Flash Cards for Chap. 1
Economics
Is the discipline that studies how efficient decisions are made.
Theory of Revealed Preference
Where our choices Reveal our Values.
Principle of Optimal Arrangement
The idea that we first choose the best then the second best and so on…
Value
The most an individual is willing to sacrifice to obtain that something.
“Efficient Decision Making”
Includes choosing the most Valuable Alternative.
Cost
The Value of the best alternative which is sacrificed when a decision is made.
No Free Lunch Principle
The idea that since any decision has at least two alternatives, any decision has a cost.
Macroeconomics
The study of entire economies, using concepts like total output, the unemployment rate, national debt…
Scarcity
Having more wants than our resources can satisfy.
Marginal Value
Value of Individual Units of that something.
How is Value Measured?
It is measured by the max you are willing to pay for something.
Consumer Gain
Is the Value - price paid for unit of or all units produced.
Demand is defined as?
The relationship between the possible prices for something and the quantities people are willing to buy.
Characteristics of Value??
Value depends on the situation (and) value is different for different people (and) subsequent units of the same good have less value.
Marginal Value
Value of individual units of that something.
Marginal Analysis
When we consume each unit for which the marginal value is at least as great as the marginal cost.
Marginal Cost
is the change in the total cost that arises when the quantity produced has an increment by unit. That is, it is the cost of producing one more unit of a good
Law of Diminishing Returns says?
As more is produced in a process, the subsequent laborers are individually less and less productive.
Supply is defined as?
The relationship between the possible prices of something and the amount people are willing and able to sell.
Equilibrium Price
Consumers can buy all they want and at the same time producers can sell all they want.
Social Gain
Is the Total Value - Total Cost
Consumer Gain
Total Value - Total Amount Paid
Producer Gain
Total amount paid - Total Cost
Economic Problem
Allocating scarce resources to their best uses.
Change in Supply
Producers wish to produce more or less even if the price does not change. They are caused by changes in the producers costs.
Change in Demand
Consumers wish to consume more or less even if the price does not change. They are caused by changes in things that influences the consumers willingness to purchase the product which have nothing to do with the product price.
What is the Basis of Economics?
(Value)
Cost of Consumer Decision
Buy one thing give up something else.
Cost of Business Decision
(Production - Value)
Max Social Gain
Every unit that people are willing to pay the cost of producing. (MV-MC)
IF the price of gas is $3.50 and the government makes it illegal to charge more than $3.00?
There will be a shortage in gas.
The consumer’s gain from purchasing a good plus the producer’s gain from producing a good is equal to?
Total value minus Total cost of the good
Bastiat said during his time that jobs in the fine arts were?
NOT as productive as jobs in other industries, since they needed subsidies of those industries.
Bastiat points out that the problem with special interest groups is that?
The Cost is spread so thinly.
‘Indirect costs’ of Regulation include?
Output that is not produced because it is not profitable under the regulation.
The reason Bruce Yandle’s friend accepted lawn mower regulations is because?
He wanted to put other small lawn mower productions out of business.
Free Market Prices function to?
> Ration good to consumer’s who most want them.
Give incentives to producers to satisfy consumers.
Give incentives to conserve scarce Resources.
Transmit information throughout the economy.
If we know the marginal cost of producing a good, how much of the good will the firm supply?
The firm will supply all units as long as…
Supply slopes upward because of?
(Marginal Cost)– {AN increase in price gives producers an incentive to supply a larger quantity} Average costs increase as you produce more, so firms need higher prices to justify higher output. As the price increases suppliers are willing to produce more of the good. If the price is low, suppliers will be willing to produce less.
Demand slopes downward because of?
The marginal value of a good falls as more is consumed.
Supply will change/shift if?
Technology changes or the prices of the resources change.
A shortage in the market can only be caused by?
A price that is lower than the equilibrium price.
Social Gain is equal to?
TV-TC
Consumer gain is equal to?
Total Value - Total amount paid
Producer gain is equal to?
Total amount paid - Total Cost
When the state increases aid to University Students, what happens in the market for University education?
Demand rises, tuition rises, enrollment rises, and taxes also must rise so private spending falls.
When Supply falls, what effects do we see in the markets?
Prices Rise and equilibrium quality falls.
How does Bastiat reply to the question “If you take the subsidy of a theater, where would you logically stop?”…
“Where would you stop”…
How does Bastiat reply to the assertion that state support of the arts, focuses society on the finer things in life–luxury industry?
???
Would a hurricane make the Economy better off?
No, explain…
When opponents point that government subsidies create jobs in the theaters, how does Bastiat reply?
“The taxes that support the subsidies would have been spent by the taxpayers and would have also created jobs.”
Friedman said that if you spend money on someone else…?
You don’t economize but do seek the highest value.
Friedman said if you spend money on yourself…?
You Economize (and) seek the highest value.
What are the (4) functions of market price?
1) Ration goods to consumers who want them most.
2) Give incentives to producers to satisfy consumers.
3) Gives incentives to conserve scarce resources.
4) Transmit information throughout the Economy.
What are some examples of what the state must know to manage the economy as well as the free market?
(Reference to the “calculation problem” in Chapter 2)
What is the calculation problem?
To manage the Economy, the state would have to know how to do every job in the Economy. If the state is to improve on the market it must know this information better than those who do the job.
What did Hayek believe about the Economic planning?
“There is no dispute as to whether planning is to be done or not, there is going to be planning, question is who plans for who?”
Markets advantage over single decision makers are?
- Freedom is preferred by most
- Markets use the ingenuity of millions
- Markets have millions of small, low risk experiments
- Firms compete to serve others
- Firms compete to use resources efficiently.
What advantage does the state have over markets?
The state can use force to produce some goods, which markets can not produce because they can’t be individually sold and consumed like national defense.
What natural experiments have been done on state control of markets?
Korea and Germany.
