Extra Credit for Exam #1 Flashcards
What is Economics?
It is a broad set of tools that can apply to any type of decision you make daily. “Economics is the study of rational choice under conditions of scarcity.”
What is scarcity?
The difference between the amount of something you want and the amount that is actually available. (ex: air, space, garbage)
What is rational choice?
“calculated, self-interested decisions”. Being able to consider costs and benefits in order to choose the decision that you feel is best, or most rational, for you. Making decisions based on the known consequences.
What is opportunity cost?
“the best alternative forgone when a choice is made” (ex: going to class instead of sleeping an extra hour) There is no such thing as a free lunch! In order to gain something, you had to give something else up. Every choice you make has an opportunity that you did not choose.
What is economics about?
Economics is NOT about money, it is about analyzing the way people make decisions in conditions of scarcity. Predictions can be made about how people will choose to spend their time.
What does it mean for economics to be a study?
Economics is a social, or behavioral, science. It is a disciplined way of thinking through problems.
How is the Scientific Method used in economics?
It is used to help understand the way the ‘real’ world works.
3 Questions economics asks:
- What should we produce?
- How will it be produced?
- Who is going to get it?
What should we produce?
Out of all the possible combinations of things that could be created in our economy, what are we actually going to create out of our limited resources?
How will it be produced?
How will labor, capital, and raw materials be combined in order to produce for our needs and wants?
Who is going to get it?
How will goods and services be divided within the economy to allow everyone to satisfy their needs and wants?
What is a scientific model?
Similar to a map. First, you have a question that you want answered. Choose the map, or model, that best answers your question. You don’t want all of the irrelevant information to clutter and make it difficult for you to answer your question. Keep in mind taxes, consumer income, and stock market. Forget things like hair color and gender. It helps because it simplifies things.
What are Hypothesis?
Predictions about how the world works based on given information. These predictions must be able to be tested.
Example of Hypothesis:
An increase in consumer income will lead to an increase in consumer spending.
Three steps of the Scientific Method:
1) Ask a question
2) Isolate important, related variables and build a model
3) Come up with predictions and hypotheses to test in the real world.
How do we isolate variables?
To isolate variables, you must hold all other variables constant.
What is Ceteris Paribus?
Ceteris Paribus: all other things being equal. The assumption that you are holding all other variables constant. (ex: What will happen to consumer spending if we increase consumer income ‘ceteris paribus?)
Where can you find economists?
- Business
- Government
- Academics
Economists in Business
They look at the big picture to see when they should launch new products into the economy and foreign economies.
Economists in Government
They do lots of research to collect data about when to impose new taxes and when to finance the government debt. They look at what is happening in the economy in all subjects.
Economists in Academics
Not only teachers, but researchers at Universities to figure out things such as, “What will happen when a minimum wage is imposed?” They publish and present their findings.
What is Positive Economics?
Economics as a predictive, descriptive social science. “How will the world work?” Making observations and asking questions. Answers questions about how the world works.
What is Normative Economics?
It is about making judgments or evaluations. Answers the question “How should the world work?” It is about norms. What is good, what is better, and what is bad. Normative wants the best possibility
Positive and Normative Economics:
Both closely related. In order to know how things ‘should’ work, you must first understand how things ‘do’ work. You need Positive economics to have Normative economics.
Economic value is created when:
The benefits of a trade exceed the costs of the trade.
Example of how economists may differ in their scientific judgments:
A disagreement on the effects of a change in tax laws on consumer behavior.
The main reason that testing theories is more difficult in economics than in the physical sciences is:
The difficulty in performing an experiment on an economic system.
Microeconomics:
Decision-making process of individuals. Think of the study of a cell. Looking at how the cell works. “How individuals respond to changes in relative prices” Microeconomics is the study of individual firms, households, and markets
Macroeconomics:
About the ‘aggregate’. The combination of households, businesses, government, and net exports. Stepping back and letting the cells merge to become something larger. The study of the economy as an organism. Asks questions about money supply.
What does aggregate mean?
It is a group of economic units acting as a whole.
Money in economics:
Economics is not about money, but money is the life blood of the “organism”, economy. Macro looks at and studies money. Micro ignores money.
What is consumption?
Household spending
What are Nominal Variables?
Variables that are measured in monetary terms. Extremely easy to add up.
What are Real Variables?
Variables that are measured in terms of goods and services. Difficult to add up.
An example of a topic that macroeconomists study is:
The change in the nation’s unemployment rate.
An example of a topic that microeconomists study is:
Ford Motor Company’s market share.
What are graphs used for?
Graphs are used by economists to represent their analysts.
How do graphs work?
Economists use graphs to represent the relationships between two (and sometimes three) variables in a 2-dimensional space.
What is a scatter diagram?
A collection of points on a graph showing the observed relationship between two variables.
What is a scatter plot?
Information arrayed in a two-dimensional space to represent two variables for each point.
What does a direct relationship indicate?
It indicates that the two variables move in the same direction.
How can you tell if you have a direct relationship?
A ‘positive slope’ of a line plotted on a scatter diagram indicates a direct
relationship between the variables.
What is an origin?
Where the x-axis and the y-axis intersect with each other. (0,0)
What are the steps of creating the demand curve?
1) Look at the data
2) Calibrate the axes
3) Plot the data on the graph
4) Connect the points to draw the demand curve
What does the demand curve do?
It shows the relationship between the price of a good and the quantity a consumer wants to buy.
What is the formula for the demand curve?
to plot ‘linear relationship’: y= a+bx
y: price, a: y-int., b: slope, x: quantity
What is the slope?
Slope= rise change y
——– or —————
run change x
What is the slope of a horizontal line?
The slope of a horizontal line is zero.
What is the slop of a vertical line?
The slop of a vertical line is infinite.
What is the slope of a line defined by:
The coefficient of Q in the demand formula P = $12 - .50Q and the change in y divided by the change in x.
Is the vertical intercept in the demand equation the constant number?
Yes because the vertical intercept is the price value where no quantity is demanded and is represented as $12 in the demand formula P = $12 - .50Q.
How does consumer demand respond to a change in price?
it is reflected in a movement along the demand curve
A change in a variable previously held constant results in what?
a change in demand and therefore, a shift of the demand curve
When income increases, what happens to the demand for normal goods?
normal goods will increase with an increase in income.
When income increases, what happens to the demand of inferior goods?
the demand for inferior goods decreases as income increases.
If there is a change in the price of a complementary good, what happens to its compliment?
the complement will directly shift with the increase or decrease
Higher expected prices in the future leads to a(n) _______________ in current demand.
increase
Lower expected prices in the future leads to a(n) _____________ in current demand.
decrease
When income decreases, what happens to the demand for inferior goods?
increases
When income decreases, what happens to the demand of normal goods?
decreases
A change in quantity demanded refers to what?
a change in the price; a movement along the demand curve
A Change in Demand refers to what?
A change in a variable previously held constant; a shift in the demand curve.
If good A and B are substitute goods, what will happen to the demand of A when the price of B increases?
the demand of A will increase
A demand schedule is what?
an individual’s demand for a certain good as a function of the price of that good.
In order to find the Market Demand, we do what?
add together the different Individual Demand Schedules.
Market Demand
a horizontal summation of all individual demand curves in the market
The Market Demand Curve
the sum of all individual demand curves within a market
horizontal summation
the sum of the individual demand curves along a horizontal axis
A market sum is what?
the sum of each individual demand at a given price.
An increase in an individuals demand will result in what to the market demand curve?
an outward shift in the market demand curve
A decrease in an individuals demand will result in what for the Market Demand Curve?
an inward shift
T or F: any variable that shifts the individual demand curve will also shift the market demand curve.
True
T or F: Market demand is based on Individual Demands.
True
If an individual’s income increases, then the Market Demand of a normal good will _________.
shift outward.
If an individual’s income decreases, the Market Demand Curve for inferior goods will generally __________.
shift outward
Profit
the difference between the total revenue earned and the total costs incurred.
When a supplier’s profit gets larger, they will respond by offering ____________ of a certain good.
more
As a supplier’s profit gets smaller, then they will supply ______________ of a specific good.
less
The Factor that influences supply through revenue is ______________.
price
Factors that influence supply through cost include _______________.
price of inputs, technology, government taxes and subsidies, and expectations.
As the price of a certain good decreases, suppliers will supply ________________ of the good. c.p.
less
If the price of product X increases, then the quantity supplied of good X will _____________. c.p.
increase
If the input costs of a good increases, then the quantity supplied will _______________.
decrease
The quantity supplied of a good will increase if the input costs for the good ____________________.
decreases.
As technology becomes more productive, the quantity supplied of a specific good will ______________.
increase
Will the quantity supplied of a good decrease if technology becomes more or less productive?
The quantity supplied will decrease if technology becomes less productive.
An increase in government taxes will influence the quantity supplied of a good and therefore will cause a reduction or increase in the quantity supplied?
An increase in government taxes will cause a decrease in the quantity supplied of a good and vice versa.
An increase in government subsidies will __________________ the quantity supplied of a specific good.
increase
If prices of a specific good are expected to rise, then the quantity supplied of this good will ______________.
decrease
Supply Function
a mathematical relationship that predicts the quantity of a good supplied as a function of each of the factors that influence supplier behavior.
The Supply Function Equation
Qs = S (P, Pi, T, G, Ex)
Supply Schedule
a set of data showing the relationship between price and quantity supplied, c.p.
The supply schedule provides the data needed to complete what?
the supply curve
The Supply Curve
the graphical relationship between the price of a good and the quantity supplied, ceteris paribus.
The Law of Supply
as the price of a good or service increases, the quantity offered for sale generally increases.
The Supply Curve will generally slope in which direction?
It will generally slope upward.
Opportunity Cost
the best alternative that is given up when a choice is made.
As the quantity supplied of a good increases, the opportunity cost will ________________.
becomes higher and increases.
Why does the supply curve slope upward?
The supply curve slopes upward because of increasing opportunity cost.
As the price of a good increases, the quantity supplied of the good will ____________.
increase also. c.p.
The leisure time a baker gives up to supply more and more loaves of bread is defined as a(n) ________________.
opportunity cost
The x-axis on a Supply Curve is what?
The quantity supplied of a specific good.
The y-axis on a Supply Curve is labeled as what?
the price of a specific good.
The Supply Curve
a collection of points representing the quantity of a good that a seller is willing and able to offer for sale, in a given period of time, as a function of the price of a good.
Supply Function
shows the amount of a good a company is willing and able to supply profitably as a function of all of the variables that influence supply.
When the price of inputs increases, it becomes more or less profitable to produce a good?
less profitable
If input prices increase, what will happen to the supply of a good?
As input price increases, producers will be less willing and able to produce a good and therefore reduce production at every price.
If the price of inputs increases, what will happen to the supply curve?
it will shift leftward
S’ is what?
the supply curve after a change has been made.
When the price of input goods Increase, what will happen to the supply?
Less goods will be produced at each price level
A change in the quantity supplied is a result of what?
a change in the price of a specific good.
A change in the price of a good results in what in relation to the supply curve?
A change in a good’s price will result in a movement along the supply curve.
A change in variable that is generally held constant, results in what in relation to the supply curve?
A change in a constant variable results in a shift of the supply curve.
A “change in quantity supplied” means what?
A change in “quantity supplied” is illustrated in a movement along the supply curve.
A “change in supply” means what?
A change in “supply” results in a shift in the variables we usually hold constant and therefore a shift in the supply curve.
