ECON 2101 EXAM (99
QUESTIONS AND
ANSWERS)
Scarcity
A situation in which unlimited wants exceed the limited resources available
to fulfill those wants
Economics
the study of the choices people make to attain their goals, given their scarce
resources.
economic models
simplified versions of reality used to analyze real-world economic situations
typical economic questions
-How are the prices of goods and services determined?
-Why have health care costs risen so rapidly?
-Why do firms engage in international trade, and how do government policies
affect international trade?
-Why does government control the prices of some goods and services, and
what are the effects of those controls?
market
A group of buyers and sellers of a good or service and the institution or
arrangement by which they come together to trade.
in analyzing markets, we generally assume
1. People are rational
2. People respond to economic incentives
3. Optimal decisions are made at the margin
People are rational
Economists generally assume that people are rational, using all available
information to achieve their goals.
,Rational consumers and firms weigh the benefits and costs of each action
and try to make the best decision possible.
Example: Apple doesn't randomly choose the price of its iPhones; it chooses
the price(s) that it thinks will be most profitable.
people respond to economic incentives
As incentives change, so do the actions that people will take.
Example: Changes in several factors have resulted in increased obesity in
Americans over the last couple of decades, including:
•Decreases in the price of fast food relative to healthful food
•Improved non-active entertainment options
•Increased availability of health care and insurance, protecting people
against the consequences of their actions
optimal decisions are made at the margin
While some decisions are all-or-nothing, most decisions involve doing a little
more or a little less of something.
Example: Should you watch an extra hour of TV or study instead?
Economists think about decisions like this in terms of the marginal cost and
benefit (MC and MB): the additional cost or benefit associated with a small
amount extra of some action.
marginal analysis
comparing marginal cost (MC) and marginal benefit (MB)
undertaking an activity until its marginal benefits equal marginal costs
marginal cost
the cost of producing one more unit of a good
marginal benefit
the additional or extra benefit associated with producing a small amount
extra
trade-off
The idea that, because of scarcity, producing more of one good or service
means producing less of another good or service.
opportunity cost
, The highest-valued alternative given up in order to engage in some activity
centrally planned economy
An economy in which the government decides how economic resources will
be allocated.
market economy
An economy in which the decisions of households and firms interacting in
markets allocate economic resources.
mixed economy
An economy in which most economic decisions result from the interaction of
buyers and sellers in markets but in which the government plays a significant
role in the allocation of resources.
market economies promote
•Productive efficiency, a situation in which a good or service is produced
at the lowest possible cost; and
•Allocative efficiency, a state of the economy in which production is in
accordance with consumer preferences; in particular, every good or service
is produced up to the point where the last unit provides a marginal benefit to
society equal to the marginal cost of producing it.
voluntary exchange
A situation that occurs in markets when both the buyer and the seller of a
product are made better off by the transaction.
equity
The fair distribution of economic benefits.
**An important trade-off for a government is that between efficiency and
equity.
building an economic model
1.Decide on the assumptions to use.
2.Formulate a testable hypothesis.
3.Use economic data to test the hypothesis.
4.Revise the model if it fails to explain the economic data well.
5.Retain the revised model to help answer similar economic questions in the
future.
important features of economic models
QUESTIONS AND
ANSWERS)
Scarcity
A situation in which unlimited wants exceed the limited resources available
to fulfill those wants
Economics
the study of the choices people make to attain their goals, given their scarce
resources.
economic models
simplified versions of reality used to analyze real-world economic situations
typical economic questions
-How are the prices of goods and services determined?
-Why have health care costs risen so rapidly?
-Why do firms engage in international trade, and how do government policies
affect international trade?
-Why does government control the prices of some goods and services, and
what are the effects of those controls?
market
A group of buyers and sellers of a good or service and the institution or
arrangement by which they come together to trade.
in analyzing markets, we generally assume
1. People are rational
2. People respond to economic incentives
3. Optimal decisions are made at the margin
People are rational
Economists generally assume that people are rational, using all available
information to achieve their goals.
,Rational consumers and firms weigh the benefits and costs of each action
and try to make the best decision possible.
Example: Apple doesn't randomly choose the price of its iPhones; it chooses
the price(s) that it thinks will be most profitable.
people respond to economic incentives
As incentives change, so do the actions that people will take.
Example: Changes in several factors have resulted in increased obesity in
Americans over the last couple of decades, including:
•Decreases in the price of fast food relative to healthful food
•Improved non-active entertainment options
•Increased availability of health care and insurance, protecting people
against the consequences of their actions
optimal decisions are made at the margin
While some decisions are all-or-nothing, most decisions involve doing a little
more or a little less of something.
Example: Should you watch an extra hour of TV or study instead?
Economists think about decisions like this in terms of the marginal cost and
benefit (MC and MB): the additional cost or benefit associated with a small
amount extra of some action.
marginal analysis
comparing marginal cost (MC) and marginal benefit (MB)
undertaking an activity until its marginal benefits equal marginal costs
marginal cost
the cost of producing one more unit of a good
marginal benefit
the additional or extra benefit associated with producing a small amount
extra
trade-off
The idea that, because of scarcity, producing more of one good or service
means producing less of another good or service.
opportunity cost
, The highest-valued alternative given up in order to engage in some activity
centrally planned economy
An economy in which the government decides how economic resources will
be allocated.
market economy
An economy in which the decisions of households and firms interacting in
markets allocate economic resources.
mixed economy
An economy in which most economic decisions result from the interaction of
buyers and sellers in markets but in which the government plays a significant
role in the allocation of resources.
market economies promote
•Productive efficiency, a situation in which a good or service is produced
at the lowest possible cost; and
•Allocative efficiency, a state of the economy in which production is in
accordance with consumer preferences; in particular, every good or service
is produced up to the point where the last unit provides a marginal benefit to
society equal to the marginal cost of producing it.
voluntary exchange
A situation that occurs in markets when both the buyer and the seller of a
product are made better off by the transaction.
equity
The fair distribution of economic benefits.
**An important trade-off for a government is that between efficiency and
equity.
building an economic model
1.Decide on the assumptions to use.
2.Formulate a testable hypothesis.
3.Use economic data to test the hypothesis.
4.Revise the model if it fails to explain the economic data well.
5.Retain the revised model to help answer similar economic questions in the
future.
important features of economic models
