exam I Flashcards
define economics
the study of the allocation of scarce resources
what are examples of economics (6)
natural resources, time, skills, man power, human capital and technology capital
what does scarce mean
limited
a _______ always has to be made
choice
unlimited _______ > limited ___________
wants; resources
define needs and give an example
needs are relatively objective, and are things such as food.
define wants and give an example
wants are more subjective and context-dependent, such as air-conditioning
true or false: scarcity is poverty
false, scarcity is NOT poverty
scarcity will never be _________
eliminated
scarcity requires ___________
rationing
define rationing
criteria for who will receive goods and who will not
what are the three types of rationing
government rationing
first come, first serve
markets
describe government rationing
the government determines what is made, how its made, and who gets it. it favors those with political connections
describe first come, first serve
a competition using time. favors those who get in line first.
describe markets
favors those who are willing and able to pay higher prices.
rationing methods can’t __________ competition, only changes the _______ of the competition
eliminate; form
scarcity creates ________ ___________
opportunity costs
define opportunity cost
the use of resources to produce one good diverts those resources from the production of other goods
what does it mean when one option is pursued?
that another option must be forgone
nothing is _____
free
as choices are made, __________ are faced
tradeoffs
what do economists assume?
that individuals chose options that best advance their personal desires and goals at the least possible cost
how are individual preferences revealed
by their choices
what can changes in incentives do?
affect human behavior in a predictable way
define marginal thinking
changes in cost and benefit
marginal benefit _ marginal cost
>
what does marginal cost equal
opportunity cost
define the sunk cost fallacy
informing future decisions on past costs is irrational and ineffective
give some examples of sunk cost fallacies
non-refundable gifts
not being able to leave due to a lease
spent twenty hours studying, so can’t drop the class
why are non-refundable gifts irrational
people believe that since they bought it, they have to use it
what are secondary effects
direct and indirect costs
give an example of a secondary effect
using paper bags instead of plastic bags.
led to more expensive products, that were harder to produce
the plastic kept bacteria at bay and E. coli formed in moist paper bags
what does opportunity cost illustrate
that information can be very costly to obtain
decision making with ________ information is often more desirable than with ________ information
imperfect; perfect
who wrote about how markets use information
F.A. Hayek
what is the knowledge problem
the knowledge and specialties of millions of people are required to produce even the simplest of objects is too much information for any person/institution/etc to contain, let alone fluidly respond
define productive efficiency
it is impossible to produce more of one good without decreasing the quantity that is used to produce another good
define allocated efficiency
produced goods/services represent the most socially desired combination
what is an example of allocated efficiency
the amish
there are _ inputs of factors of production
4
what are the four inputs of ppf
land, labor, capital, entrepreneurship
what is ppf
production possibility frontier
what is land ppf
all space is being used adequately
what is labor ppf
human or animal labor
what is capital ppf
education or machinery
what is entrepreneurship ppf
human creativity
the ppf curve requires what?
requires that the four inputs were all fully utilized
what does a bowed-out ppf represent
opportunity costs are increasing
what does a linear ppf represents
opportunity costs are constant
define comparative advantage
moving one way greatly benefits one, while barely impacting the other.
define specialization
the gains from trade become larger over time
what can specialization effect?
both quantity and quality of goods/services
mutually beneficial exchange drives ________ ________
economic growth
what are the three barriers of exchange
capital, trade, labor
explain the capital barrier of exchange
human- government cuts off/blocks internet access
technology- new tech can’t leave country it was created in
explain the trade barrier of exchange
embargo- prevents the exchange of goods and movement of people
explain the labor barrier of exchange
no free movement of labor (citizens can move freely, immigrants can’t).
if barriers were taken away:
_% increase in capital
_% increase in trade
_________ in labor
1
2
double
define efficiency
any person/firm/government can produce many goods and services
producing is the easy part. what is the hard part?
getting people to buy the product
what does private property best align with
self-interest with productive and allocated efficiency
what does private property include
the right to exclude
protection under the law
the right to transfer, sell, exchange or mortgage property
what are the four property right incentives and describe them
- can gain by employing their resources in ways beneficial to others
ie: landlord renting out property - have the incentive to care for and properly manage what they own
- have the incentive to conserve for the future
ie: eating all your snacks so your roommate can’t eat them - have the incentive to lower the chance that they will cause damage/harm to others
ie: the more likely one is to be held liable for damage the more steps they take to prevent the damage
what did Adam smith write
the wealth of nations
what did smith question
mankind’s destitute poverty
why and how some nations had escaped this fate and become wealthy
what did smith believe the divergence of wealth came from
self-interest
define self interest
prevails in the economic sphere in order to facilitate exchange between strangers
incentives may impact _______ ___________
cost benefit
how can individuals in their peruser of wealth assist others?
by providing desired goods, services, or jobs
exchange matches _______ and _______
wants, needs
what did smith believe people were led by
an invisible hand
what did the invisible hand represent
unintended consequences in exchange
define command economics
centralized decision-making determined by politicians
what is command economics
public ownership, not redistribution
define market economies
decentralized decision-making between individuals
what are Market economies
private ownership, not capitalism
what is the economic freedom survey?
an attempt to measure the degree of economic freedom in the world’s nations
what is looked at for economic freedom
- personal choice in the use of resources
- voluntary exchange coordinated by markets via the political process
- freedom to enter and compete in markets
- protection of persons and their property from aggression by other
what are the index measures
- size of government
- security of property rights
- access to spending money
- freedom to trade
- regulation of credit, labor, and business
what are variables for index measure
tax rate, degree of judicial independence, inflation rates, etc
