Econ 210

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Deduction

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A method of reasoning in which one deduces a theory based on a set of almost self-evident principles

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Scarcity

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the goods available are too few to satisfy individual's desires

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Marginal cost

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the additional cost to ou over and above the costs you have already incurred

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sunk costs

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costs that have already been incurred and cannot be recovered

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marginal benefit

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the additional benefit above what you've already derived

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economic decision rule

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if the marginal benefits of doing something exceed the marginal costs

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if the marginal costs of doing something exceed the marginal benefits

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don't do it.

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Opportunity cost

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the benefit that you might have gained from choosing the next-best alternative

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market force

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an economic force that is given relatively free rein by society to work through the market

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invisible hand

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the price mechanism

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abduction

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a method of analysis that uses a combination of inductive methods and deductive methodds

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economic model

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a framework that places the generalized insights of the theory in a more specific contextual setting

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economic principle

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a commonly held economic insight stated as a law or general assumption

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experimental economics

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a branch of economics that studies the economy through controlled laboratory experiments

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natural experiments

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naturally occurring events that approximate a controlled experiment where something has changed in one place but has not changed somewhere else

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efficiency

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achieving a goal as cheaply as possible

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invisible hand theorem

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a market economy

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microeconomics

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the study of individual choice

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macroeconomics

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the study of the economy as a whole

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normative economics

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the study of what the goals of the economy should be

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art of economics

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the application of the knowledge learned in positive economics to the achievement of the goals one has determined in normative economics

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You rent a car for $29.95. The first 150 miles are free

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but each mile thereafter costs 15 cents. You plan to drive it 200 miles. What is the marginal cost of driving the car?

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Economists estimated the government must spend $4

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170 on druf control to deter one person from using drugs and the cost that one druf user imposes on society is $897. Based on this information alone

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What is the opportunity cost of buying a $20000 car?

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The opportunity cost of buying a $20

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Suppose you currently earn $30000 a year. You are considering a job that will increase your lifetime earnings by $300000 but that requires and MBA. The job will mean also attending business school for two years at an annual cost of $25000. You already have a bachelor's degree

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for which you spent $80000 in tuition and books. Which of the above information is relevant to your decision whether to take the job?

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Suppose your college has been given $5 million. You have been asked to decide how to spend it to improve your college. Explain how you would use the economic decision rule and the concept of opportunity costs to decide how to spend it.

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I would spend the $5 million on those projects that provide the highest marginal benefit per dollar spent. The opportunity cost of spending the money on one project is the lost benefit that the college would have received by spending it on some other project. Thus

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Individuals have two kidneys

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but most of us need only one. People who have lost both kidneys through accident or disease must be hooked up to a dialysis machine

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c. Whether a society should allow this transaction is a question of value judgments and cultural norms. Our society has chosen not to allow such transactions because (among other reasons) those with more money would have increased access to organs and would therefore have advantages over those of limited means

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and the poor could be exploited in such transactions.

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Macro or Micro: Should US interest rates be lowered to decrease the amount of unemployment?

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Macro

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Macro or Micro: Will the fact that more and more doctors are selling their practices to managed care networks increase the efficiency of medical providers?

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Micro

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Macro or Micro: Should the current federal income tax be lowered to reduce unemployment?

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Macro

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Macro or Micro: Should the federal minimum wage be raised?

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Micro

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Macro or Micro: Should Sprint and Verizon both be allowed to build local phone networks?

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Micro

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Macro or Micro: Should commercial banks be required to provide loans in all areas of the territory from which they accept deposits?

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Micro

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List two microeconomic and two macroeconomic problems

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Two microeconomic problems are the pricing policies of firms (price fixing in particular) and how wages are determined in labor markets. (Why do athletes and celebrities make so much money anyway?) Two macroeconomic problems are unemployment and inflation (business cycles and growth are also macroeconomic problems).

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Positive Economics

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Normative Economics

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Positive Economics

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Normative Economics

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Positive Economics

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Normative Economics

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Positive Economics

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Normative Economics

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Positive Economics

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Normative Economics

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Show how a production possibility curve would shift if a society became more productive in its output of widgets but less productive in its output of wadgets.

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wadget production is measured on the vertical axis and widget production is measured on the horizontal axis. If the society becomes more productive in its output of widgets

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Show how a production possibility curve would shift if a society became more productive in the output of both widgets and wadgets.

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If a society became equally more productive in the production of both widgets and wadgets

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How does the theory of comparative advantage relate to production possibility curves?

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The theory of comparative advantage underlies the shape of the production possibility curve. By taking advantage of each person's comparative advantage

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If neither of two countries has a comparative advantage in either of two goods

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what are the gains from trade?

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Does the fact that the production possibilities model tells us that trade is good mean that in the real world free trade is necessarily the best policy? Explain.

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The fact that the production possibility model tells us that trade is good does not mean that in the real world

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What effect has globalization had on the ability of firms to specialize? How has this affected the competitive process?

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Globalization increases competition by allowing greater specialization and division of labor. Because companies can move operations to countries with a comparative advantage

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State the law of demand. Why is price inversely related to quantity demanded?

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The law of demand states that quantity demanded falls as price increases; or that quantity demanded rises as price falls. Price is inversely related to quantity demanded because as price rises

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List four shift factors of demand and explain how each affects demand.

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Four shift factors of demand are income

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Distinguish the effect of a shift factor of demand on the demand curve from the effect of a change in price on the demand curve.

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A change in the price causes a movement along the demand curve to a new point on the same curve. A shift in the demand curve means that the quantities will be different at all prices; the entire curve shifts.

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State the law of supply. Why is the price directly related to quantity supplied?

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The law of supply states that quantity supplied rises as price increases or

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Mary has just stated that normally

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as price rises

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List four shift factors of supply and explain how each affects supply.

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Shift factors of supply include the price of inputs

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List four shift factors of supply and explain how each affects supply.

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Shift factors of supply include the price of inputs

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Explain what a sudden popularity of "Economics Professor" brand casual wear would likely do to prices of that brand

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Customers will flock to stores demanding that funky “economics professor” look

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In a flood

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usable water supplies ironically tend to decline because pumps and water lines are damaged. What will a flood likely do to prices of bottled water?

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The price of gas shot up significantly in 2008 to over $4.00 a gallon. What effect did this likely have on the demand for diesel cars that get better mileage that the typical car?

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Because the price of gas rose significantly

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Say that the equilibrium price and quantity both rose. What would you say was the most likely cause?

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If price and quantity both rise

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Say that the equilibrium price fell and quantity remained constant. What would you say was the most likely cause?

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If price fell and quantity remained constant

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The technology is now developing so that road use can be priced by computer. A computer in the surface of the road picks up a signal from your car and automatically charges you for the use of the road. How would this affect bottlenecks and rush-hours congestion?

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Computer pricing of roads could end bottlenecks and rush hour congestion by price rationing. Currently at zero price

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Determine the price elasticity of demand if

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in response to an increase in price of 10 percent

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A firm has just increased its price by 5 percent over last year's price

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and it found that quantity sold remained the same. The firm comes to you and wants to know its price elasticity of demand.

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A firm has just increased its price by 5 percent over last year's price

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and it found that quantity sold remained the same. How would you calculate it?

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A firm has just increased its price by 5 percent over last year's price

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and it found that quantity sold remained the same. What additional information would you search for before you did your calculation?

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When tolls on the Dulles Airport Greenway were reduced from $1.75 to $1.00

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traffic increased from 10

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One football season Domino's Pizza

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a corporate sponsor of the Washington Redskins

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A major cereal producer decides to lower price from $3.60 to $3 per 15-ounce box. If quantity demanded increases by 18 percent

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what is the price elasticity of demand?

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A major cereal producer decides to lower price from $3.60 to $3 per 15-ounce box. If

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instead of lowering its price

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Federal Reserve Bank of Chicago economist William Hunter and G-7 Group economist Mary Rosenbaum estimated the demand elasticity for motor fuel to be between 0.4 and 0.85. If the price rises 10 percent and the initial quantity sold is 10 million gallons

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what is the range of estimates of the new quantity demanded?

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Federal Reserve Bank of Chicago economist William Hunter and G-7 Group economist Mary Rosenbaum estimated the demand elasticity for motor fuel to be between 0.4 and 0.85. In carrying out their estimates

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they came up with different elasticity estimates for rises in price than for falls in price

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a) Cars

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transportation

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b) Housing

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leisure travel

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c) Rubber during Worls War II

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rubber during the entire 20th century

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For the following good

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state whether it is a normal good

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For the following good

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state whether it is a normal good

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For the following good

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state whether it is a normal good

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For the following good

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state whether it is a normal good

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For the following good

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state whether it is a normal good

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For the following good

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state whether it is a normal good

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Economists have estimated the following transportation elasticities. For each pair

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explain possible reasons why the elasticities differ. a) Elasticity of demand for buses is 0.23 during peak hours and 0.42 during off-peak hours

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Economists have estimated the following transportation elasticities. For each pair

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explain possible reasons why the elasticities differ. b) Elasticity of demand for buses is 0.7 in the short tun and 1.5 in the long run

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Economists have estimated the following transportation elasticities. For each pair

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explain possible reasons why the elasticities differ. c) Elasticity of demand for toll roads is 4.7 for low-income commuters and 0.63 for high-income commuters

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Kean University Professor Henry Saffer and Wharton School of Business Professor Dave Dhaval estimated that if the alcohol industry increased the prices of alcoholic beverages by 100 percent underage drinking would fall by 28 percent and underage binge drinking would fall by 51 percent. a) What is the elasticity of demand of underage drinking and binge drinking? b) What might explain the difference in elasticities?

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a) The elasticity of demand for drinking is .28; the elasticity of binge drinking is .51.

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Source: “Alcohol Advertising and Alcohol Consumption by Adolescents

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” NBER Working Paper 9482.

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A newspaper recently lowered its price from 50 cents to 30 cents. As it did

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the number of newspapers sold increased from 240

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b) Given that elasticity

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did it make sense for the newspaper to lower its price?

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c) What would your answer be if much of the firm's revenue came from advertising and the higher the circulation

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the more it could charge for advertising?

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b)Since the demand is inelastic

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it doesn’t make sense to lower the price because it reduces the total revenue.

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Once a book has been written

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would an author facing an inelastic demand curve for the book prefer to raise or lower the book's price? Why?

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How is elasticity related to the revenue from a sales tax?

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If demand is inelastic

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For the following pair of goods

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state whether the cross-price elasticity is likely positive

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Lettuce

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carrots.

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For the following pair of goods

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state whether the cross-price elasticity is likely positive

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Housing

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furniture

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For the following pair of goods

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state whether the cross-price elasticity is likely positive

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Nike sneakers

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Puma sneakers

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For the following pair of goods

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state whether the cross-price elasticity is likely positive

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Jeans

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formal suits

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When the price of ketchup rises by 15 percent

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the demand for hot dogs falls by 1 percent.

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c) In the original scenario

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what would have to happen to the demand for hot dogs for us to conclude that hot dogs and ketchup are substitutes?