships. AKA FACTS
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*Normative economics =
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Judgments about "what ought to be" in economic matters. Normative economic views cannot be proven false because they are based on value judgments. AKA OPINIONS
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EXPLAIN: Good Intentions Do Not Guarantee Desirable Outcomes
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- Tendency to believe that proponents of a policy with good intentions mean that the policy will have a good outcome - May be unaware of effects that only can be seen over time
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EXPLAIN: Association is not Causation
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VERY IMPORANT to remember association does not = causation.
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*Post hoc propter ergo hoc fallacy =
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arguing that a causational relationship exists because of a statistical association (basically assuming association = causation)
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*Fallacy of Composition
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= Erroneous view that what is true for the individual (or the part) will also be true for the group (or the whole).
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*Microeconomics
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= The branch of economics that focuses on how human behavior affects the conduct of affairs within narrowly defined units, such as individual households or business firms.
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*Macroeconomics
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= The branch of economics that focuses on how human behavior affects outcomes in highly aggregated markets, such as the markets for labor or consumer products.
