Chapter 1 Limits, Alternatives, and Choices
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1. What is meant by the term economics?
Economics is the social science concerned with how society, individuals, and institutions make optimal (best) choices under the conditions of scarcity.
2. What is a theory and how are theories tested?
A theory is an explanation of how facts are related and shows a simplified representation of the way in which facts are related.
3. How can an economic theory be illustrated?
Three ways:GraphsTablesEquations
4. What is a positive statement? What is a normative statement?
Positive Economics = "what if"So a positive statement is one that can be factually checkedNormative Economics = "value judgements" So a normative statement is one that deals with opinion (look for words like should)
What is meant by the terms microeconomics and macroeconomics?
Microeconomics: Deals with the small parts comprising an economy (THINK INDIVIDUAL)Macroeconomics: Deals with the overall economy. (AGGREGATES)
What is meant by the phrase "economic perspective" or or the economizing problem(marginal analysis)?`
They all mean the same thing. How economists believe people think about everyday problems involving choices in an environment with scarce resources.
Chapter 1 ContinuedLimits Alternatives and Choices
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1. What are two key facts underlying economics?
Scarcity and Choice
2. What does the term opportunity cost mean and why does the concept arise?
Opportunity cost refers to the cost of a good or service measured in terms of the lost opportunity to pursue the best alternative activity with the same time and resources. This concept arises because of scarcity, so people are forced to make choices!!!OC = ANY COST THAT IS AVOIDABLE
3.What is meant by the term efficiency?
Technical efficiency- to produce goods at the least costAllocative efficiency- basically producing the goods people in the economy want produced
4.What do economists mean when they use "marginal" analysis?
MC v. MB
5.What is a production possibility curve and how does it illustrate the concepts of scarcity, opportunity cost, efficiency and economic growth?
PPF: it is graph showing the maximum possible combinations of goods that can be produced in an economy given the available factors of production and technology. Illustrates scarcity because it shows the limitations of the economy Illustrates opportunity cost because as you move along the curve there will be an opportunity costIllustrates efficiency because the curve shows the economy at full production and efficiencyIllustrates economic growth as the ppf moves outwards due to increased technology or resources.
Chapter 2Demand, Supply and Market Equilibrium
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1. What is meant by the concept "law of demand"?
Law of demand means that the quantity demanded of a good by buyers tends to increase as the price of the good decreases and tends to decrease as the price increases, other things being equal.
2.What do economists mean by the term relative prices? How doe this relate to the law of demand?
Prices are a ratio. Consumers and suppliers make decisions based on the RELATIVE PRICE. If the relative price of a good falls compared to a substitute than the demand will increase.
3. What are the 3 different ways to illustrate the law of demand?
Tables Graphs (negative slope)Equations
4. What is the difference between a change in the quantity demanded for a good or service and change in demand for a good or service?
Change in quantity demanded- only happens when there is a change in price!!! Causes the demand to move ALONG the demand curve. Change in demand- if any other factor changes besides price. Shown on the graph by a shift left or right. P - price of substitutes and complimentsY- IncomeN- Number of consumersT- tastes and preferencesE- expectations
5. What is meant by the "law of supply"?
The law that the quantity supplied of a good by sellers tends to increase as the price of the good increases and tends to decrease as the price decreases, other things being equal.
6. What does an economist mean by the term relative prices? How does this relate to the law of supply?
Prices are in ratios. If the price of a good rises in relation to a substitute than suppliers will want to produce it more.
7. What are three different ways to illustrate the law of supply?
TablesGraphs (positive slope)Equations
8. What is the difference between a change in the quantity supplied for a good or service and a change in supply for a good or service?
Change in quantity supplied= change in the price ONLY. Shown graphically by a shift ALONG the supply curve. Change in supply- change in other factors that affect supply. Shown graphically by a shift of the curve left or right. T- technologyI- Input prices and availabilityP- Prices of substitutesT- Taxes and subsidiesE- ExpectationsN- Number of suppliers and nature
9. Why is the concept of equilibrium important to the discussion of supply and demand?
Equilibrium, which is a point where there is no incentive to change, is import to supply and demand because it is the spot where the two meet in the market. Providing the right amount of goods for the right price.
10. What are three different ways to illustrate the concept of equilibrium in supply and demand?
TablesGraphs - (MB= MC)Equations
11. When a particular market is not in equilibrium, what adjustments do you expect to observe that will guide the market back to equilihbrium?
The "invisible hand" of the market system will guide it back. So supply will keep increasing with demand or decreasing with demand until the two are equal.
12. How do equilibrium prices and quantities cange in response to changes in demand and/or supply for a good or service?
Increase in demand and supply: Price ?, Quantity +Decrease in demand and supply: Price ?, Quantity - Increase in demand decrease in supply: Price +, Quantity ?Decrease in demand and increase in supply: Price - , Quantity ?
13. What are "normal" goods and "inferior" goods? What are substitute good and complementary goods? How does each of these types of goods affect our discussion of changes in the demand and supply of a good?
The demand for normal goods increases as income increases. The demand for inferior goods decreases as income increases. Substitute goods can take the place of another good. Complimentary goods are bought at the same time as a good.
14. What are the alternative interpretations one can give to the demand and supply curves?
Equations!Demand: P = A - mQSupply: P = C + dQ (basically slopes of a line)
Think Process: Economic Perspective/ Marginal Analysis
Step 1: What are the choices? A or B?Step 2: Given the choices, what are the opportunities costs of A, both explicit and implicit. (Which costs are avoidable? That is, which costs are recoverable at the time the decision is being made? These are opportunity costs associated with the choice.)Step 3: Add up the opportunity costs, and compare to the benefits associated with the choice. If extra benefits of choice A exceed the extra costs, choose A. If not, choose B.
When there are double shifts in the supply and demand curves, what happens to price and quantity?
Case 1: Increase in D and S: D +, S +, P ?, Q +Case 2: Decrease in D, Increase in S: D-, S+, P-, Q?Case 3: Increase in D, Decrease in S: D+, S-, P+, Q?Case 4: Decrease in D and S: D-, S-, P?, Q- Look at problems on cm pages 27-30
Markets
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1. What does an economist mean by the term market?
Any arrangement people have for trading with one another.
2. What are the basic characteristics of an efficiently functioning market economy?
1. Private property and freedom to negotiate binding legal contracts2.Freedom of enterprise and choice (limited gov)(democracy stimulates growth)3. Self interest is the driving force 4. Markets and prices coordinate economic activity by providing information through prices and profits5. Competition among buyers and sellers6. Specialization according to comparative advantage. 7. Limited role of get8. Stable medium of exchange
Market definitions to remember
Comparative advantage- a state, nation, or person has a comparative advantage in some product when it can produce it at a lower opportunity cost than someone (nation, state person) else. Rationing Function of Prices- is the process by which prices direct the existing supply of a product to users who value it most highly. Allocative function of prices- the process by which prices signal resources to enter in to the production of goods whose price exceeds the cost of production and away from production of goods whose prices lie below production costs.
Functions of Markets
1. Provide information through: prices, profits and price changes 2. Provide incentives: businesses maximize profits, households maximize satisfaction 3. Distribute income