Intro to Econ Flashcards
What is one commonality between the models, pareto efficiency and Kaldor-Hicks efficiency?
They are all hypothetical. The models display what could/will happen in an ideal scenario and the efficiencies look at IF THERE IS A POSSIBILITY of change
What are the different factor payments?
Land receives rent, Labor receives wages, Capital receives interest, and Entrepreneurship receives profit
What is a factor payment?
A factor payment is what a person receives when they provide a certain factor of production
How is money distributed through the economy (based on the circular flow diagram)?
Households provides money to the goods market in exchange for goods and services in the form of expenditures (consumptions). The goods market then provides the firms money in the form of revenue in exchange for the goods and services. The firms give money to the factor market in the form of a factor payment in exchange for the factors of production, and then the factor market gives that factor payment to the household in exchange for their factors of production.
How are goods and services moved through the economy (based on the Circular Flow Diagram)?
The Factors of Production are moved from the Household to the Factor Market and the to the Firms. From there, the firms use those factors of productions to provide goods and services to the goods market. The goods and services are then moved from the goods market to household
What are the four factors that make up the Circular Flow Diagram?
Households, Firms, Goods Market, and Factor Market
What is the Circular Flow Diagram?
A general display of how goods, services, and money move through the economy
How can the Production Possibilities Frontier be used to display growth/changes to the scenario?
If a third variable is added to the scenario, the PPF will shift either to the left (in) or the right (out) to display any positive or negative changes to the feasibility of the scenario.
Are Production Possibilities Frontiers more accurate with a curved line?
Technically yes, but the difference between a curved and linear line are miniscule enough that a linear line is just as credible. The linear line is also easier to work with as it only uses simple algebra while the curved line requires the use of calculus.
Why are Production Possibilities Frontiers sometimes seen with curved lines?
A curved line provides a more accurate depiction of trade-offs so you can best use your resources
What are some things that can be determined with a Production Possibilities Frontier?
If something is feasible with the current resource, if something is efficient, any trade-offs that can be made along with their opportunity cost
What part of the graph is the Production Possibilities Frontier?
If we are being specific, the Production Possibilities Frontier is the line that is displayed on the graph
What does PPF stand for and what is it?
PPF stand for Production Possibilities Frontier and it is a commonly used model that is used to see how feasible certain actions are and to compare them to one another. It is usually categorized with a straight linear line but can also be seen with a curved line.
What is empirical work used for?
Empirical work is used to determine how accurate a model is and if the decisions made from it actually work in real life.
What is one key assumption that is made when using models and what is it referred to as?
When using models, it is key to assume that anything not explicitly displayed in the model remains constant (even if it doesn’t naturally). This is referred to as “other things equal” or “ceteris parabus”
How is theoretical work used?
Theoretical work utilizes models, which are general displays of the economy to help them focus on a specific aspect and how certain decisions may affect it.
What are the two ways economists go about studying something?
Economists can perform studies through theoretical work (models) or empirical work (data collection and analysis)
In the terms of the factors of production, what is referred to when we mention “capital?”
Capital refers to the tools, technology, and equipment that is used to create a good or service.
What is the definition of “The Factors of Production?’
The factors of productions are the things put in to create an economics output
What are the factors of production
Land, labor, capital, entrepreneurship
What are some examples of things that use positive economics?
GDP calculations, revenue predictions, effects to revenue if the price is changed, etc.
What are some examples of things that involve normative economics?
The optimal tax rate (people are always going to believe that it should be lower, even if it is just for them), the price of a license (the public will want it cheap but the organization will want it more expensive), etc.
What is normative economics?
Normative economics is the opinion-based belief of what SHOULD be done for the economy. The answer to normative-based questions will change from person to person.
What is Positive economics?
Positive economics is a fact-based study of what is actually occurring in the economy. It can only be disputed if they results are proven inaccurate
What is Kaldor-Hicks improvement?
When you can make a change to a scenario to make it Kaldor-Hicks efficient
What is Equity and do economist care about it?
Equity is defined as concepts of fairness and economists, traditionally, don’t bother with equity
What is Pareto improvement?
Pareto improvement is when you can make a costless change to a scenario
What is Kaldor-Hicks efficiency?
Kaldor-Hicks efficiency is where you change a situation where one group (Group A) to be better off. Then, Group A will compensate the group worse off (Group B) while still remaining better off. If there is no way you can successfully make an improvement like this, the scenario is considered Kaldor-Hicks efficient
Is Pareto efficiency always useful? If no, what can we use instead?
Pareto efficiency is not always efficient because it requires NO ONE to be made worse, which does not happen that often. Instead, we can use Kaldor-Hicks efficiency
With pareto efficiency, what is considered “worse off”?
Something is considered worse off if the person has less than they started. Even if it is something miniscule like have 2 muffins when you originally had 4.
What is pareto efficiency?
Pareto efficiency is determined by whether or not you can make a costless change that doesn’t put ANYONE worse off than they were. If a company cannot make any costless changes, they are pareto efficient. If they can, they are deemed pareto inefficient
What is allocative efficiency?
Allocative efficiency is where a certain product is distributed to those who will genuinely appreciate and enjoy the item such as placing Packers merchandise in Green Bay opposed to Chicago
If a company’s prices are high, does that automatically mean that are not productive efficient?
No. In some cases, the only known materials to make a certain product are extremely expensive and requires high prices so a company doesn’t go bankrupt
What are some reason why a company may not be productive efficient?
The company may not be meeting their sales quota or may not be popular enough to warrant low prices
What is productive efficiency?
Productive efficiency is where you produce a good or service at the lowest cost possible
What are the four types of efficiencies economists look for?
Productive efficiency, Allocative efficient, Pareto efficiency, Kaldor-Hicks efficiency
Along with a balanced economy, what type of economy do economists desire?
Economists desire an efficient economy
In the terms of economics, when is an economy considered efficient?
An economy is deemed efficient when we can do as much as possible with as little as possible
What are some things that are looked at with microeconomics?
Opportunity costs, why people/corporations made certain decisions over others, how well an individual market did, etc.
What is the definition of microeconomics?
Microeconomics focuses of the economic decisions, trends, and issues of the individual factors that make up macroeconomics like the individual, household, or business
What are some things that are looked at in macroeconomics?
Exports, GDP, income, employment, etc.
What is the definition of macroeconomics?
The study of economic decisions, trends, and issues on a broader, “national” level scale
What are the two branches of economics?
Microeconomics and Macroeconomics
What is a simplified definition of economics?
The study of how people maximize their happiness when they have limited resources
What is an opportunity cost?
The second best option you give up for the sake of the best
What is a trade-off and why are they used?
A trade-off is where you give up one thing for the sake of the other. It is utilized to be as efficient as possible with the scarce resources available
What are some examples of common limited resources?
Time, money, natural resources, etc.
Based on the definition, what is meant by “constraints?”
Constraints are the things that prevent us from doing everything we want due to scarce (limited) resources
What is the traditional definition of utility and why don’t economists care about it?
The traditional definition of utility is “usefulness.” Economists don’t care about this because not everything that creates happiness is useful.
In the terms of economics, what is the meaning of utility?
Happiness or content
What are some of the most common economic agents?
Individuals, households, businesses, government, etc.
What is the meaning of economic agents in the definition?
. A person or group of people that makes an economic decision like what to buy or sell
What is the official definition of “Economics”?
The study of how economic agents maximize their utility given their constraints
What is the major inaccuracy involving the Circular Flow Diagram?
The Circular Flow Diagram doesn’t show the money that is taken out or added to the economy through the banks, government, and imports/exports
How is the slope useful for the Production Possibilities Frontier?
On the Production Possibilities Frontier, the slope is used to display the opportunity cost. If the slope is constant, it signifies a linear line and that the resources are equally distributed in the economy. If the slope increases, it signifies a curved line with higher opportunity costs because of the resources being unequally distributed in the economy.
