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economists assume that people respond to
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incentives
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incentives
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rewards and penalties that motivate behavior
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____ are the following types of incentives that economists believe people respond to
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moral,monetary, and personal incentives
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The Wealth of Nations, Adam Smith claimed that individuals
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are motivated by self-interest
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what 2 points do economists consider important with trade-offs?
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drug lag, drug loss
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what is the invisible hand?
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the idea that people pursuing their own self-interest actually benefits the public at large
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economics is the study of
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trade offs when making decisions
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why is it less costly to attend college during a recession
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the opportunity cost is lower during a recession because there are fewer labor market opportunities
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what is opportunity cost
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the value of what you give up when you make a choice
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when the opportunity cost increases
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individuals are less likely to choose that same option
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what does thinking at the margin mean?
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making choices by comparing the additional benefits and additional costs from doing a little bit more of some activity
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without trade, we would all be able to produce
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very little
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what is price inflation
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...
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macroeconomists is?
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the incentives to produce New Ideas
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what is inflation?
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an increase in the general level of prices
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what is inflation caused by?
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sustained increase in the money supply
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the law of demand states that
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the lower the price, the greater the quantity demanded
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what is a demand curve
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a demand curve is a function that shows the relationship between prices and their associated quantities demanded
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quantity demanded is
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the amount of a good or service that a buyer is able and willing to purchase at a given price
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define an inferior good
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when the demand goes down the income goes up
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the quantity supplied is the
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amount of a good that firms are willing adn able to sell at a particular price during a given period of time
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the supply curve illustrates
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the relationship between the quantity supplied and the price of a good
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total consumer surplus is measured by
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the area below the demand curve and above the market price
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substitute goods
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are those than can be used as alternatives for the other
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complements is
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goods that are used together
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producer surplus
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the producers gain from exchange.
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in a market, the equilibrium condition is given by the following
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quantity demanded = quantity supplied
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define surplus
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situaiton in which quantity supplied is greater tahn quantity demanded
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define shortage
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quanitty demanded is greater than quantity supplied
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when the price of a good incrases the demand for the good will
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...
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OPEC is able to raise oil prices by
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...
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define speculation
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the attempt to proft from futuer price changes
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futures are
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contracts to buy or sell specified quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future
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how are oil prices and sugar prices related?
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as oil prices increase, producers divert sugar cane from sugar production to ethanol production
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one of the biggest problems with centrally planned economies is that
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central planners have limited information on the true value of the various ways to utilize scarce resources
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the great economic problem is
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satisfying infinite wants with limited resources
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in a competitive free market, consumers decide not only whether their use of a good is worth more than the market price, but also wether their use of a good is worth more than...
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its next highest-valued use of the good
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if a central planner had the power to solve the great economic problem
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his incentive would be to use that power to enrich himself, not to solve the problem
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increasing prices act as a signal to
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suppliers to increase he quantity supplied in those markets
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speculation often
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helps smooth price fluctuations
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futures contracts
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allow individuals to speculate in various markets without having to store the product
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with speculation, prices...
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become less volatile than they otherwise would be
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is the task of effective central planning difficult?
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yes, central planners have no way of knowing the value of a particular resource in all of its uses
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the more quantit demanded responds to a change in the price o fthat good the ____ is for that good.
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more elastic demand
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the steeper a linear demand curve is the
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less elastic the demand
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if two linear demand (or supply) curves run through a common point, then at any given quantity the curve that is steeper is more
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inelastic
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to examine how responsive consumers are to price changes, economics measure
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the elasticity of demand
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the fundamental determinant of the elasticity of demand for a good is
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how easy it is to substitute the good for another
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over time, the demand for msot goods becomes ___ elastic since we are able to ____
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more; develop more/better substitutes
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are there more substitutes for Cheerios or for cereal in general? for which good is demand more elastic
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Cheerios; cheerios
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why might the demand for massages be more elastic than the deamnd for chiropractic adjustments?
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massages tend to be more luxurious and chiropractic adjustments tend to be necessities
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there are ___ substitutes for oil, so the elasticity of deamdn for oil is ___ elastic
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few; not very
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the long run demand for oil____ the short run demand for oil
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is more elastic than
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a higher income tends to make demand for a given good ____ elastic
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less
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economists categorize price elasticity of demand greater than 1 as
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elastic
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if the demand for a good is elastic, then
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revenues decrease when the price goes up
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when market for a good is ELASTIC, total revenue and price move in
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opposite directions
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in the elastic portion of a linear demand curve, firm revenue ___when price falls
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increases
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the supply of ancient Egyptian papyrus manuscripts is probably
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inelastic
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the fundamental determanant of the elasticity of supply is
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how quickly the perunit cost of production increase with an increase in production
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a tax on sellers of popcorn will
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reduce the size of the popcorn market
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a tax on sellers of apples
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leads sellers to supply less apples at every price
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The burden of a tax imposed on coffee mugs
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buyers and sellers share the burden of the tax
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if buyers are required to pay a tax on top of the price, buyers' willingness to pay will
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decrease and the demand curve will shift down
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T or F; in a market with a downward sloping demand curve and an upward sloping supply curve, a tax placed on sellers will cause sellers to recieve a lower price and buyers to pay a higher price
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True
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T or F; if the demand and supply curves have equal sloped in absolute value, the burden of commodty tax will be split equally regardlessof on whom the tax is placed
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True
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T or F; subsidies lead to existence of non-beneficial tades
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True
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a price cieling is
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an illegally established maximum price that can be charged for a good
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price cielings would create
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shortages, reductions in product quality, a misallocation of resources, a loss in gains from trade, wasteful lines and other search costs
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if a seller facing excess demand is unable to raise the price of the good due to a price cieling, a likely result will be
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a decrease in the quality of the product
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a deadweight loss is the total of
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lost consumer and producer surplus when all mutually profitable gains from trade are not exploited
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the effect of price cielings
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extend beyond the price controlled market
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a prcie floor is
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minimum price allowed by law
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for a price floor to prevent market forces from finding the equilibrum price it must be set
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above the equilibrium price, causing a market surplus
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price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers
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higher quality
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trade creates value because
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people exchange things they do not want for things they do
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a very small portion of people who use microwaves know how they work this is an exampe of
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specialization
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if instead of specialized doctors we had doctors who each knew the same things about all aspects of medicine it would be
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worse because total medical knowledge in society would decrease
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division of knowledge refers to
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people learning different tasks for which they each have a comparative advantage
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gains from international trade are best characterized a potential gains from
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both importation and exportation
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economic growth in a modern era is primarily due to the creation of new
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knowledge
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absolute advantage derives from
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the lowest cost production
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If Tyler and ALex are trading partners do their gains from trade depend on whether tyler and alex live in the same country?
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it doesnt matter in which country tyler and alex live
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if the world price of cotton is less than the price that would occur domestically without trade then a country will
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import cotton
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when a country adopts free trade and becomes a net exporter of a good that good
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becomes more expensive for domestic consumers
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an increase in import trade tends to ___ domestic prices
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decrease
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according to supply and demand framework in the text, and increase in import trade tends to ___ domestic production of good
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decrease
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you are a policymaker and a lobbyist comes to you, arguing that his industry is important for national security and has important spillover benefits. Why might you be suspicious of his claims?
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his industry benefits from tariffs that decrease foreign competition
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some goods generate spillover benefits from production but it is
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difficult to know in advance which good those are
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