Chapter 1: What is Economics?
1.
SCARCITY
2.
WANTS
3.
PRODUCTION POSSIBILITIES FRONTIER
The condition where wants are greater than the resources available to satisfy those wants.
Things that we desire.
A representation of all the possible
combinations of TWO goods that can be produced in a certain period of time.
4.
OPPORTUNITY COST
The most highly valued, or next best, alternative that is forfeited when a choice is
made.
5.
ECONOMICS
6.
MICROECONOMICS
The science that studies the choices of people trying to satisfy their wants in a world of scarcity.
The branch of economics that deals with human behavior and choices as they relate
to relatives small units.
7.
THEORY
An explanation of how something works, designed to answer a question that has no obvious answer.
8.
TANGIBLE
A good that can be touched.
9.
INTANGIBLE
The opposite of #8, typically describes a service.
10.
DISUTILITY
Another word for dissatisfaction or unhappiness.
11.
UTILITY
To an economist, another word for satisfaction or happiness.
12.
INCENTIVE
Something that encourages a person to take action.
13.
CAPITAL
Produced goods that are used for further production.
14.
ENTREPRENEURS People who have a special talent for taking advantage of new business opportunities.
15. Explain this statement: Because scarcity exists, choices must be made.
Because scarcity exists, people must choose which of their many
wants they will satisfy.
16. Why do we have a rationing device?
Because scarcity exists and we need to decide who gets what
portion of all the resources and goods available. Price is the most
widely used rationing device in our society.
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17. You attend a public school where there is no charge for admission fees or tuition. Does it follow, then, that you face no
opportunity cost in attending school. Explain your answer.
The opportunity cost of attending high school is what one would be
doing if not attending high school. Opportunity costs exist even
when tuition does not.
18. Explain how scarcity is illustrated by a production possibilities frontier.
The PPF illustrates scarcity by showing which items are available
and which are not given the limited resources in the economy of
two goods.
19. The owner of a movie theater decides to raise ticket prices from $10 to $12 a ticket. Since he sells an average of 789 tickets a
day, he might expect to collect
$1,578 more per day in ticket sales. Why might be disappointed?
He might be disappointed because demand might fall as the price
goes up.
20. Imagine you decide to go to a concert. A ticket to the concert costs $50. Also, you must take two hours off work, and you earn
$10 an hour at work. The opportunity cost of going to the concert is
$70 and two hours of work.
21. The owner of a coffee shop decides to raise the price for a cup of coffee from $1 to $1.50. Since he sells an average of 1,234
cups of coffee a day, he might expect to collect
$ 617 ($.50 x 1234) more per day in coffee sales.
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Look at the production possibilities frontier to the right to answer the next
four questions.
22.
What are the two products in the example?
Snowboards and Skis
23.
Which point or points are feasible in that economy?
A, B, C, D and E
24.
Which point represents the maximum production of skis?
25.
Which point or points represents what is unavailable to us?
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D
F
Chapter 2: Economic Systems and the Global Economy
26.
TRADITIONAL
An economy based on customs and beliefs that have been handed down from one generation
to the next.
27.
MIXED
28.
ECONOMIC SYSTEMS
An economy with a mixture of capitalist and socialist elements.
The way in which a society decided what goods to produce, how to produce them,
and for whom they will be produced.
29.
FREE ENTERPRISE
An economic system in which individuals (not government) own most, if not all, the
resources and control their use.
30.
SOCIALISM
31.
INCOME DISTRIBUTION
An economic system in which government controls and may own many of the resources.
The way all the income earned in a country is divided among different
groups of income earners.
32.
ECONOMIC PLAN
A government program specifying economic activities, such as what goods are to be produce
and what prices will be charged.
33.
GLOBALIZATION
The integration of economic activities across (national) borders; a phenomenon by which
economic agents in any given part of the world are affected by event elsewhere in the world;
the extension of the division of labor and specialization beyond national borders.
34.
VISION
35.
LABOR THEORY OF VALUE
Karl Marx and Adam Smith each had one; a certain way of looking at and explaining the world.
States that any value in produced goods comes from the labor
used to produce those goods.
36.
OFFSHORING
Work done for a company by people other than the company’s employees if the people doing
the work live in a country other than the country in which the company is located.
37. What are the three economic questions?
What goods will be produced?
How will the goods be produced?
For whom will the goods be produced?
38. Who believed that self-interest causes people to work hard and take risks, that the division of labor creates greater productivity
and wealth and that the government should provide national defense, a system of justice and public works?
Adam Smith
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39. In a
free enterprise (2 words) or market economic system, resources are owned and controlled by private
individuals.
40. What book is Adam Smith’s major work related to economics?
41. What book is Karl Marx’s major work related to economics?
The Wealth of Nations
Das Kapital
42. By how much (per year) has globalization affected U.S. income?
Roughly $1 trillion per year
43. Is there greater income inequality in the world today than, say, 100 years ago? Explain.
Yes. One hundred years ago, people in rich countries had about 10
times more income than people in poor countries. Today, they have
about 75 times more income.
44. What are three reasons that workers in other countries don’t work the same number of hours per year as workers in the United
States?
• Workers in some countries have a stronger preference for leisure
• Taxes are higher in some countries so there is less incentive to work
• Higher social assistance benefits in some countries
45. Explain how increased globalization might lessen intolerance and conflict in the world.
People might be less inclined to attack a trading partner.
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Chapter 3: Free Enterprise
46.
TOTAL REVENUE
47.
INCENTIVE
Something that encourages or motivates a person toward an action.
48.
ETHICS
Principles of right and wrong, morality and immortality, good and bad.
49.
PUBLIC PROPERTY
50.
ENTREPRENEUR
The price of a good times the number of units of the good sold.
Any good that is owned by the government.
A person with a special talent for searching out and taking advantage of new business
opportunities, as well as for developing new products and new ways of doing things.
51.
LOSS
52.
FREE RIDER
What a firm incurs if a product’s total cost is greater than total revenue.
A person who receives the benefits of a good without paying for it. They are one of the reasons why a
private business firm will not supply a nonexcludable public good because the firm cannot collect
payment.
53.
CONTRACT
54.
PUBLIC GOOD
An agreement between two or more people to do something.
A good of which one person’s consumption does not take away from another person’s
consumption.
55.
PRIVATE
56.
POSITIVE EXTERNALITY
A computer is an example of this type of good.
A beneficial side effect of an action that is felt by others.
57. What are the five major features of a free enterprise economy?
Private Property
Choice
Competition
Economic Incentives
58. National defense is a good example of a
Voluntary Exchange
public good because it is difficult to exclude people from receiving the
benefits from national defense once it is provided.
59. The government will provide
60. The
nonexcludable public goods and pay for them with taxes.
Bill of Rights states that “private property [shall not] be taken for public use, without just compensation.
61. Entrepreneurs are motivated by potential
profit.
62. Open disclosure, obeying the law and being truthful are all responsibilities of people in a
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free enterprise economy.
63. Define open disclosure.
The responsibility of giving the other person accurate information
about what is being exchanged.
64. Calculate the profit or loss in each of the following situations (TR stands for total revenue, and TC stands for total cost). Be sure
to put a minus (-) in front of a loss figure.
•
TR = $400; TC = $322
Profit/Loss =
$78
•
TR = $4,323; TC = $4,555
Profit/Loss =
($232)
•
TR = $576; TC = $890
Profit/Loss =
($314)
•
TR = $899,765, TC = $456,897
Profit/Loss =
$442,868
65. An economist would say that profit attracts resources. What does this statement mean? Give an example to illustrate your point.
Profit attracts resources into the production of the good from which the
business is earning a profit. For example, if company B is earning a profit
on the production and sale of good X, then other companies currently not
producing good X will shift resources into the production of good X.
Scenario: Bryan sells gadgets at a price of $7 apiece. His average cost is $5 per gadget. On Monday, Bryan sold 10 gadgets; on
Tuesday, he sold 7 gadgets; on Wednesday, he sold 9 gadgets; on Thursday, he sold 11 gadgets; and on Friday, he sold 13 gadgets.
$350
66.
What was Bryan’s told revenue for the week?
67.
What was Bryan’s told cost for the week?
68.
Did Bryan have a profit or a loss for the week?
69.
What was the dollar amount of Bryan’s profit or loss for the week?
$250
profit
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$100
In questions 70-78, identify the part of the
circular flow diagram in which the economic
activity listed occurs. Write 1, 2, 3 or 4 in the
blanks provided.
70.
3
Julie attends a public school.
71.
1
Travis buys a new iPod.
72.
4
Joe works 20 hours a week at Jack in
1
2
the Box.
73.
4
Monique does research at a large
4
corporation.
74.
2
Microsoft relies on the Justice
Department to enforce copyright laws.
75.
3
Dianne drives on County Road 1 to get to work.
76.
4
Bruce leases his commercial building to Widgets, Inc.
77.
1
Debbie buys a computer from her local office supply store.
78.
1
Adam buys a lawn mower from Home Depot.
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3
Chapter 4: Demand
BUYERS and SELLERS meet. (90)
79.
A market is any place where
80.
In economics, demand means
81.
Economists state that the more utility you receive from an item, the
willing to pay for it. (91)
82.
If you eat six slices of pizza, you are likely to get
enjoyed with the first piece. (91)
83.
Demand schedules and demand curves contain the
84.
True or
85.
If the demand for computers
86.
If the demand curve shifts to the lefts, it means buyers want to buy
87.
As income rises, demand for
88.
A change in the price of a substitute, income or expectations about the future price of a product will cause a change in
False
WILLINGNESS and ABILITY to buy a good. (90)
HIGHER (higher or lower) price you are
LESS (more, less or the same) satisfaction from the last piece as you
SAME information presented in different ways. (93)
A shift of the curve and a movement along the curve are the same. (95)
INCREASES (increases or decreases), the demand curve will shift to the right. (95)
LESS (more or less). (95)
NORMAL (normal, inferior or neutral) goods rises. (96)
DEMAND (demand or quantity demanded) for a product. (96/97)
SUBSTITUTES (substitutes or complements), the demand for one good moves in the same
89.
When goods are
direction as the price of the other good. (97)
90.
Popcorn and butter would be classified as
91.
If consumers expect higher prices in the near future, the demand for cars will
(97)
92.
If the number of buyers in the market increases, the demand in the market will
decrease). (97)
93.
COMPLEMENTARY goods. (97)
INCREASE (increase or decrease).
INCREASE (increase or
PRICE is the only factor that causes a change in quantity demanded. (98)
QUANTITY DEMANDED (demand or quantity demanded) is
94.
On a demand curve, a change in
represented by a movement along the curve. (99)
95.
Elasticity is really measuring consumer
96.
If movie prices increase by 30 percent and attendance (quantity of tickets demanded) drops by 40 percent, demand is
considered
RESPONSE to a price change. (102)
ELASTIC. (103)
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97.
Insulin and heart medicine are examples of INELASTIC goods. (103)
98.
The demand for NECESSITIES (necessities or luxuries) such as milk, electricity and water is usually inelastic. (104)
99.
Define elasticity of demand and how it is calculated; give one example each of elastic and inelastic goods and explain why
they have the defined characteristics.
Elasticity of demand is a way of measuring the impact that a
price change has on the number of units of a good people buy.
Elasticity of demand =
percentage change in quantity demanded
percentage change in price
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Chapter 5: Supply
SUPPLY states that producers will make less at low prices. (112)
100.
The law of
101.
According to the law of supply, the
102.
A supply curve is a reflection of what
103.
True or
104.
A
quantity supplied. (115)
105.
When the supply curve shifts to the right, producers are
they supply to the market. (117/118)
106.
If a supplier’s costs of production for a good decreases, supply for that good will
False
HIGHER (higher or lower) the price, the greater the quantity supplied. (112)
SUPPLIERS are willing and able to produce. (115)
All supply curves are upward sloping (from left to right). (115)
VERTICAL (vertical or horizontal) supply curve indicates that a change in price will have no effect on the
INCREASING (increasing or decreasing) the amount
decrease) which would cause the supply curve to shift to the
RIGHT (right or left). (117)
DECREASING (increasing or
decreasing) production which would cause the supply curve to shift to the LEFT (right or left). (117/120)
107.
If a new quota were imposed on a seller’s product, the seller would respond by
108.
More sellers entering a market would cause supply to
109.
An advance in technology would cause supply to
110.
Advances in technology
INCREASE (increase or decrease) which would be
representing on the graph by the supply curve shifting to the RIGHT (right or left). (117/120)
INCREASE (increase or decrease) which would be representing
on the graph by the supply curve shifting to the RIGHT (right or left). (117/119)
to the
111.
INCREASE (increase or
LOWER (raise or lower) the per-unit cost of production, therefore shifting the supply curve
RIGHT (right or left). (119)
If the government places a tax on SUVs, the extra per-unit cost of doing business will cause producers to produce
LESS (more or less) SUVs. (119)
RIGHT (right or left). (120)
112.
Subsidies have a tendency to shift the supply curve to the
113.
Sellers who expect the price of a good to be
production, preferring to wait and produce later. (120)
114.
A change in the quantity of gasoline supplied would be caused by a change in
115.
If the price of a product
(increases or decreases), we would expect the graph to show movement
along the supply curve from the bottom left to the top right. (121)
HIGHER (higher or lower) at a future date are likely to reduce current
INCREASES
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PRICE. (121)
116.
117.
DECREASES
If the price of a product
(increases or decreases), we would expect the graph to show movement
along the supply curve from the top right to the bottom left. (121)
INELASTIC (inelastic, elastic or unit-elastic) supply exists when the quantity supplied responds only slightly to
changes in the price. (123)
INELASTIC (elastic, inelastic or unit-elastic). (123)
118.
If sellers do not respond to a change in price, supply is
119.
If the percentage change in price is equal to 50% and the percentage change in quantity supplied is 25%, the elasticity of
supply is
INELASTIC (elastic, inelastic or unit-elastic). (123)
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Chapter 6: Price
FALL (rise or fall). (130)
120.
When there is a surplus, prices tend to
121.
Sellers who notice that buyers want to purchase less of the seller’s good will usually
price to make up the difference. (130)
122.
Equilibrium price is the price that occurs when the quantity demanded is
123.
If a shortage exists, sellers are likely to
124.
At the equilibrium price, sellers have sold everything they wanted to sell, buyers have bought everything they wanted to buy
and both are
LOWER (raise or lower) the
EQUAL to the quantity supplied. (131)
RAISE (raise or lower) the price of the good. (131)
SATISFIED. (131)
125.
If you are the producer of a good and your resource prices increased, you would decrease
demand). (134)
126.
If a winter storm caused a terrible frost in California, we would expect the
fruits to
SUPPLY (supply or
SUPPLY (supply or demand) of citrus
DECREASE (increase or decrease). (134)
DECREASE (increase or decrease) in the supply of new homes. This would be
reflected in the graph by the curve shifting to the LEFT (right or left). (134)
127.
The 2008 recession caused a(n)
128.
As more and more people are purchasing Blu-Ray players, the
DEMAND (supply or demand) for DVDs has
DECREASED (increased or decreased). (134).
SURPLUS (surplus or shortage).
129.
An unintended effect of a price floor could be a
130.
A legal maximum price at which a good can be sold is a price
131.
Price controls
132.
Even though the number of seats available in Yankee Stadium is the same for all games, we could expect prices for tickets to
CEILING (ceiling or floor). (138)
DECREASE (increase or decrease) the amount of exchange that occurs. (139)
all games to be
133.
(138)
DIFFERENT (the same or different). (141)
When the supply of a good cannot be moved in response to a difference in price between cities, prices for this good are
likely to remain
DIFFERENT (the same or different) in these cities. (142)
False
134.
True or
Decision makers in Washington, D.C., decide how much corn and wheat will be grown in the
United States. (144)
135.
In a free enterprise market,
PRICE allocate resources. (144)
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136.
Selection for positions on sports teams in high school and college can be examined
and
and explained using
SUPPLY
DEMAND. (145)
PRICE” of getting into college can be academic performance in addition to tuition. (146)
137.
The “
138.
The winning combination for a high salary is
job. (147)
139.
If there were a shortage of nurses, we would expect the wages of nurses to
(147)
LOW (high or low) supply and HIGH (high or low) demand for a
INCREASE (increase or decrease).
**************************************************************************************************************
For each of the following graphs, given an example of what would cause the given change to happen and describe what happens to
equilibrium price and quantity as a result. The first example has been completed for you. At least one of the free-response questions on
the test will match this – you will be given a graph and will need to explain it using a real-life example.
Graph (a)
Demand has increased as a
result of a change in
consumer preferences or a
change in complementary
goods. This graph could
represent demand for Star
Wars toys as the release of
the new movie grows
closer. As a result the
equilibrium price and
quantity both increase.
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