Exam 1 Flashcards
Economics
the study of the choices we make among our many wants and desires given our limited resources
Scarcity
unlimited wants exceed limited resources
Resources
inputs to produce goods and services
The economic problem
scarcity
Scarcity forces us to
choose
Choices are costly because
we must give up other oppurtunities that we value
Self-interest
doing what will make you better off
Rational
people do the best they can, based on their values and information, under current and anticipated future circumstances
Theories
established explanations or propositions used to explain and predict behavior in the real world
Ceteris Paribus
assumption of holding all other variables constant
All other variables must be held constant so
we can really know the relationship between two variables of interest
Economists try to predict the behavior of
groups rather than individuals
The founder of economics
Adam Smith
Adam Smith’s book
The Wealth of Nations
Budgets
limit what we can buy as individuals
In a global sense its ___ that limit humans
resources
Categories of resources:
labor, land, physical capital, human capital, and entrepreneurship
Labor
physical and mental effort
Land
physical area and natural resources (includes trees, animals, minerals, and water)
Pyhsical Capital
equipment and structures used to produce goods and services
Human Capital
skills and knowledge
Entrepreneurship
process of combining labor, land, and capital to produce goods and services (requires taking risks and being innovative)
A good is scarce if
we want more than exists and so we have to pay for it
The pricing system
allocates resources
Oppurtunity cost
the value of the best alternative not chosen
A personal cost is also a
societal cost
Marginal also can mean
additional
Marginal Thinking
thinking about the consequences of “additional action”
Rule of rational choice
pursue an activity as long as the marginal benefit is larger than the the expected marginal cost (MB>MC)
The marginal cost is the smae as the
oppurtunity cost
Efficiency
getting the most out of your resources
In acting rationally people are
responding to incentives
Positive incintives
reduces costs or increases benefits in order to increase in an activity
Negative incentives
increases costs or decreases benefits in order to decrease in an activity
Prices are the same as
incentives
Falling prices are incentives to
buy more
Rising prices are incentives to
buy less
Specialize
concentrate energies on only one or a few activities
Trade
buying from each other
What you specialize in involves your
oppurtunity cost
You should specialize in what
has a lower oppurtunity cost
Having the lowest oppurtunity cost means you have a
comparative advantage in something
Specialization and trade is rational and it is our self interest because
it builds wealth due to increased productivity
We are all specialists consuming
the products of other specialists
Comparative advantage
a person, region, or country can produce a good or service at a lower oppurtunity cost than others
Prosperity
the saving of time and satisfying your needs
We are all working for each other to draw upon specialization and trade to
raise each other’s living standards
Market
the process of buyers and sellers exchanging goods and services
Markets put
specialization and trade into action
Markets bulid
wealth
Wealth
more goods and services for all
The process of buyers and sellers interacting results in a
price and quantity of goods and services exchanged
A market economy provides
a way for buyers and sellers to allocate scarce resources efficiently
The price determined by the market communicates the
relative scarcity of resourecs
Markets are extraordinarily
complex things
Milton Friedman
a Nobel-Prize winning economist
Markets are dependent on
protection of property rights
The basis of efficient market allocation is that
the people making the decisions enjoy all of the benefits and incur all of the costs of the decisions
Sometimes markets don’t allocate resources effciently because
people don’t know all of the costs or benefits or don’t pay foe all of the cost or get all of the benefits
Market Failure
when the market does not allocate resources efficently on its own
Economic growth is defined as a
percentage change in the output of goods and services per capita
Greater productivity is
key for economic growth
More capital per person is
the key to greater productivity
Factors that contribute to economic growth:
physical and human capital, natural resources, technological change, incentives for innovation, and low taxes
When we trade we create a
market
A market is a ____ not a place
process
Quantity
the allocation of our scarce resources
Relative scarcity
how much is there relative to how much is desired
The value of markets goes way beyond
productive efficency
Productive
producing a higher output
The 3 economic questions
What is to be produced?
How are they produced?
For whom are they produced?
Command economy
an economy in which the government uses central planning to coordinate most economic activities
Market economy
an economy that allocates goods and services through the private decisions of consumers, input suppliers, and firms
In command economies the _____ or _____ ____ decides WHAT is to be produced
government or central planning board
In market economies, resources are allocated by
individual decision makers responding to market prices
Consumer Sovereignty
the decisions of individual consumers determine what is to be produced
Market economies use _______ to determine the most efficient ways of using resources.
market mechanisms
The United States has what kind of economy?
mixed economy
Mixed economy
both the government and the private sector determine the allocation of resources
Capital intensive
production that uses a large amount of capital (labor is scarce)
Labor intensive
production that uses a large amount of labor (capital is scarce)
The best method of production is
the least cost method
Distribution of goods in a market economy go to those who
have sufficient income and are willing and able to pay the price
In a comand economy those with ____ power get the most of the goods and services.
political
Markets determine
price and quantity
Product market
markets for output goods and services where households are buyers and firms are sellers
Factor market
market for inputs to produce goods and services, where households are sellers and firms are buyers (labor)
The production possibilities cure illistrates
an economy’s potential for allocating its limited resources for producing various combinations of goods in a given time period
Demand
the buyer side of the market
Market demand
the sum of individual demand curves
3 reasons for the negative relationship between price and quantity demanded
diminishing marginal utility, substitution effect, and income effect
Diminishing marginal utility
as you consume more of a good your satisfaction is consuming the good decreases
Marginal utility
marginal benefit for the consumer
Substitution effect
as prices rise, we tend to substitute out to other goods
Income effect
as prices rise the buyer power of our income falls, so we can’t buy as much
Price and quantity are not held _____ along demand.
constant
5 conditions held constant along demand
income, taste or preference, number of buyers, and expected prices of goods
Normal good
demand increases as income increases (steak, shoes, cars)
Inferior good
demand decreases as income increases (rahmen noodles, off brand, used clothing)
Expectations of rising prices tomorrow
causes an increase in demand today
Complements
increase in the price of one good causes a decrease in the demand for the other (increase in ice cream price=less cones demanded)
If the demand for milk is downward sloping, then an increase in the price of milk will result in
a decrease in the quantity of milk demanded
Most likely to increase the demand for jelly
an increase in income, jelly is a normal good
Would not cause a change in demand for cheese
an increase in price of cheese
Ceteris paribus, an increase in the price of DVD players would tend to
decrease the demand for DVDs (complaments)
Whenever the price of good A decreases, the demand for good B increases
complements
Whenever the price of good A increases and the demand for good B increases as well
substitutes
The difference between change in QD and a change in demand
QD is caused by a change in a good’s own price, while a change in demand is caused by a change in some other variables such as income, tastes or expectations
Suppose CNN announces that bad weather has reduced the number of cocoa bean plants and prices of chocolate are expected to rise. As a result:
the current market demand for chocolate will increase (if its going to get expensive, buy it cheap now)
An upward sloping supply curve shows that
suppliers are willing to increase production of their goods if they recieve higher prices for them
Along a supply curve
quantity supplied changes as price changes
What will not affect the supply of a good?
an increase in consumer income
What will affect the demand of a good?
an increase in consumer income
Shifters of supply
higher wages for workers, higher prices for inputs, and technological improvement
The difference between a change in quantity supplied and a change in supply
a change in quantity supplied is caused by a change in a good’s own price, while a change in supply is caused by a change in some other factor such as input prices, prices of related goods, expectations, or taxes
Not a determinate of supply
tastes
Determinates of supply
input prices, technology, expectations, and the prices of substitutes in production
If incomes are rising,in the market for an inferior good
demand will fall
If a farmer were choosing between growing wheat or soybeans an increase in the price of soybeans would
decrease the supply of wheat
A supply curve illistrates a _____ relationship between _____ and _____.
direct; price;quantity supplied
A leftward shift in supply could be caused by
some firms leaving the industry
Supply
the quantity producers are willing and able to supply to the market at different prices
Items held constant in supply
“SENT” seller’s input prices, expectations, number of sellers and technology
Higher labor costs will
cause a decrease in supply
A decrease in the price of a substitute in production will cause an
incresae in the supply of the other good
Expectations of higher prices tommorrow will cause
a decrease in supply today
When there is a excess quantity demanded for a product at the current price
the price will rise
When there is an excess quantity supplied of a product at the current price
the price will fall
A simultaneous increase in demand and decrease in supply wuld lead to
uncertain effect on the equalibrium quantity but an increase in the equalibrium price
A decrease in demand results in
a smaller equilibrium price and quantity both
The quantity of a good bought and sold ina market will be below the equilibrium quantity if
the market price is either above or below the equilibrium price
