Exam 1 Flashcards
1) What do we mean by an economic principle (or law) and how does this relate to economics being an example of the scientific method (and thus a social science)?
1) A law or principle is well supported by evidence. That objective analysis is the essence of the scientific method.
2) Explain the idea of increasing opportunity costs (in relation to a production possibilities curve). Note that the online text uses the term diminishing returns to explain the same idea since the underlying process of switching production involves getting diminishing returns from resources as you shift more of them to the other good that they are increasingly less suited for producing.
2) Increasing opportunity cost means that the amount of one good which you give up for each incremental unit of the other increases. Its not just that you have to give up one to get the other. Rather its that the incremental amount given up rises with continuing marginal shifts.
3) What happens to the production possibilities curve as time passes? Explain why!
3) It shifts upward and outward as the labor force grows and the amount of capital grows and technology improves.
4) Explain some of the problems with a command system (or centrally planned production). Give examples of short term problems and dynamic incentive problems
4) Be able to give examples of both the incentive problem and the coordination problem. Mention chronic shortages. Mention quality control problems or making the wrong size items to meet production quotas.
- Communism with central planning
- Government sets prices (fixed) and tells factories how much to produce.
- The idea is that it will allow for a more equal distribution of output.
- But this is highly dysfunctional and leads to chronic shortages.
- Soviet Russia had this problem because it waits for government to
Can sacrifice quality because they have a monopoly on certain items and just have to worry about quantity.
5) Explain Adam Smith’s point about the “invisible hand” of the market place.
5) The invisible hand metaphor is based on how market forces guide the allocation of resources to meet consumer needs in a way that aligns profit motive with the utility/needs of consumers.
8) Explain the distinction between positive and normative ideas. Why (according to my claim in class) is it important to think about that distinction more carefully?
8) Normative is opinion based ethical/subjective and Positive is factual/objective issues
9) Give some historical context relating to Adam Smith’s famous book. Date? Events during that era?
9) The Wealth of Nations was published in 1776 as the industrial revolution was ramping up in Europe. It also coincided with enlightenment era ideas about greater freedom and rationality.
10) Tell me about Marx or Malthus?? Time frame and points they made….
10) Marx criticized the injustice of capitalism (in the 1840s) and predicted it would lead to revolution and socialism/communism.
11) Briefly summarize the 3 economic systems we talked about
11) Best Terminology here: Laissez faire Capitalism and Command Economy are the extreme opposites while Capitalism with a Mixed Economy has proved viable and been embraced around the world. In LF capitalism the govt only enforces property rights. In a command economy most production is planned by the govt. Capitalism with a mixed economy allows market forces to guide most production but with regulations for health and safety and some redistribution of income.
12) Define “Economics”
12) The study of how to allocate resources in a world of scarcity. Or the social science analyzing how choices are made in a world with scarce resources.
13) Explain “ceteris paribus” relate it to the question we did in the quiz about deriving the demand for Tequila
“all else constant” Let’s do this with Tequila demand: to find the slope we hold all other factors fixed (income and prices of other goods and preferences embodied in the utility function) and change only the price of tequila. Likewise if we want to change one of those other factors we see how much it alters Demand assuming that price and the other factors are held fixed (to see how that one factor shifts the curve)
Be able to do the Supply and Demand analysis examples that are in the powerpoint questions for that topic
(answers are there)
Show and Explain the S and D scenarios for rent control and minimum wage
For rent control or minimum wage look at the slides on price ceilings and price floors (slides 51 and 53) in the long powerpoint on supply and demand. Rent control is the scenario with a shortage and minimum wage rules create a surplus (of unemployed workers). In reality the minimum wage is low enough that it doesn’t cause much unemployment.
Calculate the price Elasticity of demand with the midpoint method (and explain why we use the midpoint method)
This happens because the price elasticity of demand often varies at different points along the demand curve and because the percentage change is not symmetric. Instead, the percentage change between any two values depends on which is chosen as the starting value.
Explain why we use elasticity rather than just looking at the slope
Therefore, the slope of the demand curve represents change in price divided by change in quantity, and it can be thought of as answering the question “by how much does an item’s price need to change for customers to demand one more unit of it?”
Elasticity, on the other hand, aims to quantify the responsiveness of demand and supply to changes in price, income, or other determinants of demand. Therefore, price elasticity of demand answers the question “by how much does the quantity demanded of an item change in response to a change in price?” The calculation for this requires changes in quantity to be divided by changes in price rather than the other way around.
Explain the Total Revenue test/criteria for elasticity
look at powerpoint/ note
Be able to calculate and explain both cross elasticity and income elasticity
look at notes
know how to do consumer choice analysis
Also Same Stuff from this week on Consumer Choice analysis
