Questions and Answers
What is a marginal change?
small, incremental adjustment.
What does air pollution from burning fossil fuels exemplify?
a market failure caused by an externality.
What is referred to as an increase in the overall level of prices in an economy?
inflation.
College-age athletes who drop out of college are unaware that their opportunity cost of attending college is very high.
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What is economics the study of?
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What does efficiency mean in economic terms?
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What is market power?
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How do rational people make decisions?
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What does the 'invisible hand' refer to?
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What does the adage 'There is no such thing as a free lunch' imply?
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How are equality and efficiency different?
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What is your opportunity cost?
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Which of the following firms is most likely to have market power?
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When the government redistributes income from the wealthy to the poor, efficiency is improved.
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Thousands of people developing lung cancer from second-hand cigarette smoke is an example of a market failure caused by an externality.
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What do economists claim as policy advisors?
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What are factors of production?
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What do economists often omit in building economic models?
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In the circular-flow diagram, who are buyers in the market for goods and services?
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In the circular-flow diagram, who are sellers in the market for factors of production?
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What would explain the shift of the production possibilities from A to B?
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What would likely cause the production possibilities frontier to shift outward?
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What is the opportunity cost of each car in the production possibilities frontier for an economy that produces only sofas and cars?
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At which point(s) cannot the economy produce?
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At which points can this economy produce?
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What is the opportunity cost of an increase in wheat production from 700 bushels to 1300 bushels?
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What is the slope of a line that passes through the points (20, 30) and (40, 14)?
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In the short run, what is likely to happen if the money supply increases?
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What is the typical worker's income most closely linked to?
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What is the primary cause of inflation?
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Study Notes
Macroeconomic Concepts
- A marginal change refers to a small, incremental adjustment in decision-making.
- Air pollution from fossil fuels exemplifies a market failure caused by externalities, impacting crops and public health.
- Inflation is defined as the overall increase in price levels within an economy.
- Opportunity cost is the high value college-age athletes assign to forgoing college for professional sports.
- Economics is the study of how society allocates its scarce resources effectively.
Economic Efficiency and Market Dynamics
- Efficiency in economics indicates that society derives maximum benefits from its limited resources.
- Market power refers to the ability of an individual or small group to influence market prices, such as a sole gasoline station in a rural area.
- Rational decision-making involves comparing marginal costs with marginal benefits to make informed choices.
- The "invisible hand" describes how individual decision-making by households and firms can lead to favorable market outcomes.
Equality versus Efficiency
- The phrase “There is no such thing as a free lunch” illustrates that individuals must face tradeoffs in decision-making processes.
- Equality and efficiency differ in that equality refers to the even distribution of benefits, while efficiency focuses on maximizing societal benefits from resources.
- Government actions that redistribute income may enhance equality but can decrease overall efficiency.
Economic Models and Theories
- Economists, when acting as policy advisors, often propose normative claims about ideal world conditions and outcomes.
- Factors of production are the inputs necessary for creating goods and services.
- Economic models frequently omit intricate details to simplify analysis and focus on fundamental principles.
Circular-Flow Model
- In the circular-flow diagram, households play the role of buyers in the goods and services market while acting as sellers in the factors of production market.
- Technological advances can shift production possibilities outward, improving efficiency and production capacity.
Production Possibilities Frontier (PPF)
- Opportunity costs in production can be calculated from the slope of the PPF, reflecting trade-offs between two products, such as cars and sofas.
- Certain points on the PPF represent inefficiency (unattainable points) while others depict optimal production capabilities.
- An increase in wheat production may require sacrificing a specific amount of corn, illustrating the opportunity cost concept.
Economic Indicators
- A short-run increase in the money supply can lead to reduced unemployment and heightened inflation.
- The income level of a typical worker correlates closely with the overall productivity level within an economy.
- Primary drivers of inflation include an increase in the money supply, impacting purchasing power and price levels sustainably.
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Description
Test your understanding of key macroeconomic concepts including marginal changes, inflation, opportunity cost, and market efficiency. This quiz also explores how externalities and market power influence economic decision-making and resource allocation.
