Exam 1 Flashcards
definition of economics
The study of how any society best allocate scarce economic resources among many competing uses
Productive Efficiency
Not wasting resources, can we make more products without sacrifice?
Allocative efficiency
First must be productively efficient, but also producing wanted products (optimal)
Four categories of economic resources
Land
Labor
Capital (supplies and tools)
Entrepreneurship (risk takers, idea people)
NOT MONEY
Scarcity vs. shortage
Scarcity: short supply naturally occurring
Shortage: a market condition of a particular good at a particular price
3 fundamental economic questions
1) what to produce?
2) how to produce?
3) for whom to produce?
5 steps of the scientific method
- Problem
- Make assumptions (control variables, Ceteris paribus)
- Develop a model
- Make a prediction
- Test the model
Why do we use models in econ?
MODELS ARE SIMPLIFICATIONS OF THE REAL WORLD
Positive vs Normative analysis
Positive is factual
Normative is opinion
What is opportunity cost
The benefit of the next best alternative of the choice
What does the production possibilities frontier represent
And economic model that shows maximum production commissions of goods/services company is given its current stock of economic resources, the quality of its existing economic resources, and institutional constraints
Why is the PPF concave
LAW OF INCREAsING OPPORTUNITY COAT
Absolute advantage
The nation with the LOWER IMPUT COST
Comparative advantage
Whatever nation has the lower opportunity cost
We give up/what we make (the product in question)
Why do some think trade is bad?
- lowers jobs in home country
- not good for the economy
- adverse working conditions
What can a nation do to protect itself against trade?
- TARIFFS tax on imports even out the price between local and foreign goods
- QUOTAS limit the quantity imported
- EMBARGO- illegal import
What factors give a nation a comparative advantage in production?
- productivity differences TECHNOLOGY
- factor abundance ECONOMIC RESOURCES
- human skills
- product life cycles INVENTORS AND COPIES
- preferences
Example question
What is the opportunity cost of reading this text book?
Having more free time to nap
Demand
The amount of a good or service that consumers are both willing and able to buy at every possible price in a given time period
Quantity demanded
Amount of a good or service that consumers are both willing and able to buy at a specific price in a given time period
Supply
The amount of a good or service that firms are both willing and able to offer to sell at every possible price in a given time period
Quantity supplied
The amount of a good or service that firms are both willing and able to offer for sale at a specific price
Change in demand/supply vs change in quantity demanded/supplied
Change in d/s is movement of the entire curve
Change in quantity d/s is movement along the curve
Why is demand downward sloping
LAW OF DEMAND: there is an inverse relationship between price and quantity demanded
Why is supply upward sloping
LAW OF SUPPLY
if price goes up, quantity supplied goes up
Vice versa
Determinants of Demand
- Change in Consumer incomes
- Change in consumers taste or preference
- Change in a price of a related food or service
- Change in consumers future expectations
- Change in number of customers
- CHange in exchange rate
Determinants of supply
- Change in price of resources or change of production costs
- Change in tech/productivity
- Change in producers future expectations
- Change in number of producers
Equilibrium
The one price and quantity combination that is compatible with intention of both the buyer and the seller
Qd=Qs
Shortage and surplus
Qd>Qs, prices rise
Qs>Qd, prices fall
6 steps to change in equilibrium
- Demand or supply shifts
- At the old equilibrium price a surplus or shortage occurs
- Due to the shortage or surplus, pressure is applied to price
- Quantity demanded and quantity supplied change
- Therefore, movement along the curve
- Return to equilibrium
Price floor, what makes it effective
minimum price
binding when set above equilibrium
Price ceiling when is it effective
Maximum price
Binding when set below equilibrium
When and why might secondary rationing be needed
Exclusive to when price ceilings create an artificial shortage, used to help consumers afford products
3 factors of economic growth (expansion of the PPF)
- Increase amount of nations economic resources
- Improve the quality of resources already have
- Government to relax institutional constraints
