0010 Economic Terms and Concepts and Economic Reasoning (SMR 5.1) Flashcards
Economics is the study of _____ and _____.
Scarcity and choices
One of the basic concepts of microeconomics is ____ and _____.
Supply and demand
What is microeconomics?
smaller individual economic units and how those actions affect the market (i.e households/consumers, firms/producers)
What is scarcity?
the lack of products, not having enough of something
What is equilibrium price?
(also called market clearing price) = the price at which the quantity of a product offered is equal to the quantity of the product in demand
What is equilibrium quantity?
Equilibrium Quantity = the quantity demanded or supplied at the equilibrium price
What is voluntary exchange?
the act of buyers and sellers engaging in market transactions, which according to the proponents of the term happens freely and willingly.
i.e. a worker agreeing to make $10 / hour
What are price signals?
information conveyed to consumers and producers, via the price charged for a product or service, which provides a signal to increase or decrease the quantity supplied or quantity demanded
What is supply and demand concerned with?
Concerned with individual economic units and their actions in affecting the “market”: households/consumers and firms/producers
What is the theory of supply and demand?
Theory that the rate of the supply of goods and services (and their prices) adjust with the rate of demand for those goods and services (at an optimum price) and vice versa
Supply and Demand assumes ________ competition in the market
perfect: nothing disturbs the forces of supply and demand
Supply and Demand works on the assumption that scarcity means ______, and that high ______ will naturally result in rational _______ in supply
demand, demand, increase
In a Supply & Demand graph, demand is an ________ proportionate graph and supply is a ________ proportionate graph, the meeting point is the ____________.
inversely, directly, equilibrium price
What is the opportunity cost?
the perceived value of an alternative
Opportunity cost is based on the notion of _____.
choice; if there is scarcity, then one has to make a choice in obtaining certain goods and services or their alternative (making tradeoffs)
If you sell a book at $25 instead of $35, what is the opportunity cost?
$35
Opportunity Cost is not only measured by monetary means; it is the perceived “cost” of any alternative.
Taking a CSET class instead of going to beach, the opportunity cost here would be what?
enjoying the beach
What are the four different types of costs?
Total costs
Fixed costs
Variable costs
Marginal costs
What is the total cost?
the fixed costs + variable costs
What are the fixed costs?
costs independent of the quantity of produced goods (building, taxes, machines, total capital)
What are variable costs?
costs related to the quantity produced (i.e. material, transportations, labor)
What is a marginal cost?
The change in total cost when one more unit is produced (the effect of variable cost’s change on total cost)
What is an example of marginal cost?
For instance, suppose the total cost of making 1 shoe is $30 and the total cost of making 2 shoes is $40. The marginal cost of producing shoes decreases from $30 to $10 with the production of the second shoe ($40 – $30 = $10).
What does a Production Possibility Frontier Graph show?
- Illustrates the choices firms face when choosing between goods and services
- Shows the maximum number of alternative combinations of goods and services that a society can produce at a given time, with full utilization of economic resources and technology
- Depicts limited productive capability and the problem of scarcity as well as opportunity cost
What is the idea behind the guns & butter PPF graph?
The idea in the guns and butter PPF is that there are a limited amounts of resources.The more that we spend on military aid/guns, etc, the less we spend on schools, and social services etc. (butter). The opportunity cost to military spending is social services
What are the three types of profit?
Normal profit
Accounting profit
Economic profit
What is normal profit?
the zero gain profit, average cost = revenue at profit-maximizing output, minimum level of profit needed for a company to remain competitive in the market
What is accounting profit?
where revenue exceeds accounting cost, the actual true profit, company’s total earnings
What is economic profit?
excess of total revenue over total cost, including both explicit and implicit costs, also includes opportunity cost. (for example if you leave your job to start your own business, you must include into the cost that you’re no longer receiving salary from your other job)
What is the law of diminishing returns?
When increasing amounts of one factor of production (land, labor, capital, entrepreneur) are employed along with a fixed amount of some other production factor, after some point, the resulting increases in output of a product become smaller and smaller
What is an example of the law of diminishing returns?
Watering a plant
You water a plant for one or two days but watering it on third day could kill the plant, the diminishing return is how much you get from the plant, so on the third day, the returns diminish, so you should only water the plant two times.
What is labor economics?
Labor economics seeks to understand the relationship between workers and employers. (i.e. determining wages, causes of discrimination, impact of migration, etc.)
What are the three types of incentives?
Monetary
Non-monetary
Coercive
What is the difference between monetary and non-monetary incentives?
A monetary incentive is a financial reward (optimum wage). For example, getting a pay raise or a bonus because you work hard.
A non-monetary incentive is more of a moral incentive that gives moral precedence to a course of action. For example, you get a day off for working hard or a corner office for your efficiency and teamwork
What is a coercive incentive?
based on punishment (being fired, being harmed in property or physically). If you don’t do well you could be fired
What is important to know about incentives when it comes to economics?
All three exist in all systems, with different levels of preference
Economics is mostly concerned with monetary incentives
Whose work influenced ideas surrounding property and incentives?
Adam Smith in his book, Wealth of Nations (1775). He was a scottish economist and known as the father of economics
What were some of Adam Smith’s ideas regarding capitalism & industry?
- Argued that individuals were guided by an “invisible hand” (laissez faire economics) to do what was in their own best interests (capitalism)
- Individuals pursuing their own interest will promote the interests of society
- Believed that division of labor and specialization would make products more efficient and products better
How does private property provide incentives?
If you have collective property (i.e. like in a communist nation), the increase in production of one person will not benefit the individual but the society. But with private property, the increase in production directly benefits the individual, acting as an incentive to produce more.
What is macroeconomics?
Study of the total behavior and structures of the economy (GDP, GNP, labor unions, etc)
What type of economics (macro or micro) studies short-run changes in income, and long run issues of economic growth like inflation, recession, and depression?
Macroeconomics
Macroeconomics uses _____ factors. What are a few of these factors.
Uses “aggregate” factors such as GDP and Price Index to research the total performance of the economy
What is the difference between monetary policy and fiscal policy?
Monetary policy is made by the Federal Reserve and deals with things like interest rates while Fiscal Policy is made by congress and the president and deals with issues like the budget, medicare and social security
How do we define property?
What can be owned, bought, sold and used for gaining economic profit
What do liberals believe about property?
Property is private and can be owned by individuals (John Locke: “Every man has a property in his own person. This nobody has a right to, but himself”), ideas by Adam Smith and John Locke
What do socialists believe about property?
some property must fall under public or cooperative ownership to avoid concentrations of power and to benefit society as a whole (Some European nations)
What do communists believe about property?
inequality in profits makes it necessary for property to be held in community and to benefit all members, a command economy/planned economy (i.e. collectivization of farms in Soviet Union under Stalin)
What are the three major questions when it comes to economic decision making?
- What will we produce?
- How will we produce it?
- Who gets it?
What is the difference between a planned/command economy and a market economy?
A planned economy is where the government runs the economy whereas a Market economy is where individuals and firms run the economy.
Even though the govt does get involved in America’s economy, we are considered a ______ economy.
Market, or a mixed economy
What are the advantages and disadvantages of a planned/command economy?
Advantages: little uncertainty over where to work/keeping job; resources shifted quickly, many public services available
Disadvantages: low consumer satisfaction, inefficient, requires bureaucracy, limits individuality and new ideas
What are the advantages and disadvantage of a market economy?
Advantages: free choice for buyers, sellers, workers; huge variety of goods/services; decentralized decision making
Disadvantages: uncertainty for workers/ businesses from competition/ change; rewards productive resources only; vulnerable to market failures
Who argued for a Market economy?
Adam Smith with his ideas of “Invisible hand”: the unintended social benefits resulting from individual actions
What is the third type of economy?
Traditional economy which uses values and traditions to make economic decisions (i.e. small tribes that utilize the barter system)
What is Marginal Benefit?
the additional benefit arising from a unit increase in a particular activity
