MODULE 1: INTRODUCTION TO MANAGERIAL ECONOMICS

What is Economics?

● Economics exist because of SCARCITY

○ SCARCITY - Wants exceeds the ability of resources to satisfy them
Unlimited wants; limited resources/supply
● Economics is a social science that studies the choices that the entire society makes as
they cope up with scarcity

Field of Economics

● Microeconomics - deals with the economic behavior of individual units and specific
segments of society
- choices that individuals and businesses make and the way these
choices interact and are influenced by governments

● Macroeconomics - study of aggregate effects on the economy (national & global) of the
choices of the individuals, businesses, and government make.
- general/broad

Questions in Economics

● WHAT goods and services get produced?

● HOW goods and services are produced?
● FOR WHOM goods and services are produced?

Economics also studies when choices are made in a person's self-interest serve the social
interest.

What is Managerial Economics?

● stream of management studies which emphasizes solving business problems and

decision-making by applying the theories and principles of microeconomics and
macroeconomics. It is a specialized stream dealing with the organization’s internal
issues by using various economic theories.

● Baye: study of how to direct scarce resources in the way that most efficiently
achieves a managerial goal. In line with this, a manager is seen as a person who
directs resources to achieve a stated goal
○ Efficient - Getting the most from the inputs (or getting a lot for the efforts).
 ○ Effective - Getting the expected results from the outputs (or doing the right
things)

● Salvatore (2004) : described as the application of economic theory and the tools of
analysis of decision science to examine how an organization can achieve its aims or
objectives most efficiently.
○ Illustration
 ● defined as the utilization of managerial skills in the business by applying economic
theories and concepts to maintain efficiency in costing and production and its
effectiveness on every decision making by the firms to fully maximize their profits.

Managerial Economics and Mathematical Economics

● Utilization of mathematical economics to managerial economics is essential as it is used

to formalize (express in equation form) the economic models postulated by
economic theory to firmly identify the proper solution to a managerial problem. In
relation to this, econometrics is also used in managerial economics as a statistical
tool (particularly regression analysis) to estimate real-world data and analyze the
models postulated by economic theory; which is also used in forecasting.

Basic Principles of Effective Management

1. Identify goals and constraints.

● Constraints - availability of technology and prices of input used in production
- Constraints are an artifact of scarcity.
2. Recognize the nature and importance of profits.
3. Understand incentives.
4. Understand markets
5. Recognize the time value of money.

Six ideas that define the Economic Way of Thinking

● A choice is a trade-off
○ Give up one thing to get another

● People make rational choices by comparing benefits and costs

○ Uses available resources to most effectively meet the objective of the person
making the choice.
○ Compare the marginal benefits and marginal cost and undertake if the benefit
exceeds or equals the marginal cost.

● Benefit is what you gain from something

○ Measured by what someone is willing to give up to get something
 ● Cost is what you must give up to get something
○ Opportunity cost - best thing that must be given up; benefits forgone

● Most choices are "how much" choice made at the margin

○ Comparing all the relevant alternatives systematically to determine the best
choice.
○ Marginal cost - opportunity cost of one-unit increase in an activity
○ Marginal benefit - gain from one-unit increase in an activity

● Choices responds to incentives

○ Decisions making highly depends upon the incentives
○ associated with a product, service or activity. Negative incentives discourage
people, whereas positive incentives motivate them.

Statements about "what is" are positive statements; statements about "what ought to be"
are normative statements. Economists are interested in positive statements about cause
and effect so they develop economic models.

TRY THIS!

https://quizlet.com/111630048/chapter-1-true-and-false-flash-cards/

ADDITIONAL INFORMATION

https://quizlet.com/522510366/module-1-introduction-to-managerial-economics-flash-cards/

MODULE 2: THE ROLE OF PROFITS (ACCOUNTING VS. ECONOMIC PROFIT)

 ● To earn and maximize profit - primary objective
● To increase its own value as an economic activity - ability to exist in the market
● To improve the quality of life in the community - business creates job that lowers
unemployment rate

Earning Profit

● Profit is defined as the difference that arises when a firm’s total revenue is greater than
its total cost. It is the difference between the income an entrepreneur receives from the
sale of his goods and services and the expenses he incurs to produce them: (income –
expense). Profit is the prime motivator in a capital system.

Accounting Profit and Economic Profit

● Accounting Profit
○ total amount of money taken in from sales (total revenue) minus the cost of
producing goods or services. Shown on the firm’s income statement and are
typically reported to the manager by the firm’s accounting department.

● Economic Profit
○ difference between the total revenue and the total opportunity cost of
producing the firm’s goods or services.
○ The opportunity cost of using a resource includes both the explicit( or
accounting) cost of the resource and the implicit cost of giving up the best
alternative use of the resource.
○ Higher than accounting costs

Implicit costs are very hard to measure and therefore managers often overlook them.
Effective managers, however, continually seek out data from other sources to identify and
quantify implicit costs.

ACCOUNTING PROFIT ECONOMIC PROFIT

1. determined by GAAP 1. determined by economic principles

2. includes explicit costs only 2.. includes explicit and implicit costs.

3. single entity – accounting period view 3. macro market/whole project timeline view

4. used for income tax and financial 4. used to determine market entry, stay or
 performance exit

What is opportunity cost?

Opportunity costs represent the potential benefits an individual, investor or business MISSES
OUT when choosing one alternative over another

For example, what does it cost you to read the book in Managerial Economics? The price you
paid the bookseller for that book is an explicit cost while the implicit cost (opportunity cost) is the
value of what you are giving up by reading that book. You could be studying other subjects or
watching TV and each of these alternatives has some value to you.

Key Points:
1. Whenever a choice is made, something is given up.
2. The opportunity cost of a choice is the value of the best alternative given up.
3. Choices involve trading off the expected value of one opportunity against the
expected value of its best alternative.

TRY THIS!

In 2012, Sid was a law professor and earned $80,000 per year. But he got tired of teaching law
students and decided to start his own law firm. He started his firm at the beginning of 2013.
Sid’s revenue from his law business in 2013 was $240,000. He cashed in a $70,000 savings
bond that was paying him 6% interest per year in order to start his business. He used the entire
$70,000 to buy machines, paper, etc. to start up his law business. Sid also hired Donna to work
for him part time and paid her a total of $30,000 during 2013. Sid’s other business expenses for
2013 were equal to $22,000. Sid also had to give up renting out a building he started using for
his business. He earned $13,800 per year renting out his building before he started his
business. At the end of 2013 Sid was trying to decide if he should stay in business or go back
to teaching law. His only concern at this point is money and he is only considering this one year
(he is not forecasting future earnings, etc.). Determine Sid’s: (NO WORK, NO POINTS)

Total Revenue for his Law Business ($)

1. Explicit costs ($)

2. Accounting Profit or Loss ($)
3. Implicit costs ($)
4. Economic profit or loss ($)
5. Would you recommend Sid continue in his business or go back to teaching? Explain
your answer.
—-----------------------------------
ANSWERS

1. Total Revenue for his Law Business ($) = $240,000 (given)

2. Explicit costs ($) = $70,000 + $30,000 + $22,000 = $122,000
3. Accounting Profit or Loss ($) = Profit of $118,000 ($240,000 - $122,000)
4. Implicit costs ($) = $80,000 + $4,200 ($70,000 x .06) + $13,800 = $98,000
5. Economic profit or loss ($) = $118,000 - $98,000 = $20,000 Economic Profit
6. Would you recommend Sid continue in his business or go back to teaching? Explain
your answer. Sid should stay in his law business. He is making $20,000 more in that
business than he would in his next best opportunity (being a law professor).

MODULE 3: FIVE FORCES FRAMEWORK AND MARGINAL ANALYSIS

Michael Porter’s Five Forces Framework that Impact the Sustainability of Industry Profits

Five forces framework - created by Harvard Business School professor Michael Porter
- analyze an industry's attractiveness and likely profitability.
- since its publication in 1979, it has become one of the most popular
and highly regarded business strategy tools.

Porter recognized that organizations likely keep a close watch on their rivals, but he
encouraged them to look beyond the actions of their competitors and examine what other
factors could impact the business environment.

He identified five forces that make up the competitive environment, and which can erode
your profitability.
1. Competitive Rivalry.
● Number and strength of your competitors
● How many rivals do you have?
● Who are they?
● How does the quality of their products and services compare with yours?

When rivalry is intense, companies can attract customers with aggressive price cuts and
high-impact marketing campaigns.
● Aggressive price cuts is a pricing decision (e.g. sale discount)

● Also, in markets with lots of rivals, your suppliers and buyers can go elsewhere if
they feel that they're not getting a good deal from you.
● On the other hand, where competitive rivalry is minimal, and no one else is doing
what you do, then you'll likely have tremendous strength and healthy profits.

Things to consider: Concentration, Price, Quantity, Quality or Service Competition, Degree

of Differentiation (uniqueness of product), Switching Cost, Timing of Decisions, Information,
Government Restraints.

2. Supplier Power.
● How easy is it for your suppliers to increase their prices?
● How many potential suppliers do you have?
● How unique is the product or service that they provide?
● How expensive would it be to switch from one supplier to another?

The more you have to choose from, the easier it will be to switch to a cheaper alternative.
But the fewer suppliers there are, and the more you need their help, the stronger their
position and their ability to charge you more. That can impact your profit.

Things to consider: Supplier Concentration, Price/Productivity of alternative inputs,

Supplier Switching Costs, Government Restraints

3. Buyer Power.
● How easy is it for buyers to drive your prices down?
● How many buyers are there?
● How big are their orders?
● How much would it cost them to switch from your products and services to those of a
rival?
● Are your buyers strong enough to dictate terms to you?
When you deal with only a few savvy customers, they have more power, but your power
increases if you have many customers.

Things to consider: Buyer concentration, Price/Value of Substitute Products, Customer

Switching Cost, Government Restraints

4. Threat of Substitution.
● Likelihood of your customers finding a different way of doing what you do

For example, if you supply a unique software product that automates an important process,
people may substitute it by doing the process manually or by outsourcing it. A substitution
that is easy and cheap to make can weaken your position and threaten your profitability.

Things to consider: Price./Value of Surrogate Products/Services, Price/Value of

Complementary Products/Services, Network Effects, Government Restraints
● Substitute - change to new item (e.g. Phone - Cherry mobile)
● Compliment - associate products/services (e.g. Phone - charger, earphones.

5. Threat of New Entry.

● People's ability to enter your market.
● How easily could this be done?
● How easy is it to get a foothold in your industry or market?
● How much would it cost?
● How tightly is your sector regulated?

If it takes little money and effort to enter your market and compete effectively, or if you have
little protection for your key technologies, then rivals can quickly enter your market and
weaken your position. If you have strong and durable barriers to entry, then you can
preserve a favorable position and take fair advantage of it.

Things to consider: Entry Cost, Speed of Adjustment, Sunk Cost, Economies of Scale,
Reputation, Government Restraints

Understanding the market

For every buyer of a good there is a corresponding seller. The final outcome of the market
process then depends on the relative power of buyers and sellers in the marketplace. The
power or bargaining position of consumers and producers in the market is limited by three
sources of rivalry such as:

1. Consumer – Producer Rivalry

This rivalry occurs because of the competing interests of consumers and producers.
Consumers attempt to negotiate or locate low prices while producers attempt to negotiate high
prices. (Bargaining Agreement)

2. Consumer-Consumer Rivalry
This rivalry reduces the negotiating power of consumers in the marketplace. It arises
because of the economic doctrine of scarcity. When limited quantities of goods are available,
consumers will compete with one another for the right to purchase the available goods.

3. Producer-Producer Rivalry
Unlike the other forms of rivalry, this disciplining device functions only when multiple sellers of
a product compete in the marketplace. Given that customers are scarce, producers
compete with one another for the right to service the customers available.

Marginal Analysis

● Marginal analysis - is one of the most important managerial tools – a tool we will use
repeatedly throughout our subject discussion.
- states that optimal managerial decisions involve comparing the
marginal (or incremental) benefits of a decision with the marginal
(or incremental) costs.

● Marginal Benefit refers to the additional benefits that arise by using an additional
unit of variable.
● Marginal cost is the additional cost incurred by using an additional unit of
managerial control variable

Marginal Principle

To maximize net benefits, the manager should increase the managerial control
variable up to the point where marginal benefits equal marginal costs. This level of
control variable corresponds to the level wherein marginal net benefits are ZERO;
nothing more can be gained by further changes in that variable.

Rule: The profit maximizing level of input/output is where marginal benefit is equal to
marginal cost or marginal net benefit is equal to zero. (MB = MC; MNB = 0)
Computation Guide

● Control Variable (Column 1)

○ This is given. It may pertain to the number of workers, machines, or other
variables. It can be in the increments of 1, 5, or 10 depending on the problem.

● Total Benefit (Column 2)

○ This is given. But can be computed by

MB = TB - Previous TB / Change in Control Variable

80 = TB - 90 / 2 - 1 = 170

● Total Cost (Column 3)

○ This is given. But can be computed by.

MC = TC - Previous TC / Change in Control Variable

20 = TC - 10 / 2 - 1 = 30

● Marginal Benefits (Column 4)

○ This will be computed by dividing the change in total benefits over the change
in control variable.

MB = (170-90) / (2-1); MB = 80

● Marginal Cost
○ This will be computed by dividing the change in total costs over the change in
control variable

MC = (30-10) / (2-1); MC = 20

● Marginal Net Benefit

○ This can be computed by simply deducting the total marginal cost from
marginal cost.

(MB – MC)
Conclusion: The highest profit amounts to 200. The profit is maximized by using 5 units
of control variable because at this point, marginal benefit is equal to marginal cost (50 =
50) and marginal net benefit is equal to zero.

As you can see, when you further add another control variable, the net benefit decreases
to 180, hence, we can simply conclude that increasing the level of control variables will not
always increase our profit.

There will come a point wherein employing for example, another worker or control variable
decreases your total profit. This may happen due to some factors like the inefficiency of
additional workers, the size of the business premises or offices, etc. This is also due to the
concept of Law of Diminishing Marginal Returns which will be discussed in our future
discussions under this subject.

TRY THIS!

You are the manager of a firm that specializes in selling exotic animals to zoos around the
world. Your goal is to determine the number of baby zebras (Z) that must be born on your firm's
farm each month in order to maximize profits. The total benefits (revenues) and costs to your
firm of producing various quantities of zebras are given in the first threecolumns of the following
table. Based on this scenario, complete the table and answer the accompanying questions:

1 2 3 4 5 6 7

Control Total Total Net Marginal Marginal Marginal

Variable Benefits Costs Benefits Benefits Costs Net
(Z) B(Z) C(Z) N(Z) MB(Z) MC(Z) Benefits
MNB(Z)

0 0 0 0 0 0 0

1 200 10 200 10

2 380 20

3 540 30
 4 680 40

5 800 50

6 900 60

7 980 70

8 1,040 80

9 1,080 90

10 1,100 100

A. What level of zebra births maximizes net benefits?

B. What is the relation between marginal benefit and marginal cost at this level of Z?
C. How much is the profit on your answer?

—--------

ANSWERS
Additional Information:
https://www.nccscougar.org/site/handlers/filedownload.ashx?moduleinstanceid=95&dataid=439
&FileName=netbenefits_versus_totalbenefits%20_compatibility%20mode_.pdf

MODULE 4: MAKING AND USING GRAPH

● Graphs represent quantities as distance.

● Vertical axis - Y axis; Horizontal axis - X axis
● Shows relationship between two variables
● Variables that move in the same direction have a positive or direct relationship
● Variables that move in the opposite direction have a negative, or inverse relationship
● Ceteris Paribus - Latin phrase that means "all other things being equal."
- It means that something will occur as a result of something else
most of the time, if nothing else changes.

Kind of graphs

● Scatter diagram
○ illustrates the relationship between two numerical variables through dots
○ Used to trace the cost
○ Dots are called outliner
● Time-series graph
○ shows how the value of a particular variable or variables has changed over
some period of time.
○ to see the peak of demand or sale
○ useful for making predictions about the future such as weather forecasting
or financial growth.

● Cross-section graph
○ show the values of a variable for different groups in a population at a point in
time
○ Demand in terms of grouping
○ Demographic profiles
○ A simple example of cross-sectional data is the gross annual income for each of
1000 randomly chosen households in New York City for the year 2000.
Additional Information:

https://open.lib.umn.edu/principleseconomics/back-matter/appendix-a-1-how-to-construct-and-in
terpret-graphs/

TRY ANSWERING MODULE 5: QUIZ

MODULE 6: MARKET FORCES: LAW OF DEMAND

● A fundamental building block in any economic analysis is the concept of demand. It

is one of the elements that make the market economies work.
● Demand - quantity of a good or service that consumers are willing and able to
purchase during a specified period of time
● All other things remaining constant (ceteris paribus assumption).

The buyer should not only be willing to purchase but also have the capacity to
buy the goods or services. Otherwise, it is not considered a demand.

● Demand is the behavior of potential buyers in the market. It is defined as the entire
relationship of price and quantity.

● Law of Demand - the relationship between quantity of a good that consumers are
willing to buy and the price of the good that shows opposite or inverse relationship
between price and quantity demanded. In other words, the higher the price, the lower
the demand and the lower the price, the higher the demand.

Individual Demand Curve

● The individual demand curve represents the quantity of a good that a consumer will
buy at a given price, holding all else constant.
 ● For example, consumer A might buy zero oranges at $1 each, one orange at 75
cents each, and two at 50 cents each, while consumer B might buy one at $1, two at
75 cents, and three at 50 cents. When charted on a grid with price on the vertical
axis and quantity purchased on the horizontal axis, these points form the individual
demand curves for consumers A and B.

Market Demand Curve

● The market demand curve is the sum of all the individual demand curves in the
market.
● If the entire market consisted of only the two consumers mentioned above, the total
demand for oranges at a price of $1 would be one orange, because A would buy none
and B would buy one. At a price of 50 cents, the market demand would be five oranges,
summing A's two oranges and B's three. For a single good, adding all the individual
demand curves of the millions of consumers in the market makes the total market
demand curve.

Why is Demand Downward Sloping?

1. Simple Reasoning
2. Diminishing Additional Satisfaction
3. Substitution Effect
4. Income Effect
 Change in Demand (Shift) of Demand Curve
VS.
Change in Quantity Demanded (Movement)

Change in Demand (Shift) of Demand Curve

● A change in demand refers to an increase or decrease in demand that is brought
about by a change in the other factors, except price.
● A change in demand is a result of non-price determinants coming into force.
● A change in demand entails a shift in the demand curve; either to the left or to the
right of the original demand curve.

Change in Quantity Demanded

● A change in quantity demanded refers to the variation in consumers’ demand of a
commodity due to a change in its price, other factors remaining constant. Thus, the
only factor that causes a change in quantity demanded is price.
● There is upward or downward movement along the same demand curve.

Demand Shifters

● Changes in total income.

○ If the incomes of the consumers increase, it is expected that the demand will
increase, even if price remains the same. On the contrary, if income falls,
demand will also fall. For example, when the income of consumers falls, the
 demand for cars (which is an example of normal goods) will also dip. However,
in the case of inferior goods, the demand will fall with an increase in income
because consumers will shift to a superior substitute.

● Inferior good - describes a good whose demand drops when people's

incomes rise. This occurs when a good has more costly substitutes
that see an increase in demand as incomes and the economy improve.
● Normal good - good that experiences an increase in its demand due to
a rise in consumers' income. In other words, if there's an increase in
wages, demand for normal goods increases while conversely, wage
declines or layoffs lead to a reduction in demand.

● Prices of related products.

○ There exist products in the market that may be substitutes or complements to
the product in question.
○ It is worthwhile to mention that if the price of a substitute changes, the
demand for the product under consideration moves in the same direction
as the change in the substitute price.
○ For example, in case the price of Coke increases, the quantity demanded of
Pepsi, a substitute, will increase.
○ In case of complementary goods, demand for the product in question and its
supplement move in the same direction
○ E.g. If the price of computers increases, the demand for computers will fall.
And with it, the demand for printers, a complementary good, will also fall.

● A complementary good or service is an item used in conjunction with

another good or service. Usually, the complementary good has little
to no value when consumed alone, but when combined with another
good or service, it adds to the overall value of the offering. It shares a
beneficial relationship with another product offering, for example, an
iPhone and the apps used with it.
● A substitute, or substitutable good, refers to a product or service that
consumers see as essentially the same or similar-enough to another
product. Put simply, a substitute is a good that can be used in place of
another.
● Future expectations. If the market sentiment suggests that the price of a commodity
is expected to rise in the future, it may lead to an increase in the current demand and
vice-versa.

● Tastes and Preferences.

○ In fact, the endeavor of any marketer of goods or services is to alter the tastes
and preferences of the consumers so that they like the product that is being
sold.
○ The tastes and preferences of consumers are affected by numerous factors
like advertising, promotions, cultural environment, government reports etc.
○ For example, if the findings of a government funded research study suggest that
ingestion of carbonated drinks like Coke or Pepsi may be harmful to the human
body, people may refrain from drinking these products and this may lead to a
decrease in demand.

● Environmental factors.
○ The political, economic, social, cultural and technological environment
prevailing in the country/region may have a direct bearing on demand.
○ For example, apprehensions of a breakout of a war may lead to an enormous
increase in demand for necessities and at the same time shrink the demand
for luxury items.

● Population.
○ The population has a direct bearing on the demand for a commodity.
○ More the number of people, higher the likely demand.
○ The demographic profile and changes thereon also significantly affect the
demand of particular products.
○ It is for this reason that marketers the world over are eyeing countries like
China and India, not only because the economies of these countries are
developing at a fast clip but also because of the huge population base.
TRY THIS!

TRUE OR FALSE

1. Demand is the willingness of an individual to acquire a specific product.

2. Studying demand in economics is a must especially in analyzing the concepts of
business and political laws.
3. The demand for a good or service is defined to be the relationship that exists between
the price of the good and the quantity demanded in a given time period, ceteris paribus.
4. Change in quantity demanded entails an upward or downward movement along the
same demand curve.
5. Consumers buy more, if they have limited income.
6. In a market economy, the price of a good or service is determined through the interaction
of demand and supply.
7. There is a positive or direct relationship between the price and the quantity demanded.
8. A normal good is a good that experiences an increase in its demand due to a decrease
in consumers' income.
9. When the price of good X increases, the demand for its substitute goods will increase.
10. Input prices are one of the demand shifters that cause the movement of the demand
either to the left or to the right.

MULTIPLE CHOICE

_____1. A market is a
a. place where only buyers come together.
b. place where only sellers meet.
c. group of people with common desires.
d. group of buyers and sellers of a particular good or service.

_____2. When we are studying the behavior of buyers, we are studying

a. supply.
b. demand.
c. an entire market.
d. government regulation.

_____3. A demand curve is the

a. curve that relates income with quantity demanded.
b. upward-sloping line relating price with quantity supplied.
c. downward-sloping line relating the price of the good with the quantity demanded.
d. None of the above answers is correct.

_____4. What will happen in the rice market if buyers are expecting higher prices in the near
future?
a. The supply of rice will increase.
b. The demand for rice will decrease.
c. The demand for rice will increase.
d. The demand for rice will be unaffected.

_____5. (Refer to Figure above) The movement from point A to point B on the graph would be
caused by
a. an increase in income.
b. an increase in price.
c. a decrease in price.
d. a decrease in the price of a substitute good.

_____6. Ceteris paribus is a Latin phrase that literally means

a. “after this therefore because of this.”
b. “other things being equal.”
c. “to respond slowly to a change in price.”
d. “There’s no such thing as a free lunch.”

_____7. If the price of a good increases, then

a. the demand for complementary goods will increase.
b. the demand for the good will increase.
c. the demand for substitute goods will increase.
d. the demand for the good will decrease.

_____8. If coffee and milk are complements, then which of the following will occur if the price of
coffee increases?
a. The quantity of coffee demanded will increase.
b. The quantity of coffee supplied will decrease.
c. The demand for milk will increase.
d. The demand for milk will decrease.
_____9. Which of the following is NOT a determinant of the demand for good X?
a. The cost of labor used to produce good X.
b. The price of good X.
c. The income of consumers who buy good X.
d. The price of good Y, which is a substitute for good X.

_____10. Demands differ from wants in that

a. wants require a plan to acquire a good but demands require no such plan.
b. demands are unlimited, whereas wants are limited by income.
c. wants imply a decision about which demands to satisfy, while demands involve no specific
plan to acquire the good.
d. demands reflect a decision about which wants to satisfy and a plan to buy the good, while
wants are unlimited and involve no specific plan to acquire the good.

—-----

ANSWERS

1. F
2. F
3. T
4. T
5. F
6. T
7. F
8. F
9. T
10. F

1.D
2.B
3.C
4.C
5.C
6.B
7.C
8.D
9.A
10.D

TRY THIS!

1. Which of the following is the best definition of an economic system?

a. A set of policies used by a government to regulate production
b. A government program promoting economic growth and employment
c. A graphical model to understand how economies work
d. A mechanism to decide what to make, how to make it, and who gets it

2. Which of the following is NOT true of a pure command economy?

a. Production decisions are centrally coordinated
b. Prices serve as signals to allocate resources
c. The factors of production are collectively owned
d. Capital and labor are allocated based on a centralized plan

3. Which of the following demonstrates nonrivalry in consumption?

a. Equipment
b. Oil
c. Information
d. Workers

4. Which of the following is NOT a microeconomic question?

a. How does a mother’s education influence a child’s health?
b. How should a firm respond if it knows a competing firm will advertise?
c. What happens to a firm’s revenue if they increase a good’s price?
d. How is the unemployment rate related to business cycles?

5. When a government decides only people who have paid an annual fee will get certain
services, such as firefighting services, which of the three economic questions does it answer?
a. Is this a good way to allocate services?
b. How should it be produced?
c. Who should get the goods produced?
d. Is it fair to deny services?

6. Which of the following best describes what we mean by resources in economics?

a. Natural resources like natural gas and trees
b. The factors used to produce goods and services
c. Human resources like workers
d. Monetary wealth

7. Which of the following are key differences between market economies and command
economies?
a. Resources are owned by private individuals, rather than by the government, in a market
economy
.b. Resources are all owned by the government in a market economy.
c. Money is used to facilitate exchanges in market economies, but not command economies.
d. The government makes all decisions about resource allocation in a market economy

7. Which of the following best describes the law of demand?

a. When price decreases, the quantity demanded increases
.b. Demand decreases for a normal good when incomes increase.
c. People demand the same amount of a good no matter its price
.d. Sellers set the price that demanders pay

8. Something has changed about how consumers buy hats, which has resulted in the change
shown in the graph shown here.

A graph with two demand curves

Which of the following changes could this graph represent?

a. People like hats more than they did before, and their demand for hats has increased because
of this
b. There has been a decrease in the price of hats, resulting in an increase in the quantity
demanded for hats
c. People do not like hats as much as they did before, resulting in a movement along the
demand curve.
d. People do not like hats as much as they did before, so their demand has decreased

9. Which of the following is a characteristic of a perfectly competitive market?

a. Firms are price setters
b. There are few sellers in the market.
c. Firms can exit and enter the market freely
d. All of these

10. If a perfectly competitive firm currently produces where price is greater than marginal cost it:
a. will increase its profits by producing more.
b. will increase its profits by producing less.
c. is making positive economic profits.
d. is making negative economic profits.

11. When a perfectly competitive firm makes a decision to shut down, it is most likely thar
a. Price is below the minimum of average variable cost.
b. Fixed costs exceed variable costs
c. Average fixed costs are rising
d. Marginal cost is above average variable cost.

12. In the long run, a profit-maximizing firm will choose to exit a market when
a. Fixed costs exceed sunk costs.
b. Average fixed cost is rising.
c. Revenue from production is less than total costs
d.. marginal cost exceeds marginal revenue at the current level of production.

13. When firms have an incentive to exit a competitive market, their exit will
a. Drive down market prices.
b. Drive down profits of existing firms in the market.
c. Decrease the quantity of goods supplied in the market.
d. All of the above are correct

14. In a perfectly competitive market, the process of entry or exit ends when
a. Firms are operating with excess capacity
b. Firms are making zero economic profit
c. Firms experience decreasing marginal revenue
d. Price is equal to marginal cost.
15. Equilibrium quantities in markets characterized by oligopoly is
a. Lower than in monopoly markets and higher than in perfectly competitive markets
b. Lower than in monopoly markets and lower than in perfectly competitive markets.
c. Higher than in monopoly markets and higher than in perfectly competitive markets.
d. Higher than in monopoly markets and lower than in perfectly competitive markets.