Macro Economics Midterm Flashcards
What are some examples of the economic way of thinking?
- Can you prove there is no person worth a trillion dollars?
- Why would you purchase more Coca-Cola when the price increases?
- How can you explain the relationship between the Super Bowl winner and changes in the stock market?
What are the 3 building blocks in the economic
way of thinking?
- scarcity & choice
- model building
- pitfalls of economic reasoning
What is the economic problem?
• Providing for people’s wants and needs in a world of scarcity.
What is meant by scarcity?
• The condition in which wants are forever greater than the available supply of time, goods, and resources.
What does scarcity force us to do?
• It forces us to make choices.
What are the three categories of resources?
- Land
- Labor
- Capital
What is a land resource?
• Any natural resource provided by nature.
What are resources?
• The basic categories of inputs used to produce goods and services.
What is capital?
The physical plants, machinery, and equipment used to produce other goods. They do not directly satisfy human wants.
What is labor?
• The mental and physical capacity of workers to produce goods and services.
What is financial capital?
• The money used to purchase capital. Financial capital by itself is not productive, it is a paper claim on capital.
What is entrepreneurship?
• Creative labor of individuals that enables them to seek profits by combining resources. Entrepreneurship organizes resources to produce goods and services. Land, Labor, and Capital.
What is economics?
• The study of how society chooses to allocate its scarce resources in order to satisfy unlimited wants and needs.
What is macroeconomics?
• The branch of economics that studies decision-making for the economy as a whole.
What is the purpose of an economic model?
• To forecast or predict the results of various changes in variables.
What is the scientific method?
- Problem identification
- Model development
- Testing a theory
Define the scientific method of an economic model.
- Identify the problem.
- Develop a model based on simplified assumptions.
- Test the model and formulate a conclusion.
What is an economic model?
• A simplified description of reality used to understand and predict the relationships between variables.
What conclusion can we make from a scientific, economic model?
• If the evidence supports the model, the conclusion is to accept the model. If not, the model is rejected.
What assumption (rule) is always made when testing a model?
ceteris paribus - Latin phrase that translates approximately to “holding other things constant” and is usually rendered in English as “all other things being equal”. In economics and finance, the term is used as a shorthand for indicating the effect of one economic variable on another, holding constant all other variables that may affect the second variable.
What is an example of ceteris paribus?
• If the price of new Ford cars decrease, and everything else stays the same, consumers will buy more, but if other variables change, we cannot make a prediction.
What are the two common pitfalls in understanding how the economy works?
- failing to understand the ceteris paribus assumption.
2. confusing association with causation.
What is the difference between association and causation?
• We cannot always assume that when one event follows another, the first caused the second.
What conclusion can we make about the pitfalls in understanding how the economy works?
A theory cannot be tested legitimately unless its ceteris paribus assumption is satisfied.