ECON 2302 - FIRST TEST - CH 1&2 EC 110 TEST-CHPT 1, ECON 2302 CH 1 ASSIGNMENT HELP AND REVISION MATERIALS FOR COLLEGE STUDENTS

A normative economic statement such as “The minimum wage should be abolished”

involves values (religion, ethics, political philosophy) in addition to data

A circular-flow diagram is a model that

a.
helps to explain how participants in the economy interact with one another.
b.
helps to explain how the economy is organized.
d.
Both (a) and (b) are correct.

A positive economic statement such as “Pollution taxes decrease the quantity of pollution generated by firms”

would require values and data in order to be evaluated.

Refer to Figure 2-2. If the owners of land, labor, and capital are represented by Box B of this circular-flow diagram, then

firms are represented by Box A.

Efficient production is represented by which point(s)?

K, N

Inefficient production is represented by which point(s)?

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Economic models

are simplifications of reality, and in this respect economic models are no different from other scientific models.

Economists make assumptions in order to

focus their thinking on the essence of the problem at hand

A model can be accurately described as a

simplification of reality.

A macroeconomist — as opposed to a micro economist — might study

the effect of an increasing inflation rate on national living standards

Economic Policy advisors:

try to improve the world

Economic Scientists:

try to explain the world

Assumptions are used to:

simplify the complex world,
make it easier to understand.

Model:

a highly simplified representation of
a more complicated reality.

The Production Possibilities Frontier (PPF) is
a graph that shows the combinations of:

2 goods the economy can possibly produce given the available resources and the available technology

The Circular-Flow Diagram, a visual model of the economy, shows how:

dollars flow through markets among households and firms

Two types of “actors” in a circular flow diagram:

households
firms

Two markets in a circular flow diagram:

-the market for goods & services
-the market for “factors of production”

Points above the PPF are:

not possible

Points on the PPF are:

possible
efficient: all resources are fully utilized

Points under the PPF are:

possible but not efficient: some resources underutilized

The slope of the PPF tells you the

opportunity cost of one good in terms of the other.

Economic growth shifts the PPF line -

outward.

What equals the
“rise over the run,” the amount the line rises when you move to the right by one unit on a PPF graph?

The slope of a line

If opp. cost remains constant,

PPF is a straight line.

PPF illustrates the concepts of _____, ______ ____ ,
_______ and inefficiency,
unemployment, and _______ growth.

tradeoff ,opportunity cost, efficiency, economic

A bow-shaped PPF illustrates the concept of increasing

opportunity cost.

PPF illustrates the concepts of
tradeoff and opportunity cost,
efficiency and inefficiency,
unemployment, and

economic growth.

If the PPF is bow-shaped, opp. cost of a good rises as more of…

the good is produced,

PPF is bow-shaped when different workers have different

skills, opportunity costs of producing one good in terms of the other, or mix of resources with varying opportunity costs. (E.g., different types of land suited for
different uses).

define macro economics focus

employment rates, inflation, economic growth (as a large organization - county, state, world)

economic scientists make _____ , that can be refuted and analyzed.

positive statements

define micro economics focus

how households and firms(companies) interact and make decisions

policy advisors base their advice on _____ , that are based on the fairy tale view

normative statements

during an oil shortage, an economic policy maker would figure out how n=best to respond, while an economic scientist would______

see it as a chance to gather interesting data

land, labor, and capital

Factors of production

markets for goods and services

firms sells / households buy (milk, eggs)

markets for factors of production

households sell / firm buys (labor)

two reason economists may give conflicting advice

1. may disagree about theories importance of parameters/economic variables
2. have different personal values
3. perception vs reality ()

Delta symbol signifies…

change in a variable

negatively related

two variables are negatively related if they move in the opposite direction

positively related

the variables move in the same direction

slope formula

rise/run

causality

The relationship between a cause and its effect

reverse causality

A situation where the researcher believes that A causes B when actually B causes A

scarcity

Not having enough resources to satisfy every need.

economics

study of how people and societies use limited resources to satisfy unlimited wants; the management of scarcity and choice

guns n butter

term to describe how society allocates resources for different uses. (defense, goods, aid, etc. )

People face…

trade offs (work vs leisure)

the cost of something is what you…

give up to get it (lost wages + tuition = degree )

rational people think along…

margins (don’t believe its all or nothing)

rational people

people who systematically and purposefully do the best they can to achieve their objectives

marginal changes

Small, incremental adjustments to one’s plan of action.

efficiency

society getting the most it can from its scarce resources

equality

the property of distributing economic prosperity uniformly among the members of society

efficiency versus equality is an example of a

tradeoff

opportunity cost

the highest valued alternative that must be given up in order to engage in an activity

People respond to…

rewards and punishment (good deal vs a fee)

incentive

Something that induces a person to act

trade can make things

more competitive (lower costs and higher wages for in demand jobs)

markets are the most efficient way to

organize trade

market economy

An economy in which the decisions of households and firms interacting in markets allocate economic resources.

Government can improve

market outcomes (protect property rights or )

property rights

the ability of an individual to own and exercise control over scarce resources

market failure

a situation in which a market left on its own fails to allocate resources efficiently

externality

the impact of one person’s actions on the well-being of a bystander

market power

the ability of a single or group of actors to substantially alter the market price of a good or service

productivity

quantity of goods and services produced from each unit of labor input

a country’s living standards are linked to…

their ability to produce

inflation

A rise in the general level of prices in an economy.

business cycle

Fluctuations in economic activity, such as employment and production

society faces a short term trade off between

inflation and unemployment (more $ printed means more spending, increasing demand and need for employees)

invisible hand

Adam Smith’s economic theory (free market) that the greatest benefit to a society is brought by individuals acting freely in a competitive market place in the pursuit of their own self interest

prices rise when…

too much $ is in circulation

Economics deals primarily with the concept of

scarcity

The overriding reason why households and societies face many decisions is that

resources are scarce

A society allocates its scarce resources to various jobs. These scarce resources include

land, people, and machines -among countless others

The principle that “people face tradeoffs” applies to

individuals, families, and societies, every person and/group on the planet

Efficiency means that

society is getting the maximum benefits from its scarce resources.

trade and specilization

…

Productivity is the…

amount of goods and services produced from each unit of labor input.

Inflation is defined as

an increase in the overall level of prices in the economy.

What is the most important factor that explains differences in living standards among countries?

…

Which of the following is the primary cause of inflation?

an increase in the quantity of money

The short-run tradeoff between inflation and unemployment implies that, in the short run,

a decrease in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate.

The adage, “There is no such thing as a free lunch,” means

everything has a value and cost

Billie Jean wants to buy either a new amplifier for her guitar or a new mp3 player to listen to music while working out. Both the amplifier and the mp3 player cost $120, so she can only buy one. This illustrates the basic concept that

people face trade-offs.

Guns and butter are used to represent the classic societal tradeoff between spending on

…

The terms equality and efficiency are similar in that they both refer to benefits to society. However they are different in that

equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits from scarce resources.

Which of the following words and phrases best captures the notion of equality?

sameness

Which of the following is an economic principle concerning how people interact?

all of the above

Dee can earn more in the hour it would take her to work on her lawn than she must pay her landscaper. This scenario is an example of which principle of economics?

…

The “invisible hand” directs economic activity through

prices

Resources are

scarce for households and scarce for economies.

scarcity

Not having enough resources to satisfy every need.

economics

study of how people and societies use limited resources to satisfy unlimited wants; the management of scarcity and choice

guns n butter

term to describe how society allocates resources for different uses. (defense, goods, aid, etc. )

People face…

trade offs (work vs leisure)

the cost of something is what you…

give up to get it (lost wages + tuition = degree )

rational people think along…

margins (don’t believe its all or nothing)

rational people

people who systematically and purposefully do the best they can to achieve their objectives

marginal changes

Small, incremental adjustments to one’s plan of action.

efficiency

society getting the most it can from its scarce resources

equality

the property of distributing economic prosperity uniformly among the members of society

efficiency versus equality is an example of a

tradeoff

opportunity cost

the highest valued alternative that must be given up in order to engage in an activity

People respond to…

rewards and punishment (good deal vs a fee)

incentive

Something that induces a person to act

trade can make things

more competitive (lower costs and higher wages for in demand jobs)

markets are the most efficient way to

organize trade

market economy

An economy in which the decisions of households and firms interacting in markets allocate economic resources.

Government can improve

market outcomes (protect property rights or )

property rights

the ability of an individual to own and exercise control over scarce resources

market failure

a situation in which a market left on its own fails to allocate resources efficiently

externality

the impact of one person’s actions on the well-being of a bystander

market power

the ability of a single or group of actors to substantially alter the market price of a good or service

productivity

quantity of goods and services produced from each unit of labor input

a country’s living standards are linked to…

their ability to produce

inflation

A rise in the general level of prices in an economy.

business cycle

Fluctuations in economic activity, such as employment and production

society faces a short term trade off between

inflation and unemployment (more $ printed means more spending, increasing demand and need for employees)

invisible hand

Adam Smith’s economic theory (free market) that the greatest benefit to a society is brought by individuals acting freely in a competitive market place in the pursuit of their own self interest

prices rise when…

too much $ is in circulation

Economics deals primarily with the concept of

scarcity

The overriding reason why households and societies face many decisions is that

resources are scarce

A society allocates its scarce resources to various jobs. These scarce resources include

land, people, and machines -among countless others

The principle that “people face tradeoffs” applies to

individuals, families, and societies, every person and/group on the planet

Efficiency means that

society is getting the maximum benefits from its scarce resources.

trade and specilization

…

Productivity is the…

amount of goods and services produced from each unit of labor input.

Inflation is defined as

an increase in the overall level of prices in the economy.

What is the most important factor that explains differences in living standards among countries?

…

Which of the following is the primary cause of inflation?

an increase in the quantity of money

The short-run tradeoff between inflation and unemployment implies that, in the short run,

a decrease in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate.

The adage, “There is no such thing as a free lunch,” means

everything has a value and cost

people face trade-offs.

Guns and butter are used to represent the classic societal tradeoff between spending on

…

The terms equality and efficiency are similar in that they both refer to benefits to society. However they are different in that

equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits from scarce resources.

Which of the following words and phrases best captures the notion of equality?

sameness

Which of the following is an economic principle concerning how people interact?

all of the above

Dee can earn more in the hour it would take her to work on her lawn than she must pay her landscaper. This scenario is an example of which principle of economics?

…

The “invisible hand” directs economic activity through

prices

Resources are

scarce for households and scarce for economies.

Economy

Comes from greek word oikonomos, which means “one who manages a household”

_______ and economies have much in common.

Households

Once society has allocated people to various jobs, it must also allocate the _________ and ________ they produce.

goods, services

The management of society’s resources is important because resources are _________.

Scarce

Scarcity

Society has limited resources and therefore cannot produce all the goods and services people wish to have.

Economics

The study of how society manages its scarce resources.

What do Economists study?

How people make decisions, how much they work, what they buy, how much they save, and how they invest their savings. They also study how people interact with one another. They also study analyze trends that affect the economy as a whole, including the growth in average income, the fraction of the population that cannot find work, and the rate at which prices are rising.

What is an Economy?

Simply a group of people dealing with one another as they go about their lives.

The behavior of the _______ reflects the behavior of the __________ of the economy.

Economy, people

Principle 1: People Face Trade Offs

To get what we like, we usually have to give up something we also like. Example-a student could spend all their time studying for one subject or divide her time and study for two.

“Guns and Butter”

The classic trade off-the more a society spends on national defense to protect, the less it can spend on consumer goods (butter) to raise the standard of living.

Efficiency

Society is getting the maximum benefits from its scarce resources.

Equality

Benefits are distributed uniformly among society’s members.

__________ refers to the size of the economic pie

Efficiency

__________ refers to how the economic pie is divided into individual slices

Equality

When the government tries to cut the economic pie into more equal slices, the pie gets ________

smaller.

People are likely to make good decisions only if they understand the ________ that are available to them

options

Principle 2: The Cost of Something is What You Give Up To Get It

Making decisions requires comparing the costs and benefits of alternative courses of action

Opportunity Cost

What you give up to get something. When making any decisions, decision makers should be aware of the opportunity osts that accompany each possible action.

Principle 3: Rational People Think at the Margin

Rational people systematically and purposefully do the best they can to achieve their objectives, given the available opportunities.

Marginal Change

A small incremental adjustment to an existing plan of action.

Rational people often make decisions by comparing marginal _______ and marginal ________.

Benefits, costs

A rational decision maker takes an action if and only if the marginal ______ of the action exceeds the marginal _______ cost.

benefit, cost

Principle 4: People Respond to Incentives

Because rational people make decisions by comparing costs and benefits, they respond to incentives

Incentive

Something that induces a person to act.

_______ are crucial to analyzing how markets work.

Incentives

A higher price in a market provides an ______ for buyers to consume _____ and an incentive for sellers to produce ______.

incentive, less, more

Inflation

Increases in the general level of prices

Productivity

The amount of goods and services produced per unit of labor

Market Power

The ability of a single person or small group to influence market prices

Externalities

the impact of one person’s actions on the well-being of a bystander. Example is pollution

Market Failure

When the market fails to allocate society’s resources efficiently

Market

A group of buyers and sellers. They do not need to be in a single location

To achieve greater ______, we could redistribute income from wealthy to poor, but this reduces _______ to work.

equality, incentive

Business Cycle

The irregular and largely unpredictable fluctuation in economic activity measured by the production of goods

All Decisions Face Tradeoffs. True or False?

True

Society Faces the important tradeoff between….?

Efficiency and equality

Principle 5: Trade can make everyone better off

Countries can benefit from trade and specialization

Principle 6: Markets are usually a good way to organize economic activity

In a market economy, the decisions of a central planner are replaced by the decisions of millions of firms and households.

Principle 7: Governments can sometimes improve market outcomes

Market economies need institutions to enforce property rights so individuals can own and control scarce resources.

What is the Government’s most important role?

To enforce property rights.

What are the causes of Market failure?

Externalities and market power

Principle 8: A country’s standard of living depends on its ability to produce goods and services

Almost all variation in living standards is attributable to differences in countries’ productivity, or, the amount of goods and services produced by each unit of labor input

What is the most important determinant of living?

Productivity

What does productivity depend on?

Equipment, skills, and technology available to workers

Principle 9: Prices rise when government prints too much money

When the government creates large quantities of the nation’s money, the value of the money falls.

Principle 10: Society faces a short-run tradeoff between inflation and unemployment

Over a period of a year or two, many economic policies push inflation and unemployment in opposite directions.

Who said that households and firms interacting in markets act as if they are guided by an “invisible hand” that leads them to desirable market outcomes.

Adam Smith

______ are the instrument with which the invisible hand directs economic activity.

Prices

The growth in the quantity of money is the ultimate source of _______.

Inflation

Society faces a short-run trade-off between ______ and _______.

Inflation, unemployment

Market Economy

An economy that relies mainly on market forces to allocate goods and resources and to set prices

The “invisible hand” refers to….

the ability of free markets to reach desirable outcomes, despite the self-interest of market participants.

Governments may intervene in a market economy in order to….

Protect property rights, correct a market failure due to externalities, and achieve a more equal distribution of income.

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