Study Questions for Test 1 (Covers Lectures and Text Chapters 1-6)

1. Do you have an understanding of the Ten Principles of

Economics explained in Mankiw Chapter 1?

Yes
2. Who is known as the Father of Economics and what do you
know about him?

Adam Smith. He wrote the 1776 book The Wealth of Nations.

3. Can you explain the invisible hand principle?

The invisible hand refers to the rational human nature that causes us
to behave in our own self interest.
4. What is the difference between scarce and rare?

Scarcity = Having to give something up in order to get it.

Scarcity does not equal rare because it can occur often.
5. What is a good? What is the opposite?
Good = something we want more of
Bad = something we want less of
6. What do the terms objective and subjective mean?

7. What are some ways that we ration? What is the most

common? Why do we need to ration?

8. Can you explain the concept of opportunity cost?

The thing that must be given up to get something.

9. What is meant by the term economizing behavior?

Economists assume we all behave rationally.

10.
What does the term marginal mean? Why is it
important in economics?

Marginal = Extra, Incremental.

11.
What are the two Latin terms we covered in lecture and
what do they mean?

Ceteris Paribus = All things constant

Post Hoc Ergo Propter Hoc = Follows, therefore, because of
12.
What is the difference between positive and
normative?

Positive Statements = Describes the world as it is. Fact, can be proven.

Normative Statements = How the world should be. Opinion based
(Could/should).
13.
What is the difference between microeconomics and
macroeconomics?

Microeconomics = Households + Firms

Macroeconomics = Economy-wide phenomena (Inflation,
Unemployment)
14.

Can you explain the concept of transaction costs?

15.
Can you explain economic thinking regarding
middlemen?
Middlemen are actually cost saving because they provide a closer
shipping location (Home Depot, Lowes) than the actual
manufacturer

16.
Can you explain the basic concept of the Circular Flow
Diagram?

The circular flow diagram shows how households and firms interact in
the economy (Buying and selling).
17.

Can you fully explain the concept of the PPF?

The PPF, or PPC, is a graph containing 2 goods that shows the

combination of possible outcomes between the change in supply and
demand curves.
Point on the curve = Efficient (Getting all we can from available
resources)
Point under the curve = Inefficient
Point above/apart from the curve = Impossible at the current time
18.
Can you explain the concept of comparative
advantage?

The ability to produce goods/services at a low Opportunity cost.

19.

What does a change in price lead to?

A change in quantity demanded.

20.
What is the difference between QD and Demand? QS and
Supply?

QD = Quantity demanded, points on/off the curve (Total quantity of

goods demanded)
Demand = the curve
QS = Quantity supplied, points on/off the curve (Total quantity of goods
available)
Supply = the curve

21.
What do the acronyms InPoRTEN and InPrTEN mean
and when do we use them?

InPoRTEN = Income, Price of related goods, Tastes, Expectations,

Number of buyers.
InPrTEN = Input Prices, Technology, Expectations, Numbers of sellers
We use these when looking at what sparks a change in demand
(InPoRTEN) and Supply (InPrTEN)
22.
What is the difference between a normal good and an
inferior good?

Normal Good = Something we want more of if our income increases

(Steak and potatoes)
Inferior good = Something we want less of if our income increases
(Ramen)
23.
What is the difference between a substitute and a
compliment?

Substitute = Gatorade and Powerade

Compliments = Hot dogs and hot dog buns
24.
What does equilibrium refer to? What is another term
for this?

Equilibrium is where the supply and demand curve meet. SUPPLY CAN
NEVER EQUAL DEMAND (Flat bell curves).
25.
How would you define surplus and shortage? Can
you create a graph that shows them?

Surplus = An excess in supply due to low demand

Shortage = Not enough supply due to high demand

26.

Can you explain the concept of elasticity?

Elasticity refers to a persons responsiveness. If I am willing to pay a high

amount for gas because I am almost on empty then I will be more
elastic/willing to pay. If they raise the price and I have a full tank, I will be
less elastic because I am less responsive to buy.
27.
What are some determinants of the price elasticity of
demand?

28.
What does a perfectly elastic demand curve look like? A
perfectly inelastic demand curve?

Perfectly elastic = like the bottom half of a c

Perfectly inelastic = Vertical line (Perfect 90 degree angle)
29.

Can you explain the concept of externalities?

30.
Can you explain the results of price ceilings and price
floors? Give examples?

Price Celling = causes a shortage. For example, rent control forces

landlords to charge residents at a low price, which then raises demand
and lowers the supply (Amount of rooms avalaible).
Price Floor = causes a surplus. Setting a minimum amount of cost that
sellers have to follow causes a lower demand and higher supply.

31.
Can you depict price ceilings and price floors
graphically?

32.

Who typically benefits from price controls?

33.

Can you explain the concept of economic efficiency?

Getting all we can from available resources.

34.
Can you explain the difference between perfectly
competitive markets and monopoly markets?

Perfectly competitive markets = buyers can buy all they want. Sellers
can sell all they want.
Monopoly = 1 seller who sets the price

35.
What is the difference between a price taker and a
price maker?

Price takers = accept the price as it is and have no power to change it.
Price makers = can make/change the price.
36.

Can you explain the concept of market failure?

Market failure = when the market fails to efficiently allocate its

resources.
2 types of market failure causes:

1) Externality = an unintended consequence (Pollution)

2) Market power = one person or place having a significant impact over
market price (1 airport in a small town has a lot of market power
because there are no other airports to choose from)