First Three Lecture

Question 1

Economics

Answer 1

The social science that studies production and trade

Question 2

Spontaneous Order

Answer 2

Order that is the production of human action, not human design

Question 3

Positive V. Normative

Answer 3

Positive analysis attempts to describe the way things are in reality
Normative analysis describes a value judgement

Question 4

Theory

Answer 4

An abstract explanation of some phenomenon

Question 5

Society

Answer 5

A group of people who have moral, political, or economic relationships with each other

Question 6

Social System

Answer 6

A set of rules that determines the role of physical force in human relationships

Question 7

Market Economy

Answer 7

A social system in which resources are privately owned and controlled

Question 8

Property RIght

Answer 8

A moral and legal right to control a resource, and to exclude others from using it

Question 9

Command Economy

Answer 9

A social system in which resources are collectively owned or controlled (typically through a government)

Question 10

Four Points of Economics

Answer 10

Scarcity: The amount of goods available is not sufficient to satisy all human desires
Unlimited Desires: No matter what one’s current circumstances, it is always possible to imagine and achieve a more desireable state of affairs
Methodological Individualism: The principle that the individual human being is the basic unit of research in the sicial sciences (think people as individuals but not groups)
Rational Choice: People pursue their values (self-interested, respond to incentive)

Question 11

Price System

Answer 11

a network of interrelated prices of goods and services

Question 12

Exchange of Equivalents and why is it wrong?

Answer 12

Theory that people exchange one good for another when both parties value the goods equally
But if valued equally, there will be no need trade things.

Question 13

Just Price Theory and why is it wrong?

Answer 13

There is a single just price at which each good should be sold
Sellers always want the price to be higher and buyers always want the price to be lower. As long as it’s voluntary, the price is just. If not, one side would complain.

Question 14

Mercantilists belief and why are they wrong

Answer 14

Social order requires government planning
Money constitutes real wealth for the nation
Trade is a zero-sum game
Wrong because more money means more nominal value but less real value - inflation
Trade benefits both sides so it is a positive sum game

Question 15

Nominal Value V. Real Value

Answer 15

The face value of a certain amount of money V. how much the money can buy

Question 16

Invisible hand

Answer 16

Adam Smith’s metaphor for the power of individual self-interest to create spontaneous order

Question 17

Utility

Answer 17

Usefulness in satisfying human desires

Question 18

Subject Theory of Price

Answer 18

The theory that price of a good is determined by its utility - rejected by classical economists

Question 19

Water-Diamonds Paradox

Answer 19

Water is very useful but has a low price. Diamonds is not very useful but has a high price

Question 20

Labor Theory of Value

Answer 20

The price of a good is determined by its cost of production and amount of labor used to produce it

Question 21

Four problems of Labor Theory of Value

Answer 21

1. How do you measure labor?
2. Labor has a price
3. It’s a theory of intrinsic value - the value is inherent in the object itself
4. it ignores the context of the exchange - price depend on the seller/buyer

Question 22

Iron Law of Wages

Answer 22

Price of labor is determined by the cost of human subsistence and reproduction (but led to labor - food - labor cycle)

Question 23

Marginal Revolution

Answer 23

The discovery of the theory of marginal utility in early 1870s

Question 24

A Good and its four requirements

Answer 24

A useful thing that is subject to human control
1. A human need must exist
2. The object must have properties that allow it to satisfy this need
3. Humans must know of this causal connection
4. Humans must have sufficient control over it

Question 25

Consumer Good (First order good)

Answer 25

A good that serves our desires directly

Question 26

Producer Good (Higher Order Good)

Answer 26

A good that is used in production of other good

Question 27

Structure of Production

Answer 27

Set of steps to make consumer good with producer goods

Question 28

Theory of Derived Demand

Answer 28

The value of goods of higher order is derived from that of the corresponding goods of lower order (from bottom up)

Question 29

Marginal Unit

Answer 29

The next unit gained or given up

Question 30

Marginal Utility

Answer 30

The additional utility that a person gets from having one more unit of a good, or loses from having less unit of a good

Question 31

Theory of Marginal Utility

Answer 31

The Theory that the price of a good is determined by its marginal utility

Question 32

Opportunity Cost

Answer 32

The best alternative given up when making a choice

Question 33

Principle of Diminishing Marginal Utility

Answer 33

As a person acquires more units of a good, the satisfaction they derive from each new unit is lower than the previous unit

Question 34

Increasing Marginal Opportunity Cost

Answer 34

As a person gives up more units of a good the satisfaction they give up with each new unit is higher than the previous

Question 35

Four condition for trade to take place

Answer 35

1. The parties have reversed values
2. Both recognize the opportunity for exchange
3. Both have the power to transact
4. The benefits of the transaction must outweigh the costs

Question 36

The Range of Indeterminacy

Answer 36

The range of potential prices

Question 37

Market Clearing Price

Answer 37

A price at which anyone who wants to buy or sell can find a willing trade partner

Question 38

Implications of Price Determination model

Answer 38

1. Buyers willing to pay more exclude ones willing to pay less
2. Sellers willing to sell less exclude ones willing to sell more
3. Price for all traders is set by marginal traders - maximum buying price and minimum selling price
4. As more parties enter the market, the range of indeterminacy tends to shrink