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Chapter 1
Why do people have to make choices?
Why do people have to make choices?
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Resources are scarce
Choices must be made
Opportunity cost
There's no free lunch
Choices must be made
Opportunity cost
There's no free lunch
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What is purposeful behavior?
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Rational self-interest
Individuals and utility
Firms and profit
Desired outcome
Individuals and utility
Firms and profit
Desired outcome
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Explain the concept of Marginal Analysis.
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This involves comparing the marginal cost to the marginal benefits in order to decide whether or not to use another unit of a resource.
Marginal benefit
Marginal cost
Marginal means "extra"
Comparison between marginal benefit and marginal cost
Marginal benefit
Marginal cost
Marginal means "extra"
Comparison between marginal benefit and marginal cost
question
Identify the 5 steps of the Scientific Method.
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1. Observe
2. Formulate a hypothesis
3. Test the hypothesis
4. Accept, reject, or modify the hypothesis
5. Continue to test the hypothesis, if necessary
2. Formulate a hypothesis
3. Test the hypothesis
4. Accept, reject, or modify the hypothesis
5. Continue to test the hypothesis, if necessary
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What is the "Other Things Equal Assumption"?
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Ceteris paribus
Price and quantity
Price and quantity
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Explain the difference between Macro and Micro economics.
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Micro- The study of the individual consumer, firm, or market
Macro- The study of the entire economy or a major aggregate of the economy
Macro- The study of the entire economy or a major aggregate of the economy
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What is the difference between Positive and Normative economic statements?
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Positive- Economics statements that are factual (is)
Normative- Economic statements that involve value judgments (ain't)
Normative- Economic statements that involve value judgments (ain't)
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What ate the four factors of production?
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-Land
-Labor
-Capital
-Entrepreneurial ability
-Labor
-Capital
-Entrepreneurial ability
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What is shown by a production possibilities curve (PPC)?
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Economic model that shows different combo of two goods that an economy can produce
Full employment
Fixed resources
Fixed technology
2-good economy
Consumer goods and capital goods
Full employment
Fixed resources
Fixed technology
2-good economy
Consumer goods and capital goods
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How does the Law of Increasing Opportunity Costs work?
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As more of a particular good is produced, its marginal opportunity costs increase
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What characteristics are found in a growing economy?
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Increase output per worker
Increase driven by technology
Increase driven by technology
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Identify some of the pitfalls of sound economic reasoning.
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Biases
Loaded Terminology
Fallacy of composition
Post hoc fallacy (A does not cause C)
Correlation not causation (If 2 things happen at the same time it doesn't mean that one cause the other to happen)
Loaded Terminology
Fallacy of composition
Post hoc fallacy (A does not cause C)
Correlation not causation (If 2 things happen at the same time it doesn't mean that one cause the other to happen)
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Chapter 2
Identify the four factors of production.
Identify the four factors of production.
answer
1. Land
2. Labor
3.Capital
4. Entrepreneurial ability
2. Labor
3.Capital
4. Entrepreneurial ability
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What does a production possibilities curve show?
answer
Different combo of two goods that an economy can produce
Fixed employment
Fixed resources
Fixed technology
2-good economy
Consumer goods and capital goods
Fixed employment
Fixed resources
Fixed technology
2-good economy
Consumer goods and capital goods
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Explain the Law of Increasing Opportunity Cost.
answer
As more of a particular good is produced, its marginal opportunity costs increase
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What is rational self interest?
answer
self-interested behavior
incentives
incentives
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How does specialization work?
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Division of work
Geographical specialization
Geographical specialization
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What is meant by the term consumer sovereignty?
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"Dollar Votes"
Method for consumers to determine which goods will be produced
Determines which products and industries survive or fail
Method for consumers to determine which goods will be produced
Determines which products and industries survive or fail
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Define sole proprietorship, partnership & corporation.
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Sole proprietorship- a business owned and managed by a single individual
Partnership-a business organization owned by two or more persons who agree on a specific division of responsibilities and profits
Corporation-A business owned by shareholders, also called stockholders, who own the rights to the company's profits but face only limited liability for the company's debts and losses
Partnership-a business organization owned by two or more persons who agree on a specific division of responsibilities and profits
Corporation-A business owned by shareholders, also called stockholders, who own the rights to the company's profits but face only limited liability for the company's debts and losses
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Who really takes the risk in the business world? Why?
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...
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What is the difference between a command system and a market system.
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Command system
-The command system is known as socialism or communism
-Government ownership or resources
-Decisions made by a central planning board
-North Korea, Cuba, Myanmar
Market system
-The market system is a mix of decentralized decision making with some government control
-Systems found in much of the world
-Private markets are dominant force
-Private ownership of resources
-Self-interested behavior
-The command system is known as socialism or communism
-Government ownership or resources
-Decisions made by a central planning board
-North Korea, Cuba, Myanmar
Market system
-The market system is a mix of decentralized decision making with some government control
-Systems found in much of the world
-Private markets are dominant force
-Private ownership of resources
-Self-interested behavior
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Who determines what gets produced in a market system?
answer
Consumers with the ability and willingness to pay will get the product
Ability to pay depends on income
Ability to pay depends on income
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Chapter 3
Define a market, and explain what it takes to have a market demand.
Define a market, and explain what it takes to have a market demand.
answer
Interaction between buyers and sellers
Competition and buyer must demand goods
Competition and buyer must demand goods
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Identify the the determinants of demand.
answer
1.Change in consumer tastes and preferences
2.Change in the number of buyers
3.Change in income
4.Change in prices of related goods
5.Change in consumer expectations
2.Change in the number of buyers
3.Change in income
4.Change in prices of related goods
5.Change in consumer expectations
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What is the difference between changes in demand, and changes in quantity demanded.
answer
...
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What is marginal cost?
answer
the increase in total cost that results from carrying out one additional unit of an activity
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Identify the determinants of supply.
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1. A change in resource prices
2. A change in technology
3. A change in the number of sellers
4. A change in taxes and subsidies
5. A change in prices of other goods
6. A change in producer expectations
2. A change in technology
3. A change in the number of sellers
4. A change in taxes and subsidies
5. A change in prices of other goods
6. A change in producer expectations
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What is equilibrium price and, how is it determined?
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The price in a competitive market at which the quantity demanded and the quantity supplied are equal, there is neither a shortage nor a surplus, and there is no tendency for price to rise or fall.
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What is meant by the term, Rationing Function of Prices?
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The ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistent
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What is the difference between changes in supply, and changes in quantity supplied?
answer
"change in demand" - refers to a shift of the demand curve
"change in quantity demanded" - refers to a movement along the demand curve as a result of a change in the product's price.
"change in quantity demanded" - refers to a movement along the demand curve as a result of a change in the product's price.
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What are price ceilings? What is the problem with them?
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-Set above equilibrium price
-Rationing problem
-Black markets
Example: rent control
-Rationing problem
-Black markets
Example: rent control
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What are price floors? What is the problem with them?
answer
-Prices are set above the market price
-Chronic surpluses
Example: Minimum wage law
-Chronic surpluses
Example: Minimum wage law
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Chapter 4
Identify the two types of market failures.
Identify the two types of market failures.
answer
-Demand-Side Market Failures
When it is not possible to charge consumers for the product
Some can enjoy benefits without paying
Firms not willing to produce since they cannot cover the costs
-Supply-Side Market Failures
Occurs when a firm does not pay the full cost of producing its output
External costs of producing the goods are not reflected in supply
When it is not possible to charge consumers for the product
Some can enjoy benefits without paying
Firms not willing to produce since they cannot cover the costs
-Supply-Side Market Failures
Occurs when a firm does not pay the full cost of producing its output
External costs of producing the goods are not reflected in supply
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What is meant by the term "consumer surplus"?
answer
-Difference between what a consumer is willing to pay for a good and what the consumer actually pays
-Extra benefit from paying less than the maximum price
*pays "less" than willing to pay
-Extra benefit from paying less than the maximum price
*pays "less" than willing to pay
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Why is selling at the equilibrium the most efficient allocation of resources?
answer
...
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What is meant by the term "producer surplus"?
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Difference between the actual price a producer receives and the minimum price they would accept
Extra benefit from receiving a higher price
Extra benefit from receiving a higher price
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What is meant by the term "free rider"?
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Free rider problem refers to a situation where some individuals in a population either consume more than their fair share of a common resource, or pay less than their fair share of the cost of a common resource
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How is the market demand determined?
answer
...
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What are Quasi-Public goods?
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Pay fees/Used tax $$$
Those that have large positive externalities or spillover benefits where benefits accrue to some third party external to the market transaction so govt will sponsor their provision. (education, museums)
Those that have large positive externalities or spillover benefits where benefits accrue to some third party external to the market transaction so govt will sponsor their provision. (education, museums)
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What is meant by the terms "nonrivalry" and "nonexcludibility"?
answer
Nonrivalry means that when one consumes the good this doesn't preclude another from consuming the good.
Nonexcludability means that no one can be prevented from enjoying the benefits of a public good
Nonexcludability means that no one can be prevented from enjoying the benefits of a public good
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Political pressures often lead government to respond inefficiently when attempting to correct for market failures. Why?
answer
$$$ Interest Groups
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*Chapter 5"
Identify some of the economic tasks that the government performs.
Identify some of the economic tasks that the government performs.
answer
Government's right to coerce
Force and economic efficiency
Correcting for market failures
Positive externalities
Negative externalities
Reducing private-sector economic risks
Force and economic efficiency
Correcting for market failures
Positive externalities
Negative externalities
Reducing private-sector economic risks
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How does the government's right to coerce help them make policy?
answer
...
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Why does the government often times find it easier to extend benefits than to raise taxes? What is the result?
answer
...
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Why are government economic actions not always self correcting (no invisible hand)?
answer
...
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Efficient public decision making is often impaired by the special-interest effect. Why?
answer
They contribute to re-election
$$$
$$$
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What is rent seeking behavior, and how does it work?
answer
...
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Why have unfunded liabilities grown so rapidly in recent years?
answer
...
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What is the principal agent problem?
answer
Owner/Manager disagree
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What is regulatory capture, and how does it work?
answer
...
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