midterm 1 Flashcards
Who is John Maynard Keynes?
An influential 20th-century economist who argued that economics is a way of thinking rather than a doctrine.
What did Keynes say about economics?
Economics is “a method rather than a doctrine, an apparatus of the mind, a technique of thinking.”
What is a theory in economics?
A simplified representation of how two or more variables interact, used to understand complex real-world issues.
What is a model in economics?
An applied or empirical representation used to test theories; models and theories are often used interchangeably.
What is the circular flow diagram?
A model that shows how households and firms interact in the goods and services market and the labor market.
What do arrows “A” and “B” represent in the circular flow diagram?
Arrow “A” represents firms producing and selling goods/services to households, while arrow “B” represents households paying firms for those goods/services.
What do arrows “C” and “D” represent in the circular flow diagram?
Arrow “C” represents households providing labor to firms, while arrow “D” shows firms paying households wages for labor.
What is a traditional economy?
An economy where occupations stay in the family and economic progress is minimal, often found in parts of Asia, Africa, and South America.
What is a command economy?
An economy where the government makes all decisions about production, pricing, and wages. Examples include Cuba and North Korea.
What is a market economy?
An economy where economic decisions are decentralized, and private individuals own resources and businesses.
What is a mixed economy?
An economy that combines elements of both command and market systems, such as the U.S., which is market-oriented but still has some government involvement.
What is the significance of the Heritage Foundation’s Index of Economic Freedom?
It ranks countries based on the extent of their economic freedom, assessing how free individuals and businesses are to make economic decisions.
What are underground economies or black markets?
Markets where transactions occur without government approval, often found in heavily regulated command economies.
What is globalization?
The increasing cultural, political, and economic connections between people across the world, often driven by trade and technology.
What is Gross Domestic Product (GDP)?
The total value of goods and services produced in a country over a specific period, used to measure the size of an economy.
What is fiscal policy?
Economic policies that involve government spending and taxation to influence the economy.
What is monetary policy?
Policies that involve controlling interest rates and credit availability to manage the economy’s money supply.
What is scarcity in economics?
The condition where human wants for goods and services exceed the available supply.
What is specialization?
When workers or firms focus on tasks for which they are well-suited within the production process, increasing efficiency.
What is the goods and services market?
The market in which firms sell what they produce and households buy these goods and services.
What is the labor market?
The market where households sell their labor as workers to firms or other employers in exchange for wages, salaries, and
What is a budget constraint?
The limitation of an individual’s choices based on their income, prices of goods and services, and the amount of resources they have.
What is marginal analysis?
The process of examining the additional benefits of an activity compared to the additional costs incurred by that same activity.
What is opportunity cost?
The cost of the next best alternative that is forgone when making a choice.
What are incentives in economics?
Factors that motivate individuals and businesses to make decisions, such as profits, wages, and subsidies.
What is the difference between microeconomics and macroeconomics?
Microeconomics focuses on individual consumers and firms, while macroeconomics looks at the economy as a whole, including inflation, unemployment, and growth.
What is positive economics?
The branch of economics that focuses on facts and cause-and-effect relationships, describing and explaining economic phenomena.
What is normative economics?
The branch of economics that expresses value judgments about what the economy should be like, focused on opinions and fairness.
What is a production possibilities frontier (PPF)?
A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.
What does the slope of the PPF represent?
The opportunity cost of one good in terms of the other good.
What is the law of demand? a.
The principle that, all else equal, an increase in the price of a good will lead to a decrease in the quantity demanded, and vice vers
What is the law of supply?
The principle that, all else equal, an increase in the price of a good will lead to an increase in the quantity supplied, and vice versa.
What is equilibrium in a market?
The point where the quantity demanded equals the quantity supplied, resulting in no surplus or shortage in the market.
What is a surplus?
A situation where the quantity supplied of a good exceeds the quantity demanded at the current price.
What is a shortage?
A situation where the quantity demanded exceeds the quantity supplied at the current price.
What is price elasticity of demand?
A measure of how much the quantity demanded of a good responds to a change in the price of that good.
What is price elasticity of supply?
A measure of how much the quantity supplied of a good responds to a change in the price of that good.
What are externalities in economics?
Unintended side effects of an economic activity that affect third parties, can be positive or negative (e.g., pollution).
What is the tragedy of the commons? .
A situation where individuals overuse a shared resource, leading to its depletion or degradation, due to a lack of private ownership.
What is a public good?
A good that is non-excludable and non-rivalrous, meaning it can be used by anyone without reducing its availability to others (e.g., national defense).
What is the free rider problem?
When individuals benefit from resources or services without paying for them, often associated with public goods.
What is a monopoly?
A market structure where a single seller dominates the market, with no close substitutes for the product, often leading to higher prices.
What is monopolistic competition?
A: A market structure where many firms sell similar but not identical products, with some control over their prices.
What is perfect competition?
A market structure where many firms sell identical products, and no single firm can influence the market price.
What is an oligopoly?
A market structure where a few large firms dominate the market, often leading to collusion and price-setting.
What is scarcity? Can you think of two causes of scarcity?
Scarcity is the fundamental economic problem of having limited resources to meet unlimited wants. Two causes of scarcity are limited natural resources and the high cost of producing goods.
Residents of the town of Smithfield like to consume hams, but each ham requires 10 people to produce it and takes a month. If the town has a total of 100 people, what is the maximum amount of ham the residents can consume in a month?
The maximum number of hams the residents can produce is 10 hams per month. This is because it takes 10 people to make one ham, and with 100 people, 100 ÷ 10 = 10 hams.
A consultant works for $200 per hour. She likes to eat vegetables, but is not very good at growing them. Why does it make more economic sense for her to spend her time at the consulting job and shop for her vegetables?
It makes more economic sense for the consultant to work because she earns $200 per hour, which is likely far more than the value of the vegetables she could grow in that time. She can use her earnings to buy vegetables and still have money left over.
A computer systems engineer could paint her house, but it makes more sense for her to hire a painter to do it. Explain why.
It makes more sense for the engineer to hire a painter because her time is more valuable spent working in her specialized field. The painter can do the job efficiently, allowing the engineer to focus on her higher-paying work.
What would be another example of a “system” in the real world that could serve as a metaphor for micro and macroeconomics?
An example could be a sports league. Microeconomics focuses on individual teams and their strategies, while macroeconomics focuses on the overall performance of the league, rules, and regulations affecting all teams.
What is an example of a problem in the world today, not mentioned in the chapter, that has an economic dimension?
Climate change is a problem with an economic dimension. It affects industries like agriculture, energy, and insurance, and requires global cooperation and economic resources to address.
The chapter defines private enterprise as a characteristic of market-oriented economies. What would public enterprise be?
Public enterprise refers to government-owned and operated businesses or industries, which are typical in command economies. Examples include state-run utilities or public transportation systems.
Why might Belgium, France, Italy, and Sweden have a higher export-to-GDP ratio than the United States?
These countries have smaller economies relative to the U.S. and may rely more on international trade to drive their economies, leading to a higher export-to-GDP
Give the three reasons that explain why the division of labor increases an economy’s level of production.
- Specialization allows workers to focus on tasks where they have an advantage.
- Increased efficiency comes from workers becoming more skilled at specific tasks.
- Time-saving by avoiding switching between tasks.
What are three reasons to study economics?
- To understand how economies operate.
- To make informed decisions as a consumer or business owner.
- To contribute to debates on public policy and economic issues.
What is the difference between microeconomics and macroeconomics?
Microeconomics focuses on individual consumers, firms, and markets. Macroeconomics looks at the economy as a whole, dealing with issues like inflation, unemployment, and GDP.
What are examples of individual economic agents?
Examples include consumers, workers, firms, and governments.
