EXAM 2 Flashcards by Jack Green

David Ricardo

Economist who developed the theory of comparative advantage, which explains how trade can benefit countries even if one country is less efficient in all areas of production.

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The ability of a country (or individual) to produce a good or service at a lower opportunity cost than others

comparitive advantage

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Tiger Woods and Lebron James Example

Used to illustrate comparative advantage—both excel in their respective fields, and they could benefit from specializing and trading with each other.

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oods that are not identical and vary in quality, characteristics, or features.

heterogeneous assortments

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4 elements of trade

The willingness to trade,
The terms of trade,
The opportunity cost of producing goods,
The comparative advantage of each party

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Cate and Roberto Example

an example used to show comparative advantage or trade specialization.

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The value of the next best alternative forgone when making a decision.

opportunity cost

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When a country can produce more of a good with the same amount of resources than another country.

absolute advantage

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Focusing on the production of one good or service to gain efficiency and reduce opportunity costs.

specialization

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plitting tasks in a production process to increase efficiency and productivity.

division of labor

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Economic theory that advocates for government intervention to accumulate wealth through trade, typically by maximizing exports and minimizing imports.

mecantilism

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The quantity of a good or service consumers are willing to buy at various prices.

demand

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Individuals who make decisions by considering all relevant information and choosing the option that maximizes their utility.

rational actors

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Goods for which demand increases as income increases.

normal goods

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Goods for which demand decreases as income increases.

inferior goods

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Consumer preferences that can shift demand.

taste

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The price of a good itself, which affects its demand

own price

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A consumer’s earnings, which can affect their demand for goods.

income

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What consumers believe will happen in the future, affecting their current demand.

expectations

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Goods that are often consumed together, such as cars and gasoline.

compliments (goods)

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Goods that can replace each other, like butter and margarine.

subsititutes

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A graph showing the relationship between the price of a good and the quantity demanded.

demand curve

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A graph showing the relationship between the price of a good and the quantity supplied.

supply curve

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Revenue minus costs

profit

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Total income from the sale of goods or services

revenue

The expenses incurred in producing goods, including labor, materials, and overhead.

cost of production

Own Price Change and the Demand Curve:

A change in the price of a good will typically result in a movement along the demand curve.

Income Change and the Demand Curve:

A change in consumer income shifts the demand curve for normal or inferior goods.

Price of Complement Changes and the Demand Curve

If the price of a complement rises, the demand for the related good will fall.

Price of Substitute Changes and the Demand Curv

If the price of a substitute rises, the demand for the related good may increase.

Own Price Change and the Supply Curve:

change in the price of a good can lead to a movement along the supply curve.

Production Cost Change and the Supply Curve

A change in production costs (like wages or technology) shifts the supply curve.

The point where supply and demand curves intersect

market equilibrium

When supply exceeds demand,

Excess Supply and Surplus:

When demand exceeds supply

Excess Demand and Shortages:

What Shifts the Demand Curve:

Factors like income, tastes, expectations, the prices of related goods, and more can shift the demand curve.

What Shifts the Supply Curve:

Changes in production costs, technology, and the number of suppliers.

The total benefit society gets from the allocation of resources

economic surplus

The difference between what consumers are willing to pay and what they actually pay.

consumer surplus

The difference between the price producers receive and the minimum price they are willing to accep

producer surplus

The loss of total surplus that occurs when the market is not in equilibrium.

deadweight loss

Prices act as a communication tool that conveys information about scarcity and demand.

prices and language

Prices adjust to reflect changes in supply and demand, signaling where resources are needed.

price signals

I, Pencil:

story illustrating the complexity of markets and how no one individual knows how to make something as simple as a pencil.

The idea that order in society can emerge without central planning.

spontaneous order

A debate over whether central planning can efficiently allocate resources, with opposing views from Ludwig von Mises and F.A. Hayek..

socialist calcualtion debate

Economist who argued that central planning is inefficient due to the lack of price signals.

lugwig von mises

A work by F.A. Hayek arguing that knowledge is decentralized, and markets are the best way to use it efficiently.

the use of knowledge in socieity

Economist known for his work on the role of prices in economic coordination

FA Hayek

The ability of prices to adjust to shifts in supply and demand.

price flexibility

Government-imposed limits on prices, including price ceilings and price floors.

price controls

A maximum price that can be charged for a good, often leading to shortages.

price ceiling

real world examples of price ceilings

Rent control or price caps on essential goods.

minimum price that can be charged for a good, often leading to surpluses.

price floor

Real World Examples of Price Floors

minimum wage laws

A market with only one buyer.

monopsony

Raising prices unfairly during times of crisis

price gouging

Why Price Floors Create Surplus:

Price floors set a price above equilibrium, leading to excess supply.

Why Price Ceilings Create Shortages:

Price ceilings set a price below equilibrium, leading to excess demand.

The lost economic surplus when price controls are imposed.

deadweight loss

A situation where one party (the agent) makes decisions that affect another party (the principal), leading to potential conflicts of interest.

principle-agent problem

A harmful side effect of an economic activity (e.g., pollution).

negatie externality

A beneficial side effect (e.g., education).

positive externality

Examples of Negative Externalities:

air pollution, noise, traffic

Purpose of Taxing Negative Externalities

To internalize the externality and reduce its occurrence.

Potential Issues of Taxing Negative Externalities:

Difficulty in accurately measuring the externality.

Unregulated markets where goods are bought and sold illegally.

black market

externalities that affect prices but do not directly affect third parties (e.g., increased demand driving up prices).

pecuniary externalities

Goods that are excludable and rivalrous (e.g., a sandwich).

private goods

Goods that are non-rivalrous but excludable (e.g., a gym membership).

club goods

Goods that are rivalrous but non-excludable (e.g., fish in the ocean)

common goods

Goods that are non-rivalrous and non-excludable (e.g., national defense).

public goods

Making producers or consumers bear the cost of externalities.

internalizing the cost

Overuse of a common resource due to lack of ownership

tragedy of the comomns

Command and Control as a Solution to the Tragedy of the Commons:

government intervention to limit resource use

Cultural Norms as a Solution to the Tragedy of the Commons:

social pressure to limit resource use

Privatization as a Solution to the Tragedy of the Commons

assigning ownership to reduce overuse

The idea that private bargaining can solve externalities without government intervention.

Coase Theorum

An international agreement to reduce the use of ozone-depleting substances.

Montreal Protocol

A system where firms are allocated a limit on emissions and can trade allowances.

cap and trade program

Government payments to encourage the production or consumption of certain goods.

subsidies

Obstacles to Government Success Fighting Climate Crisis

Political challenges, vested interests, and international coordination.

Systems where companies can buy and sell pollution rights to reduce emissions.

markets for pollution

Legal rights to possess, use, and transfer property.

property rights

The right to prevent others from using one's property.

right to exclude

Purpose of Property Law

To define and enforce property rights.

Property owned by the government.

public property

Collective ownership and management of property.

communes

Issues with Communes:

lack of incentives and potential ineffiencies

A legal arrangement to manage property on behalf of beneficiaries.

trust

Purpose of Contract Law:

enforce agreements between parties

Legal rights to creations of the mind, such as inventions or creative works.

intellectual property

Benefits that are experienced by third parties (e.g., education).

positive externalities

Education as a Positive Externality:

Education provides benefits to society beyond the individual.

Financial assistance to encourage the production or consumption of goods with positive externalities

subsidies

How Subsidies Can Help Us Get More of the Good That Is a Positive Externality

can make such goods more affordable and encourage greater production or consumption.

Unexpected effects resulting from a policy or action.

unintended Consequences:

Benefits that extend beyond the direct impact of an activity.

positive spillovers

The ability of a firm or group to control prices or supply in a market.

market power

Market power held by a single buyer.

monopsony power

Market power held by a single seller.

monopoly power

agreements between firms to reduce competition.

cartels

Towns where a single company owns and controls everything.

company towns

Barriers that arise naturally, such as high capital costs or technical expertise.

natural barriers to entry

Barriers created by law or policy to prevent competition

man made barriers to entry

erms used to describe influential industrialists, often criticized for unethical practices.

Robber Barons or Captains of Industry

Exchange of goods and services across national borders

international trade

Goods or services sent to another country.

export

goods or services brought into a country

import

: The market within a single country.

domestic market

The international marketplace for goods and services.

global market

Arguments for Tariffs

Protecting domestic industries, national security.

Effects of Tariffs

higher prices, reduced trade

Conflicts where countries impose tariffs and retaliatory tariffs on each other.

trade wars

A high tariff enacted during the Great Depression, worsening the economic crisis.

Smoot-Hawley Tariff:

Protecting industries critical for national security through trade restrictions.

Protectionism and the National Defense

Markets Allow Us Not to Sell Some Thing

Markets often discourage the sale of certain goods (e.g., illegal substances).

The legal ban on alcohol production and consumption in the U.S. during the 1920s.

prohibitoin

The amendment that initiated alcohol prohibition.

18th amendment

Promises of Prohibition Reformers:

Reducing crime and improving health.

Actual Outcomes of Prohibition:

ncreased crime, bootlegging, and death from unsafe alcohol.

The idea that stricter prohibition leads to more dangerous and potent illegal products.

iron law of prohibition