Exam 1 | Topics 1-13 Flashcards
What is scarcity and why does it exist?
i. Demand for a good or service is greater than the availability of the good or service.
ii. Basic economics problem, the gap between limited resources and theoretically limitless wants. It requires people to make decisions about how to allocate resources efficiently, in order to satisfy basic needs
b. Explain the link between scarcity and each of the following:
Choice, opportunity cost, the need for a rationing device, competition
i. choice,
a. Scarcity refers to the finite nature and availability of resources while choice refers to people’s decisions about sharing and using those resources
ii. opportunity cost,
a. This concept of scarcity leads to the idea of opportunity cost. The opportunity cost of an action is what you must give up when you make that choice. … Opportunity cost is a direct implication of scarcity. People have to choose between different alternatives when deciding how to spend their money and their time.
iii. the need for a rationing device,
a. Rationing devices are needed to decide who gets what portion of the available goods. Because people compete for the rationing device, competition is a consequence of scarcity. Economists often consider both the costs and benefits of an activity.
iv. competition.
a. Competition arises out of scarcity because there are not enough resources to satisfy unlimited wants, so people have to compete for the finite resources that are available. Also, whatever the rationing device is (money for example) people will compete for it.
a. Explain how the scientific method works.
a. Decide what it is you want to explain or predict, Identify the variables that you believe are important to what you want to explain or predict, state the assumptions of the theory, state the hypothesis, test the theory by comparing it predictions against real-word events, if evidence supports the theory then no further action is needed, if evidence rejects then formulate a new theory.
b. Are scientific theories ever proven? Explain why or why not.
a. No scientific theory is ever truly 100% guaranteed. Scientific theory is not the end result of the scientific method; theories can be proven or rejected, just like hypotheses. Theories can be improved or modified as more info is gathered so the accuracy becomes greater over time.
c. How is the scientific method similar to democracy, evolution, and the market system? Explain each.
a. The ideas are the same to decide what it is you want to explain or predict, identify the variables that you believe are important to what you want to explain or predict, state the assumptions of the theory, state the hypothesis, test the theory by comparing its predictions against real-world events and if it supports then it’s a viable theory.
b. Democracies depend on science for effectively addressing public problems
c. Evolution is based on observation, experimentation and verification and these have consistently supported the Darwinian theory of natural selection.
d. Market system helps researches learn the truth, by coming up with questions, hypothesis, experiments and analysis to refinement. Helps commerce marketers increase ads and promotion effectiveness.
a. Explain what is meant by opportunity cost and the law of increasing costs?
a. The law of increasing opportunity costs states that as you increase production of one good, the opportunity cost to produce an additional good will increase.
a. Discuss why it bows out from the origin. (Or stated differently: What causes opportunity costs to increase as more of a good is produced?)
a. The law of increasing opportunity cost states that when a company continues raising production its opportunity cost increases. Specifically, if it raises production of one product, the opportunity cost of making the next unit rises. This occurs because the producer reallocates resources to make that product.
ii. List and discuss the different sources of economic growth.
a. When an economy’s production at the full employment level increases, one can say that economic growth occurs. The expansion in the production at the full employment level is expressed by a shift of production possibility frontier outward.
b. Discuss (and illustrate with another production possibilities frontier) how a technological advancement in one line of production (say in growing cotton) might result in greater output in production of an unrelated good (say maize) which did not experience any technological advancement in our ability to produce it.
i. Since the tech advance improved the production, the production of maize improved as well.
a. Socialism: What does the socialist thinker say about the following in a capitalistic market system:
i. prices, competition, private property, exchange, government, income distribution, and power
i. prices,
a. the rationing, information-transmitting, and incentive-producing function of price are invisible to the socialist thinker.
b. A set by greedy businesses with vast economic power
c. “control” price, want to reduce the economic power
d. Willing to have a law passed stating that it is illegal to pay less than a certain wage to workers.
ii. competition,
a. a free market as largely being controlled by big business interests that dictate to people what they will buy and at what price.
iii. private property,
a. those who own property will have more political power than those who do not own it and will use their greater political power to their advantage and disadvantage of others.
b. Property in the economy is best owned by the government to make it beneficial to many than the few.
iv. exchange,
a. sees one person in an exchange as being made better off at the expense of the other person.
v. government,
a. government decision makers as promoting the best interests of society as a whole
b. goal of the government is to do the right thing.
c. If the government decision was a mistake, then they didn’t have all of the facts
vi. income distribution,
a. desirable properties that emerge naturally as the unintended consequences of individuals’ actions.
b. Things that were deliberately created to serve some purpose.
vii. and power?
a. Holds free market as an exploiting people’s preferences like advertising
b. More inclined to trust the intentions and actions of the government decision makers than capitalist thinkers are.
c. Socialist vision focuses on those things that were deliberately created to serve a purpose.
Capitalism: What does the capitalist thinker say about the following in a capitalistic market system:
i. prices, competition, private property, exchange, government, income distribution, and power
viii. prices,
a. determined by the impersonal forces of supply and demand
ix. competition,
a. free market as exhibiting intense competition.
a. Competition among producers will force them to offer the highest-quality product to consumers for the lowest price.
x. private property,
a. places high value on private property.
b. Private property encourages individuals to use their resources in a way to that benefits others.
xi. exchange,
a. both the buyer and seller of the clothes benefit from the exchange or else they would have not entered into it.
xii. government,
a. government decision makers as responding to well-organized special-interest groups and no to the unorganized members of the general public.
b. Goal of the government is to get elected and reelected to office.
c. Government decision mistakes are due to politically motivated for a lack of info.
xiii. income distribution,
a. what emerges naturally-like equilibrium price in a free market- is often desirable for buyers and sellers.
b. Does not want to disturb the natural processes at work in society that bring about desirable outcomes.
xiv. and power?
a. Holds free market-free prices, competition private property, and exchange-is a marvelous “system” for rationing goods, conveying information, producing high-quality goods at the lowest prices, getting people to use their resources in a way that will benefit others, and generally raise people’s standard of living.
b. Capitalist vision focuses on the desirable qualities of things that were not deliberately created but emerged naturally as the unintended consequences people’s actions.
The Simple Circular Flow of Economic Activity
b. Point out where capitalism answers the questions of ‘what,’ ‘how,’ and ‘to whom,’ and explain how each question is answered at the places indicated on your drawing
“What” and “to whom” is the goods and services market and the factor market
a. Define the law of demand and draw a Demand Curve labeling the axes correctly and curve correctly.
a. The law of demand states that as the price of a good decreases, the quantity demanded of that good increases. In other words, the law of demand states that the demand curve, as a function of price and quantity, is always downward sloping.
b. We defined demand as the amount of some product a consumer is willing and able to purchase at each price. That suggests at least two factors in addition to price that affect demand. Willingness to purchase suggests a desire, based on what economists call tastes and preferences. If you neither need nor want something, you will not buy it.
b. List the “Ceteris Paribus” variables that affect demand and illustrate a shift in a Demand Curve. Now discuss how a change in each of these varialbes would lead to the shift you have illustrated in your drawing.
a. It allows the demand curve to exist as a constant without variables other than price affecting it. … If their income effect stays the same and the cost of goods and services either go up or down, then it has an effect on your purchasing power.
a. Define the law of supply and draw a Supply Curve labeling all the axes correctly.
a. A supply curve shows how quantity supplied will change as the price rises and falls, assuming ceteris paribus, so that no other economically relevant factors are changing. If other factors relevant to supply do change, then the entire supply curve will shift. Just as a shift in demand is represented by a change in the quantity demanded at every price, a shift in supply means a change in the quantity supplied at every price.
