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Principle of economics > CH 4+5+6 > Flashcards

CH 4+5+6 Flashcards

1
Q

price controls

A

legal restrictions on how high/low market price may go

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2
Q

price ceiling (definition)

A

maximum price sellers allowed to charge for good/service

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3
Q

price floor (definition)

A

mimimum price buyers required to pay for good/service

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4
Q

price ceilings create inefficiency in at lest 4 ways:

A
  1. inefficient low quaNtity
  2. inefficient allocation to consumers
  3. wasted resources
  4. inefficiently low quaLity

(and blackmarkets)

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5
Q

inefficient allocation to consumers (price ceiling)

A

some people who want the good badly+willing to pay high price don’t get it and some who care relatively little+only willing pay low price get it–> someone is better off andthe other worse

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6
Q

wasted resources (price ceiling)

A

people spend up money, effort and time to cope with shortages caused by price ceiling–> example: wasted time, thus an opportunity cost

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7
Q

inefficiently low quality (price ceiling)

A

sellerd offer low-quality goods at low price even though buyers rather have higher quality+willing to pay higher price for it–> because price ceiling makes it impossible for supplier to raise price to improve

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8
Q

black markets

A

market where goods+services bought/sold illegally–> prices charged are illegal by price ceiling (or illegal completely to sell)

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9
Q

3 common results price ceilings

A
  1. persistant shortage of the good
  2. inefficiency arrising from this persistant shortage
  3. the emergence of illegal, black market activity
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10
Q

2 reasons to why price ceiling:

A
  1. they do benefit some people
  2. government officials don’t understand supply+demand analysis
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11
Q

binding

A

when it affects the market

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12
Q

4 ways how Price floors causes inefficiency:

A
  1. leads to inefficiently low quantity
  2. leads to inefficient allocation of sales among sellers
  3. leads to waste of resources
  4. leads to seller providing an inefficiently high-quality level

(and illegal behaviour)

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13
Q

inefficient allocation of sales among sellers

A

sellers who willing to sell at lowest price unable to mae sales, while sales go to seller only willing sell at higher price

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14
Q

inefficiently high quality

A

sellers offer high-quality goods at high price, eventhough buyers would prefer lower quality at lower price

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15
Q

quantity control/quota

A

upper limit on quantity of a good that can be bought/sold (instead of price limits)
–> other way of government to intervene in market

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16
Q

quota–> licenses=

A

gives owner right to legally supply a good/service

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17
Q

demand price (quantity controls)

A

the price at which consumers will demand that quality

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18
Q

supply price (quantity controls)

A

price at which producers will produce that quality

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19
Q

how does the supply of a good that is legally restricted create a wedge?

A

the difference between the
demand price and the supply price at the quota limit.

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20
Q

quota rent

A

the earnings that accrue to the license holder of ownership of the right to sell the good–> it is equal to the market price of the licence

if person doesn’t rent out his license and uses it himself–> can’t ask the same higher price as if he did rent it out–> no now has an opportunity cost of the maount he misses by using it himself–> because otherwise he wouldn’t have to work and still would make money

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21
Q

2 undesirable side effects quantity controls:

A
  1. inefficiency due to missed opportunities
  2. incentives for illegal acctivities
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22
Q

imports

A

goods+services purchased from other countries

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23
Q

exports

A

goods+services sold to other countries

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24
Q

world GDP

A

total value of goods+services produced in world as a whole

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25
Q

globalisation

A

phenomenon of growing (economic) linkages

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26
Q

hyper globalisation

A

extremely high leveks of international trade

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27
Q

reshoring

A

bringing production closer to markets

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28
Q

Ricardian model of International Trade

A

the analysis of international trade under the assumption that opportunity costs are constant–> makes PPF straight lines

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29
Q

Autarky

A

refers to situation in which country doesn’t trade with other countries

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30
Q

the ky to mutual gain (international trade):

A

trade liberates bouth countries from self sufficiency–> because can all focus on producing product with comparative advantage–> total world production rises–> higher standard of living possible in both countries

BUT: no country will pay a relative price for a good that is higher than the opportunity cost would be if they would produce it themselves

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31
Q

what determines the comparative advantage?

A

the height of opportunity cost of that good

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32
Q

pauper labour fallacy

A

belief that when a country with high wages imports goods produced by workers who are paid low wages, must hurt the standard living of workers in importing country

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33
Q

sweatshop labour fallacy

A

belief that trade must be bad for workers in poor exporting countries because those workers are paid very low wages by our standards

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34
Q

misconceptions arising from misunderstanding comparative advantage:

A
  • pauper labour fallacy
  • sweatshop labour fallacy
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35
Q

sources of comparative advantage

A
  • international differences in CLIMATE
  • international differences in FACTOR ENDOWMENTS
  • international differences in TECHNOLOGY
36
Q

factor endowments (explained/definition)

A

factors of production like labour, capital, land etc–> the mix of different factors differ among countries–> therefore important source of comparative advantage

37
Q

Heckscher-Ohlin Model

A

influential model of international trade–> according to this model a country has comparative advantage in a good whose production is intensive that are abundatly available in that country

38
Q

factor abundance

A

how large country’ supply of a factor is relative to its supply of other factors

39
Q

factor intensity

A

ranking of goods according to which factor is used in relatively greater quantities in production compared to other factors

40
Q

world price

A

the price at which a good can be bought/sold abroad

41
Q

factor price

A

price employers have to pay for services of afactor of production

42
Q

exporting industries

A

produce goods+services that are sold abroad

43
Q

import-competing industries

A

produce goods+services that are compete with imported goods

44
Q

free trade

A

government doesn’t try to reduce/increase levels of exports that occur naturally as a result supply+demand
–> but many governments use taxes+other restrictions to limit imports

45
Q

(trade) protection

A

policies that limit the amount of imports–> usually with the goal to protect domestic producers in import-competing industries from foreign competition

46
Q

the 2 most common protectionist policies

A
  • tariffs
  • import quotas
47
Q

tariff (definition)

A

tax levied on sale import good
–> usually intended to discourage imports+protect import-competing domestic producers
–> raises bot price received by domestic producers+domestic customers

48
Q

import quota (definition)

A

legal limit on the quantity of a good can be imported
–> usually administred through licenses–> limited amount issued–> license holders hold right to import limited quantity of good each year

49
Q

3 arguments FOR Trade Protection:

A
  1. Nationnal Security Argument
  2. Job creation argument
  3. Infant industry argument
50
Q

international trade agreements

A

treaties in which country promises to engage in less trade protection against export of other countries in return for promise other countries do the same for own exports

51
Q

trade wars

A

countries delibertely try to impose pain on their trading partners, as a way to force them to make policy concessions

52
Q

Function WTO and the 2 roles it plays:

A
  • Function: oversees international trade agreements+rules on disputes between countries over those agreements

2 rules:
1. provides the framework for massively complex negotiations involved in major internationatl trade agreements
2. resolves disputes between members, typically arise when one country claims other country’s policies violate its previous agreement

53
Q

2 special circumstances that WTO does allow trade protection:

A
  1. when foreign competition is “unfair” under certain technical criteria
  2. as a temporary measure when sudden surge imports threaten to disrupt domestic industry
54
Q

2 main reasons for doubt globalisation:

A
  1. decline of manufacturing
  2. offshore outsourcing
55
Q

outsourcing

A

company hires other company to perform a task

56
Q

offshore outsourcing

A

company hires people/companies in other countries to perform various tasks
–> think callcentres in India

57
Q

consumer’s willingness to pay

A

maximum price at which they would buy that good
–> won’t buy if it costs more, but eager to do so if it’s less
–> if price equal to individual’s willingness to pay, they’re indifferent between buying/not buying

58
Q

individual consumer surplus

A

net gain to an individual from purchase of a good–> equal to difference between buyers willingness to pay and price paid

59
Q

total consumer surplus

A

sum of individual consumer surpluses of all buyers of good in market

60
Q

seller’s cost

A

lowest price at which potential seller willing to sell

61
Q

individual producer surplus

A

net gain to an individual seller from selling good–> equal to the difference between price received+seller’s cost

62
Q

total producer surplus

A

sum of individual suprpluses of all the sellers of a good in a market

63
Q

macroeconomics

A

focuses on the behaviour of the economy as a whole

64
Q

microeconomics

A

focuses on how decisions are made by individuals+firms and the consequences of those actions

65
Q

paradox of thrift

A

when families+businesses worried about possibility of economic hard times, they prepare by cutting their spending–> this redduction in spending depresses the economy as consumers spend less+businesses react by firing people–> result: families+businesses may end up worse than if hadn’t try to act responsibly by cutting their spending

Flipside scenario:
when feeling optimistic about future–> spend more today–> stimulates economy, leading businesses to employ more people, further expanding economy–> increasing behaviour leads to good times for all

66
Q

policy (definition)

A

what the government can do to make macroeconomic performance better

67
Q

self-regulating economy (explaination/definition)

A

problems like unemployment are resolved without government interference, through the working of the invisible hand

68
Q

keynesian economics

A

economic slumps are caused by inadequate spendingl and they can all be helped by government intervention–> through:
- monetary policy
- fiscal policy

69
Q

monetary policy (definition)

A

uses changes in quantity of money to alter interest rates+effect overall spending

70
Q

fiscal policy (definition)

A

uses changes in government spending+taxes to affect overall spending

71
Q

recession

A

period of economic downturn when output+employment are failing

72
Q

expansion/recovery

A

period of economic upturn when output+employment are rising–> aka when economy is not in recession it’s in an expansion

73
Q

business cycle

A

alternation between recessions+expansions

74
Q

business-cycle peak

A

the point at which economy turns of expansion to recession

75
Q

business-cycle through

A

point at which economy turns from recession to expansion

76
Q

long-run economic growth

A

the sustained upward trend in economy’s output overtime–> reflects one of basic principles: “increases in economy’s potential lead to economic growth overtime”

77
Q

long-run growth per capita

A

sustained upward trend in output per person–> is key to higher wages+standard of living

78
Q

inflation

A

a rise in overall level of prices

79
Q

deflation

A

a fall in overall level of prices

80
Q

price stability

A

overall level of prices changes slowly or not at all

81
Q

open economy (definition)

A

economy that trades goods+services with other countries

82
Q

trade deficit

A

a country has this when value of goods+services bought from foreigners is more than the value of goods+services it sells to them

83
Q

trade surplus

A

a country has this when value of goods+services bought from foreign countries is less than value of good+services it sells to them

84
Q

when is a price celing binding?

A

when the price ceiling is set on a price that is below the quilibrium price

85
Q

when is a price floor binding?

A

when the price floor is set at a price that is above the equilibrium price

86
Q

lean production

A

techniques designed to improve manufacturing productivity through increased efficiency → can close gap in productivity with country that had technological advantage

87
Q

Depression (definition)

A

prolonged recession

Principle of economics (7 decks)

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