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Chapter 1 Flashcards

1
Q

Economics

A

The study of how humans make decisions in the face of scarcity. “ one who manages a household”

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2
Q

Scarcity

A

Means that human wants for goods, services, and resources exceed what is available. Leads to individuals, businesses and countries have to trade off one goal against another

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3
Q

Opportunity Cost

A

The highest-valued alternative given up in order to engage in some activity.

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4
Q

Economist think

A

On the margin

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5
Q

How do we fulfill our (unlimited) wants

A

Produce everything we consume or produce some of what we consume and “trade” for the rest of what we want

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6
Q

Division of labor

A

The way in which different workers divide required tasks to produce a good or service

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7
Q

Specialization

A

When workers or firms focus on particular tasks for which they are well-suited within the overall production process

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8
Q

Market

A

The interaction between potential buyers and sellers, Demand and Supply

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9
Q

Macroeconomic

A

The branch of economics that focuses on broad issues such as growth, unemployment,inflation and trade balance

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10
Q

The factors of production

A

Land, Labor, Capital and Entrepreneurship

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11
Q

Traditional Economy

A

typically an agricultural economy where things are done the same as they have always been done

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12
Q

Command Economy

A

An economy in which the
government uses central planning to coordinate most
economic activities.

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13
Q

Market economy

A

An economy that allocates resources
and distributes goods and services through the private
decisions of consumers, suppliers and producing firms

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14
Q

Mixed Economy

A

An economy in which both the private
sector and government determine the allocation of
resources

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15
Q

Three questions that every economy must answer

A

What to produce, How to produce, Who gets the goods and services produced

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16
Q

Budget Constraint

A

all possible consumption
combinations of goods that someone can afford,
given the prices of goods, when all income is
spent; the boundary of the opportunity set.

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17
Q

Opportunity Set

A

all possible combinations of
consumption that someone can afford given the
prices of goods and the individual’s income (all
income does not need to be spent)

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18
Q

Utility

A

Satisfaction, usefulness, or value one obtains from consuming goods, and services

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19
Q

Law of diminishing marginal utility

A

As a person receives more of a good, the additional (or marginal) utility from each additional unit of the good declines.

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20
Q

Sunk costs

A

Costs that were incurred in the past and cannot be recovered. (Move on from them and think about the future)

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21
Q

Production possibilities frontier (PPF)

A

a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has
available. The slope of the production possibilities frontier shows the opportunity cost.

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22
Q

Law of diminishing returns

A

As additional increments of resources to producing a good or service are added, the marginal benefit from those additional increments will decline

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23
Q

Productive efficiency

A

when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)

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24
Q

Allocative Efficiency

A

When the mix of goods produced represents the mix that society most desires

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25
Cooperative advantage
When a country can produce a good at a lower opportunity cost than another country
26
Markets
Interaction between buyers and sellers. Local, national and international. Price is determined by the interactions of buyers and sellers
27
Demand
The amount that consumers are willing and able to purchase at a given price ceteris paribus (other things equal) during a specified period of time
28
Law of Demand
Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. Inverse relationship between price and the quantity demanded
29
Determinants of Demand
Change in income , change in consumer tastes and preferences, change in the consumption of the population, change in prices of related goods, change in consumer expectations
30
Change in income
The effect of a change in income depends on whether the good is a normal good or an inferior good
31
Supply
a schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period.
32
The law of Supply
Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls. There is a direct relationship between price and the quantity supplied.
33
Determinants of supply
A change in the number of sellers, a change in input prices, a change in technology, a change in taxes and regulations, a change in prices of substitutes in production, a change in producer expectations, a change in natural and other conditions for production
34
Market equilibrium
Equilibrium occurs where the demand curve and supply curve intersect i.e. where the quantity demanded equals the quantity supplied
35
Rationing function of prices
The ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistent. Prices are the best tool for eliminating market shortages and surpluses.
36
Competitive markets
Markets in which a large number of independently acting buyers and sellers come together to buy and sell standardized products.
37
Price ceiling
Sets the maximum legal price a seller may charge for a product or service
38
Price Floor
a Minimum price fixed by the government
39
National income accounting
Measures economy’s overall performance
40
Bureau of Economic Analysis (BEA)
compiles the data and reports it in National Income and Product Accounts (NIPA)
41
Gross Domestic Product (GDP)
Measures the value of final goods and services produced within a given country during a given period of time. It tells us whether an economy’s output is growing
42
GDP
is the dollar value of all final goods and services produced within a given country during a given period of time.
43
The dollar value is
Monetary measure
44
GDP is a monetary measure
enables us to compare the relative values of the vast number of goods and services produced in different years.
45
The Demand Approach ( Expenditures Approach )
The total dollar value of what consumers purchase in the economy. Sum of all the money spent in buying goods and services. GDP=C+I+G+(X-M)
46
The Production Approach ( Supply approach)
The total dollar value of what is the country produces
47
Income approach
The sum of all the income derived or created from producing goods and services. The payment for the use of resources in the production process
48
Consumption (C)
All expenditures by households on goods and services. Personal consumption expenditures in the NIPA
49
Investment (I)
Creation of new capital assets. Final purchases of machinery, equipment, and tools by businesses. All constructions. Non-investment transactions are excluded(stocks, resales )
50
Government Purchases (G)
Expenditures on goods and services, publicly owned capital.
51
The Trade Balance (X)
Some of goods and services produced within the borders of the USA are bought by foreigners. Thus, when computing GDP, we must include foreign spending on our exports (X).
52
The Trade Balance (-M)
Goods and services produced outside of the United States.
53
The Trade Balance(Net Exports)
Exports (X)- Imports (M) If the trade balance is positive, then it is a trade surplus If the trade balance is negative, then it is a trade deficit
54
The Production Approach
Everything that is purchased must be produced by someone. A country’s production can be broken into durable goods, non durable goods, services, structures, and the change in inventories
55
Income Approach
This approach allocates expenditures as income to those responsible for producing the output. Most of the expenditures flow back to those who help produce the output in the form of wages, rent, interest and profit.
56
What is excluded from GDP?
No intermediate goods or services are included. Excludes nonproduction transactions, secondhand sales, the underground economy.
57
Intermediate goods
Goods and services that are purchased for resale or for further processing or manufacturing. If included it would amount to multiple counting.
58
Final Goods
Consumptions goods, capital goods, and services that are purchased by their final users.
59
GNP vs. GDP
Gross National Product (GNP): Total income earned by the nation’s factors of production, regardless of where located. Gross Domestic Product (GDP): Total income earned by domestically-located factors of production, regardless of nationality. GNP – GDP = Income receipts from the rest of the world minus income payments to the rest of the world Examples of income: wages, profits, rent, interest & dividends on assets
60
Net National Product (NNP)
Net National Product (NNP): 
GNP minus the value of how much physical capital is worn out, or reduced in value because of aging (depreciation), over the course of a year. NNP can be further subdivided into national income - includes all income earned: wages, profits, rent, and profit income.
61
Nominal value
The economic statistic in current value not adjusted for inflation
62
Real Value
An economic statistic after it has been adjusted for inflation.
63
Nominal versus Real GDP
Nominal GDP Based on current prices - that were in effect when output was produced. When prices rise, this inflates nominal GDP; when they fall this deflates nominal GDP Real GDP Adjusted for changes in the price level
64
Real GDP formula
Price Index In Given Year = (Price of Market Basket in Specific year/ Price of Same Basket in Base Year) x 100 Real GDP= Nominal GDP/ Price Index (in hundredths)
65
Calculating Real GDP Growth rate
Governments report GDP growth as an annualized rate. When analyzing growth in a quarter, the calculated growth in real GDP for the quarter is multiplied by four when it is reported (as if the economy were growing at that rate for a full year)
66
Business Cycle
Alternating increases and decreases in economic activity over time
67
Phases of the business cycle
Peak, Recession, Trough, and Expansion
68
GDP Per Capita
GDP per capita= GDP/population
69
Exchange rate
The value or price of one currency in terms of another currency.
70
Standard of living
All elements that affect peoples happpiness and well-being, whether they are bought and sold in the market or not.
71
Short comings of GDP
Leisure The environment Nonmarket activities The underground economy Composition and distribution of the output Technology and Products available Non-economic Sources of Well-Being

Econ Exam 1 (2 decks)

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