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Econ 103 > Econ 103 - Midterm #1 - Rustici > Flashcards

Econ 103 - Midterm #1 - Rustici Flashcards

1
Q

The economic distinction between changes in demand or supply, and in changes of quantity demanded or supplied arises because..?

A

Changes in relative price are different than variables affecting relative price.

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2
Q

What turns a non-economic good into an economic good?

A

Scarcity

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3
Q

The neoclassical revolution placed what two distinctive pillars as their foundation of principal theory?

A

Subjectivism in value and marginal utility analysis

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4
Q

Which of the following was not a feature in classical price theory?
1) Objectivism in value or intrinsic value
2) Labor as the source of all value
3) Historical price of production
4) The value of higher order goods was derived from the value of lower order goods
5) An infinite regression of values

A

The value of higher order goods was derived from the value of lower order goods

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5
Q

The scholastics “Just Price Doctrine” failed as a theory of price formation because..?

A

It is a normative theoretical analysis explaining market prices when a positive theory was needed

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6
Q

Are hotdogs, ramen noodles, and bologna normal or inferior goods?

A

Whether these goods are normal or inferior depends on an individuals preference

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7
Q

Why is “people make smart choices” incorrectly stated as a basic assumption in economics?

A

People make rational choices. Whether these choices are smart are up to the individual

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8
Q

What is not true with respect to buyers, sellers, and market prices? Why?

A

Consumers valuing the goods the least exclude consumers that desire the good the most. The logic is backwards.

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9
Q

Suppose we have 5 buyers and 6 sellers in the market for horses (Auction model):
Max Buying
b1 - 110
b2 - 98
b2 - 97
b4 - 90
b5 - 88
Max Selling
s1 - 89
s2 - 92
s3 - 93
s4 - 98
s5 - 99
s6 - 102

A

The clearing price is 97 because Qs = Qd, or 3 buyers and 3 sellers will get what they want at that price

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10
Q

The most important function of the price system arises from?

A

Its ability to transmit scarce information to billions of people

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11
Q

What is not true to the structure of production and factor pricing?

A

The values of goods of the higher order depend on accessing complementary goods of the same stage of production

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12
Q

What is true with respect to the law of demand?

A

An inverse relationship exists between the relative price of the good and the quantity demanded

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13
Q

What is not true with respect to the value of economic goods?

A

The magnitude of importance of different ends are equal

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14
Q

The classical economist refused to accept subjective value theory because of the inherent paradox of the value of water and diamonds. How did Carl Menger resolve this paradox?

A

By explaining that value is attached to the margin

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15
Q

An inferior good is determined as a good which..?

A

When a persons income increases the demand for the good decreases

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16
Q

The main problem with Aristotles idea of equality of exchange was that..?

A

It could not explain why voluntary trade would occur since equal values traded would have no benefit to the trading agents

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17
Q

Which of the following accurately summarizes the theory presented in the article “I, Pencil” by Leonard Reed?

A

Without any knowledge of the others or the evolution of the pencil itself, the pencil is created by individuals pursuing their own self interest

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18
Q

According to Peter Boettke in “morality cooperation” markets..?

A

Always exist regardless of institutional structures

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19
Q

Economics

A

The science of purposeful human action and the unintended consequences

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20
Q

Spontaneous Order

A

The product of human action, not of human design or intention (Unplanned Social Order)

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21
Q

The Price System

A

An information system that tells us what we don’t know.
-Life cannot exist without it
-Product of our minds
Not numbers but a collection of knowledge

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22
Q

Money

A

Medium of exchange.
-Spontaneous order that was not invented
-Life cannot exist without it
-Evolved from barter and replaces it
-The entire structure of the economy collapses without a medium of exchange. (i.e. POW Camps)

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23
Q

Financial Intermediaries (Banks)

A

Borrowers and savers making trade

24
Q

Bond and Stock Markets

A

-Retrade of ownership
-2 types of markets: primary and secondary (stocks)

25
Q

Accounting

A

-Nobody invented accounting
-Franciscan monks tried to copy the transactions of the merchants and tried to balance his purchases/ sales
-Spontaneous accident that is still evolving to this day

26
Q

4 Basic Assumptions of Mircoeconomics

A
  1. Unlimited Wants
  2. Scarcity
  3. Only Individuals Choose
  4. Rational Choice
27
Q

Unlimited Wants

A

-Mama Rustici: “The Treadmill of happiness”
-You can always imagine more wants
-Greedy, Greedy, and Greedy!

28
Q

Scarcity

A

-Forces choice on acting agents
-To satisfy your needs you need to do something
-Mother Nature imposes scarcity- she is indifferent to your existence

29
Q

Only Individuals Choose

A

-People can be in groups but everyone still has individual choices
-We are the economy!

30
Q

Rational Choice

A

-Purposes-> Intent-> Aiming at an objective
-Economy just judges the means to an end

31
Q

Aristotle

A

-Credited as coining the phrase Economics
-Started the idea “Equality of Exchange”
-Prices come from the exchange of our equal values
-He was wrong because if this were true there would be no trade because trade exists from inequality

32
Q

St. Thomas Aquinas (Scholastics)

A

-“THE JUST-PRICE DOCTRINE”- Normative Theory!
-Tried to determine the ethical content of prices
-Sellers always think prices are too low and Buyers always think prices are too high
-He was wrong because there is no such thing as a JUST- PRICE

33
Q

4 Fundamental Mistakes of Merchantilism

A

-Belief that social order was politically designed
-Addition of Regulations: caused riots all over France because of taxes, and promoted Laissez Faire
-Belief that the country with the most money is the richest- confused nominally with reality
-“Zero-sum” process- economy is not static it’s dynamic.
*Separation of Humans from the Economic System- obviously untrue because people make up the economy.

34
Q

Adam Smith

A

-Came up with the thesis that in the market there is a grand division of labor
-Who steers the different laborers: THE PRICE SYSTEM
-Believed that the price system was an information system that was a means of communication
-Mutual Symbiosis and Reciprocal Respect
-Market place turns greed into social order
-Only thing is that he could not explain the price

35
Q

Requirements for goods

A
  1. A human need
  2. Properties that allow the good/object to satisfy our needs
  3. Knowledge of the casual connection between 1 and 2
  4. Sufficient command of the object + accessibility
  5. Scarcity
36
Q

Laws of factor pricing

A
  1. Classical- Goods:down; Value:down.
  2. Menger- Goods:down; Value: up!
37
Q

Derived demand

A

The backward way of spending money is a derived demand principle
-Consumer->Bakery->Pillsbury->Fa

38
Q

Available quantities of an economic good:
Needs> Available Quantities- Scarcity:

A

Economic good with a price

39
Q

Available quantities of an economic good:
Needs< Available Quantities- Free good:

A

Non-economic goods without a price

40
Q

Available quantities of an economic good:
Needs= Available Quantities- Transition point

A

Trade equally

41
Q

The theory of value

A
  1. Subjectivism
  2. Marginalism
42
Q

Subjectivism

A

Value is in the mind
-Paradox of values (water->diamonds)
-We don’t trade in theory. We attach value in the margin and not the totality.
-We ask how important something is to our needs and that’s when we attach value

43
Q

Marginalism

A

Ordinal ranking of values
-Transitivity

44
Q

Transitivity

A

logical value of things

45
Q

4 Basic principles of value in economic goods

A
  1. The value of goods are imposed from our needs (Subjectivism)
  2. The magnitude of importance of different ends are unequal (Value is ranked ordinally)
  3. The magnitude of importance for goods are unequally impeded (Value attached unequally)
  4. The value we attach to any given unit of a good is dependent on the least important need satisfied with the available quantities. (Marginalism)
46
Q

3 things needed for trade

A
  1. Inverse valuation
  2. Both parties recognize the inverse values
  3. Both parties have it within their power to transfer ownership
  4. NOT IN ORIGINAL 3 The perceived cost of making the trade is less than the perceived benefit (NET BENEFIT) (created by Ronald Coast in 1937)
47
Q

Increasing opportunity cost

A

As you forego successive units of a good you attach greater value to the remaining unit

48
Q

Diminishing marginal utility

A

The margin for the good is moving downwards

49
Q

4 Principles of the auction model

A
  1. Consumers that value the goods the most exclude the sellers that value the goods the least (COMPETITIVE OVERSELLING)
  2. Consumers that value the goods the least exclude the sellers that value the goods the most (COMPETITIVE UNDERSELLING)
  3. The final exchange price is set between the limits defined by the maximum and minimum selling values of the margin
  4. As more parties enter the exchange, “Ceteris Peribus”, the limits for price progression are progressively narrowed.
50
Q

3 Factors why human values change

A
  1. Time- values change over time. It would be odd if time didn’t change. –Menger
  2. Income
    ⁃ Normal Good- need and income go the same way
    ⁃ Inferior Good- need and income go the opposite way
    ⁃ RUSTICI EXAMPLES: Twinkies vs. Ramen Noodles
  3. Available Quantities- shift of margin; as you acquire more you value it less
51
Q

The law of demand

A

✓ There is an inverse relationship between the relative price of the good and quantity demand
✓ D = { f (own price; values of buyers; # of buyers; income of buyers; price of related goods…)}
✓ SHIFT TO THE RIGHT: Increase in demand
✓ SHIFT TO THE LEFT: Decrease in demand

52
Q

Prices of related goods

A
  1. Substitutes- always moves in the same direction as the demand curve
  2. Complements- always moves in the opposite direction as the demand curve
53
Q

The law of supply

A

✓ There is a positive relationship between the relative price of the good and the quantity supplied
✓ S = { f (own price; values of sellers; numbers of sellers; technology (production); input prices, taxes or subsidies…)}
✓ Relative prices are the prices in terms of other goods
✓ Supply Curve-> Set of minimum selling prices; called the opportunity cost curve/marginal cost curve

54
Q

Who benefits from minimum wage

A
  1. UNIONS- by raising the minimum wage, you make poor, unskilled workers jobless and we give more money for the skilled workers
  2. BUSINESSES- Places with higher standards of living (New York got the minimum wage law bumped up and now the employers from Arizona are coming here.
55
Q

Rent Controls

A

✓ Destroyed housing by creating a shortage
✓ Apartments/Buildings were never fixed or taken care of; Arsony was abundant there, and people have been bombing us lightly.

Econ 103 (2 decks)

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