Cengage
Chapter 1
An Economic Foundation for Consumer Decisions
The Chapter in Perspective
In this chapter you will learn:
* What scarcity is, and why it forces consumers to make choices.
* About tradeoffs consumers make and opportunity costs they experience when they choose between goods and services they may purchase in different markets.
* How the forces of demand and supply determine equilibrium prices in competitive markets, and the difference between money and relative prices.
* To recognize characteristics of perfect, and imperfect competition.
* That the economic systems in other nations do not always operate in the same way as our system that is essentially one of capitalism.
* How the American economy has been affected by the growth of the Internet.
* About new consumer responsibilities that have been created by new technologies.
* What ethical behavior is, and how it affects decisions American consumers make.
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Chapter 1 - Study Guide
Reading Outline
I. What is the relationship between the amount of productive resources that exist and the problem of scarcity?
A. How may a wealthy person be affected by scarcity in a different way than a person who is poor?
B. Why wouldn't printing more money solve the problem of scarcity?
II. How does the problem of scarcity impact businesses and the government?
III. Why does scarcity force consumers to make choices?
A. Why is it unlikely that consumers will ever achieve total satisfaction?
B. What is the relationship between scarcity and the need consumers
have to budget their spending?
IV. What is the difference between the value of a good a consumer might purchase and the opportunity cost that is incurred as a result of that purchase?
V. What is the difference between a tradeoff and an opportunity cost that are both involved in making a consumer choice?
VI. Why is the assumption that consumers always wish to have more goods or services a reasonable one to make in the study of consumer economics?
VII. Why don't economists regard the building in which a store operates as a market?
VIII. Why is it reasonable to believe that transactions that take place in the American
economy are voluntary exchanges?
IX. What is demand?
A. According to the law of demand what would happen to the quantity of a product that would be demanded if its price increased?
B. What are several events that could change the demand for a product other than a change in its price?
X. What is supply?
A. According to the law of supply what would happen to the amount of a product that would be supplied if its price decreased?
B. What are several events that could change the supply of a product other than a change in its price?
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An Economic Foundation for Consumer Decisions
XI. What is equilibrium price?
A. Why would there be a shortage of a product at a price that is lower than its equilibrium price?
B. Why would there be a surplus of a product at a price that is higher than its equilibrium price?
XII. What is the difference between a product's money price and its relative price?
XIII. What does the term consumer sovereignty mean?
A. Why is consumer sovereignty more likely to exist when there is perfect competition in a market?
B. What does consumer sovereignty have to do with the way consumers spend their money?
XIV. How does imperfect competition prevent consumers from always controlling
production decisions and the allocation of scarce resources?
A. What is a monopoly?
B. Why isn't consumer sovereignty likely to exist in a market that is made up of firms that hold monopoly power?
XV. What roles do governments play in different economic systems?
A. What roles do governments play in nations that have socialist economic systems?
B. What trends have taken place in the American economy over the past 100 years that make it less an example of capitalism than it once was?
XVI. How has the growth of electronic commerce affected American consumers?
A. What is the Internet and how was it created?
B. What uses may American consumers make of the Internet?
C. What new consumer responsibilities have resulted from the growth of the Internet?
XVII. What does the term "ethical behavior" mean?
A. Why isn't it easy to know what being an ethical consumer means?
B. What are several common examples of unethical consumer behavior?
C. How may the great size if the American economy contribute to the number of unethical choices consumers make?
D. How do some consumers make unethical choices in the way they use government services?
E. How may consumers make ethical choices when they invest their savings?
F. Why must consumers choose for themselves whether or not to be ethical in their decisions?
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Chapter 1 - Study Guide
Key Terms in Context - Part 1
Directions: Place the Key Terms from the list below in the appropriate blanks to correctly complete each sentence.
equilibrium price goods law of demand law of supply
market opportunity cost profit services
scarcity tradeoff
1. When Jeff bought a new bicycle he made a(n) _________________ because he could no longer afford to go to Florida on vacation.
2. Gloria opened up a florist shop because she likes working with plants and she hoped
to earn a good ____________________.
3. According to the ___________________ Max should expect to sell more bread from his bakery if he lowers his price.
4. Consumers often buy the __________________ of lawyers, automobile mechanics and doctors.
5. If there were no problem of __________________ we would all have all the goods and services we want.
6. The _____________________ Janice experienced when she bought a book for her math class was the value of a dress that was her second choice that she could no longer afford.
7. All of the transactions between people who buy and sell cars make up the
__________________ for that product.
8. If Carl offers lamps for sale at the ____________________ of $45 each there will be just as many people who choose to buy them as he is willing to sell.
9. Sue sells all sorts of pots and pans and other ___________________ for the kitchen in her store.
10. According to the _________________________ Hanna will be willing to offer more paintings for sale if she finds she can charge a higher price.
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An Economic Foundation for Consumer Decisions
Key Terms in Context - Part 2
Directions: Place the Key Term from the list below in the appropriate blank to correctly complete each sentence.
World Wide Web capitalism consumer sovereignty
ethical behavior imperfect competition money price
perfect competition relative price
socialist economic system web browser
1. Even if a product's price goes up, its ____________________ may be lower if the price of other products have gone up more.
2. If the people owned and ran all of the businesses in a nation with no government
involvement, that country's economic system would be an example of
______________________.
3. In a(n) ___________________ the government owns and runs all of the businesses.
4. When there is ___________________ businesses have at least some monopoly power.
5. A product's ____________________ is the amount consumers pay when they buy it.
6. _______________________ involves making choices that people consider proper even when other choices are not against the law.
7. The ______________________ is an information retrieval system that organizes the Internet’s resources in a graphical fashion.
8. When there is _________________________ consumers don't care which firm made the products they buy, they are only concerned with the product's price.
9. If there is ____________________________ consumers determine which products will be produced through how they choose to spend their money.
10. The first ____________________, Mosaic, gave people the ability to search the Internet.
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Chapter 1 - Study Guide
Using Consumer Skills
Directions: Construct demand and supply curves on the graph based on the information in the table below. Then answer the questions that follow.
Demand and Supply Schedule for Baseballs
Price Quantity Demanded Quantity Supplied
$100 10 50
$ 80 20 40
$ 60 30 30
$ 40 40 20
$ 20 50 10
P $100 .
R 80 .
I 60 .
C 40 .
E 20 .
0 . . . . . .
0 10 20 30 40 50
Q U A N T I T Y
1. What is the equilibrium price in this example? _____
2. How many baseballs will be supplied and sold at the equilibrium price? _____
3. If the price was $80, what would happen to force the price to the equilibrium price?
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An Economic Foundation for Consumer Decisions
Trial Test
Directions: Circle the letter of the best answer for each question.
1. Scarcity exists because there is a limited supply of:
a. money
b goods and services
c productive resources
d productive businesses
2. Scarcity forces consumers to:
a make choices in the products they buy
b do without products they need
c go into debt to buy what they need
d work more hours to earn more money
3. If Jill spends $25 to buy a new pair of shorts, then her opportunity cost is:
a. the value of the $25 she spent
b. the value of a hat that was her second choice
c. the value of a $500 coat she could not afford
d. the value of the time she used to earn the $25
4. Which of the following is the best example of a market?
a. the book store where students buy their texts
b. the advertising that tells students where to buy their books
c. the accounting system the store uses to keep track of its sales of texts
d. the transactions students make with the book store to buy texts
5. According to the law of demand an increase in the price of a product will:
a. cause fewer people to want the product
b. cause fewer people to need the product
c. cause fewer people to buy the product
d. cause fewer people to have a use for the product
6. Which of the following events would cause more people to demand milk even if there was no change in milk's price?
a. a sickness that causes cows to give less milk
b. an increase in the birth rate
c. a decline in the price of soft drinks
d. an increase in the cost of the food cows eat
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Chapter 1 - Study Guide
7. According to the law of supply an increase in the price of a product will:
a. cause firms to offer more of the product for sale
b. cause firms to offer less of the product for sale
c. cause firms to offer the same amount of the product for sale
d. could cause firms to offer either more or less product for sale depending on demand for the product
8. At the equilibrium price for a product consumers will:
a. buy as much of the product as they want
b. buy as much of the product as is offered for sale
c. buy as much of the product as they can afford
d. buy as much of the product as producers can make
9. If a product's money price goes up 5% when all other prices go up 10%, we know that its relative price has:
a. increased
b. decreased
c. stayed the same
d. there isn't enough information provided to answer this question
10. If there is a shortage of a product in a competitive market this product's price is:
a. at its equilibrium price
b. below its equilibrium price
c. above its equilibrium price
d. is too high for any consumers to afford
11. Consumer sovereignty in a market economy means consumers:
a. don't have money to buy the products they need
b. are forced to buy the products offered by monopolies
c. expect the government to determine the products that are manufactured
d. control production by how they spend their money
12. When there is imperfect competition:
a. only one firm is allowed to make each product
b. businesses have at least some monopoly-like power
c. consumers must buy the products offered for sale
d. businesses may set any price they want and will still sell all of their products
13. In a capitalist economic system:
a. people own and run the businesses
b. people own businesses but follow government orders
c. the government owns the businesses but allows people to run them
d. the government owns and runs the businesses
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An Economic Foundation for Consumer Decisions
14. In a socialist economic system:
a. people own and run the businesses
b. people own businesses but follow government orders
c. the government owns the businesses but allows people to run them
d. the government owns and runs the businesses
15. The Internet was first developed by:
a. the U. S. Department of Commerce
b. the New York Stock Exchange
c. the U. S. Department of Defense
d. the Microsoft Corporation
16. The importance of the Internet can be seen in all of the following except:
a. the way consumers shop
b. the amount we pay in income taxes
c. the way Americans are entertained
d. the availability of information
17. A web browser gives ordinary people the ability to:
a. create their own web sites
b. use e-mail
c. reduce their costs of going online
d. search the Internet
18. To be an ethical consumer you must:
a. only follow the law
b. pay your taxes on time
c. make choices you believe are right
d. do the same things that other people do
19. If one consumer cheats a store:
a. other consumers are likely to pay
b. the business will probably fail
c. the government will receive less tax income
d. no one will lose but that consumer will gain
20. People who invest their savings in an ethical way:
a. usually earn more than other investors
b. are certain to earn less than other investors
c. receive personal satisfaction from their choice
d. do not to pay as much tax on the income they receive
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Chapter 1 - Study Guide
Short Answer Questions
1. Explain the difference between the tradeoff consumers make when they buy a product and the opportunity cost they experience as a result of making that choice.
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2. Explain why a price for a product that is above its equilibrium price will move to that price in a competitive market.
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3. How is it possible for a product's money price to go up at the same time that its relative price goes down?
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4. Why couldn’t ordinary people use the Internet before the creation of programs such as Mosaic?
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5. Why can the choice of being an ethical consumer only be an individual choice?
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An Economic Foundation for Consumer Decisions
Suggestions for Further Learning
Identify a product that you commonly use that can be purchased either from a local store or over the Internet. Make lists of advantages and disadvantages of purchasing this product in each of these ways. Be sure to include considerations of price, quality, and convenience. Which method of shopping for this product do you choose? Why do other consumers make different decisions that are still rational choices for them?
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