Economics Flashcards
Who is Adam Smith?
Founder of the field of economics.
1723-1790
Scottish
“Wealth of Nations” (1776) - Market Economy
Smith’s Views on Market Economy
Superior form of organization.
-Self-interest = dominant motivating force but self-interest = public interest
4 General viewpoints on workings of markets
- classical
- Keynesian
- Monetary
- Neoclassical
Definition of Economics
“The social science that examines how people choose to use limited or scarce resources to obtain maximum satisfaction of unlimited wants.”
Macroeconomics
Study of Economy as a whole
- Inflation - Unemployment - Economic Growth
Microeconomics
Study of individual parts that make up the economy
-Households
-Business firms
-Government agencies
Emphasizes how units make decisions and consequences of decisions
Scarcity
1) Which & how many goods and services a society should produce.
2) How it should produce those goods and services
3) How goods and services should be distributed.
2 Components of Scarcity
1) Good has to be limited
2) People have to want it.
Economic Growth in relation to scarcity
Produce more of the goods and services people want so they have an abundant supply.
More Resources, Better Resources, Better Technology
Improve the Use of Goods and Services
Society uses resources wisely = less scarcity
Reduce Wants
Society wants less .
Difficult long term.
4 E’s
1) Allocative Efficiency
2) Productive Efficiency
3) Full Employment
4) Equity
Allocative (Economic) Economy
Produces the types and quantities of goods and services that most satisfy people.
Limited resources + right mix of goods and services = Allocative Economy
Productive Economy
“Technical Efficiency”
Producing greatest quantity of goods and services possible at minimum cost. Not wasting resources.
- Not using more resources than necessary - Using resources where they are best suited. - Using technology to minimize cost
Equity
Wants Distribution of goods and services to be “fair”.
Equity =/= Equality
NO OBJECTIVE STANDARD
Standards of Equity
1) Contributory Standard
2) Needs Standard
3) Equality Standard
Contributory Standard
People are entitled to a share based on what the contribute.
More In = More Out
Needs Standard
Disbursed based on need.
Personal contribution is irrelevant
Equality Standard
Every Person is entitled to an equal share
Full Employment
Using all available resources (not just labor)
Produces more.
Production Possibilities Frontier Curve
Used to illustrate the problems associated with scarcity
-Maximum feasible combinations of 2 goods and services that society can produce
Assumptions: capable of only 2 goods
Fixed quantity of resources
Most productive manner.
Technical Efficiency
When more of one good cannot be produced without producing less of the other.
Traditional Economies
- Rely on tradition to determine production/distribution
- Not static
- Reticent to change and ill-equipped for sustained growth
- Poorer third world countries
Command Economies
-Rely on central authority (dictator or government) to make decisions
Market Economy
- No central authority
- Custom plays very little part
- Buyers and sellers decide what goods and services.
- Consumers make decisions based on income (Individual Self Interest)
Mixed Economy
- Contains elements of all 3 systems
- All real-world economies are mixed economies.
- Mixture varies by country
Capitalism
Productive resources are owned by private individuals
Socialism
- Mixed economic system
- Productive resources owned collectively by society
- Allocation by government
- Markets are used to determine price of goods and wages
Planned Economy
- Production is publicly owned with little to no private ownership.
- Central planning authority makes decisions
Demand
How much someone wants something
Supply
How much of something is available
Demand relation
Graph to show quantity demanded at a particular price.
- Price on y-axis - quantity on x-axis - Downward slope = Buy less when price is high and more when price is low. - Upward slope = The more purchased the higher the price.
Equilibrium
Intersection of the supply and demand curves.
“STABLE”
Elasticity
Excess demand and excess supply that puts pressure on the prices.
Elastic
When quantity produced responds to changes in price.
Inelastic
When changes don’t respond to changes.
Gross Domestic Product (GDP)
The total money value of final goods and services that a country produces over a given period of time (usually 1 year).
- Snapshot of the economy at that certain point in time.
- Used to measure country’s income
Expenditures Approach
Looks at amount of new goods and services purchased in a country for a given year.
Expenditure Approach Equation
GDP = C + I + G +NX
C: Consumption
I: Investment
G: Goods
NX: Net Exports
Aggregate Supply
National output produced
Aggregate Demand
National output purchased
4 Phases of the Economic Cycle
1) Boom
2) Recession
3) Trough
4) Recovery
Boom
Expansion of the economy that brings prosperity
Recession
Contraction of the economy with a decline in GDP and rise in unemployment
Trough
Turning point in the economic cycle.
Slide from the mean to the lowest point in a recession
Recovery
Rise from the trough back to mean, lessening unemployment and rising prices
Surplus
When sellers make too many goods and there isn’t enough buyers
Inflation Rate
Rate at which prices rise
Expansionary Fiscal Policy
Raises government spending and/or decreases taxes in order to increase spending.
Contractionary Fiscal Policy
Decreases in government spending and increases in taxes to decrease spending in the economy.
Federal Reserve System (The Fed)
Government entity in charge of banks and money
