Term
| Q1 1) Define the subject of economics?1 |
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Definition
| Economics is a social science that studies how scarce resources are distributed to supply our unlimited wants. |
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Term
| Q1 2) Compare and contrast positive science, normative science,and art?3 |
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Definition
| Positive science is based on facts concerning what is. Normative science is concerned with values and things that ought to be. Positive science does not have to be correct, but must be proved or disproved. Normative science cannot be disproved because it is completely subjective. The art is the procedure used to obtain the end results. |
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Term
| Q1 3) What are economic models?1 |
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Definition
| Economic models or theories are a simplified version of reality allowing us to investigate/analyze the real world effects and answer the economic questions asked. *A supply and demand graph is an example of a economics model. |
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Term
| Q1 4) How do they relate to scientific analysis?1 |
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Definition
| They follow the same process of solving questions by using the same kind of scientific method. Such as gathering information, developing a hypothesis and using this information to test and evaluate the hypothesis. |
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Term
| Q1 5) Demonstrate a simple model of cause and effect using a function formula and two dimensional graph or diagram.4 |
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Definition
| Make a chart. Label axis Y/P, X/Q. Graph of function x=y. |
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Term
| Q2 1)Explain the relationship between scarcity and opportunity cost?2 |
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Definition
| Scarcity means there is a limit to the supply of whatever we are referring to. Opportunity cost refers to the value of the next best thing we choose not to do or use because a more desired alternative is chosen. The amount of time in a day is limited to 24 hours, so we can agree time is scarce. If we decide to go DT for a few hours instead of studying for the same amount of time, the opportunity cost for a few hours DT is a few hours of studying. |
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Term
| Q2 2) What are the advantages and disadvantages of specialization?3 |
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Definition
| The main advantages of specialization is improved productivity by becoming more efficient in the production of a good or service. Specialization usually leds to lower production cost and higher quality of the product. A disadvantage of specialization is that everybody must rely on one another to get what they need. One person cannot do another job, if a specialist cannot produce a part needed for your final product, all production will be at a standstill. |
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Term
| Q2 3) Explain the six types of economic choices which must be made in any society?3 |
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Definition
| 1. What to produce. 2. How to produce. 3. Distribution is determined by the market. 4. Savings/investments vs. Consumption. 5. Who will make the choices. 6. How will choices be made. |
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Term
| Q2 4) Describe five or more benefits consumers and workers enjoy from free market exchange?2 |
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Definition
| 1. Markets provide information. 2. They provide choices. 3. Competition in markets, prevents exploitation. 4. Competition provides incentives for innovation. 5. Competition creates cost reduction. 6. Greater gains for consumer and in the real sense higher income. |
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Term
| Q3 1) Explain the role of prices in solving the economic problems of production(2), technology(2) and income distribution.(2) |
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Definition
| Prices will make sure producers make choices where profits can be made. Prices will make sure producers try to minimize cost to maximize profit.Prices make sure we choose the most efficient method of production (Technology) to minimize our production cost while maximizing output. Income distribution depends on the value of the resources that you make available to the market. And if these contributions to the market are in high demand and scarce the price will be high. |
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Term
| Q3 2) Identify five or more determinants of demand in a market. 2 |
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Definition
| 1)Taste. 2)Income 3)Prices 4)Price of substitute 5) Future expectations 6)Demographics |
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Term
| Q3 3) Identify the determinants of supply. 2 |
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Definition
| 1. Price of the good. 2. Number of suppliers in the market, price of substitutes. 3. Production cost. 4. Technological change. 5.Future expectations of sellers price. 6. Number of sellers in market. |
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Term
| Q4 1) Explain how economist measure the sensitivity of demand to changes in prices. 2 |
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Definition
| Economist can measure the price elasticity of demand by using the formula (dQ/Q/dP/P)-If the outcome is greater than 1 then the price is elastic and if the outcome is less than 1 the price is inelastic. |
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Term
| Q4 1b) Explain how economist measure the elasticity of demand to changes in income. 1 |
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Definition
| We use the formula (%dQ/%dIncome) and same rules apply here, if the outcome is > than 1 then the demand is elastic and if it is < 1 then it is inelastic. |
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Term
| Q4 2) How do economist measure the sensitivity (elasticity) of supply to changes in prices. 1 |
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Definition
| Economist can measure the price elasticity of supply with the formula (%changeQsupplied/%changeinprice)) |
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Term
| Q4 3) How can these measures be used to predict 1) changes in price 2) changes in quantity. 4 |
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Definition
| These measures are used to predict how changes in prices will effect changes in quantity and can also be used to predict the effect of changes in price on quantity demanded as well as quantity supplied. |
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Term
| Q4 4) Explain the measures that can be used to identify substitutes and complements. 2 |
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Definition
| The measures that we use to identify substitutes and complementary goods is called cross-price elasticity and the formula we use is (%Change,productA/%Change,productB) |
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Term
| Q5 1) How does a price increase alter consumption choices? |
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Definition
As the price increases of a good or service, it will make the consumer feel relatively poorer due to the income effect and it will likely make the consumer choose substitutes instead. Income effect; a higher price means that in effect, the buying power of income has been reduced, even though actual income has not changed.
Substitution effect; when a price changes, consumers have an incentive to consume less of the good with a relatively high price and more of the good with the relatively low price. Always go hand in hand with each other. |
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Term
| Q5 2) Why do we expect all demand curves to slope downward? |
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Definition
| When a price of a commodity is relatively high, only a few consumers can afford to buy it, once price falls, more numbers of consumers would start buying it because those that could not afford it can now afford it.Thus when the price of a commodity falls, the number of consumers increases and this tends to raise market demand for the commodity. |
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Term
| Q5 3) What is consumer surplus? 1 |
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Definition
| The difference between the total amount that consumers are willing and able to pay for a good or service and the amount they actually pay. Market price- Indicated by demand curve. |
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Term
| Q5 4) What is producer surplus? 1 |
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Definition
| The difference between the amount the producer is willing to supply goods for and the actual amount received. |
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Term
| Q5 5) How do they relate to price discrimination? |
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Definition
| Consumer and producer surplus are analyzed and firms use price discrimination to find the marginal consumer. *Price discrimination; pricing strategy where identical or largely similar goods or services are transacted at different prices by the same provider in different markets. |
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Term
| Q5 6) How does ignoring "Non monetary opportunity cost" and failing to ignore "sunk cost" lead to a less satisfactory decision? 2 |
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Definition
| Ignoring non-monetary opportunity costs leads to less satisfactory decisions because if you don't consider other options that don't have a price, you can be missing out on better options for the business even if they are not considered fiscal options. Even though you aren't willing to pay the price for something, once its given to you, you don't want to give it up because now you own it and it has more value to you. If you don't consider the endowment effect, you can make bad decisions because you aren't considering the personal value someone has to their own personal belongings.Failing to ignore sunk costs leads to less satisfactory decisions because staying focused on something that can not be changed anymore will lead you to ignore current business situations. |
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Term
| Q6 1) Identify (Explain) six management tasks which must be mastered in any organization. 4 |
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Definition
1.Planning;visualizing preparing in advance. 2.Marketing; Deals with product development
3.Personal; A body of persons employed. 4.Production; how the business will convert the materials. 5.Accounting; system to check accuracy of financial stmnts. 6. Finance; management of large amounts of money. |
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Term
| Q6 2) Explain two or more dilemmas that limit the efficiency of any organization. 2 |
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Definition
| Centralization or decentralization choosing to have one individual make decisions for company or have several individuals responsible for business. Centralization dilemma; requires time to have one individual making decisions, results in slower business operations. Decentralization dilemma; it is difficult at times to get whole team on same page, individuals have multiple ideas on particular business decisions. Another dilemma; individual interest and organizational needs. |
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Definition
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Term
| Q7 1) Explain the factors which limit the power of a competitive firm to influence market prices.1 |
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Definition
| 1. Competition;# of producers in market. 2. Barriers to entry; control over a scarce resource government imposed barriers. 3. Availability of substitutes of goods; will weaken a firms market price. |
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Term
| Q7 2) Compare and contrast : Sunk Cost, Fixed Cost, Variable cost, Marginal cost, and average cost. |
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Definition
Sunk cost; are spent and cannot be recovered.
Fixed cost; are an on-going burden even when production is halted. Variable cost; are cost that are directly proportional to the quantity of output, labor being the most common type of variable cost. Marginal cost; is the increase in total cost that results when an input is increased by one unit. Average cost; is the total cost divided by the number of goods produced. AC begins to increase when it intersects with MC curve.
*MC impact one another as production fluctuate. |
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Term
| Q7 3) Contrast the Law of Diminishing returns and Diseconomies of scale. |
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Definition
| The Law of Diminishing returns refers to how production output decreases as one input is increased, while other inputs are left constant. Diseconomies of scale refers to a point at which the company no longer enjoys economies of scale and at which the cost per unit rises as more units are produced. A major difference between the two is that DR occurs in the short run and DS over a longer period of time. Concepts which represent how a company can end up making losses as inputs are left constant. |
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Term
| Q8 1) Why should a producer expand production until MC= selling price of the product. |
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Definition
| Maximize revenue when P=MC |
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Term
| Q8 2) If Price= MC will the producer be making a profit? |
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Definition
| Not necessarily must check to see if P=MC>MR |
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Term
| Q8 3) When should a business continue even though its suffering losses? |
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Definition
| R > or equal to MC then staying open will minimize losses R< or equal to MC then shutting down would be best. |
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Term
| Q8 4) Explain why the resources capital and labor are considered both compliments and substitutes in production |
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Definition
| Minimize production cost producer must decide Capital Vs Labor. Equipment and software are cheap while cost of labor is rising every year making a capital a better investment. Firms cannot always choose capital as a substitute for labor because they can also be compliments to each other. |
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Term
| Q8 5) What is wilfred's pareto's definition of economic efficiency. |
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Definition
| no one can be better off without making someone else worse off. |
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Term
| Q8 6) Three forms of economic efficiency |
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Definition
Exchange efficiency; voluntary trade improvements have been made.
Product Efficiency; production at lowest resource cost. Product mix efficiency; produce combination of goods consumers value most. |
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Term
| Q8 7) What is the effect of tax on efficiency. |
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Definition
| Taxes drive a wedge between the price paid by the consumer and the revenue received by the seller. |
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Term
| Q8 8) Why do economist believe that tax rate increases may reduce tax revenue? |
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Definition
| Reduces payoff, causing people to opt out of the work force. Encourages tax shelter or other forms of tax avoidance. |
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Term
| Q9 1) How does a profit maximizing strategy of the monopolist differ from that of a competitive firm?2 |
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Definition
| Although both competitive firms and monopolies maximize profit by producing at MR=MC and where P>MC. The competitive firm needs to constantly adjust differentiated because the incentive for new firms to enter the market is big. Perfect competitive markets are considered price takers were monopolist are considered price makers. |
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Term
| Q9 2) Why do monopolies occur and persist? |
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Definition
| Monopolies occur because of no similar substitutes and persist because of high barriers of entry. |
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Term
| Q9 3) Why do we believe that monopoly is disadvantageous to consumers and society?2 |
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Definition
| Economist believe that a monopoly may be bad for the consumer/society because it will reduce consumer surplus while increasing producer surplus. Monopolies also create a deadweight loss which is not economically efficient. Total social welfare would be less whenever there is a monopoly. |
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Term
| Q9 4) How can we measure the distortions of a specific monopoly?3 |
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Definition
| We measure the distortions of a monololy by finding the deadweight loss Adding the area of triangle A and B or calculating the area of the big triangle can find the deadweight loss in a monopoly. To find the area we use 1/2(BasexHeight) |
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Term
| Q9 5) What conditions are necessary for price discrimination? |
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Definition
| Price discrimination is the ability to charge different price for the same product. The ideal condition for price discrimination to work is a monopoly. Firms gain market power by P>MC . |
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Term
| Q9 6) When is price discrimination not illegal?1 |
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Definition
| If it increases competition and results in an increase in social welfare. Buying a hotel room online. Everyone must be eligible for PD. |
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Term
| Q10 1) What is a cartel?1 |
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Definition
| A cartel is a group of firms working together to create a similarity of a monopoly. |
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Term
| Q10 2) What problems must be solved by a cartel to be formed and to operate successfully? 2 |
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Definition
| Prediction of demand, find out MC. Then decide where you re going to produce the quota and then agree that nobody deviates. |
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Term
| Q10 3) Why is it difficult to sustain a cartel? 2 |
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Definition
| The biggest problem about a cartel is maintaining it. The main reason is that te incentive to cheat is high, to produce more then there given limit. which is set by the cartel. When interest rates are high the incentive to cheat is high. |
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Term
| Q10 4) Compare and contrast 3 policies used to correct the inefficiencies of monopolies?3 |
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Definition
| The antitrust policy involves regulating inefficiencies in monopolies by prohibiting mergers and promoting breakups in monopolies. Antitrust policy also tries to find and fine firms who work together to raise prices to create additional consumer surplus. |
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Term
| Q10 5) Which laws and agencies authorize and enforce these policies? |
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Definition
| The agencies in the US that control these policies are the FTC and antitrust division of the justice department. Sherman Act 1890, Clayton Act, FTC act, Robinson PAtman Act, Celler Kefauver Act. Wheeler/Lee act |
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Term
| Q11 1) Define externalities and give examples of both positive and negative externalities?3 |
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Definition
Externalities are products that have effects on outsiders, that are beyond the buyer and seller. Positive externality are benefits from an activity not enjoyed by the buyer or seller. For example fixing my house or cr for people to enjoy as they walk by.
Negative externality are cost of the activity, not borne by the buyers or sellers. A producer saves cos by putting waste into the atmosphere or local water, damage to air and water harms people. |
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Term
| Q11 2) Why will the market fail to provide the correct quantities of goods with externalities?2 |
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Definition
| Consumers pay to much for a good with positive externalities and will buy too little. On the other hand a consumer pays to little for a good with negative externalities and will buy to much. Under comp producer may choose to produce to much or too little. |
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Term
| Q11 3) How are market failures related to private property rights? 2 |
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Definition
| Market can fail if there are no property rights. The Coase Theorem; correct resource allocation will occur if property rights are assigned and marketable.Ownership of the property right determines who compensates whom but does not alter the efficient solution. |
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Term
| Q11 4) Identify and evaluate 1) Command and control 2) Tax and Subsidy 3) Marketable property rights, as methods of resolving the inefficiencies of externalities. 3 |
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Definition
| 1. Command and control establishes limits that are punishable with fines, cease and desist orders. 2. Tax Subsidy's change incentives to change choices. Tax negative and subsidize positive externalities. 3. Marketable property rights, these are in the form of permits that limit the quantity to the goal. Marketable permits transfer to best uses. Prices adjust to locate desired quantity. |
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Term
| Q12 1) Define public goods and give several examples. 4 |
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Definition
| Public goods are non-exclusive and non-rivalrous. Satisfying more consumers does not require more production. Excluding consumers reduces total satisfaction for no reason. MC of satisfying more Consumers=0 therefore the correct price should be zero. 1. Basic research, external benefits. 2. Roadway cost zero to use. 3. Lighthouse does not impose any cost in society. 4. Street lights. 5. Fireworks show. 6. Mental health and government aid i.e food stamps, SSI |
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Term
| Q12 2) Why will markets fail to provide the optimal level of public goods?3 |
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Definition
| The inability of the market to provide public goods is failure because nobody would pay for the goods though they are essential to society. If the MC of making the good available to another user is 0 then the appropriate price is 0. Consumers will try to use the good without paying for it--The free rider problem. Therefore government will need to intervene by providing public good out of general taxation. |
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Term
| Q12 3) Compare and contrast 1Public provision 2Clubs and 3Private profit as methods of producing paying and distributing goods |
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Definition
Government: uses taxes to pay for the public good and then anyone can use it for very cheap. The problem is many people don't use it and still have to pay for it.
In private provisions like country clubs they charge initiation fees to pay for it and monthly fees to cover the fixed costs for managing the public goods. The problem is that it is wasteful since others can't use it even though the marginal cost is 0.
Private companies: charge people a lot of money to use it but then there is a waste because it is inefficient when the marginal cost is very low. It also discourages a lot of people to use it when it is private and only the very rich can afford it . |
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Term
| Q13 1) Explain what determines the demand for labor?3 |
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Definition
| The demand for labor is determined by the price of the labor, the planned level of production, and the labor productivity or the marginal physical product. |
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Term
| Q13 2) What Factors determine the supply for labor in the markets?3 |
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Definition
| The supply for labor is determined by the employees opportunity cost (the trade off between leisure time and income), the budget constraint that is defined (higher wages, more supply), and the preferences of the laborers (location, satisfaction of job, lifestyle of worker). |
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Term
| Q13 3) Use an example of labor choice from your own experience to demonstrate the income and substitution effect of higher wages. 2 |
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Definition
| One example would be when I was working in the retail business as a salesperson. I could clearly distinguish when leisure became more important than wage. Working over time increased my wages leading me to substitute more income for less leisure. However s I got wealthier I reached a point where I valued leisure more than my income. My incentives for leisure increased as my income increased. |
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Term
| Q14 4) Explain how an increase in the wages offered by employers influences the supply of labor. 2 |
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Definition
| An increase in wages affects the supply of labor by increasing the quantity of the laborers because the job is more attractive if it has a higher wage and less of a budget constraint. This will create an excess supply of workers so the firm then needs to try to find a wage that is equal to the employees opportunity cost. |
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Term
| Q14 1) contrast physical capital and financial capital.1 |
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Definition
| Physical capital is a tangible asset that a firm has in its inventory. Financial capital is a resource like money, stocks or bonds that are used to purchase physical capital and such to produce a product for a firm. |
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Term
| Q14 2) What are the four critical attributes of financial securities. |
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Definition
| 1. Yield. 2. Risk. 3. Tax-treatment. 4. Liquidity; important for future use. |
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Term
| Q14 3) explain the relationship between the rental rate of physical capital and the demand price of physical capital |
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Definition
| The rental rate of physical capital is related to the demand price of physical capital through the yield. The rental price is equal to the yield times the price to own. If an owner wants a 10% yield and it costs 100,000 to own it then the rental price will be 10,000 dollars. |
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Term
| Q14 4) what determines the production of new capital. 3 |
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Definition
| The production of new capital is determined by the existing stock of that capital (the amount that is already there), the changes is capital stock (value of the capital), the amount the capital is expected to yield and whether or not the future cash flow is greater than the initial investment. Producers of new capital produce only if MC less than or equal to price. |
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Term
| Q14 5) what determines the development of natural resources |
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Definition
| The production of natural resources is determined by the property rights of that natural resource, the investment in exploration, the pure economic rent (price minus the cost of production), and the scarcity of that resource. |
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Term
| Q15 1) What determines the Distribution of income in a market economy?1 |
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Definition
| 1. Resources available and their ownership. 2. Market value of resources. 3. The use of decisions of the owners. 4. Independent characteristics. |
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Term
| Q15 2) Define the dimensions of the poverty problem in the united states. 1 |
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Definition
| Poverty is the state of being extremely poor; inadequate income(relative or absolute). 20% of families have less than 50% of median income in the US. Common characteristics of the poor, Lack of education, Negative family status, Don't work, Crime(Victims and perpetrators). |
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Term
| Q15 3) Explain the dilemma of welfare design in terms of benefits incentives and total program cost. 1 |
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Definition
| Benefit dilemma, eligibility and minimum benefit. -Benefit reduction rate, -Breakout level. Incentives dilemma(Categorical Vs General assistance). Total program cost, budget cost and funding sources. Income programs cost 500 billion. |
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