Exam 1 Flashcards
Economics
Scarce resources with unlimited wants
Six principles for thinking like an economist
- Scarcity
- When there isn’t enough for everyone to have one for free there has to be a Rationing device (price, speed, government limitation) - Rational, Self-Interest
- This is the reason why people do things or the way that they develop decisions
- People will weigh out the cost vs. benefit
- Incentives matter and can encourage a person to choose one thing over another - Marginal Analysis
- Marginal means additional
- Additional benefits vs. additional costs - Unintended effects
- Opportunity Cost
- Scientific Method
- Look at all Variables
- Make Assumption
- Create a Hypothesis
- Gather and look at data
Potential Pitfalls
- Other things constant
- Be careful of others things that could effect study - Fallacy of composition
- The mistaken belief that what’s good for the individual is good for the whole group - Association vs. causation
Production Possibilities Frontier Assumptions
- Focus on Product of two goods: Shirts and ice cream
- Focus on given period of time: one year
- Resources are fixed
- Technology is fixed
- Rules of the game are fixed
Production possibility
The maximum amount of product you can produce
Production Possibilities Frontier (PPF)
Shows all of the different possibilities of products that can be produced at any given time
PPF and Scarcity
Points outside PPF are unattainable
PPF and Efficiency
- Productive efficiency
- It is impossible for you to increase the amount of production of one product without decreasing the production of another
- Points on the PPF line - Allocative efficiency
- The best point on the graph that gives you what you want
PPF and Opportunity Cost
Negative slope
PPF and Law of Increasing Opp. Cost
- Every time that you give up making more of a product, and when doing this you increase the opp. Cost
- The sloped graph gives me this effect
- Resources aren’t perfectly substitutable
PPF and Economic Growth
o Increase in Technology
o Increase in Resources
o Increase in Rules
o Show growth by PPF shifts
Absolute advantage
- The ability to produce more of a good with the same amount of resources
- Task specific
Comparative advantage
The ability to produce at a LOWER Opportunity Cost
Three concepts of I Pencil
- No one [person] knows (how to make it)
- Those that make me do not do so because they want me
- No master mind (coordinates my production)
Advantages Phrase
By specializing and trading they each got to consume more than they could on their own
Three Fundamental Economic Questions
What to Produce? How to Produce? For whom is it produced? Pure Capitalism - Markets Determine It Command Economy - Central Planning
Households
- Demand - goods and services
2. Supply - Resources
Firms
- Demand - Resources
2. Supply - goods and services
Roles of Government
1) Public Good
2) Promote Competition
3) Establish Rules
4) Regulate Natural Monopolies
5) Deal with Externalities
6) Redistribute Income
7) Economy Stability
Demand
- Changes in QUANTITY demanded
- Function typically has a downward slope
- Dealing with price and quantity
Law of Demand
- As price goes up, Quantity goes down OTC
2. As price goes down, Quantity goes up
Reasons for Law of Demand
1) Substitution effect
- When the price of a good goes up other goods seem better and so the Q. demanded for the first good drops
2) Income effect
- As price goes up your real purchasing power goes down and Q. goes down
3) Law of Diminishing Marginal Utility
Change in Demand
Shifts of Demand
- Tastes/Preferences goes up and demand goes up
- Prices of Other Goods
a. Compliment: P goes up D goes down
b. Substitute: P goes up D goes up - Consumer Income
a. Income increases demand increases - Normal Goods
b. Income increases demand decreases - Inferior Goods - Number of Consumers
a. Number of consumers increase demand increases - Consumer expectations
a. You expect it not to be available so you increase your consumption
Law of Supply
- P increase - Q increase
- P decrease - Q decrease
Higher prices are necessary for attracting scarce resources
Changes in Supply
Shifts of Supply
1) # of producers increases supply increases
2) Technology increases supply increases
3) Prices of resources increases supply increases
4) Product expectations
5) Prices of alternate goods to produce
6) Taxes/subsidies on goods
7) Regulations
Problem of scarcity of resources
There aren’t enough resources to satisfy people’s unlimited wants
In economics, how is Capital defined
Human creations used in the production process
The assumption that individuals act Rationally implies…
People implicitly calculate the costs and benefits of an activity to decide if it is worthwhile
When economic choice involves an adjustment to an existing situation, Marginal Analysis…
Involves comparing the additional cost and additional benefits of an activity before deciding
Association-is-Causation Fallacy
The incorrect idea that if two variables are associated in time, one must necessarily cause the other
Opportunity Cost
The value of the best alternative forgone when an item or activity is chosen
Is it Possible for a person to have a Comparative Advantage in the production of all products?
Nope
Households act as Suppliers when they provide what
Resources to firms and governments
Largest source of incomes for US households
Wages and Salaries
What is the most common form of business entity
Sole Proprietorship
List the three types of firms in terms of volume of sales
Sole Proprietorship - Partnership - Corporations
Public Goods
Available to all regardless of who pays for it
Since 1930, US Gov. Spending as a percent of GDP has done what
Increased
What mansion is the setting for GREED film
Vanderbilt house
Recently it has been discovered that lobsters grown on lobster farms can feed on algae, which is a cheaper food. As a result of this discovery…
The supply curve for lobster will shift to the right
