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192 Cards in this Set
- Front
- Back
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The curve that shows the relationship between the price of a good and the quantity that consumers are willing to purchase at each price is the ?
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Demand Curve
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Each point on the demand curve indicates
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the quantity demanded at that price
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The law of demand is simply a reflection of the
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basic principle of economics: Incentives influence behavior in a predictable fashion
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Consumers buy less of a good as its price increases because
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substitute goods are now relatively cheaper
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The height of the demand curve for a product at a given quantity represents
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the marginal value derived by the consumption of that unit
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The difference between total willingness to pay and the total amount paid is
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the consumer surplus
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Jeff buys a new shirt for $50. If his willingness to pay is___, he receives consumer surplus of $15 on his purchase
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$65
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Ceteris paribus, an increase in the price of a good will cause the
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consumer surplus derived from the good to increase
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if consumer purchases of a good are highly sensitive to the price of a good, economists say the demand for the good is relatively
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elastic
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The price elasticity of demand for a commodity is determined primarily by the
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availability of substitutes for the good
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Name a good that would likely have the most inelastic demand
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gasoline
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A demand curve shows the relationship between price and quantity demanded, other things constant. These "other things" include
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Consumer preferences
The price of substitutes goods Consumer income |
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An increase in the price of hot dogs will reduce the demand for hot dog buns.
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Demand is used properly
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If people expect the price of coffee to rise next month, the demand for coffee will
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increase now
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What would lead to an increase in the demand for computer software?
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a decrease in the price of personal computers
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If a firm is not covering the cost of all resources employed by the firm (including the opportunity cost of the resources owned by the firm), it will generally
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go out of business in the long run
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When a firm is earning economic proift, this indicates that the firm is
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increasing the value of the resources it is using
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if price rises, what happens to the supply of a product
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it does not change
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Corn and soybeans are alternatives that could be grown by most farmers. if government subsidies for corn based ethanol lead to high corn prices, this will
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decrease the supply of soybeans
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Two studies published in the New England Journal of Medicine link the risk of breast cancer to alcohol consumption. Young women who nine or more drinks per week were reportedly 150% more likely to develop breast cancer. According to economic analysis, how would this information affect the market for alcohol?
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Demand will decrease, placing downward pressure on price
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Other things constant, a decrease in the demand for computers will
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decrease the demand for computer manufacturing workers
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When a price floor is above the equilibrium price,
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quantity supplied will exceed quantity demanded so there will be a surplus
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Which of the following would tend to increase the price of lumber?
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an increase in the demand for newly constructed homes
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Other things constant, if a labor union is able to successfully increase the wages of autoworkers there will be
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a decrease in the supply of automobiles and an increase in the price of automobiles
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Price controls will tend to cause misallocation of resources because
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a production (or opportunity) cost no longer corresponds to market price
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Under rent control, landlords cease to be responsive to tenants' concerns about the quality of the housing because
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with shortages and waiting lists, they have no incentive to maintain and improve their property
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A minimum wage that is set above a market equilibrium wage will tend to create
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an excess supply of labor, that is, unemployment
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a price ceiling that sets the price of a good below market equilibrium will cause
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An increase in quantity demanded of the good.
A decrease in quantity supplied of the good. A shortage of the good. |
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A market that operates outside the legal system, either by selling illegal goods or by selling goods at illegal prices is referred to in economics as a
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black market
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During the Prohibition period, (when production and sale of alcohol was illegal)
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The quality of alcohol sold became less reliable.
The murder rate increased. Gangsters dominated the alcohol trade. |
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When a tax is imposed on a good, the actual incidence of the tax generally
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is shared between the buyer and the seller
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a tax imposed on the sellers of a good will
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raise the price paid by buyers and lower the equilibrium quantity
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the actual incidence of a tax depends on
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the elasticities of supply and demand
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Suppose that a tax is placed on textbooks. if the buyers end up bearing most of the tax burden, this indicates that the
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demand is more inelastic than supply
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taxes create dead weight losses because they
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distort incentives
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if the government wants to generate large revenues from placing a tax on the consumption of a good, it should choose a good for which
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the demand is price inelastic
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the actual incidence (or burden) of a tax refers to
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who actually bears the burden of the tax once changes in market prices are taken into account
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Suppose that the federal government levies a 50 cent per gallon excise tax on gasoline and that the demand for gasoline is highly inelastic while the supply is highly elastic. Under these circumstances, the burden of the tax
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will fall primarily on consumers
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The federal government currently levies a 15.3 percent payroll tax (7.65 percent on both the employer and the employee) on the wages of all workers. If the supply of labor is relatively inelastic when compared to the elasticity of the demand for labor, the burden of the tax will
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fall primarily on employees
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The marginal tax rate is defined as
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the change in tax liability divided by the change in taxable income.
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Give a statement that best characterizes the idea of economic efficiency
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Actions that generate more benefits than costs should be undertaken.
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Suppose someone tells you that to succeed in college you should always study as hard as you possibly can for every exam. What economic concepts does this statement violate?
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Opportunity Costs
Marginal thinking Economic Efficiency |
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Does economic efficiency indicate that all pollution should be eliminated?
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No at some point, the benefits of spillover levels of pollution will not be worth the additional costs
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What would be a protective function of government ?
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Providing national defense
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Markets may fail to allocate resources efficiently when
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property rights are neither well-defined nor adequately protected
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Externalities
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cause the price system to misallocate resources
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Suppose that an MBA degree creates no externality because the benefits of an MBA are captured by the student in the form of higher wages. If the government offers subsidies for MBAs, then
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The equilibrium quantity of MBAs will be greater than the efficient quantity.
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Sellers have a strong incentive to lobby government for legal restrictions that would reduce the intensity of competition in their market because
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competition tends to result in lower prices and lower profits.
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Give the best example of an action that imposes an external cost
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water pollution from an upstream factory that increases the cost of providing clean water to downstream residents.
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markets fail when externalities are present
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because some of the costs and benefits of producing the good are not reflected in the market price.
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As a general rule, if pollution costs are external, firms will produce
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too much of a polluting good
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give an example of an action that creates an external benefit
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getting a measles vaccination that prevents you from getting (and thus spreading) the disease
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a good is considered to be a public good if it
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is both non-rival in consumption and nonexcludable.
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Give the best example of a public good
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a flood control system
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Some goods are essential for well-functioning markets--a legal system for example. However, providing a legal system through the market may not work. give a statement that best describes why the market may fail to provide some essential goods and services
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the free rider problem
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In which market would information problems likely be the most serious?
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Used Cars
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What will most likely help the consumer make better-informed choices when choosing among goods that are seldom purchased?
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brand name reputation
franchising consumer rating magazines |
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When it is difficult to assign and enforce property rights,
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market result in outcomes that are often inefficient
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It can be difficult to define and enforce property rights against damaging pollutants when
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many polluters are harming one person.
Many polluters harm the same large group of people with the same pollutant. the harms are difficult to quantify |
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What will have the strongest demand for large expenditures on environmental quality?
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Wealthy Countries
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The science which studies human behavior as a relationship between ends and scarce means which have alternative uses is
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Economics
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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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scarcity
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the act of selecting among alternatives
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choice
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An input used to produce economic goods. Land, Labor, skills, natural resources, and capital are examples. Throughout history, people have struggled to transform available, but limited, resources into things they would like to have economic goods.
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resource
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scarce goods include
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food, clothing, household goods (tables, chairs), education, national defense, leisure time, entertainment, clean air, pleasant environment (trees, lakes, rivers, open spaces, etc., pleasant working conditions
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Limited resources include
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Land, natural resources, machines and other human-made physical resources, technology, human resources (the knowledge, skill, and talent of individual human beings)
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__ is a record of our struggle to transform available, but limited, resources into goods that we would like to have
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history
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human made resources (such as tools, equipment, and structures) used to produce other goods and services. They enhance our ability to produce in the future
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capital
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a fact based on observable phenomena that is not influenced by difference in personal option
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objective
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an opinion based on personal preferences and value judgments
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subjective
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allocating a limited supply of a good or resource among people who like to have more of it. When price performs the rationing function, the good or resource is allocated to those willing to give up the most "other things" in order to get it
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rationing
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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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economic theory
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The use of resources is costly, so
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trade-offs must be made
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when a scarce resource is used to meet one need,
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other competing needs must be sacrificed
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the forgone shoe is an example of
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when a scarce resource is used to meet another need, other competing needs must be sacrificed
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The highest valued alternative that must be sacrificed as a result of choosing an option
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opportunity cost
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Individuals choose purposefully--they try to get the most from their limited resources
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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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economizing behavior
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The subjective benefit or satisfaction a person expects from a choice or course of action
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utility
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Incentives matter--
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choice is influenced in a predictable way by changes in incentives
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Because consumers respond incentives,
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store owners know they can sell off excess inventory by reducing prices
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the effects of a change in the current situation. for example the cost of producing an additional unit of a product, given the producers current facility and production rate
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marginal
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although information can help us make better choices
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its acquisition is costly
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Beware of the secondary effects:
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Economic actions often generate indirect as well as direct effects
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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
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secondary effects
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Sometimes actions change the incentives people face and they respond accordingly
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creating secondary effects that were not intended
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the value of a good or service is
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subjective
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The test of a theory is
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its ability to predict
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developing a theory from basic principles and testing it against events in the real world. Good theories are consistent with and help explain real-world events. Theories that inconsistent with the real world are invalid and must be rejected
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scientific thinking
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a body of systematized knowledge concerning what is; a normative or regulative science is a body of systematized knowledge relating to criteria of what ought to be, and concerned therefore with the ideal as distinguisehd from the actual
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a positive science
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the scientific study of "what is" among economic relationships
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positive economics
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Judgments about what ought to be in economic matters. cannot be proven false because they are based on value judgments
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Normative economics
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a Latin term meaning "other things constant" that is used when the effect of one change is being described, recognizing that if other things changed, they also could affect the result. Economists often describe the effects of one change, knowing that in the real world, other things might change and also exert an effect
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Ceteris Paribus
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erroneous view that what is true fro the individual will also be true for the group
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fallacy of composition
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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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Microeconomics
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the branch of economics that focuses on how human behavior effects outcomes in highly aggregate markets such as the markets for labor or consumer products
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macroeconomics
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When individuals engage in a voluntary exchange,
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both parties are made better off
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By channeling goods and resources to those who value them most,
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trade creates value and increases the wealth created by a societies resources
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The time, effort, and other resources needed to search out, negotiate, and complete an exchange
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transaction costs
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A person who buys and sells goods and services or arranges trades. reduces transaction costs
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middleman
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The rights to use, control, and obtain the benefits from a good or service
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property rights
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Property rights that are held by an owner and protected against invasion by others. Private property can be transferred, sold, or mortgaged at the owners discretion
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private property rights
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private property rights involve 3 things
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1.the right to exclusive use of the property
2. legal protection against invasion from other individuals who would seek to use or abuse the property without the owners permission 3. the right to transfer, sell, exchange, or mortgage the property |
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Private owners can gain by
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employing their resources in ways that are beneficial to others, and they bear the opportunity cost of ignoring the wishes of others
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a private owner has a strong incentive to do things with
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his or her property that increase its value to others
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private owners have a strong incentive
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to care for and properly manage what they own
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when apartments and other investment properties are owned privately,
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the owner has a strong incentive to provide amenities that others value highly relative to their cost
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Private owners have an incentive to conserve for the future
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particularly if the property is expected to increase in value
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without clear defined private-property rights,
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there is less of an incentive to take proper care of things--
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private owners have an incentive to lower the chance that
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their property will cause damage to the property of others
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a curve that outlines all possible combinations of total output that could be produced
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production possibilities curve
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production possibilities curve assumes that
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1. a fixed amount of productive resources
2. a given amount of technical knowledge 3.full and efficient use of those resources. The slope of the curve indicates the amount of one product that must be given up to produce more of the other |
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the purchase, construction, or development of resources, including physical assets, such as plants and machinery, and human assets, such as better education. Expands an economy's resources. is sometimes called capital formation
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investment
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An increase in the economy's resource base would
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expand our ability to produce goods and services
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The technological knowledge available in an economy at any given time. The level determines the amount of output we can generate with our limited resources
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technology
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the creation of a new product or process, often facilitated by the knowledge of engineering and science
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Invention
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the successful introduction and adoption of a new product or process; the economic application of inventions and marketing techniques
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innovation
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a person who introduces new products or improved technologies and decides which projects to undertake. Will increase the value of resources and expand the size of the economic pie
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entrepreneur
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the replacement of old products and production methods by innovative new ones that consumers judge to be superior. the process generate economic growth and higher living standards
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creative destruction
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An improvement in the rules under which the economy functions
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can also increase output
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by working harder and giving up current leisure
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we could increase our production of goods and services
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a method that breaks down the production of a product into a series of specific tasks, each performed by a different worker
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division of labor
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a principle that states that individuals, firms, regions, or nations can gain by specializing in the production of goods that they produce cheaply and exchanging them for goods they cannot produce cheaply
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law of comparitive advantage
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a method of organization in which private parties make their own plans and decisions with the guidance of unregulated market prices. the basic economic questions of consumption, production, and distribution are answered through these decentralized decisions
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market organizations
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an economic system in which productive resources are owned privately and goods and resources are allocated through market prices
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capitalism
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the method of organization that relies on public-sector decision making (voting, political bargaining, lobbying, etc.) to resolve basic economic questions
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collective decision making
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a system of economic organization in which the ownership and control of the basic means of production rest with the state and resource allocation is determined by centralized planning rather than market force
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socialism
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Money given up to make a purchase e.g. (jessica's skirt across town)
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opportunity cost
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total costs
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transaction costs
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inefficient
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inside ppc curve
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efficient
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on ppc curve
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unattainable
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outside curve
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the difference between the lowest price a seller is willing to accept and the price he actually receives
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producer surplus
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a move along the demand curve is caused by
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a change in product price
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a shift in the demand curve is cause by
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a change in consumer income
a change in consumer taste a change in the price of resources used to create product |
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when price is lower than the equilibrium price
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shortage
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when price is higher than the equilibrium price
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surplus
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where do lines of supply and demand cross
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equilibrium
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a shift down and to the right
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is supply increase
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If Toivo thinks the last dollar spent on pasties yields less satisfaction than the last dollar spent on beer, and Toivo is a utility-maximizing consumer, he should
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increase his spending on beer and decrease his spending on pasties.
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A 10 percent increase in the price of sugar reduces sugar consumption by about 5 percent. The increase causes households to
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spend more on sugar.
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Which of the following would be the best example of consumer surplus?
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Sam pays $8 for a haircut, but is so pleased with how he looks, he is willing to pay $12.
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"I like ice cream, but after eating homemade ice cream last night, I want to have something else for dessert today." This statement most clearly reflects
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the law of diminishing marginal utility.
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If Sarah's income rises by 20 percent, and, as a result, she purchases 40 percent more designer clothing, her income elasticity for designer clothing is
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2.0.
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Studies indicate that the demand for fresh tomatoes is much more elastic that the demand for salt. These findings reflect that
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more good substitutes exist for fresh tomatoes than for salt.
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Suppose the state of New York imposes a one dollar per pack tax on cigarettes, which increases their price by 30 percent, and as a result, the quantity sold declines by 20 percent. The price elasticity of demand for cigarettes is equal to
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-0.67
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Suppose that the quantity of DVD players sold increased from 200 to 400 when the price fell from $225 to $175. Over this price range, the absolute value of the price elasticity of demand for DVD players is
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2.67
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If Starbucks coffee shop on campus increases its prices by 5 percent, but revenues remain unchanged, the price elasticity of demand for the services offered by the coffee shop must be
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of unitary elasticity.
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If the price of gasoline goes up, and Dan now buys fewer candy bars because he has to spend more on gas, this would be explained by
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the income effect.
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Marginal utility is the change in
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total utility when an extra unit of output is consumed.
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Ceteris paribus, an increase in the price of a good will cause the
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consumer surplus derived from the good to decrease.
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Which of the following is the best example of the substitution effect?
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Joe buys fewer apples and more oranges as the result of an increase in the price of apples.
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The demand for which of the following goods is most likely to be quite inelastic?
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legal services
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The price elasticity of demand for a product tends to be large (more elastic) when
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people spend a large share of their income on the product.
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If the demand for a good is elastic, then total revenue
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increases as price decreases.
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You and your college roommate eat three packages of Ramen noodles each week. After graduation, both of you are hired at a starting salary of $84,000 per year, several times your income as college students. You still buy Ramen noodles and now buy four packages per week, but your roommate plans to buy far less than she did as a college student.When looking at income elasticity of demand for Ramen noodles,
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yours would be positive and yours roommates negative.
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A good is classified as inferior if
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consumers buy less when income rises.
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Indifference curves illustrate how
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an individual ranks alternative consumption bundles.
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Within the framework of indifference curve analysis, what prevents the individual from purchasing more and more of each good?
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a budget contraint
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Limited income necessitates
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Choice
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Consumers make decisions
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purposefully
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One good can be substituted for
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another
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Consumers must make decisions without ___, but with ___ & ___
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information
knowledge past experiences will help |
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The law of diminishing marginal utility applies: As the rate of consumption increases, the marginal utility gained
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from consuming additional units of a good will decline
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the basic economic principle that as the consumption of a product increases, the marginal utility derived from consuming
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Law of diminishing marginal utility
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The additional utility, or satisfaction, derived from consuming an additional unit of a good
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Marginal utility
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the maximum price a consumer will be willing to pay for an additional unit of a product. It is the dollar value of the consumers marginal utility from the additional unit, and therefore it falls.
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Marginal benefit
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Because a consumers willingness to pay for a unit of a good is directly related to
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the utility derived from consuming the unit, the law of diminishing marginal utility implies that a consumers marginal benefit, and thus the height of the demand curve, falls with the rate of consumption
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At any given price, consumers will purchase all units of a good for
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which their maximum willingness to pay--their marginal benefit--is greater than the price
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the consumer will maximize his or her satisfaction (or total utility) by
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ensuring that the last dollar spent on each commodity yields an equal degree of marginal utility
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The demand curve or schedule shows the amount of a product that consumers are willing to buy at
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alternative prices during a specific time period.
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The law of demand states that the amount of a product bought is
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inversely related to its price
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That part of an increase (decrease) in amount consumed that is the result of a good being cheaper (more expensive) in relation to other goods because of a reduction (increase) in price
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substitution effect
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that part of an increase (decrease) in amount consumed that is the result of the consumers real income being expanded (contracted) by a reduction (rise) in the price of a good
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Income effect
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the relationship between the market price of a good and the amount demanded by all the individuals in the market area
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the market demand schedule
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Because individual consumers purchase less at higher prices, the amount demanded in a market area as a total is
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also inversely related to price
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The market demand is simply the
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horizontal sum of the individual demand curves of consumers
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The % change in the quantity of a product demanded divided by the % change in the price that caused the change in quantity. ___ indicates show responsive consumers are to a change in a products price
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Price elasticity of demand
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because elasticity is a relative concept, the elasticity of a straight line demand curve will
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differ at each point along the demand curve
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the most important determinant of the price elasticity of demand is
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the availability of substitutes
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when good substitutes for a product are available,
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a price increase induces many consumers to switch to other products.
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Demand is
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elastic
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In general, when the price of a product increases
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consumers will reduce their consumption by a larger amount in the long run than in the short run
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The demand for most products will be more elastic in the
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long run than in the short run
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The demand for most products will be more elastic in the long run than in the short run
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2nd law of demand
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when demand is inelastic, the change in the price will ___ and as a result
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dominate
the price and total expenditures will change in the same direction |
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the impact of the change in quantity
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will dominate, and therefore the price and expenditures will move in opposite directions
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when price elasticity of demand is equal to
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total expenditures will remain unchanged as price changes
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The % change in the quantity of a product demanded divided by the % change in consumer income that caused the change in quantity demanded, it measures the responsiveness of the demand for a good to a consumers change in income
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income elasticity
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a good that has a positive income elasticity, so that, as consumer income rises, demand for the good rises, too
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normal good
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a good that has a negative income elasticity, so that, as consumer income rises, the demand for the good falls
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inferior good
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the % change in quantity supplied, divided by the %change in the price that caused the change in quantity supplied
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Price elasticity of supply
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