Economics Test

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mamcgill
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257868
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Economics Test
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2014-02-11 21:06:20
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Economics
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Economics Topic 1 -2
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  1. Why are there differences in standards of living?
    There are differences in standards of living because it depends on the production and productivity of an area.
  2. What is productivity?
    Productivity is the quantity of goods and services produced from one unit (generally time) of labor.
  3. What does it mean that workers in other countries are less productive?
    When it is said that workers in other countries are less productive, it is because they are typically lacking in capital, education, and technology. If the goal of each country is to dig a hole, then those with less backhoes, shovels and hands (aka capital) will not be as advanced. If citizens are uneducated and cannot read a manual, then a backhoe is no good to them and they are stuck with shovels and their hands. Finally, the quality of their capital (aka technology) matters, because you would rather have 1 backhoe than 5000 shovels.
  4. What is inflation?
    Inflation is not the value of a product, it is an increase in the overall price level.
  5. Why is inflation a potential problem?
    Inflation is a potential problem because it hurts the savers when the interest on their money is not equal to inflation, such as when the money is placed in a back or under a mattress.
  6. What causes inflation?
    Inflation is caused by the government printing too much money.
  7. Why does inflation lead to lower unemployment?
    Inflation leads to lower unemployment because when prices are higher firms have more money and want to produce more and therefore hire more workers.
  8. Why is the business cycle?
    The business cycle is the natural fluctuations of economic activity such as production and employment. It is often unpredictable.
  9. Why is economics different than physics?
    Economics is different than physics in that people adjust behavior based on the system because they have self-awareness within that system.
  10. How are economists similar to evolutionary biologists?
    Economists are similar to evolutionary biologist in that they both only work with one data set and there are ethical limitation making real world experiments difficult.
  11. What are assumptions and why do economists use them?
    Assumptions are simplifications of the world. Economists use them to make it easier to get an approximate answer.
  12. What are some common assumptions?
    • rationality
    • perfectly competitive markets
    • representative agents
  13. What is an economic model?
    An economic model is based on some assumptions and graphically or mathematically sums up an idea.
  14. Why do we use models?
    We use them to give us a framework to answer questions.
  15. What is the circular flow diagram?
    The circular flow diagram is a visual representation of the flow of goods and money.
  16. What is the production possibilities frontier?
    The ppf is a graph that shows combinations that the economy can produce given available factors of production.
  17. How do we distinguish efficiency on the ppf?
    Efficiency is when the point is on the line, meaning we can't get any more of A without giving up some of B.
  18. How does the ppf represent one of the principles?
    This illustrates that people face tradeoffs.
  19. How can changes in technology change the ppf?
    Chances in technology allow us to produce more product with the same amount of money.
  20. What are agents?
    Agents are the actors in our model of the economy.
  21. What are the most simple agents?
    Buyers and sellers.
  22. Hoe do agents interact?
    in a market.
  23. What is a market?
    A market is a group of buyers and sellers of a particular good or service.
  24. What are some different types of markets?
    • auctions
    • trading floors
    • wholesales
  25. What is competition?
    Competition is haggling over prices
  26. What is a competitive market?
    A competitive market is a market in which there are many buyers and sellers such that each has a negligible impact on the market price.
  27. What does perfectly competitive mean?
    A perfectly competitive market is a market in which there are numerous (millions of) buyers and sellers with no impact on the price and the goods and services offered are exactly the same.
  28. What are price takers?
    Price takers are people who take the price of a good or service as it is given.
  29. What is a monopoly?
    A monopoly is when one seller can impact the market price and has market power.
  30. Who are the demanders in an economy?
    In an economy the demanders are the buyers.
  31. What is the quantity demanded?
    The quantity demanded is the amount of a good that buyers are willing and able to purchase at a particular price.
  32. What is the law of demand?
    The Law of Demand is that the quantity demanded falls when the price of that good rises.
  33. What is a demand curve?
    The Demand Curve is the graphical (mathematical) representation of the Law of Demand.
  34. What is the difference between individual demand and market demand?
    Market demand is when all the individual supplies are added together. Each agent has their own individual demand. In order to get the market demand, one must combine the demand of all the agents in the market.
  35. How might demand change?
    Demand might change due to such things as preferences, the number of buyers, the buyer's income (ability to buy), and the prices of other goods.
  36. What is a normal good?
    A normal good is one where an increase in income causes an increase in demand.
  37. What is an inferior good?
    An inferior good is a good where an increase in income causes a decrease in demand. Ex: ramen noodles
  38. What are substitutes?
    Substitutes are when an increase in the price of one good leads to an increase in demand of another.
  39. What are complements?
    Complements are when an increase in the price of one good leaders to a decrease in demand of another. Ex: milk and cookies on a $10 budget
  40. What is the quantity supplied?
    The quantity supplied is the amount that sellers are willing and able to sell at a particular price.
  41. What is the Law of Supply?
    The Law of Supply is that the quantity supplied of a good increases when the price of a good rises.
  42. What is the supply curve?
    The supply curve is the graphical (mathematical) representation of the Law of Supply.
  43. What is the difference between individual supply and market supply?
    Market supply is when all the individual supplies are added together. Each firm has their own individual supply. In order to get the market supply, one must combine the supply of all the firms in the market.
  44. How might supply change?
    Supply might change due to such things as input, technology, expectations, and the number of sellers.
  45. What happens when demand and supply are on the same graph?
    When supply and demand are on the same graph they must eventually intersect.
  46. What is an equilibrium?
    An equilibrium is when the quantity supplied is equivalent to the quantity demanded. Qs=Qd
  47. What is the equilibrium quantity?
    The equilibrium quantity is the quantity amount at which the equilibrium occurs.
  48. What is the equilibrium price?
    The equilibrium (or market) price is the price at which the equilibrium occurs.
  49. What is a surplus?
    A surplus is when there is an excess supply because the quantity supplied exceeds the quantity demanded. Qs>Qd
  50. What is a shortage?
    A shortage is when there is an excess demand because the quantity demanded exceeds the quantity supplied. Qd>Qs
  51. Why do surpluses and shortages typically exist for short periods of time?
    Surpluses and shortages typically exist for short periods of time because of price floors and price ceilings. Price floors create a surplus, while price ceilings create a shortage. When there is a shortage of good, the demand will drive the price up until it reaches equilibrium. When there is an excess of goods, the lack of demand will drive the price down until it reaches equilibrium.
  52. What is Macroeconomics?
    Macroeconomics is the study of the allocation of resources, how the economy works as a whole, and measurements of the economy. It helps us understand how we get from the cornstalk to the tortilla chip and who gets the bigger party bowl.
  53. What is a monopsony?
    A monopsony is when there is one buyer. Ex: the government buying F12 fighter jets, battleships, and nuclear submarines.
  54. Was our description of supply and demand normative or positive?
    Our description of markets has been positive because we have been describing things as they are, rather than as they should be.
  55. What is welfare economics?
    Welfare economics is the study of how the allocation of resources affects economic well-being.
  56. How might we go about determining the benefits buyers and sellers receive?
    We determine the benefits by seeing what they got in the exchange.
  57. What is willingness to pay?
    Willingness to pay is the maximum amount that a buyer will pay for a good.
  58. How does willingness to pay influence market outcomes?
    Willingness to pay influences market outcomes by driving the price higher or lower. If people are not willing to pay that much for a good, then the supplier must bring the price down in order to accommodate it. Likewise, when the market price is lower than what people are willing to pay, manufacturers can bring the price up.
  59. What influences willingness to pay?
    Willingness to pay is influenced by the individual's desire for the product: the more they want a good, the more they are willing to pay.
  60. What is consumer surplus?
    Consumer surplus is the difference between the willingness to pay and the maximum amount that a buyer will pay for.
  61. How can we use the demand curve to measure consumer surplus?
    The area between the demand curve and the price of the good is the measurement of consumer surplus.
  62. How does a lower price raise consumer surplus?
    A lower price raises consumer surplus because the buyer pays less. Since CS=WP-$P, the less the buyer pays the more they get to keep.
  63. What does consumer surplus measure?
    Consumer Surplus measures the benefit buyers receive from participating in a market.
  64. What is cost?
    Cost is the value of everything a seller must give up to produce a good, including, goods, time, supplies, and other opportunities.
  65. What is willingness to sell?
    Willingness to sell is the lowest price at which a producer is willing to give up their product.
  66. What is producer surplus?
    Producer surplus is the amount the seller paid minus their costs.
  67. How is producer surplus similar to consumer surplus?
    Consumer surplus and producer surplus are similar because they are differences between. CS is the difference between how much they would have been willing to spend and how much they actually spent. PS is the difference between how much the consumer paid and how much they needed in to make in order to break even.
  68. How do we use the supply curve to measure producer surplus.
    The area between the supply curve and the selling price is the measurement of producer surplus.
  69. How does an increase in price raise producer surplus?
    An increase in price raises producer surplus because the suppliers make more money off the product.
  70. What is a benevolent social planner (dictator)?
    A social planner is someone who tries to maximize our social welfare.
  71. How will we define social welfare?
    • Social welfare is the total surplus, or the consumer surplus plus the producer surplus.
    • CS=VB-$P
    • PS=$P-CO
    • TS=VB+CO
    • So, the value to buyer plus the cost
  72. When is an allocation of resources efficient?
    An allocation of resources is efficient when we maximize the total surplus received.
  73. How might we think about an equitable distribution of resources?
    We can think about an equitable distribution of resources as distributing economic resources uniformly among members of society.
  74. How can we evaluate the market equilibrium?
    We evaluate market equilibrium by find the interception of supply and demand.
  75. Why is the market mechanism efficient?
    The market mechanism is efficient because it maximizes total surplus for consumers and producers. They allocate the supply of goods to the buyers who value them most highly while also allocating the demand for goods to the sellers who can produce them at the lowest cost, thereby producing the quantity of goods that maximizes the sum of consumer and producer surplus.
  76. What are some of the assumption underlying the market analysis above?
    • Perfectly competitive markets
    • Rationality
    • Perfect information
  77. What are externalities?
    Externalities are side effects of decisions made by buyers and sellers.
  78. What is market power?
    Market power is when of small group of buyers or sellers can influence market price.
  79. How does market power influence our analysis?
    Market power influences our analysis because people do not act as price-takers.
  80. What is a market failure?
    Market failure is an inability of some unregulated markets to allocate resources efficiently.
  81. How do we determine whether there is a market failure?
    • In theory, we create a model that is a market failure or generate one.
    • In the real world, we know there is a market failure by laws and courtrooms.
  82. What do we do about it if there is a market failure?
    If we see a new market failure, we implement government policies.
  83. What sorts of situations can we evaluate with our simply supply and demand framework?
    We can evaluate monopolies, costs of taxation, and international trade.
  84. Are these all directly applicable to the real world?
    These give us a baseline relative to our perfectly competitive markets.
  85. Why do we use such simple models of the real world?
    They provide basic framework or a starting point for discussion, but require empirical evidence.
  86. How does a monopoly behave differently from a firm in a competitive market?
    Monopolies don't act like price-takers. They have information about buyers because they know the buyer's demand curve.
  87. How do monopolies choose the price they will sell at?
    Monopolies choose the price they will sell at by marginal revenue.
  88. What does that do to our supply and demand graph?
    It lowers CS and increases PS, making the market run inefficiently.
  89. Where on the graph are the firms profits?
    The firms profits are the box under the triangle.
  90. Who loses out?
    Consumers lose out by a reduction in consumer surplus.
  91. What happens when there is a tax on a particular product?
    When there is a tax on a particular product, there is an increase in the amount the buyers pay and a decrease in the amount the sellers receive.
  92. Where on the graph are the tax revenues?
    The revenues are under the triangle.
  93. How can figure out who pays what part of the tax?
    We can figure out who pays what part of the tax through the equilibrium price. The area of the box above the equilibrium is the part the consumers pay because it cuts into their surplus. The area of the box below the equilibrium is the part the producers pay because it cuts into their surplus.
  94. What influences who pays?
    The slope of the supply and demand curves influence who pays.
  95. What is deadweight loss?
    The amount of surplus that goes away when some sort of market distortion, like taxes, are in place.
  96. What influences the size of the deadweight loss of taxation?
    The size of deadweight loss is influenced by the rate of taxation.
  97. In what instances might incurring the deadweight loss not be a bad thing?
    incurring a deadweight loss might not be a bad thing if we want to take externalities into account. Externalities generate costs that are not part of the market and creating a tax will incur the cost FOR society.
  98. If we are willing to incur the deadweight loss, is there an optimal tax?
    Yes, we can determine the rate at which the government will maximize their tax revenue through a graph/equation, providing us with the ideal rate.
  99. How do we generally evaluate international trade?
    We evaluate international trade by comparing equilibrium under autarky to free trade.
  100. What is autarky?
    Autarky is when there is no trade whatsoever.
  101. How does the world price influence imports and exports?
    • If the world price is higher than the domestic price, then the country will export that product.
    • If the world price is lower than the domestic price, then the country will import that product.
  102. What are the gains and losses of an exporting country?
    In an exporting country, producer surplus increases while consumer surplus decreases.
  103. What are the gains and losses of an importing country?
    In an importing country, producer surplus decreases while consumer surplus increases.
  104. What is a tariff?
    A tariff is a tax on goods produced abroad and sold domestically.
  105. How does a tariff influence the gains and losses of an importing country?
    A tariff incurs a deadweight loss from the consumers. In addition, consumers lose a portion as tax revenue to the government and a portion that increases producer surplus.
  106. What influences the size of the gains of losses?
    The size of these gains and losses are influenced by the rate of the tariff.
  107. Why do people argue for restricting trade?
    People argue for restricting trade because (in the short run) we lose jobs by importing.
  108. Under what circumstances would it be appropriate to restrict trade?
    • In order to transition a market into importation by easing the loss of jobs slowly over time.
    • In order to allow your country's industry (in its infancy) to grow until it can compete in the world market.
    • In order to prevent ourselves from jeopardizing security and to continue maximizing welfare.
  109. What is economics the study of?
    Economics is the study of the allocation of resources.
  110. What does standard of living depend on?
    Standard of living depends on the productivity of a country.
  111. Why do economists use models?
    For simplicity's sake. It makes it easier for economists to make predictions.
  112. What point on a ppf are efficient?
    The points on the line.
  113. Why do we assume there are perfectly competitive markets?
    Because it makes people price-takers.
  114. Why does printing too much money cause inflation?
    Printing too much money causes inflation when the output of money is increasing at a rate greater than the output of goods and services is. If the amount of money that is in the economy suddenly increases, then all of a sudden the agents have a lot more money to spend on the same amount of items. This means that products will cost more money for the same amount of good, making the value of the dollar less.
  115. What is the difference between a competitive market and a perfectly competitive market?
    A competitive market is a market in which there are many buyers and sellers such that each has a negligible impact on the market price. A perfectly competitive market is a market in which there are millions of buyers and sellers with no impact on the price and the goods and services offered are exactly the same. The difference between the two is that the products in a perfectly competitive market are all equal in quality and there are so many agents involved that no one has an effect on the price of said goods. This results in people acting like price takers in the perfectly competitive market.
  116. Why does demand slope down?
    Demand slopes downward because at some point, an economist switched the independent and dependent variables from where they normally are on a graph. Therefore, even though the quantity is increasing because the price is decreasing, the demand slopes down.
  117. What is consumer surplus?
    Consumer surplus is the difference between how much consumers are willing to pay and the actual price of the good or service.
  118. Was our description of supply and demand normative or positive?
    Our description of supply and demand has been positive because we have been describing things as they are rather than the way they should be.
  119. When supply increases which way does the supply curve move? Why?
    When supply increases, the supply curve will move to the right, not upward. When economists began drawing supply and demand curves, someone decided that the quantity (dependent variable) should be on the x-axis instead of the y-axis as it is traditionally in mathematics. Therefore, when the amount (or quantity) that is being supplied increases, the curve moves to the right.
  120. Consider the market for peanut butter. What would happen to the equilibrium price and quantity if the price of jelly increased?
    Imagine that you only have $10 to spend on PB&J for your sandwich. Because the price of jelly has increased, you can now buy less peanut butter, so the demand decreases (moves left). This relationship makes PB&J complements of one another. Therefore, when the price of jelly increases, the equilibrium price and quantity of peanut butter will also increase.
  121. What would happen to the market for peanut butter if peanuts became more expensive?
    Peanuts are a pretty important part of peanut butter, so when they become more expensive so does the peanut butter, meaning the firm can’t make as much and supply decreases (moves left). Therefore, when the peanuts become more expensive, the equilibrium quantity decreases and the equilibrium price increases.

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