Economics - Trimester 1 Final Flashcards
0
Q
How are production possibility frontiers produced? (3)
A
- Calculate the maximum possible production of good 1; plot on y-axis
- Calculate the maximum possible production of good 2; plot on x-axis
- Draw a line connecting the two points
1
Q
What are the four principals of economics? (4)
A
- Every decision has a cost
- money, time, opportunity - Humans face Trade-offs
- type of decision where more of something necessarily means less of something else - Humans respond to Incentives
- humans make decisions by comparing benefits to costs (if benefits>costs = they’re motivated - Humans make decisions at the margins
2
Q
Define opportunity cost
How is opportunity cost calculated? (2)
A
The most highly valued opportunity or alternative forfeited when a choice is made
Calculate by finding total like normal math problem
3
Q
Production possibilities frontier (PPF)
A
Graphic representation of all possible combination of two goods that an economy can produce
4
Q
What are the 3 types of resources or factors of production? (4)
A
a. k.a. Inputs
1. Land - natural resources (ex. Water, minerals, animals, forests)
2. Labor - physical and mental talents that ppl contribute to the production of goods an services (ex. weatherman telling us the weather on TV)
3. Capital - produced goods that can be used as resources for further production (ex. Machinery, tools, computers, etc.)
5
Q
Goods
A
Anything that satisfies a persons wants or brings satisfaction; also tangible products
6
Q
Services
A
Tasks that people pay others to perform for them
7
Q
Types of goods and services? (2)
A
Intangible / tangible goods
Services - intangible
8
Q
What are the three allocation questions that all economic systems answer? (3)
A
- What to produce?
- How to produce?
- For whom to produce?
9
Q
Define (Economic) risk
High risk trade-off
Low-risk trade-off (3)
A
Risk = the likelihood of an investment producing losses
High risk: more risk = losses are more likely; but, more risk = higher profits
Low risk: less risk = losses are less likely; but, less risk = smaller profits
10
Q
Time-horizon (3)
A
Length of time
Owning a stock for a greater time-horizon = lower risk
Owning a stock for a smaller time-horizon = higher risk
11
Q
Buying on the margin
A
Borrowing money to buy stock
12
Q
Difference between private and public good? (2)
A
Private good - a good of which one person’s consumption takes away from another person’s consumption
Public good - a good of which one person’s consumption does not take away from another person’s consumption
13
Q
Type of public goods (2)
A
Excludable public goods - a public good that individuals can be excluded from consuming (ex. concert ticket - takes away from someone else getting it)
Non-excludable public goods - a public good that individuals cannot be excluded from consuming (physically)
14
Q
Characteristics of traditional market
Give example(s)
A
An economic system in which the allocation questions are answered based on customs, beliefs, religion, and habits
Ex. Amish communities, isolated African/Asian communities, aboriginal communities
15
Q
Characteristics of a market economy? (5)
Example(s)
A
- businesses decide questions of allocation
- owns private property
- individual freedom
- individuals vote
- free enterprise
Ex. The U.S., Japan, Germany
16
Q
Characteristics of a command economy? (5)
Example(s)
A
- state decides questions of allocation
- state owns all property (public property)
- characterized by high levels of equality among individuals
- few or one individual makes a centralized decision by his decree
- socialism
Ex. North Korea, Cuba, China
17
Q
Free enterprise
Example
A
An economic system in which individuals (not government) own most, if not all, the resources and control their use; government plays small part in economy
Ex. Market economy
18
Q
Socialism
Example
A
An economic system in which government controls and may own many of the resources
Ex. Command economy
19
Q
Adam smith (6)
A
Free enterprise
Capitalism
Most ethical economic system
Ideas-
- risks benefits society
- division of labor = greater productivity and health
Major works-
- the wealth of nations
20
Q
Karl Marx (5)
A
Socialism
Communism
Ideas-
- all value in produced goods comes from labor (labor theory of value)
- capitalists exploit laborers (surplus value)
Major work- Das Kapital
21
Q
Labor theory of value
A
Theory that all value in produced goods is derived from labor
22
Q
Surplus value
A
The difference between the total value of production and subsistent wages paid to workers
23
Q
Why won’t a private company produce non-excludable public goods?
A
Because once a nonexcludable public good is produced, no one will pay for it, because people won’t wanna pay for something they cannot be excluded from consuming
24
How does a circular flow diagram represent a free market economy? (5)
3 stakeholders:
1. Households- SELL factors of production, BUY goods and services
2. Firms- SELL goods, BUY factor of production
3. Government- collect taxes, make transfers, & demand goods & services
Two markets:
1. Resource market- factors of production are exchanged for money
- land, labor, and capital
2. Products market- goods/services are exchanged for money
25
Law of demand
If Price⬆️; Quantity demanded⬆️
```
P = price of the good
Qd = quantity demanded of the good
```
26
Demand
Willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period
27
Quantity demanded (2)
Number of units of a good purchased at a specific price
When price of the good changes, quantity demanded will also change and a new point will be added to the demand curve
28
Law of diminishing marginal utility
Law states that as a person consumes additional units of a good, eventually the utility gained from each additional unit of the good decreases
29
What happens to the demand when circumstances other than price change? (2)
Economists say that demand changes
30
Determinants of demand (5)
1. Consumer preferences-
- consumer pref.⬆️; demand⬆️
2. Consumers' income-
- normal goods --> income⬆️; demand⬆️
- inferior goods --> income⬆️; demand⬇️
3. Price of related goods
- complementary goods --> price⬆️; demand⬇️
- substitute goods --> price⬆️; demand⬆️
4. Market size, or # of consumers
- market size⬆️; demand⬆️
5. Consumers' expectation of future price
- consumers' expectation of price⬆️; demand in the present⬆️
31
Elasticity of demand
The degree to which a price change affects the quantity demanded
32
Inelastic goods (4)
Necessity, goods w/o a substitute, goods that cost a small portion of consumers' income, small time-horizon
Quantity demanded is not sensitive to a change in price
A large change in price = small change in quantity demanded
Result is a demand curve that is steep or nearly vertical
33
Elastic goods (4)
Luxuries, many substitutes, costs a large portion of consumers' income, large time-horizon
Quantity demanded is sensitive to change in price
Small change in price = large change in quantity demanded
Result is a demand curve that is shallow or nearly horizontal
34
Inferior good
Income⬆️; demand⬇️
35
Normal good
Income⬆️; demand⬆️
36
Substitute (2)
A similar good
Price⬆️; demand⬆️
37
Complement (2)
A good that is consumed jointly with another good
Price⬆️; Demand⬇️
38
How to calculate price elasticity (elasticity of demand)? (2)
inelastic goods:
- price⬆️; TR⬆️
Elastic goods:
- price⬆️; TR⬇️
39
Law of supply
If Price⬆️; Quantity supplied⬆️
40
Quantity supplied (2)
Number of units of a good produced and offered for sale at specific price
When price of a good changes, quantity supplied will also change and a new point is added
41
Supply
The willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific time period
42
How to find Total revenue
TR = price x quantity
43
Incentives for consumers and producers (2)
Consumers - low prices
Producers - high prices
44
What happens to quantity supplied and supply when circumstances other than prices change?
Economists say that the supply has changed
45
Determinants of supply (6)
1. Price of resources (land, labor, capital)
- price⬆️; supply⬇️
2. Government tools:
- regulations: regulations⬆️; supply⬇️
- taxes: taxes⬆️; supply⬇️
- subsidies: subsidies⬆️; supply⬆️
3. Price of producers' options
- price of option⬆️; supply⬇️
4. Competition
- competition⬆️; supply⬆️
5. Producers expectations of future profits
- expectations of profits⬆️; supply in present⬆️
6. Technology
- technology⬆️; supply⬆️
46
Equilibrium (3)
Demand = supply
Quantity demanded = quantity supplied
When producers and consumers agree on price and quantity
47
Equilibrium price
Equilibrium quantity (2)
Equilibrium price - the price at which a good is bought and sold in a market that is in equilibrium
Equilibrium quantity - the quantity of a good that is bought and sold in a market that is in equilibrium
48
Surplus
Qs > Qd
Only occur at prices ABOVE equilibrium price
49
Shortage (2)
Qd>Qs
Only occurs at prices BELOW equilibrium price
50
Price ceiling
Legislated price-set lower than equilibrium price - above which buyers and sellers cannot legally buy and sell a good
51
Price floor
A legislated price - set above the equilibrium price - below which buyers and sellers cannot legally buy and sell a good
52
Why do price controls create surpluses and shortages? (2)
Ceiling price = shortage
Floor price = surplus
53
Demand ⬆️
equilibrium quantity ⬆️
equilibrium price ⬆️
54
Demand ⬇️
Qe⬇️
Pe⬇️
55
Supply ⬆️
Qe ⬆️
Pe ⬇️
56
Supply ⬇️
Qe⬇️
Pe⬆️
57
Demand⬆️ and supply ⬆️
Qe⬆️
In determinant Pe
Compass method - East
58
Demand⬇️ and supply⬇️
Qe⬇️
Indeterminate equilibrium price
Compass method: west
59
Demand⬆️ and supply⬇️
Indeterminate equilibrium quantity
P⬆️
Compass method: north
60
Demand⬇️ and supply⬆️
Indeterminate equilibrium quantity
Pe⬇️
Compass method: south
61
Business firm
An organization that uses resources to produce goods and services that are sold to consumers, other firms, or the government
62
Law of diminishing marginal productivity
If a factor of production is added to another factor of production in fixed supply eventually total output will peak and thereafter decrease
63
4 types of business ownerships? (4)
1. Sole proprietorships
2. franchise
3. Partnership
4. Corporation
64
Sole proprietorship
Advantages (2)
Disadvantages (3)
(6)
One person or family owns the business
Advantages:
- all profits belong to one person
- complete control of enterprise
Disadvantages:
- unlimited liability (responsible for all debts)
- limited ability to raise funds for business expansion
- sole proprietorships usually end with retirement or death of proprietor
65
Partnership
Advantages (2)
Disadvantages (2)
Business owned by two or more partners (co-owners)
Advantages:
- specialization (one person works on a job that they are good at and the other person does the same -- increases chances of success)
- profit of partnership = income of the partners (only income taxes need to be payed)
Disadvantages:
- 2 types of partners
* general: partners who are responsible for the management of the firm; they face unlimited liability, too t usually get involved in management of firm or contracts
- potentially difficult decision-making process
66
Corporation (3)
Advantages (3)
Disadvantages (4)
A legal entity that can conduct business in its own name in the same way that an individual does
Owned by its stockholders (ppl who own shares of stock in the corp)
Assets: anything of value to which the firm has a legal claim
Advantages:
- limited liability (owner of business firm can lose only the amount he/she has invested (in the firm))
- perpetual existence (they live forever)
- can raise money by selling stocks
Disadvantages:
- double taxation (corporate income tax and personal income tax)
- dividends=shares of the corp's. profits distributed to stockholders
- more complicated to set up and organize
- "corporate citizenship"
67
Board of directors (2)
Decision making body in a corporation
Decides corporate policies and goals
68
Bonds
Debt
69
Franchise
Advantage
Disadvantage
A contract by which a firm (usually a corporation) lets a person or group use its name and sell its goods in exchange for certain payments and requirements
Advantages:
- ready made product/business
Disadvantages:
- profits and decision making shared with the corporation
70
Stocks
Dividends
71
How do businesses decide where to locate?
Similar firms have an incentive to locate near each other due to the competition for customers
72
Nader vs Friedman view (2)
Nader:
- Ralph Nader believes businesses have ethical and social responsibilities
* no asymmetrical info
* encourage to make sure they get exactly what they want
* treat employees well
* consider "quality of life" issues
* donate funds to meet social needs in community
Friedman:
- Milton Friedman believes that the only responsibility of a business is to use its resources and engage in activities designed to increase its profits (free competition w/o deception or fraud)
73
4 types of market structures (4)
1. Perfect competition
2. Monopolistic competition
3. Oligopoly
4. Monopoly
74
Perfect competition:
Characteristics (4)
Issues (1)
Examples (3-4)
Characteristics:
- many buyers/sellers
- sells identical products
- no asymmetrical info
- no barriers to enter/exit market
Issues:
- sellers=price takers
*a seller that can sell all its output at equilibrium price but can sell no other
output at any other price
Ex. Agriculture products; stocks or bonds; gas
75
Monopolistic competition
Characteristics (3)
Issues (1)
Examples (2)
Characteristics:
- many buyers and sellers
- different or unique products
- few barriers to enter/exit market
Issues:
- sellers are price makers
* seller that can sell some of its output at various prices
Ex. Athletic shoes (NIKE, Adidas, Reebok); fast food (mcds, BK, Wendy's)
- sellers use advertising to differentiate products
76
Oligopoly
Characteristics (3)
Issues (3)
Examples (3)
Characteristics:
- few sellers
- identical or similar products
- many barriers
Issues:
- sellers may try to collude (conspire to fix prices)
- if seller collides, they can act as a cartel (group w/ monopoly power)
- cartels don't last long due to large temptation to cheat
Examples: OPEC (Saudi Arabia,Ilya, Venezuela), airline industry (American, United, delta), broadcast TV (CBS, NBC, ABC, FOX)
77
Monopoly
Characteristics (3)
Issues (2)
Types of monopolies (2)
Examples (3)
Characteristics:
- one seller
- no subs
- many barriers
Issues:
- price makers; they choose price
- Sherman antitrust act (outlawed monopolies in the u.s. In 1890)
Types of monopolies:
- government monopoly
* ex. Rogaine
- natural monopoly
* Alcoa, AT&T
78
Government monopoly (3)
Government sanctioned monopolies
- patent: form of intellectual property granted to an inventor
- copyright: form of intellectual property granted to an author or artist
79
Natural monopolies (2)
A business that can produce at an unusually low cost
- many have exclusive ownership of a resource
80
Flat money (3)
Why do most modern economies use flat money?
Money that has extrinsic value
- Flat money has value by authoritative decree
It's most used because it durable, portable, and divisible
81
Bank panic "bank run"
Occurs when too many depositors simultaneously try to withdraw their deposits from a bank, which depletes the banks' reserves
82
Federal reserve system structure? (3)
Structure: decentralized central bank
- 12 district banks
- board of governors of the federal reserve systems: the governing body of the Fed.
83
Why was the Fed created? (2)
Result of the panic of 1907
| - didn't have strategy for circulating $
84
Responsibilities of Fed? (3 w/ bullets)
- Regulate banks to ensure they follow federal laws
* reserve requirement: regulation that requires a bank to keep a certain percentage of its deposits in its reserve account with the Fed or the vault
- a bank for banks
* holds required reserves of all banks
* lender of last resort
- conducts monetary policy by controlling the money supply
* Fed is SOLELY responsible for monetary policy
* monetary policy: how much currency should be here in the economy?
85
How can the Fed change the money supply ?
1. The reserve ratio
- reserve ratio⬆️; money supply⬇️
2. The discount rate (interest rate for banks charged by Fed)
- discount rate⬆️; money supply⬇️
3. Open market operations (buying/selling of Federal securities--> treasury bonds)
- FED sells securities/treasury bonds; money supply ⬇️
- FED buys securities/treasury bonds; money supply ⬆️
86
What does GDP measure? (Or nominal GDP)
Value of all final goods and services produced in a country
87
BRIC countries (5)
Why are thy important?
1. Brazil
2. Russia
3. India
4. China
Countries with rapidly increasing GDP
88
Components of GDP (4)
1. Consumption (C)
- household purchases in product market
- NO new housing
2. Investment (I)
- anything firms purchase in resource market
- military spending, road construction
- NOT social security or welfare
3. Net exports (NX)
- Exports-imports
- exports: products made in US; sold to other countries
- imports: products made in foreign countries; sold in U.S.
89
What does real GDP measure ?
How do you calculate it? (4)
Compares output from year to year
Real GDP - GDP that has been adjusted for price changes
- measured in base years
Real GDP = base yr price x current year quantity
90
Inflation (4)
An increase in prices on average, or an increase in price level
- Decreases purchasing power
- doesn't all prices increase
- % of change in the CPI
91
Purchasing power
The quantity of good money buys
92
How is inflation measured?
Inflation rate = [(CPI later y - CPI earlier yr) / CPI earlier yr] •100%
93
Sources of inflation (3)
Demand side inflation
Supply side inflation
The federal reserve
94
Demand-side inflation (3)
⬆️demand = ⬆️inflation
⬆️demand for all goods = inflation
Growing population = inflation
95
Supply side inflation (3)
⬇️supply = ⬆️price
⬇️supply for all goods = inflation
Supply shock- unforeseen disruption in supply; causes inflation
96
How is the federal reserve a source of inflation? (3)
⬆️population = ⬆️need for more $
⬆️money supply more than needed = inflation
Hyperinflation - only occurs when money supply increases very rapidly
97
How does inflation affect individuals on fixed incomes? (2)
Incomes don't change, but cost of goods ⬆️
Includes senior citizens and/or retirees
98
How does inflation affect savers? (4)
Earned interest = ⬆️purchasing power of $
⬆️inflation = ⬇️️purchasing power of $
Interest rate > inflation rate; purchasing power ⬆️
Interest rate < inflation rate; purchasing power ⬇️
99
How does inflation affect borrowers? (2)
Incomes eventually ⬇️ with inflation
Debts become easier to repay with inflation
100
Phases of the business cycle (5)
1. Peak - GDP at temp. high
2. Contraction - when GDP ⬇️ (recession = Real GDP fails for 2 consecutive quarters)
3. Trough - low point in real GDP
4. Recovery - when real GDP is rising; begins at the trough)
5. Expansion - refers to ⬆️ in real GDP after recovery
101
Consumer price index (3)
Measure of price level based on a 'basket' of goods
Basket mainly contains household goods
Most expensive good in basket = housing
102
Calculate CPI
CPI = (basket current yr value) ÷ (basket base yr value) x 100
103
How to find out how much something would cost today?
Yr 1 price x (CPI yr 2 / CPI yr 1) = Equivalent Yr 2 price
104
What GDP omits? (5)
1. Illegal goods and services
2. Legal goods w/ no record of transaction (ex. Mowing neighbors lawn)
3. Used goods
4. Stocks and bonds
5. Gov. Transfer payments (social security and welfare payments = entitlements)
