Economics 101-04 8/28/13 1:39 PM

Welcome to Economcis 101, Principles of Macroeconomics! 

This is a course in the principles of macroeconomics. Its objective is to

understand the way the economy as a whole works. We look at the forces

that determine overall production, at the business cycle (alternating periods

of prosperity and recession), and at economic policies meant to stabilize the

economy, combat unemployment and inflation and promote economic

growth. Before turning to all that, however, we first discuss the general

outlook and methodology of economics, the forces of supply and demand,

and the way prices are formed and markets work – topics central to virtually

all economic thought.  

Textbook. The textbook for this course is Macroeconomics, by McConnell,

Brue and Flynn, 19th edition. This is the macroeconomics half of Economics,

by the same authors. (Be careful not to buy the microeconomics

half instead.) You should buy the textbook in the bookstore, which comes

with access to Connect, the online program through which you will do and

submit homework assignments. Alternatively, you can save money by buying

the text as an ebook. In this case, you will need to separately purchase the

Connect access code. Getting the text as an ebook has the advantage of

digital navigation, search, etc. It has the disadvantage of your not being able

to hold a real book in your hands and leaf through it easily. That’s my

preference but it may not be yours. You may also find the textbook on the

web in less expensive new or used copies, and buy access to Connect

separately.

You can find the course syllabus at this site under "Course Materials."   

TO REGISTER AT CONNECT: Go to

http://connect.mcgraw-hill.com/class/riskin-fall13. Click on the

“register now” button. To register, you will have to furnish the code number

that came with your textbook, or else purchase one. The registration page

has two videos – “HOW TO REGISTER WITH AN ACCESS CODE” and “HOW TO

PURCHASE ACCESS ONLINE” – that clearly explain each procedure. If you

purchase access online, you can choose between purchasing access to only

the site (“Connect”) or purchasing access to the site AND to the online

textbook (“Connect Plus”).

 

Once you register, I will see your name on the class roster, and you will have

access to the class website. The URL,

http://connect.mcgraw-hill.com/class/riskin-fall13, is a unique one for

our section of Economics 101. Be sure to type it in correctly to access the

site, which is where homework assignments will be posted and the online

book accessed. 

 Whichever you choose, do it quickly. Assignments begin soon and you need

to be registered at Connect to do them.    

There will be regular homework assignments, a midterm and a final

examination. The homework will account for about 10% of the course grade,

the midterm 40% and the final, 50%.  The final is cumulative, including some

questions from the first half of the semester, but most questions will deal

with material from the second half.

 Readings are mainly from the textbook, but this will be supplemented from

time to time by readings about current events that are relevant to what we

are learning. They will be posted at the class page at Blackboard. The

following outline gives the order in which we will take up the topics and the

textbook readings for each topic. It does not indicate the length of time for

each topic. This varies from topic to topic, and from semester to semester.

You should keep up with where we are in the syllabus; if you can’t figure it

out, ask!    

Connect does not have email capability, so I will communicate with the class

through emails from this class page at Blackboard, where you are

automatically be registered. PLEASE BE SURE THE RIGHT EMAIL ADDRESS IS

LISTED FOR YOU ON BLACKBOARD. If not, change it to one that you look at

frequently. Otherwise you might miss important announcements (new

homework posted, etc.) about the course. 

8/28/13 1:39 PM

Economics defined

Economic wants to exceed productive capacity

A social science concerned with making optimal under conditions of

scarcity

Key features

Scarcity and choice

Purposeful (rational) behavior

Marginal analysis

Scarcity and choice

Resources (factors of production) are scarce

Therefore, choices must be made

Opportunity cost

o There’s no free lunch when resources are fully employed.

Purposeful behavior

Rational self-interest

Individuals seek utility (satisfaction)

Firms seek profit

Theories, principles and models

The scientific method

o Observeformulate a hypothesistest the

hypothesisaccept, reject, or modify the

hypothesiscontinue to test the hypothesis if necessary

Economic principles

o Generalizations

o Other-things-equal assumption

Ceteris paribus

Microeconomics

Decision making by individual units

Macroeconomics

Aggregate

Positive economics

Deals with economic facts

Normative economics

A subjective economic perspective on the economy

What ought to be.

Individuals Economizing problem

An individual has $120 gift card from Barnes and Nobles

$120 budget

o 12

o 10

o 8

o 6 A

o 4

o 2

o 0 Bo 2 4 6 8 10 12

DVD’s ($20)

Books ($10)

6 05 24 43 62 81 100 12

A=(Income=$120)/(PDVD=$20)

B= (Income=$120)/(PBooks=$10)

Pitfalls to sound economic reasoning

Biases

o normative masquerading as positive

Loaded terminology

o “tax,” “spend,” and liberals, government healthcare, etc.

Fallacy of composition

o relevant to counter cyclical policy

Fallacy of “Post hoc ergo propter hoc” fallacy

o Rooster crows before sunrise, therefor the crowing causes the

sun to rise

Related: correlation not necessary causation

o Classic case: smoking and cancer

o E.g. education and income?

Society’s Economizing Problem

Scarce resources ; “factors of production”

o Land (natural resources), Labor, Capital, Entrepreneurial

Ability

Entrepreneurial Ability: Take initiative, Makes decisions,

Innovates, takes risk

Production Possibilities Model

Illustrates production choices

Assumptions

o Full employment

o Fixed resources

o Fixed technology

o Two goods

The law of Increasing opportunity costs makes the PPC concave.

International Trade

Specialization in the division of labor

Increased production possibilities

Market System and Circular Flow 8/28/13 1:39 PM

Economic Systems

Set of institutional arrangements

Coordinate mechanism

Differences in systems exist by

o Who owns the factors of production

o What method is used to motivate coordinate, and direct

economic activity.

Traditional societies

Economic tradition, or by class power

The command system

Government ownership

Decisions made by social planning board

o Communism

The Market System

Known as capitalism- BUT there are big differences between

national versions of capitalism

o Austria, Hong Kong, U.S., U.K.,

Role of markets are greater, role of Government is

smaller

(more stuff)

Characteristics of the market system

Private property

Freedom of enterprise and choice

Self-Interest

Competition

Markets and prices

May breed economic inequality

Disagreement about proper role of government

Technology and Capital Goods

Advanced technology and captital good are encouraged

(more)

Active but limited government

Government is needed to alleviate market failures

Government can increase effectiveness of a market system

Markets do not exist in a vacuum

o They need institutional environment

Five fundamental questions

What goods and services will be produced?

o Goods and services that create a profit

“Dollar Votes”

Consumers determine which goods will be

produced, which industries survive or fail

“consumer sovereignty”

Note that dollar votes are unequally distributed

over the population

How will the goods and services be produced?

o Producers seek to maximize profits

To do so, they try to minimize costs per unit by using

the most efficient techniques

Their constraints are:

Existing technology

Prices of necessary technology

And the must choose the output level that maximizes

profit (or minimizes loss)

Who will get the goods and services (output)?

o Consumers with the willingness and ability to pay will get the

product

o Ability to pay depends on income.

o What does income depend on

The market value of the resources possessed by

individuals

But what does income depend on?

Hard work, education, creativity, but also

inherited wealth, “connections,” monopoly

power, luck

No assurance of a fair distribution of income

U.S. now has upward mobility than many

European economies

How will the system accommodate change?

o Changes in consumer taste

o Changes in technology

o Change in resource prices

o How a market system adapts to these changes

How will the system promote progress

o Capital accumulation

o Improved “human capital”- i.e. Skills, education, training

o Technological advance

Creative destruction

When newer technology comes out (computers)

old technology is destroyed economically (type-

writer)

Invisible hand

1776 Wealth of Nations by Adam Smith

o Unity of private and social interest

Virtues of the market system

o Efficiency

o Incentives

o Freedom, (but legal, not economic)

But some pretty strong assumptions necessary for these results.

Some problem with the market system (see chapter 5.)

Markets do not exist for some goods and services- Pollution

Markets may work poorly (health care, “public goods”)

Monopoly, oligopoly instead of competition

Inequality and poverty: markets can coexist with any income

distribution

Businesses

Three main categories of businesses

o Sole proprietorship

o Partnership

o Corporation

Demand Supply and Market Equilibrium 8/28/13 1:39 PM

Markets

Interactions between buyers and sellers

Markets may be:

o Local

o National

o International

Price is discovered in the interactions of buyers and sellers

Demand

Schedule or curve

Amounts consumers are willing and able to purchase all prices

(book is wrong)

Other things equal

Individual demand

Market demand

Law of demand

Other things equal, as price falls, the quantity demand rises, and as

price rises, the quantity demanded falls

Reasons

o Law of diminishing marginal utility

The more you have of something, the less important

one more unit is to you

o Income effect

If income goes down, you could buy less. If the price

living goes down, you can buy more stuff

o Substitution effect

When the price of something changes (train goes up),

substitutes (cars) become relatively cheaper

Determinants of demand

Change in consumer tastes and preferences

Change in number of buyers

Change in income

o Normal goods

o Inferior goods

Supply

Schedule or curve

Amount producers are able and willing to sell at various prices

Individual supply

Market supply

Law of supply

Other things equal, as the price rises, the quantity supplied rises

and as the price falls, the quantity supplied falls.

Reason

o Short run vs Long run

o In short runs, at some point marginal costs will rise

Demands of supply

Anything that affects cost

o A change in resource prices

o A change in technology

o A change in taxes and subsidies

A change in the number of sellers

A change in prices of other goods

A change in producer expectations

Market equilibrium

Equilibrium occurs where the demand curve and the supply surve

intersect

Surplus and shortage

Rationing and function of prices

Efficient allocation

o Productive efficiency

o Allocate efficiency

Edsel, New Coke

Government set prices

Price ceilings

o Set below equilibrium price

o Rationing problem

o Black markets

Example: Rent control

Price floor

o Prices are set above the market price

o Chronic surplus

Example: Minimum wage laws

Market Failures: Market goods and externalities

Market failures

Market fails to produce the right amount of the product.

Resources may be

o Over-allocated

o Under-allocated

Demand side failure

Impossible to charge consumers what they are willing to pay for the

product

Some can enjoy benefits without paying

Supply side failure

Occurs when a firm does not pay the full cost of producing its

output

External costs of producing the good are not reflected in supply

(missed)

Consumer surplus

Difference between what a consumer is willing to pay for a good

and what the consumer actually pays

Extra benefit from paying less than the maximum price

Private goods

Produced in the market by firms

Offered for sale

Characteristics

o Rivalry

o Excludability

Public goods

Provided by the government

o Offered for free

Characteristics

o No rivalry

o No excludability

o Free-rider problem

o Since the mc of one more unit is 0, the price should also be 0

Cost

Resourced diverted from private good production

Private goods that will not be produced

Benefit

The extra satisfaction from the output of more public goods

Quasi-Public goods

Could be provided through the market system

Because of positive externalities the government provides them

Examples: Education, Streets, Libraries

Externalities

A cost or benefit accruing to a third party external to the transaction

Positive externalities

o Honey bee and flowers

o Too little is produced

o Demand-side market failure

Negative externalities: pollution

o Too much is produced

o Supply side market failures

Midterm Review 8/28/13 1:39 PM

54. Microeconomics:

A)  is the basis for the "after this, there fore because of this" fallacy.

B)  is not concerned with details, but only with the overall big

picture of the economy.

C)  is concerned with individual economic units and specific

markets.

D)  describes the aggregate flows of output and income.

o Answer: C

52. Macroeconomics can best be described as the:

A)  analysis of how a consumer tries to spend income.

B)  study of the large aggregates of the economy or the economy as

a whole.

C)  analysis of how firms attempt to maximize their profits.

D)  study of how supply and demand determine prices in individual

markets.

o Answer: B

9. Economics may best be defined as the:

A)  interaction between macro and micro considerations.

B)  social science concerned with the efficient use of scarce

resources to achieve maximum satisfaction of economic wants.

C)  empirical testing of value judgments through the use of logic.

D)  use of policy to refute facts and hypotheses.

o Answer: B

57. Refer to the above tables. Opportunity costs are:

A)  constant in both Duckistan and Herbania.

B)  larger in Duckistan than in Herbania.

C)  increasing in both Duckistan and Herbania.

D)  increasing in Duckistan and constant in Herbania.

o Answer: C

85. If an economy is operating inside its production possibilities curve for

consumer goods and capital goods, it:

A)  can only produce more consumer goods by producing fewer

capital goods.

B)  can only produce more capital goods by producing fewer

consumer goods.

C)  can produce more of both consumer goods and capital goods by

using its resources more efficiently.

D)  must improve its technology to produce more out put.

o Answer: C

128. Refer to the above diagram. An improvement in technology will:

A)  shift the production possibilities curve from PP1 to PP2.

B)  shift the production possibilities curve from PP2 to PP1.

C)  move the economy from A to C along PP1.

D)  movetheeconomyfromA,B,orConPP1toD.

o Answer: A

166. (Consider This) A direct cost of going to college is:

A)  tuition, while an indirect cost (opportunity cost) is books and

other supplies.

B)  forgone income while in college, while an indirect cost

(opportunity cost) is tuition.

C)  tuition, while an indirect cost (opportunity cost) is forgone

income while in college.

D)  books and supplies, while an indirect cost (opportunity cost) is

food and housing.

o Answer: C

3. When economists say that people act rationally in their self interest, they

mean that individuals:

A)  look for and pursue opportunities to increase their utility.

B)  generally disregard the interests of others.

C)  are mainly creatures of habit.

D)  are unpredictable.

o Answer: A

36. The term "ceteris paribus" means:

A)  that if event A precedes event B, A has caused B.

B)  that economics deals with facts, not values.

C)  other things equal.

D)  prosperity inevitably follows recession.

o Answer: C

71. The fallacy of composition states that:

A)  generalizations relevant to microeconomics never apply to

macroeconomics.

B)  expectations give rise to self-fulfilling prophesies.

C)  generalizations pertaining to individuals always apply to the

group.

D)  quantifiable economic goals are always incompatible with one

another.

o Answer: C

75. Which of the following best illustrates the post hoc, ergo propter hoc

fallacy?

A)  Because it was 90 degrees today, I worked up a sweat playing

tennis.

B)  I took the day off work to go to the beach and that's why it

rained.

C)  Because it rained at the football game, my new sweater got wet.

D)  Because I have studied diligently this semester, my grade

average has improved.

o Answer: B

157. Refer to the above diagram. Flow (3) represents:

A)  wage, rent, interest, and profit income.

B)  land, labor, capital, and entrepreneurial ability.

C) goods and services.

D) consumer expenditures.

o Answer: C

156. Refer to the above diagram. Flow (2) represents:

A)  wage, rent, interest, and profit income.

B)  land, labor, capital, and entrepreneurial ability.

C) goods and services.

D) consumer expenditures.

o Answer: B

25. Which of the following is one of the Five Fundamental Questions?

A)  Which products will be in scarce supply and which in excess

supply?

B)  Who should appoint the head of the central bank?

C)  How much should the society save?

D)  What goods and services will be produced?

o Answer: D

32. From society's point of view the economic function of profits and losses is

to:

A)  promote the equal distribution of real assets and wealth.

B)  achieve full employment and price level stability.

C)  contribute to a more equal distribution of income.

D)  reallocate resources from less desired to more desired uses.

o Answer: D

34. Economic profits in an industry suggests the industry:

A)  can earn more profits by increasing product price.

B)  should be larger to better satisfy consumer demand.

C)  has excess production capacity.

D)  is the size that consumers want it to be.

o Answer: B

56. A decrease in demand is depicted by a:

A)  move from point x to point y.

B)  shift from D1 to D2.

C) shift from D2 to D1.

D) move from point y to point x

o Answer: C

57. A decrease in quantity demanded (as distinct from a decrease in

demand) is depicted by a:

A)  move from point x to point y.

B)  shift from D1 to D2.

C) shift from D2 to D1.

D) move from point y to point x.

o Answer: D

12. The income and substitution effects account for:

A)  the upward sloping supply curve.

B)  the downward sloping demand curve.

C) movements along a given supply curve.

D) the "other things equal" assumption.

o Answer: B

23. In 2003 the price of oil increased, which in turn caused the price of

natural gas to rise. This can best be explained by saying that oil and natural

gas are:

A)  complementary goods and the higher price for oil increased the

demand for natural gas.

B)  substitute goods and the higher price for oil increased the

demand for natural gas.

C)  complementary goods and the higher price for oil decreased the

supply of natural gas.

D)  substitute goods and the higher price for oil decreased the

supply of natural gas.

o Answer: B

70. A decrease in supply is depicted by a:

A)  move from point x to point y.

B)  shift from S1 to S2.

C) shift from S2 to S1.

D) move from point y to point x.

o Answer: C

A firm's supply curve is upsloping because:

A)  the expansion of production necessitates the use of qualitatively

inferior inputs.

B)  mass production economies are associated with larger levels of

output.

C)  consumers envision a positive relationship between price and

quality.

D)  beyond some point the production costs of additional units of

output will rise.

o Answer: D

An improvement in production technology will:

A)  increase equilibrium price.

B)  shift the supply curve to the left.

C) shift the supply curve to the right

D) shift the demand curve to the left.

o Answer: C

Answer: B

114. The rationing function of prices refers to the:

A)  tendency of supply and demand to shift in opposite directions.

B)  fact that ration coupons are needed to alleviate wartime

shortages of goods.

C)  capacity of a competitive market to equate the quantity

demanded and the quantity supplied.

D)  ability of the market system to generate an equitable

distribution of income.

o Answer: C

--29. A negative externality or spillover cost occurs when:

A)  firms fail to achieve allocative efficiency.

B)  firms fail to achieve productive efficiency.

C)  price exceeds marginal cost.

D)  the total cost of producing a good exceeds the costs borne by

the producer.

o Answer: D

28. A positive externality or spillover benefit occurs when:

A)  product differentiation increases the variety of products

available to consumers.

B)  the benefits associated with a product exceed those accruing to

people who consume it.

C)  a firm produces at the P = MC output.

D)  economic profits are zero in the long run.

o Answer: B

32. Refer to the above diagrams for two separate product markets. Assume

that society's optimal level of output

in each market is Q0 and that government purposely shifts the market

supply curve from S to S1 in diagram (a) and from S to S2 in diagram (b). We

can conclude that the government is correcting for:

A)  spillover costs in diagram (a) and spillover benefits in diagram

(b).

B)  spillover benefits in diagram (a) and spillover costs in diagram

(a).

C)  spillover costs in both diagrams.

D)  spillover benefits in both diagrams.

o Answer: A

1. The two main characteristics of a public good are:

A)  production at constant marginal cost and rising demand.

B)  non-excludability and production at rising marginal cost.

C)  nonrivalry and non-excludability.

D)  non rivalry and large spillover costs.

o Answer: C

93. Which of the following is an example of a public good?

A) a fireworks display.

B) a hotdog

C) a barbeque grill

D) a personal computer

o Answer: A

Which of the following would an economist not consider to be an investment

A stockbroker buying 10,000 shares of Starbuck’s stock

If depreciation exceeds gross investment:

A)  the economy's stock of capital may be either growing or

shrinking.

B)  the economy's stock of capital is shrinking.

C)  the economy's stock of capital is growing.

D)  net investment is zero.

o Answer: B

55. If in some year gross investment was $120 billion and net investment

was $65 billion, then in that year the country's capital stock:

A)  may have either increased or decreased.

B)  increased by $65 billion.

C) increased by $55 billion.

D) decreased by $55 billion.

o Answer: B

16. GDP can be calculated by summing:

A)  consumption, investment, government purchases, exports, and

imports.

B)  investment, government purchases, consumption, and net

exports.

C)  consumption, investment, wages, and rents.

D)  consumption, investment, government purchases, and imports.

o Answer: B

27. Suppose that inventories were $40 billion in 2003 and $50 billion in 2004.

In 2004, accountants would:

A)

add$10billiontootherelementsofinvestmentincalculatingtotalinvestm

ent.

B)  subtract $10 billion from other elements of investments in

calculating total investment.

C)  add $45 billion (= $90/2) to other elements of investment in

calculating total investment.

D)  subtract $45 billion(=$90/2) from other elements of investment

in calculating total investment.

o Answer: A

Refer to the above data. The gross domestic product is:

A) $326.

B) $282.

C) $307.

D) $300.

o Answer: C

Refer to the above data. The net domestic product is:

A) $233.

B) $255.

C) $230.

D) $348.

o Answer: B

86. Refer to the above data. Consumption of fixed capital (private sector) is:

A) $23.

B) $14.

C) $32.

D) $26.

o Answer: A

87. Refer to the above data. U.S. imports are:

A) $26.

B) $16.

C) $24.

D) $14.

o Answer: D

Environmental pollution is accounted for in:

A) GDP.

B) PI.

C) DI.

D) none of the above.

o Answer: D

157. The GDP tends to:

A)  overstate economic welfare because it does not include certain

nonmarket activities such as the productive work of housewives.

B)  understate economic welfare because it includes expenditures

undertaken to offset or correct pollution.

C)  understate economic welfare because it does not take into

account increases in leisure.

D)  overstate economic welfare because it does not reflect

improvements in product quality.

o Answer: C

115. Refer to the above data. Real GDP in year 3 is:

A) $100.

B) $450.

C) $225.

D) $150.

o Answer: D