0010 Economic Terms and Concepts and Economic Reasoning (SMR 5.1)

Question 1

Economics is the study of _____ and _____.

Answer 1

Scarcity and choices

Question 2

One of the basic concepts of microeconomics is ____ and _____.

Answer 2

Supply and demand

Question 3

What is microeconomics?

Answer 3

smaller individual economic units and how those actions affect the market (i.e households/consumers, firms/producers)

Question 4

What is scarcity?

Answer 4

the lack of products, not having enough of something

Question 5

What is equilibrium price?

Answer 5

(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

Question 6

What is equilibrium quantity?

Answer 6

Equilibrium Quantity = the quantity demanded or supplied at the equilibrium price

Question 7

What is voluntary exchange?

Answer 7

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

Question 8

What are price signals?

Answer 8

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

Question 9

What is supply and demand concerned with?

Answer 9

Concerned with individual economic units and their actions in affecting the “market”: households/consumers and firms/producers

Question 10

What is the theory of supply and demand?

Answer 10

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

Question 11

Supply and Demand assumes ________ competition in the market

Answer 11

perfect: nothing disturbs the forces of supply and demand

Question 12

Supply and Demand works on the assumption that scarcity means ______, and that high ______ will naturally result in rational _______ in supply

Answer 12

demand, demand, increase

Question 13

In a Supply & Demand graph, demand is an ________ proportionate graph and supply is a ________ proportionate graph, the meeting point is the ____________.

Answer 13

inversely, directly, equilibrium price

Question 14

What is the opportunity cost?

Answer 14

the perceived value of an alternative

Question 15

Opportunity cost is based on the notion of _____.

Answer 15

choice; if there is scarcity, then one has to make a choice in obtaining certain goods and services or their alternative (making tradeoffs)

Question 16

If you sell a book at $25 instead of $35, what is the opportunity cost?

Answer 16

$35

Question 17

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?

Answer 17

enjoying the beach

Question 18

What are the four different types of costs?

Answer 18

Total costs
Fixed costs
Variable costs
Marginal costs

Question 19

What is the total cost?

Answer 19

the fixed costs + variable costs

Question 20

What are the fixed costs?

Answer 20

costs independent of the quantity of produced goods (building, taxes, machines, total capital)

Question 21

What are variable costs?

Answer 21

costs related to the quantity produced (i.e. material, transportations, labor)

Question 22

What is a marginal cost?

Answer 22

The change in total cost when one more unit is produced (the effect of variable cost’s change on total cost)

Question 23

What is an example of marginal cost?

Answer 23

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).

Question 24

What does a Production Possibility Frontier Graph show?

Answer 24

• 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

Question 25

What is the idea behind the guns & butter PPF graph?

Answer 25

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

Question 26

What are the three types of profit?

Answer 26

Normal profit
Accounting profit
Economic profit

Question 27

What is normal profit?

Answer 27

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

Question 28

What is accounting profit?

Answer 28

where revenue exceeds accounting cost, the actual true profit, company’s total earnings

Question 29

What is economic profit?

Answer 29

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)

Question 30

What is the law of diminishing returns?

Answer 30

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

Question 31

What is an example of the law of diminishing returns?

Answer 31

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.

Question 32

What is labor economics?

Answer 32

Labor economics seeks to understand the relationship between workers and employers. (i.e. determining wages, causes of discrimination, impact of migration, etc.)

Question 33

What are the three types of incentives?

Answer 33

Monetary
Non-monetary
Coercive

Question 34

What is the difference between monetary and non-monetary incentives?

Answer 34

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

Question 35

What is a coercive incentive?

Answer 35

based on punishment (being fired, being harmed in property or physically). If you don’t do well you could be fired

Question 36

What is important to know about incentives when it comes to economics?

Answer 36

All three exist in all systems, with different levels of preference

Economics is mostly concerned with monetary incentives

Question 37

Whose work influenced ideas surrounding property and incentives?

Answer 37

Adam Smith in his book, Wealth of Nations (1775). He was a scottish economist and known as the father of economics

Question 38

What were some of Adam Smith’s ideas regarding capitalism & industry?

Answer 38

• 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

Question 39

How does private property provide incentives?

Answer 39

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.

Question 40

What is macroeconomics?

Answer 40

Study of the total behavior and structures of the economy (GDP, GNP, labor unions, etc)

Question 41

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?

Answer 41

Macroeconomics

Question 42

Macroeconomics uses _____ factors. What are a few of these factors.

Answer 42

Uses “aggregate” factors such as GDP and Price Index to research the total performance of the economy

Question 43

What is the difference between monetary policy and fiscal policy?

Answer 43

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

Question 44

How do we define property?

Answer 44

What can be owned, bought, sold and used for gaining economic profit

Question 45

What do liberals believe about property?

Answer 45

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

Question 46

What do socialists believe about property?

Answer 46

some property must fall under public or cooperative ownership to avoid concentrations of power and to benefit society as a whole (Some European nations)

Question 47

What do communists believe about property?

Answer 47

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)

Question 48

What are the three major questions when it comes to economic decision making?

Answer 48

1. What will we produce?
2. How will we produce it?
3. Who gets it?

Question 49

What is the difference between a planned/command economy and a market economy?

Answer 49

A planned economy is where the government runs the economy whereas a Market economy is where individuals and firms run the economy.

Question 50

Even though the govt does get involved in America’s economy, we are considered a ______ economy.

Answer 50

Market, or a mixed economy

Question 51

What are the advantages and disadvantages of a planned/command economy?

Answer 51

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

Question 52

What are the advantages and disadvantage of a market economy?

Answer 52

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

Question 53

Who argued for a Market economy?

Answer 53

Adam Smith with his ideas of “Invisible hand”: the unintended social benefits resulting from individual actions

Question 54

What is the third type of economy?

Answer 54

Traditional economy which uses values and traditions to make economic decisions (i.e. small tribes that utilize the barter system)

Question 55

What is Marginal Benefit?

Answer 55

the additional benefit arising from a unit increase in a particular activity