Econ Exam 1: Feb 6 Flashcards
Economics
the study of how society produces, exchanges, and consumes goods and services in the face of economic scarcity
Economic Scarcity
Society/individuals have infinite wants/desires, and an insatiable appetite for “stuff”
Absolute Scarcity
Don’t have raw material, don’t get finished product. ex- no bauxite=no aluminum foil
Commodities
Satisfy our wants and desires
Goods
Tangible items (car, bike, candy etc)
Services
Intangible (haircut, legal advice etc)
What are the 4 categories of resources?
Labor, Land, Capital, Entrepreneurship
Labor
all human effort that goes into production
Land
all natural resources used for production
Capital
machiner, plant and equipment used in production
Entrepreneurship
innovator or risk taker
What are the resources earnings?
Labor~wages
Land~rent
Capital~interest
Entrepreneurship~profits
Normal profits
need to be earned to just stay in business (to pay bills, put food on table)
Excess profits
profits earned that are over and above normal profits
What are the three economic agents?
households, firms, government
Households
provide resources (labor) and consume goods/services
Firms
provide goods/services and purchase resources ex-retailers, wholesalers etc.
Government
plays supporting role in overall process
Market
a context in which the voluntary exchange btwn a buyer and a seller of a good or service takes place, always changing
ex-Amazon, store, catalog, online etc.
What are the two fields of study of economics?
Macro and Micro
What are the four economic issues/goals?
Efficiency, Equity, Stability, Economic Growth
Efficiency
making the best possible use of resources when trying to achieve something
Technical efficiency
efficient use of resources when producing a good or service
Allocative efficiency
the efficient allocation of a society’s scare resources
What are the 4 questions of economics?
What to produce? How to produce? How much to produce? Who is our market?
How do we allocate resources?
1) Prices & 2) Competitive Markets
Equity
refers to the way society’s output is distributed-is it fair? (judgement call, no right answer)
What are two methods to redistribute income?
transfer payments and taxes
Stability
Price and employment contribute
Price
CPI or Consumer Price Index, high CPI means rising inflation, measures price of typical household goods
Employment
measured by unemployment rate
Economic Growth
refers to the substantial and sustained increase in the nations income or output (substantial meaning 5-5.5% increase)
Macroeconomics
study of the determination of economic aggregates such as total employment, total output, and price level, look at totals for whole economy
Microeconomics
the study of the efficient allocation of relatively scare resources and the distribution of income
theory
tries to explain why or how things happen in the real world
Abstraction
ignoring many details to focus on the most important elements of a problem. Why? - millions of different variables, not enough time to study all
Opportunity Cost
the value of the benefit of the BEST alternative when a choice is made, slope of PPF curve, slope flat= low opp cost, slope steep= high opp cost
Positive Statement
one that states what is- deals in fact and explanation (something that is true)
Normative Statement
one that involves a value judgement (an opinion) such as on Meet The Press
Independent Variable
independent of the other variables, changes on its own
Dependent Varibale
Dependent on the other independent variable(s)k. A change in the ind var causes a change in this one
Slope
the change in the dependent variable when the independent variable changes by one unit
Circular Flow Diagram
visual model of the economy that shows how dollars flow through markets among households and firms
Production Possibilities Frontier (PPF)
a graph that show the combos of output that the econ can possibly produce given the available factors of production and avail. production technology, can show trade offs that occur
efficient outcome
economy is getting all it can from the scare resources avail. Points lie on PPF curve
inefficient outcome
economy is producing less than it could from the resources it has available. Points lie below PPF curve
Feasible outcome
production level that can occur with current level of resources avail. If point is above/outside PPF it is not feasible.
What ideas does the PPF highlight?
scarcity, efficiency, trade-offs, opportunity cost, economic growth
Market
a group of buyers and sellers of a particular good or service (buyers det. demand, sellers det. supply) can be organized or not
What are price an quantity determined by?
they are determined by all buyers an sellers
Competitive Market
a market in which there are many buyers and many sellers so that each individual has a negligible impact on market price
Perfectly Competitive Market
highest form of competition, 2 characteristics
1) goods offered for sale are exactly same
2) numerous buyers/sellers so not one has any influence over market price
Monopoly
market with only one seller
Quantity Demanded
the amount of good that buyers are willing and able to purchase
Law of Demand
the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
Demand Schedule
a table that shows the relationship between the price and quantity demanded
Market Demand
sum of all the individual demands for a particular good or service
How does an increase in demand affect the demand curve?
curve shifts to right
How does a decrease in demand affect the demand curve?
shifts curve to the left
What variables can shift a demand curve?
income, prices of related goods, tastes, expectations, # of buyers
Normal good
a good for which , other things equal, an increase in income leads to an increase in demand
Inferior good
a good for which, other things equal, an increase in income leads to a decrease in demand
substitutes
two goods for which an increase in price of one leads to an increase in demand for the other
complements
two goods for which an increase in the price of one leads to a decrease in demand for the other
quantity supplied
the amount of a good that sellers are willing and able to sell
Law of Supply
The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
Market Supply
sum of all the supplies of all sellers
What happens to the supply curve if there is an increase in supply?
The supply curve shifts to the right
What happens to the supply curve if there is a decrease in supply?
The supply curve shifts to the left
What happens to supply if there is advances in technology?
supply increases because labor costs decrease
Equilibrium
a situation in which the market price has reached the level at which quantity supplied equals the quantity demanded
Do markets naturally move towards equilibrium?
yes, actions of buyers and sellers naturally move markets towards equilibrium
Surplus
a situation in which quantity supplied is greater than quantity demanded “situation of excess supply”
Shortage
a situation in which quantity demanded is greater than quantity supplied “situation of excess demand”
What do price increases cause in terms of supply and demand?
Price increases cause quantity demanded to fall and quantity supplied to rise
Law of Supply and Demand
the claim that price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance
What is a shift in the supply (or demand) curve called?
“change in supply” or “change in demand”
What is movement along fixed supply (or demand) curve called?
“change in quantity supplied” or “change in quantity demanded”
Vertical Intercept
the value of the dependent variable when the independent variable equals 0.
Production Possibilities Curve
Shows the maximum alternative combinations of two goods that an economy can produce at a given time, with a given stack of resources a given level of technology, and fully employed resources
Why does the PPC have a negative slope?
It shows the opportunity cost because we live in a world with scarcity
What is the shape of the PPC?
Curve concave to origin
What does the PPC show about opportunity cost?
At first, loss of production of one product is minimal, but as you use more resources to make the other product, you sacrifice an ever increasing amount of the first product to make the second
What kind of curve does stable opportunity cost create?
It creates a straight line, it happens very rarely because few products use the exact same resources
What aspects of Economics are evident in the PPC?
math, opportunity cost, scarcity, efficiency, resources, 4 econ questions, abstraction, theory, economic growth, production, commodities, allocative efficiency, choices
What four functions do market prices perform?
1) Resource Allocation
2) Give a rel. idea of value of goods
3) Info about the future
4) Incentives: Households go to work, firms produce goods/services
Complete Market Demand Function
tells us the quantity that consumers are willing and able to buy at all alternative market prices UNDER ALL MARKET CONDITIONS
Px
Price of good x
Yc
income of consumers
Nc
number of consumers
Tc
tastes and preferences of consumers
Ps
price of substitute goods for x
Pc
price of complimentary goods for x
Yd
income distribution
Ec
expectations of consumers of good x
Dx= f( Px, Yc, Nc, Tc, Ps, Pc, Yd, Ec, …)
Complete Market Demand Function.
Substitute
if price increases on one good, there will be an increase in demand for other good
Compliments
if price increases on one good, there will be a decrease in demand of the other
Ceteris Paribus (CP)
all other variables held constant
Single Market Demand Function
tells us the quantity that consumers are willing and able to buy at all alternative market prices, ceteris paribus
Dx=F(Px)
Demand Function
Buyer’s Reservation Price
the last price at which a consumer will purchase the good.
Law of Demand (lecture def)
In general, there is an inverse or negative relationship between the quantity of (x) consumers are willing and able to buy and the price c.p.
What are the three reasons why law of demand holds true?
1) Law of Diminishing Marginal Utility
2) Income Effect
3) Substitution Effect
Law of Diminishing Marginal Utility
If we take an individual consumer and a bundle of quantities of a good, over the relevant range, marginal utility received will be positive but declining as units of consumption increase
Utility
the satisfaction a consumer receives from consuming a good
Total Utility
the total satisfaction received from consuming a certain quantity of a good.
What does marginal mean?
EXTRA
Marginal Utility
the extra utility that is brought about by the addition of one more unit of the good
Marginal utility is the _____ of the total utility curve.
Slope, derivative
Income Effect
A price increase of good (x) will decrease the relative income (purchasing power) of consumers.
Substitution Effect
As the price of good (x) rises, consumers will purchase more of a substitute good (w).
