Exam #1 Review (Chapters 1, 3, 19) Flashcards
what is economics?
the study of choices people make to attain their goals given their scarce resources
three ideas behind economics
- people are rational when making decisions
- people respond to economic incentives
- optimal decisions are made at the margin
what is opportunity cost?
the value of the thing you didn’t do (value of next best alternative)
normative statement
statements of what should be
“lower carbon emissions mean cleaner air”
positive statement
statement of fact, what is
-“sales of Chevy Volts tripled in 2012 over 2011”
what is a market?
set of buyers and sellers whose actions afect the price of a product or service
productive efficiency
goods and services will be produced at lowest cost
allocative efficiency
goods and services are produced in accordance with consumer’s preference
market economy
goods and services are based on supply and demand
centrally planned economy
goods/services produced based on government decisions
law of demand
at lower prices, larger quantity will be demanded. at higher prices, smaller quantity will be demanded
as price changes…what will change?
the quantity demanded…not the demand
substitution effect
the change in the quantity demanded of a good that results from a change in price, making goods more or less expensive relative to other goods that are substitutes
income effect
the change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumers’ purchasing power
five things that cause a demand curve to shift (PETRI)
- change in income
- a change in price of related goods
- a change in taste/preferences
- change in expectations
- population and demographics
normal good
a good for which the demand increases as income rises and decreases as income falls
inferior good
a good for which the demand increases as income falls and decreases as income rises
substitutes
goods and services that can be used for the same purpose
complements
goods and services that are used together
5 things that cause a supply curve to shift (TIEFS)
- a change in technology
- a change in price of inputs
- a change in expectations
- a change in the number of firms
- a change in the prices of substitutes in production
what is the equilibrium?
price where quantity demanded is equal to the quantity supplied
if both curves move in the same direction, we know (……..)
we will know the quantity but not the price
if both curves move in opposite directions, we know…
we will know the price but not the quantity
an increase income shifts the demand curve (and the good is normal)
right
an increase in income (and the good is inferior) shifts the demand curve…
left
an increase in the price of a substitute good shifts the demand curve…
right
an increase in the price of a complementary good shifts the demand curve…
left
an increase in the taste for a good shifts the demand curve…
right
an increase in population shifts the demand curve…
right
an increase in the expected price of a good in the future shifts the demand curve…
left
an increase in the price of an input shifts the supply curve…
left, because the costs of producing the good rise
an increase in productivity (technological change, typically) shifts the supply curve….
right, because the costs of producing the good fall
an increase in the price of a substitute in production shifts the supply curve…
left, because more of the substitute is produced and less of the good is produced
an increase in the number of firms in the market shifts the supply curve…
right, and additional firms result in a greater quantity supplied at every price
an increase in the expected future price of the product shifts the supply curve…
left, because less of the good will be offered for sale today to take advantage of the higher price in the future
what is mercantilism?
old idea that a country’s wealth is measured by how much precious metal (gold, silver) it has
how did Adam Smith measure wealth?
Adam Smith said a country’s wealth is measured by the amount of goods and services it’s citizens have
-best way to have a lot of stuff is to be able to produce a lot of stuff
Gross Domestic Product
total market vale of all final goods and services produced in a country during a given period of time (typically a year)
what is America’s latest GDP measurement?
$15.8 trillion
how much had the economy shrunken, according to last reports?
America’s economy shrunk by -.1%
who measures GDP?
The Bureau of Economic Analysis (BEA)
what is meant by final goods and services?
a good or service purchased by a final user
intermediate good or service
a good or service that is an input into another good or service, such as a tire on a truck
which would be included in GDP: an american company producing goods in Mexico or a foreign company producing goods in america?
the foreign company producing goods in America would be counted in GDP, the other would not
what four main things are left out of GDP?
- non-market activities (housewife labor, underground economy)
- government checks like unemployment checks and social security checks
- financial transactions (stocks) and illegal activities (drugs, prostitution)
- used goods (used HOUSES)
what are the four main categories of components of GDP? (CIGNX)
- consumer goods
- investment goods
- government purchases
- Net exports
how much of the GDP is accounted for by consumer goods?
$11.2 trillion
how much of the GDP is accounted for by investment goods?
$2.08 trillion
how much of the GDP is accounted for by government purchases?
$3.05 trillion
how much of the GDP is accounted for by net exports?
-$557 billion
five categories of exports and imports
- passenger fares
- travel
- other transportations (package delivery)
- royalties and licensing fees
- other private services (financial services, database services, consulting services)
regarding passenger fares:
if someone in Lawrence buys a ticket from NYC to Germany on Hufthansa Airlines, is this an import or export?
this would be an import
if someone in Berlin buys a ticket from Munich to Chicago through American Airlines, is this an import or export?
this would be an export
regarding travel:
if someone from Lawrence spends the night in a hotel in Paris, is this an import or export?
this is an import
real GDP
the value of final goods and services evaluated at base-year prices
nominal GDP
the value of final goods and services evaluated at current year prices
what is America’s real GDP? nominal GDP?
Real GDP: 13.6 trillion, based on 2005 base year value
Nominal GDP: 15.8 trillion
GDP deflator
(nominal of certain year / real of certain year) x 100
measures inflation
what is the current value of GDP deflaor?
115.98
prices have increase almost 16% since 2005
value added approach of GDP
calculating value added by each stage of production
income approach of calculating GDP (4 parts)
- wages
- rent
- interest payments
- profits
what is GNP?
Gross National Product
what does GNP measure?
GNP includes any American companies abroad
-value of all goods and services produced by residents of US, even if production takes place outside of US
Which of the following would be included in GNP?
- a Mitsubishi plant producing in OHIO
- a Ford plant producing in India
Only the Ford plant producing in India would be included in the GNP
what are four key things that GDP does not account for?
- value of leisure
- negative effects of production like pollution
- GDP doesn’t reflect socail problems
- GDP measures size of pie, but now how it’s distributed
what is the GPI?
Genuine Progress Indicator
-an attempt to measure whether growth in production of goods/services actually increases well-being
