Economics 101 Notes
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macroeconomics beginning notes which practice test...
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Economics 101-04
8/28/2013 9:39:00 AM
Welcome to Economcis 101, Principles of Macroeconomics! This is a course in the principles of macroeconomics. Its objective is to understand the way the economy as a whole works. We look at the forces that determine overall production, at the business cycle (alternating periods of prosperity and recession), and at economic policies meant to stabilize the economy, combat unemployment and inflation and promote economic growth. Before turning to all that, however, we first discuss the general outlook and methodology of economics, the forces of supply and demand, and the way prices are formed and markets work – topics central to virtually all economic thought. Textbook. The textbook for this course is Macroeconomics, by McConnell,
Brue and Flynn, 19th edition. This is the macroeconomics half of
Economics,
by the same authors. (Be careful not to buy the microeconomics half instead.) You should buy the textbook in the bookstore, which comes with access to Connect, the online program through which you will do and submit homework assignments. Alternatively, you can save money by buying the text as an ebook. In this case, you will need to separately purchase the Connect access code. Getting the text as an ebook has the advantage of digital navigation, search, etc. It has the disadvantage of your not being able to hold a real book in your hands and leaf through it easily. That’s my preference but it may not be yours. You may also find the textbook on the web in less expensive new or used copies, and buy access to Connect separately. You can find the course syllabus at this site under "Course Materials." TO REGISTER AT CONNECT: Go to http://connect.mcgrawhill.com/class/riskin-fall13. Click on the “register now” button. To
register, you will have to furnish the code number that came with your textbook, or else purchase one. The registration page has two videos – “HOW TO REGISTER WITH AN ACCESS CODE” and “HOW “HOW TO PURCHASE ACCESS ONLINE” – that clearly explain each procedure. If you purchase
access online, you can choose between purchasing access to only the site (“Connect”) or purchasing access to the site AND to the online textbook (“Connect Plus”).
Once you register, I will see your name on the class roster, and you will have access to the class website. The URL, http://connect.mcgrawhill.com/class/riskin-fall13, is a unique one for our section of Economics
101. Be sure to type it in correctly to access the site, which is where homework assignments will be posted and the online book accessed. Whichever you choose, do it quickly. Assignments begin soon and you need to be registered at Connect to do them. There will be regular homework assignments, a midterm and a final examination. The homework will account for about 10% of the course grade, the midterm 40% 40% and the final, 50%. The final is cumulative, cumulative, including some questions from the first half of the semester, but most questions will deal with material from the second half. Readings are mainly from the textbook, but this will be supplemented from time to time by readings about current events that are relevant to what we are learning. They will be posted at the class page at Blackboard. The following outline gives the order in which we will take up the topics and the textbook readings for each topic. It does not indicate the length of time for each topic. This varies from topic to topic, and from semester to semester. You should keep up with where we are in the syllabus; if you can’t figure it out, ask! Connect does not have email capability, so I will communicate with the class through emails from this class page at Blackboard, where you are automatically be registered. PLEASE BE SURE THE RIGHT EMAIL ADDRESS IS LISTED FOR YOU ON BLACKBOARD. If not, change it to one that you look at frequently. Otherwise you might miss important announcements (new homework posted, etc.) about the course.
8/28/2013 9:39:00 AM Economics defined
Economic wants to exceed productive capacity
A social science concerned with making optimal under conditions of scarcity
Key features
Scarcity and choice
Purposeful (rational) behavior
Marginal analysis
Scarcity and choice
Resources (factors of production) are scarce
Therefore, choices must be made
Opportunity cost o
There’s no free lunch when resources are fully employed.
Purposeful behavior
Rational self-interest
Individuals seek utility (satisfaction)
Firms seek profit
Theories, principles and models
The scientific method o
Observeformulate a hypothesistest the hypothesisaccept, reject, or modify the hypothesiscontinue to test the hypothesis if necessary
Economic principles o
Generalizations
o
Other-things-equal assumption
Ceteris paribus
Microeconomics
Decision making by individual units
Macroeconomics
Aggregate
Positive economics
Deals with economic facts
Normative economics
A subjective economic perspective on the economy
What ought to be.
Individuals Economizing problem
An individual has $120 gift card from Barnes and Nobles
$120 budget DVD’s Books
($20)
($10)
6
0
5
2
4
4
3
6
2
8
1
10
0
12
o
12
o
10
o
8
o
6
o
4
o
2
o
0
A
B 2 4 6 8 10 12
o
A=(Income=$120)/(PDVD=$20) B= (Income=$120)/(PBooks=$10)
Pitfalls to sound economic reasoning
Biases o
Loaded terminology o
“tax,” “spend,” and liberals, government healthcare, etc.
Fallacy of composition o
normative masquerading as positive
relevant to counter cyclical policy
Fallacy of “Post hoc ergo propter hoc” fallacy o
Rooster crows before sunrise, therefor the crowing causes the sun to rise
Related: correlation not necessary causation o
Classic case: smoking and cancer
o
E.g. education and income?
Society’s Economizing Problem
Scarce resources ; “factors of production” o
Land (natural resources), Labor, Capital, Entrepreneurial Ability
Entrepreneurial Ability: Take initiative, Makes decisions, Innovates, takes risk
Production Possibilities Model
Illustrates production choices
Assumptions
o
Full employment
o
Fixed resources
o
Fixed technology
o
Two goods
The law of Increasing opportunity costs makes the PPC concave.
International Trade
Specialization in the division of labor
Increased production possibilities
Market System and Circular Flow
8/28/2013 9:39:00 AM
Economic Systems
Set of institutional arrangements
Coordinate mechanism
Differences in systems exist by o
Who owns the factors of production
o
What method is used to motivate coordinate, and direct economic activity.
Traditional societies
Economic tradition, or by class power
The command system
Government ownership
Decisions made by social planning board o
Communism
The Market System
Known as capitalism- BUT there are big differences between national versions of capitalism o
Austria, Hong Kong, U.S., U.K.,
Role of markets are greater, role of Government is smaller
(more stuff)
Characteristics of the market system
Private property
Freedom of enterprise and choice
Self-Interest
Competition
Markets and prices
May breed economic inequality
Disagreement about proper role of government
Technology and Capital Goods
Advanced technology and captital good are encouraged
(more)
Active but limited government
Government is needed to alleviate market failures
Government can increase effectiveness of a market system
Markets do not exist in a vacuum o
They need institutional environment
Five fundamental questions
What goods and services will be produced? o
Goods and services that create a profit
“Dollar Votes”
Consumers determine which goods will be produced, which industries survive or fail
“consumer sovereignty”
Note that dollar votes are unequally distributed over the population
How will the goods and services be produced? o
Producers seek to maximize profits
To do so, they try to minimize costs per unit by using the most efficient techniques
Their constraints are:
Existing technology
Prices of necessary technology
And the must choose the output level that maximizes profit (or minimizes loss)
Who will get the goods and services (output)? o
Consumers with the willingness and ability to pay will get the product
o
Ability to pay depends on income.
o
What does income depend on
The market value of the resources possessed by individuals
But what does income depend on?
Hard work, education, creativity, but also inherited wealth, “connections,” monopoly
power, luck
No assurance of a fair distribution of income
U.S. now has upward mobility than many European economies
How will the system accommodate change? o
Changes in consumer taste
o
Changes in technology
o
Change in resource prices
o
How a market system adapts to these changes
How will the system promote progress o
Capital accumulation
o
Improved “human capital” - i.e. Skills, education, training
o
Technological advance
Creative destruction
When newer technology comes out (computers) old technology is destroyed economically (typewriter)
Invisible hand
1776 o
Wealth of Nations by
Adam Smith
Unity of private and social interest
Virtues of the market system o
Efficiency
o
Incentives
o
Freedom, (but legal, not economic)
But some pretty strong assumptions necessary for these results.
Some problem with the market system (see chapter 5.)
Markets do not exist for some goods and services- Pollution
Markets may work poorly (health care, “public goods”)
Monopoly, oligopoly instead of competition
Inequality and poverty: markets can coexist with any income distribution
Businesses
Three main categories of businesses o
Sole proprietorship
o
Partnership
o
Corporation
Demand Supply and Market Equilibrium 8/28/2013 9:39:00 AM Markets
Interactions between buyers and sellers
Markets may be:
o
Local
o
National
o
International
Price is discovered in the interactions of buyers and sellers
Demand
Schedule or curve
Amounts consumers are willing and able to purchase all prices (book is wrong)
Other things equal
Individual demand
Market demand
Law of demand
Other things equal, as price falls, the quantity demand rises, and as price rises, the quantity demanded falls
Reasons o
Law of diminishing marginal utility
The more you have of something, the less important one more unit is to you
o
Income effect
If income goes down, you could buy less. If the price living goes down, you can buy more stuff
o
Substitution effect
When the price of something changes (train goes up), substitutes (cars) become relatively cheaper
Determinants of demand
Change in consumer tastes and preferences
Change in number of buyers
Change in income o
Normal goods
o
Inferior goods
Supply
Schedule or curve
Amount producers are able and willing to sell at various prices
Individual supply
Market supply
Law of supply
Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls.
Reason o
Short run vs Long run
o
In short runs, at some point marginal costs will rise
Demands of supply
Anything that affects cost o
A change in resource prices
o
A change in technology
o
A change in taxes and subsidies
A change in the number of sellers
A change in prices of other goods
A change in producer expectations
Market equilibrium
Equilibrium occurs where the demand curve and the supply surve intersect
Surplus and shortage
Rationing and function of prices
Efficient allocation o
Productive efficiency
o
Allocate efficiency
Edsel, New Coke
Government set prices
Price ceilings o
Set below equilibrium price
o
Rationing problem
o
Black markets
Example: Rent control
Price floor o
Prices are set above the market price
o
Chronic surplus
Example: Minimum wage laws
Market Failures: Market goods and externalities Market failures
Market fails to produce the right amount of the product.
Resources may be o
Over-allocated
o
Under-allocated
Demand side failure
Impossible to charge consumers what they are willing to pay for the product
Some can enjoy benefits without paying
Supply side failure
Occurs when a firm does not pay the full cost of producing its output
External costs of producing the good are not reflected in supply
(missed) Consumer surplus
Difference between what a consumer is willing to pay for a good and what the consumer actually pays
Extra benefit from paying less than the maximum price
Private goods
Produced in the market by firms
Offered for sale
Characteristics o
Rivalry
o
Excludability
Public goods
Provided by the government o
Offered for free
Characteristics o
No rivalry
o
No excludability
o
Free-rider problem
o
Since the mc of one more unit is 0, the price should also be 0
Cost
Resourced diverted from private good production
Private goods that will not be produced
Benefit
The extra satisfaction from the output of more public goods
Quasi-Public goods
Could be provided through the market system
Because of positive externalities the government provides them
Examples: Education, Streets, Libraries
Externalities
A cost or benefit accruing to a third party external to the transaction
Positive externalities o
Honey bee and flowers
o
Too little is produced
o
Demand-side market failure
Negative externalities: pollution o
Too much is produced
o
Supply side market failures
Midterm Review
8/28/2013 9:39:00 AM
54. Microeconomics:
A) is the basis for the "after this, there fore because of this" fallacy.
B) is not concerned with details, but only with the overall big picture of the economy.
C) is concerned with individual economic units and specific markets.
D) describes the aggregate flows of output and income. o
Answer: C
52. Macroeconomics can best be described as the:
A) analysis of how a consumer tries to spend income.
B) study of the large aggregates of the economy or the economy as a whole.
C) analysis of how firms attempt to maximize their profits.
D) study of how supply and demand determine prices in individual markets. o
Answer: B
9. Economics may best be defined as the:
A) interaction between macro and micro considerations.
B) social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of
economic wants.
C) empirical testing of value judgments through the use of logic.
D) use of policy to refute facts and hypotheses. o
Answer: B
57. Refer to the above tables. Opportunity costs are:
A) constant in both Duckistan and Herbania.
B) larger in Duckistan than in Herbania.
C) increasing in both Duckistan and Herbania.
D) increasing in Duckistan and constant in Herbania. o
Answer: C
85. If an economy is operating inside its production possibilities curve for consumer goods and capital goods,
it:
A) can only produce more consumer goods by producing fewer capital goods.
B) can only produce more capital goods by producing fewer consumer goods.
C) can produce more of both consumer goods and capital goods by using its resources more efficiently.
D) must improve its technology to produce more out put. o
Answer: C
128. Refer to the above diagram. An improvement in technology will:
A) shift the production possibilities curve from PP1 to PP2.
B) shift the production possibilities curve from PP2 to PP1.
C) move the economy from A to C along PP1.
D) movetheeconomyfromA,B,orConPP1toD. o
Answer: A
166. (Consider This) A direct cost of going to college is:
A) tuition, while an indirect cost (opportunity cost) is books and other supplies.
B) forgone income while in college, while an indirect cost (opportunity cost) is tuition.
C) tuition, while an indirect cost (opportunity cost) is forgone income while in college.
D) books and supplies, while an indirect cost (opportunity cost) is food and housing. o
Answer: C
3. When economists say that people act rationally in their self interest, they mean that individuals:
A) look for and pursue opportunities to increase their utility.
B) generally disregard the interests of others.
C) are mainly creatures of habit.
D) are unpredictable. o
Answer: A
36. The term "ceteris paribus" means:
A) that if event A precedes event B, A has caused B.
B) that economics deals with facts, not values.
C) other things equal.
D) prosperity inevitably follows recession. o
Answer: C
71. The fallacy of composition states that:
A) generalizations relevant to microeconomics never apply to macroeconomics.
B) expectations give rise to self-fulfilling prophesies.
C) generalizations pertaining to individuals always apply to the group.
D) quantifiable economic goals are always incompatible with one another. o
Answer: C
75. Which of the following best illustrates the post hoc, ergo propter hoc fallacy?
A) Because it was 90 degrees today, I worked up a sweat playing tennis.
B) I took the day off work to go to the beach and that's why it rained.
C) Because it rained at the football game, my new sweater got wet.
D) Because I have studied diligently this semester, my grade average has improved. o
Answer: B
157. Refer to the above diagram. Flow (3) represents:
A) wage, rent, interest, and profit income.
B) land, labor, capital, and entrepreneurial ability.
C) goods and services.
D) consumer expenditures. o
Answer: C
156. Refer to the above diagram. Flow (2) represents:
A) wage, rent, interest, and profit income.
B) land, labor, capital, and entrepreneurial ability.
C) goods and services.
D) consumer expenditures. o
Answer: B
25. Which of the following is one of the Five Fundamental Questions?
A) Which products will be in scarce supply and which in excess supply?
B) Who should appoint the head of the central bank?
C) How much should the society save?
D) What goods and services will be produced? o
Answer: D
32. From society's point of view the economic function of profits and losses is to:
A) promote the equal distribution of real assets and wealth.
B) achieve full employment and price level stability.
C) contribute to a more equal distribution of income.
D) reallocate resources from less desired to more desired uses. o
Answer: D
34. Economic profits in an industry suggests the industry:
A) can earn more profits by increasing product price.
B) should be larger to better satisfy consumer demand.
C) has excess production capacity.
D) is the size that consumers want it to be. o
Answer: B
56. A decrease in demand is depicted by a:
A) move from point x to point y.
B) shift from D1 to D2.
C) shift from D2 to D1.
D) move from point y to point x o
Answer: C
57. A decrease in quantity demanded (as distinct from a decrease in demand) is depicted by a:
A) move from point x to point y.
B) shift from D1 to D2.
C) shift from D2 to D1.
D) move from point y to point x. o
Answer: D
12. The income and substitution effects account for:
A) the upward sloping supply curve.
B) the downward sloping demand curve.
C) movements along a given supply curve.
D) the "other things equal" assumption. o
Answer: B
23. In 2003 the price of oil increased, which in turn caused the price of natural gas to rise. This can best be
explained by saying that oil and
natural gas are:
A) complementary goods and the higher price for oil increased the demand for natural gas.
B) substitute goods and the higher price for oil increased the demand for natural gas.
C) complementary goods and the higher price for oil decreased the supply of natural gas.
D) substitute goods and the higher price for oil decreased the supply of natural gas. o
Answer: B
70. A decrease in supply is depicted by a:
A) move from point x to point y.
B) shift from S1 to S2.
C) shift from S2 to S1.
D) move from point y to point x. o
Answer: C
A firm's supply curve is upsloping because:
A) the expansion of production necessitates the use of qualitatively inferior inputs.
B) mass production economies are associated with larger levels of output.
C) consumers envision a positive relationship between price and quality.
D) beyond some point the production costs of additional units of output will rise. o
Answer: D
An improvement in production technology will:
A) increase equilibrium price.
B) shift the supply curve to the left.
C) shift the supply curve to the right
D) shift the demand curve to the left. o
Answer: C
Answer: B
114. The rationing function of prices refers to the:
A) tendency of supply and demand to shift in opposite directions.
B) fact that ration coupons are needed to alleviate wartime shortages of goods.
C) capacity of a competitive market to equate the quantity demanded and the quantity supplied.
D) ability of the market system to generate an equitable distribution of income. o
Answer: C
--29. A negative externality or spillover cost occurs when:
A) firms fail to achieve allocative efficiency.
B) firms fail to achieve productive efficiency.
C) price exceeds marginal cost.
D) the total cost of producing a good exceeds the costs borne by the producer. o
Answer: D
28. A positive externality or spillover benefit occurs when:
A) product differentiation increases the variety of products available to consumers.
B) the benefits associated with a product exceed those accruing to people who consume it.
C) a firm produces at the P = MC output.
D) economic profits are zero in the long run. o
Answer: B
32. Refer to the above diagrams for two separate product markets. Assume that society's optimal level of output in each market is Q0 and that government purposely shifts the market supply curve from S to S1 in diagram (a) and from S to S2 in diagram (b). We can conclude that the government is correcting for:
A) spillover costs in diagram (a) and spillover benefits in diagram (b).
B) spillover benefits in diagram (a) and spillover costs in diagram (a).
C) spillover costs in both diagrams.
D) spillover benefits in both diagrams. o
Answer: A
1. The two main characteristics of a public good are:
A) production at constant marginal cost and rising demand.
B) non-excludability and production at rising marginal cost.
C) nonrivalry and non-excludability.
D) non rivalry and large spillover costs. o
Answer: C
93. Which of the following is an example of a public good?
A) a fireworks display.
B) a hotdog
C) a barbeque grill
D) a personal computer o
Answer: A
Which of the following would an economist not consider to be an investment
A stockbroker buying 10,000 shares of Starbuck’s stock
If depreciation exceeds gross investment:
A) the economy's stock of capital may be either growing or shrinking.
B) the economy's stock of capital is shrinking.
C) the economy's stock of capital is growing.
D) net investment is zero. o
Answer: B
55. If in some year gross investment was $120 billion and net investment was $65 billion, then in that year the
country's capital stock:
A) may have either increased or decreased.
B) increased by $65 billion.
C) increased by $55 billion.
D) decreased by $55 billion. o
Answer: B
16. GDP can be calculated by summing:
A) consumption, investment, government purchases, exports, and imports.
B) investment, government purchases, consumption, and net exports.
C) consumption, investment, wages, and rents.
D) consumption, investment, government purchases, and imports. o
Answer: B
27. Suppose that inventories were $40 billion in 2003 and $50 billion in 2004. In 2004, accountants would:
A) add$10billiontootherelementsofinvestmentincalculatingtotalinves tment.
B) subtract $10 billion from other elements of investments in calculating total investment.
C) add $45 billion (= $90/2) to other elements of investment in calculating total investment.
D) subtract $45 billion(=$90/2) from other elements of investment in calculating total investment. o
Answer: A
Refer to the above data. The gross domestic product is:
A) $326.
B) $282.
C) $307.
D) $300. o
Answer: C
Refer to the above data. The net domestic product is:
A) $233.
B) $255.
C) $230.
D) $348. o
Answer: B
86. Refer to the above data. Consumption of fixed capital (private sector) is:
A) $23.
B) $14.
C) $32.
D) $26. o
Answer: A
87. Refer to the above data. U.S. imports are:
A) $26.
B) $16.
C) $24.
D) $14. o
Answer: D
Environmental pollution is accounted for in:
A) GDP.
B) PI.
C) DI.
D) none of the above. o
Answer: D
157. The GDP tends to:
A) overstate economic welfare because it does not include certain nonmarket activities such as the productive work of housewives.
B) understate economic welfare because it includes expenditures undertaken to offset or correct pollution.
C) understate economic welfare because it does not take into account increases in leisure.
D) overstate economic welfare because it does not reflect improvements in product quality. o
Answer: C
115. Refer to the above data. Real GDP in year 3 is:
A) $100.
B) $450.
C) $225.
D) $150. o
Answer: D
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