Micro Exam

  1. Difference between Macro and Micro Economics
    Macro refers to the level of economic activity. Deals with the level of prices, income, employment, etc. in the whole economy.

    Micro refers to the structure of economic activity. Deals with the small units like a business firm, an industry, or a single market.
  2. Define Ceteris Paribus.  Examples
    Assuming other things to remain the same. Used to get around not being able to conduct controlled experiments.

    Ex:If the price of beef increases, ceteris paribus, people will purchase less beef. In this situation, ceteris paribus means that the possibility of other changes affecting the sales of beef will not be considered. Other things could happen that would keep the sales of beef the same or even increase the sales of beef – for example, the price of other meats could increase even more than the price of beef increased, leaving beef as the cheapest meat available, or the Centers for Disease Control could announce that eating beef prevents cancer, which would most likely increase the sales of beef – but in this situation, we only want to consider what happens if the price of beef rises while keeping all other factors the same.
  3. What is the central problem of economics?
    It asserts that there is scarcity; that is, that the finite resources available are insufficient to satisfy all human wants and needs.
  4. Adam Smith – book written in 1776?
    The Wealth of Nations and An Inquiry Into the Nature and Causes of the Wealth of Nations
  5. Difference between Positive and Normative Economics.  Examples
    Positive-Approach to econ involving statements of facts ex:"government-provided healthcare increases public expenditures"

    Normative-Approach to econ giving interpretations of facts ex:"government should provide basic healthcare to all citizens"

    Economists take a normative economic approach when they formulate policy
  6. What is the Fallacy of Composition?
    If you save your income its good for you, but if everyone saves their income, then the economy will turn bad.
  7. How are the major economic goals of Economic Growth, Full Employment, and Price Stability measured by mainstream economists?
    Economic Growth: (Annual increase of GDP by 3-5%) No, our increase is 2.9% 

    Full Employment: (Unempl of <5%) No, 5.5%

    Price Stability: (Annual increase in CPI of <5%) Yes, increase of 1.4%
  8. What is the difference between a direct and indirect relationship between variables?  Examples.
    Direct Relationship: Two variables move in the same direction that is, they both increase or decrease at the same time (e.g. the number of inches of rainfall per month & the sale of umbrellas)

    Indirect Relationship: Two variable moves in the opposite direction, that is as one increases, the other decreases at the same time (e.g. the number of inches of rainfall per month and the sale of sunglasses)
  9. What are the four major sectors of the economy?
    • 1) Household/consumer
    • 2)Business
    • 3)Government
    • 4)Foreign
  10. What is a Production Possibilities Curve (PPF)?  Why the bowed out shape?
    A way to show the problem of using scarce resources to satisfy unlimited wants graphically. The bow is because of a transfer of resources they are not transferable to a 1 to 1 basis, but to a 1 to 3 or different among sectors of an economy
  11. What do points on PPF mean?
    Full production/full employment ON the curve
  12. What is Opportunity Cost?  How is it related to the PPF?
    The most highly valued opportunity or alternative given up when a choice is made
  13. Define Balanced/Unbalanced Economic Growth.  Show graphically.
    Unbalanced: technology changes in only one sector (lines meet up eventually)

    Balanced: Technology changes in all sectors of the economy (lines are parallel)
  14. What is the type of Capitalism in the U.S.?  What are the assumptions it is based upon?
    • Without SS and Medicare (80% Private 20% Gov)
    • With(62% P and 38% G)

    We need to increase the rate of economic growth faster than the rate of increase in the size of government
  15. Define the Law of Demand
    All other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa.
  16. Difference between Change in Quantity Demanded and Change in Demand.  What causes each?
    Change in Quantity Demanded: A movement from one row to another in the demand schedule or a movement along (up or down) the same demand curve Cause: A change in price (only)

    Change in Demand: An increase or decrease in ALL the QD's at the same prices in the demand schedule, or a shift outward (to the right) or inward (to the left) of the D curve Causes: change in the # of buyers (population, weather), change in consumer taste, income, or price of other goods
  17. Define the Law of Supply
    All else equal, an increase in price results in an increase in quantity supplied.
  18. Difference between Change in Quantity Supplied, and Change in Supply.  What causes each?
    Change in Quantity Supplied Cause: A change in price

    Factors causing a change in Supply: change in the number of sellers, change in seller expectations about the future price of a good, change in production costs, change in technology
  19. Minimum Wage Law – Traditional vs. New Analysis
    Traditional analysis is minimum wage is above market equilibrium

    New analysis is minimum wage is below market equilibrium
  20. What is the idea behind Price Elasticity of Demand?  Supply?
    Demand:How responsive are consumers to a given % change in P?(will they change their purchases by a larger, equal, or smaller % in response to a certain % change in P?)

    Supply:How responsive are sellers to a given % change in market P? (Assuming they have no control over market price, will they change their output for sale by a larger, equal, or smaller % in response to a certain % change in the market P?)
  21. Remember the Mid-Point Formula and how to use it
    • chart?chf=bg,s,00000000&cht=tx&chl=E%3D%5Cfrac%7BQb-Qa%7D%7BPb-Pa%7D*%5Cfrac%7BPa%2BPb%7D%7BQa%2BQb%7D&chs=328x80
    • If E is > 1 it's Elastic
    • If E is < 1 it's Inelastic
    • If E = 1 it's Unitary
  22. What is the Total Revenue Test?
    • 1) (P*Q)/time
    • 2)If P and TR move in the opposite direction, D is elastic
    • 3)If P and TR move in the same direction, D is inelastic
    • 4)If any change in D results in NO change in TR, D is unitary

    No TR for supply
  23. Explain the difference between Elastic, Inelastic, and Unitary Elastic Demand.
    Elastic: if a % change in P generates a LARGER % change in QD

    Inelastic: if a % change in P generates a SMALLER % change in QD
  24. What are the main Other Factors determining the elasticity of demand (4)?  Supply (1)?
    • 1) # of substitutes available for product, many=Elas, few=inelas
    • 2)% of Y income required to purchase product, large=elas, small=inelas
    • 3)How product is perceived by consumer, luxury=elas, necessity=inelas
    • 4)Time Factor, long period-elas, short period=inelas
  25. What is Income Elasticity of Demand in terms of Normal and Inferior Goods?
    • (after the midpoint formula)
    • If Ey is positive the good is a normal good
    • If Ey is negative the good is an inferior good
    • If Ey is positive 1 the good is unitary normal
    • If Ey is negative 1 the good is unitary inferior
  26. Define Total Utility, Marginal Utility, Diminishing Marginal Utility
    • Total Utility=Amount of satisfaction(from all units bought)
    • Marginal Utility=Additional satisfaction of each additional scoop per unit

    If you buy more units, MU diminishes
  27. What is the formula for the Utility Maximizing Rule?
Card Set
Micro Exam
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