Economics is best defined as the study of
how people allocate scarce resources among unlimited wants.
A posative (nonzero) price for a good means
the good is scarce
The fundamental economic problem
When an individual is behaving out of “ration self-interest” this means that the individual
is making choices that provide him or her with the creates amount of satisfaction possible
The category of economics that contains statements about “what ought to be” is known as
Because of scarcity
costs are incurred by in making choices, we attempt to utilize our resources as efficiently as possible, we must make choices between production possibilities, we are unable to produce all of what we would like to produce
Which of the following is true of theories?
A theory is a simplification of reality.
Ceteris paribus means
other things being equal
Macroeconomics is primarily concerned with
aggregate economic activity.
If you move along the production possibility curve and the opportunity cost of producing one good in terms of another changes, it follows that the production possibility curve
must be a straight line
The idea that consumers ultimately determine what to produce in a market economy is called
the major player in determining monetary policy is the
department of the treasury
If you have a choice between bundle x or bundle y, the opportunity cost of bundle x is
The production possibilities curve illustrates
trade offs facing society, that more of one product can be produced only by reducing the quantity of other products being produced, assuming that resources are being used efficiently, the max. output that can be produced with a limited amount of resources, the opportunity costs of alt. choices
The self-interest motive as a basis of economics is most often attributed to
Shortages result from ______ the equilibrium price and drive prices_____
An improvement in technology will cause the production possibilities curve to shift
to the right
Economic growth can be illustrated
by an outward shift of the production possibilities curve
An externality is defined as
the effect of a decision on a third party that is ignored by the decision maker
What accounts for specialization?
People specialize where their opportunity costs are lowest
The largest component of total spending in the US economy is
The law of demand illustrates
as price decreases, quantity demanded increases
Which of the following is not held constant when constructing a demand curve for good X
Prices of other goods
What distinguishes a public good from a private good?
Public goods are subject to the free-rider problem
If the price of a product decreases this causes
Movement down along the demand curve
Private property rights
are an essential element of a market economy
If the price of product x falls and this causes the demand for product y to shift to the right then we can conclude
X and Y are complements
The law of supply states that
price and quantity supplied are positively related.
A market is in equilibrium
when the demand and supply curves intersect
Fiscal policy is best defined as
policy aimed at government spending and taxation
If there is a surplus of a product we can conclude
The products price is above equilibrium
If demand decreases but supply increase, we can say that
equilibrium price will decrease, but equilibrium quantity is indeterminate.
The circular flow model
focuses on aggregate economic activity.
If supply and demand for a good both decrease which of the following is true
equilibrium quantity will fall, but we cannot say for sure what will happen to equilibrium price.
Which of the following will NOT cause a decrease in the supply of tea
An increase in the price of tea.
What are the determinants of the production-possibilites curve?
Factor endowments, technology
What is the idea behind Adam Smith’s invisible hand theory
competition converts self interests into the public interests
Why do consumer demand curves slope downward
income and substitution effects. Diminishing marginal utility. Law of demand.
What is the basis of the economists belief that voluntary trade is mutually beneficial
Recently the price of gasoline decreased significantly. And during the same period the quantity of gasoline purchased decreased. This is a clear violation of law of demand.
cetris not paribus
What is the role for government in the market economy?
Property rights, cops and courts. Reduce market failures
What do “prices do in market economy
Allocate resources. Signal resource allocation. Distribute. Answer, what? how? for whom?
What are economist talking about when they speak of market failure?
Markets and prices poorly allocating resources. Public goods, externalities, lack of competition, macro instability
What is a normal good?
When income goes up, you buy more of it. An inferior good is when when your income goes up, you buy less.
What will cause possibility production curve to slope downwards?
Lose of land labor or capital. Example. Natural disasters. Population shrinks.
What is the old claim of market economy?
Growth leads to specialization and division of labor which leads to capital accumulation
What is the new claim of market economy?
efficient allocation of resources.
What determines demand?
Tastes and preferences. Income. Relative price.
What determines supply?
technology, factors of price, other prices
Questions of production
What? How much? for whom?
Population growth exceeds food supply so life sucks. Educate citizens. Wages exceed substance leads to an increase in population. Diminishing returns.
Peasants, capitalist, land lords, labor theory of value. Rel. price of a good is determined by the ratio of quantities of labor required for production
Gov. response to externalities
Rules and regulations, taxes and subsidies
If we have to much debt how do we know?
Interest rates go up
Market demand is determined by
horizontal sums of individual demand curves
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