Econ Midterm Revised Flashcards
Memorization
Q: What is the “hockey stick” diagram in economic history?
A: It illustrates the rapid rise in per capita GDP since the Industrial Revolution, following centuries of stagnation.
Q: Define capitalism.
A: An economic system characterized by private property, markets, and firms.
Q: What are the three key institutions of capitalism?
A: Private property, markets, and firms.
Q: How does specialization contribute to economic gains?
A: It increases efficiency and total output by allowing individuals or firms to focus on specific tasks.
Q: What is GDP per capita, and why is it used?
A: It is the total output of an economy divided by the population, used to measure average living standards.
Q: What role do institutions play in different varieties of capitalism?
A: They shape economic performance by influencing how markets and firms operate.
Q: What is the relationship between capitalism and economic growth?
A: Capitalism promotes economic growth through innovation, specialization, and investment incentives.
Q: What did Adam Smith argue about self-interest?
A: He argued that self-interest, guided by the “invisible hand,” can lead to socially beneficial outcomes.
Q: What is the Malthusian trap?
A: A cycle where population growth offsets economic progress, keeping living standards low.
Q: How did the Industrial Revolution allow economies to escape the Malthusian trap?
A: Permanent technological change outpaced population growth, increasing income per capita.
Q: What was the Industrial Revolution?
A: A period of significant technological advancement starting in the late 18th century, leading to increased industrial production.
Q: Explain the concept of innovation rents.
A: Profits earned by innovators when new technologies reduce production costs or create new products.
Q: What is a production function?
A: A mathematical representation showing the maximum output achievable from different combinations of inputs.
Q: How does technological progress affect the production function?
A: It shifts the production function upward, indicating higher output from the same input levels.
Q: What is an isocost line?
A: A line showing all possible input combinations that result in the same total cost.
Q: What is diminishing marginal returns?
A: The principle that as additional units of an input are added, the increase in output eventually declines.
Q: What is opportunity cost?
A: The value of the next best alternative foregone when making a decision.
Q: Describe the trade-off between free time and income.
A: Individuals must balance labor (earning income) with leisure (free time), as more work increases income but reduces leisure, and vice versa.
Q: What are indifference curves?
A: Graphs representing combinations of goods or activities that provide equal satisfaction to an individual.
Q: Define the marginal rate of substitution (MRS).
A: The rate at which an individual is willing to trade one good or activity for another while maintaining the same level of satisfaction.
Q: What is the feasible frontier?
A: A curve depicting the maximum feasible output combinations given available resources and technology.
Q: Explain the marginal rate of transformation (MRT).
A: The rate at which one good or activity must be sacrificed to produce an additional unit of another good or activity.
Q: What is a social dilemma?
A: A situation where individual rational choices lead to a suboptimal outcome for the group.
Q: Define Nash equilibrium.
A: A set of strategies where no player can benefit by unilaterally changing their strategy, assuming others’ strategies remain constant.
Q: What is the prisoners’ dilemma?
A: A game theory scenario where two individuals acting in their own self-interest result in a worse outcome than if they had cooperated.
Q: Explain altruism in economic terms
A: The willingness to bear a cost to benefit someone else.
Q: What is reciprocity?
A: Responding to another’s action with a similar action, rewarding kind actions and punishing unkind ones.
Q: Describe the concept of social preferences.
A: Preferences that consider not only an individual’s own outcomes but also the outcomes of others.
Q: What is game theory?
A: The study of strategic interactions where the outcome for each participant depends on the actions of all involved.
Q: Define the term “strategy” in the context of game theory.
A: A complete plan of action specifying a player’s choice for every possible situation in a game.
Q: What is a payoff matrix?
A: A table that shows the payoffs for every possible action combination in a strategic interaction.
Q: Explain the concept of dominant strategy.
A: A strategy that yields a higher payoff regardless of the strategies chosen by other players.
Q: What is the assurance game?
A: A game where players prefer to cooperate, but cooperation occurs only if each player is assured the other will also cooperate.
Q: How do social preferences, repetition, and institutions help resolve social dilemmas?
A: Social preferences encourage cooperation, repetition builds trust, and institutions enforce rules to reduce free-riding behavior.
