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84110 Foundations of Political Economy > Midterm 1 Study Guide > Flashcards

Midterm 1 Study Guide Flashcards

1
Q

macroeconomics

A

the study of economy-wide phenomena, including inflation, unemployment, GDP, and economic growth

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2
Q

microeconomics

A

the study of how households and firms make decisions and how they interact in markets

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3
Q

“invisible hand”

A

unseen forces of the marketplace that guide self-interested firms and households to desirable outcomes; works through price adjustments

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4
Q

People face trade-offs

A

1st principle of economics (individual)

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5
Q

efficiency

A

the property of society getting the most it can from its scarce resources

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6
Q

equality

A

the property of distributing economic prosperity uniformly among the members of society

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7
Q

opportunity cost

A

what must be given up to obtain some item; 2nd principle of economics (individual)

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8
Q

Rational people think at the margin

A

3rd principle of economics (individual)

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9
Q

marginal change

A

an incremental adjustment to a plan or action

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10
Q

marginal benefit

A

the benefit that comes with an additional unit purchased

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11
Q

People respond to incentives

A

4th principle of economics (individual)

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12
Q

incentive

A

something that induces a person to act

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13
Q

Trade can make everyone better off

A

5th principle of economics (interactions)

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14
Q

Markets organize economic activity

A

6th principle of economics (interactions)

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15
Q

market economy

A

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

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16
Q

Governments can sometimes improve market outcomes

A

government rule allows the invisible hand to operate; markets may not always create efficient or equal outcomes; 7th principle of economics (interactions)

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17
Q

property rights

A

the ability of an individual to own and exercise control over scarce resources

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18
Q

A country’s standard of living depends on its ability to produce goods and services

A

8th principle of economics (overall economy)

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19
Q

productivity

A

the quantity of goods and services produced from each unit of labor input

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20
Q

Prices rise when the government prints too much money

A

9th principle of economics (overall economy)

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21
Q

Society faces a short-run trade-off between inflation and unemployment

A

increasing money -> increase in demand for goods -> more workers hired -> lower unemployment -> increasing inflation;10th principle of economics (overall economy)

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22
Q

business cycle

A

fluctuations in economic activity, such as employment and production

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23
Q

scientific method

A

the development and testing of theories that follows from 1) observation/question, 2) theoretical explanation/hypotheses, 3) data collection/analysis

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24
Q

assumption

A

a simplification of a more complex process; allows for easier understanding

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25
Q

circular flow model

A

a model that indicates how dollars flow through markets among households and firms

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26
Q

market for factors of production

A

market in which households sell labor, land, capital, entrepreneurial ability to firms

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27
Q

market for goods and services

A

market in which households buy goods and services from firms

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28
Q

production possibilities curve

A

maps possible amount of products produced given a certain amount of resources and capabilities; can increase curve by improving production techniques; points inside the curve are inefficient

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29
Q

positive economics

A

describes the world as it is

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30
Q

normative economics

A

describes how the world ought to be; involves values and facts

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31
Q

Why isn’t economic advice followed?

A

economic policy is made in a political context; different values of political parties; impact of global events

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32
Q

comparative political economy

A

variations in domestic institutions (executive, legislative, union structures) and domestic economies

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33
Q

logic of markets

A

channel resources to the most competitive and profitable economic activity

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34
Q

logic of governments

A

states that governments should exercise authority on behalf of the interest of the public

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35
Q

market failure

A

a situation in which a market left on its own does not allocate resources efficiently

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36
Q

externality

A

the impact of one person’s actions on the well-being of a bystander; for market failure, global events

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37
Q

government interventions

A

when markets fail, government provide public goods, place regulations to combat externalities, and impose standards

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38
Q

state capacity

A

the ability of a state to translate policies into binding public policies and remedy market failures (how well-funded governments are)

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39
Q

economic voting

A

influence of economy on election outcomes

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40
Q

principle-agent problem

A

people find it difficult to hold the government accountable

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41
Q

rent-seeking

A

converting political power to advance government and/or business interests at the expense of the public interest

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42
Q

international politics and the economy

A

the way political and economic factors interact at the global level; includes power, international institutions, inter- and intra-state conflict, and interconnectedness

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43
Q

market

A

a group of buyers and sellers of a good or service

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44
Q

competitive market

A

a market in which there are numerous buyers and sellers, each of which has a negligible impact on the market price

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45
Q

perfectly competitive markets

A

markets in which 1) all goods offered are the same, and 2) there are numerous buyers and sellers

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46
Q

price-takers

A

buyers and sellers in a perfectively competitive market who must accept the price set

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47
Q

monopoly

A

non-competitive markets with only one seller; control price and are not affected by supply and demand

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48
Q

market power

A

the ability of an economic actor to have substantial influence on market prices

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49
Q

quantity demand

A

amount of any good that buyers are willing and able to purchase

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50
Q

law of demand

A

other things being equal, when the price of a good rises, the quantity demanded falls; when the price declines, the quantity demanded rises

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51
Q

demand schedule

A

a table that shows the relationship between price and quantity demanded

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52
Q

demand curve

A

a graph of the relationship between the price of a good (vertical axis) and quantity demanded (horizontal axis); generally slopes negatively

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53
Q

movements along the demand curve

A

caused by a change in price (e.g. inflation) or possibly a change in supply of the good

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54
Q

shifts in demand curve

A

caused by a change in quantity demanded at any price; impacted by income, prices of related goods, tastes, expectations, and number of buyers

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55
Q

normal good

A

a good whose demand is positively correlated with income

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56
Q

inferior good

A

a good whose demand is negatively correlated with income

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57
Q

substitutes

A

two goods for which an increase in the price of one leads to an increase in demand for the other

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58
Q

complements

A

two goods in which an increase in the price of one leads to a decrease in the demand for the other

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59
Q

quantity supplied

A

the amount of a good that sellers are willing and able to sell

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60
Q

law of supply

A

other things being equal, the quantity supplied of a good rises when the price of the good rises; the quantity supplied decreases when the price of the good decreases

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61
Q

supply schedule

A

a table that shows the relationship between the price of a good and the quantity supplied

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62
Q

supply curve

A

a graph of the relationship between the price of a good (vertical axis) and the quantity supplied (horizontal axis)

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63
Q

movements along the supply curve

A

caused by a change in price (e.g. inflation) or change in demand of the good

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64
Q

shifts in supply curve

A

caused by a change in quantity supplied at any price; impacted by input prices, technology, expectations, number of sellers

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65
Q

equilibrium

A

a situation in which the market price has reached the level at which the quantity supplied equals the quantity demanded

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66
Q

market-clearing prices

A

equilibrium price at which buyers buy all they want to buy and sellers sell all they want to sell

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67
Q

surplus

A

producers are unable to sell all they want at the going prices; excess supply

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68
Q

shortage

A

consumers are unable to buy all they want at the going prices; excess demand

69
Q

law of supply and demand

A

the price of any good adjusts to bring the quantity supplied and the quantity demanded into balance

70
Q

elasticity

A

a measure of the responsiveness of the quantity demanded/supplied to a change in price

71
Q

price elasticity of demand

A

how much quantity demanded responds to a change in the price of a good; percentage change in quantity demanded / percentage change in price

72
Q

variations in elasticity of demand

A

includes availability of substitutes, necessities vs. luxuries, defining market broadly or narrowly, and time horizon (tends to be more elastic in long-term)

73
Q

total revenue

A

the amount paid by buyers and received by the sellers of a good; calculated as the price of the good (P) times the quantity sold (Q)

74
Q

inelastic good

A

a good whose quantity demanded/supplied responds slightly to a change in price

75
Q

elastic good

A

a good whose quantity demanded/supplied responds significantly to a change in price

76
Q

price elasticity of supply

A

how much the quantity supplied responds to a change in the price; percentage change in quantity supplied / percentage change in price

77
Q

variations in elasticity of supply

A

depend on limits of firms’ production capacity

78
Q

resilient supply chains

A

a supply chain in which buyer-supplier relationships are 1) prepared and can adapt very quickly to unexpected events, 2) production disruptions are minimized (output losses are minimized), 3) supply chain relationships recover very quickly

79
Q

disruptions in supply chains and shortages

A

include lack of resilient supply chains, change to consumer preferences, declining output

80
Q

supply chains in India

A

impact observed by red, orange, green zones during COVID-19; complex supply chains more resilient

81
Q

complex vs. simple supply chains

A

complex supply chains broke down less in India because they were more prepared for unexpected events, new suppliers were found quickly, considered important suppliers who provide specific goods

82
Q

firm responses to supply chain disruptions

A

firms change their supply chains toward larger, more connected, and/or more important suppliers; minimize distance from supplies

83
Q

automotive supply lines

A

complex supply chains that are geographically concentrated with final assembly close to demand location

84
Q

environmental effects on automotive supply lines

A

due to flooding in 3 out of every 4 plants, affected plants shut down for months, leading to production standstill

85
Q

manufacturers’ responses and ramifications

A

manufacturers worked on diversifying manufacturing across plants and creating more plants with spare capacity space, leading to increase in cost for manufacturers and consumers and reduction in variety of models

86
Q

total cost

A

the market value of the inputs a firm uses in production

87
Q

explicit cost

A

input costs that require money or funds by the firm

88
Q

implicit cost

A

non-monetary input costs such as time, physical labor, effort, etc. by the firm

89
Q

profit

A

total revenue minus total cost

90
Q

economic profit

A

total revenue minus total cost, including both explicit and implicit costs

91
Q

accountant profit

A

total revenue minus total explicit cost

92
Q

production function

A

the relationship between quantity of inputs (employees) and quantity of outputs (products)

92
Q

fixed costs

A

costs that do not vary with the quantity of output produced

92
Q

variable costs

A

costs that vary with the quantity of output produced

92
Q

diminishing marginal product

A

the property whereby the marginal product of an input declines as the quantity of inputs increase

92
Q

average total cost

A

total cost divided by the quantity of output

93
Q

average fixed cost

A

fixed cost divided by the quantity of output

94
Q

average variable cost

A

variable cost divided by the quantity of output

95
Q

marginal cost

A

the increase in total cost that arises from an extra unit of production

96
Q

cost curves

A

1) marginal cost increases with quantity produced (diminishing marginal product)
2) average total cost is U-shaped
3) marginal cost crosses average total cost at the minimum average total cost point (amount to produce)

97
Q

time horizons

A

cost varies between short-term and long-term periods: long-run average total cost is flatter; firms have different long-run cost expectations

98
Q

economies of scale

A

long-run average total cost declines as production increases (negative slope on average total cost curve); more employees leads to specialization

99
Q

diseconomies of scale

A

long-run average total cost increases as production increases; more employees leads to coordination problems

100
Q

constant returns to scale

A

long-run average total cost remains the same as the quantity of output changes

101
Q

average revenue

A

total revenue divided by the quantity sold; for all firms, equal to the price of the good

102
Q

marginal revenue

A

change in total revenue divided by the change in quantity sold; for competitive firms, equal to price

103
Q

maximizing profit from quantity production

A

if MR > MC, increase production
if MC > MR, decrease production
profit is maximized when MR = MC

104
Q

shutdown

A

a firm’s short-run decision to not produce anything based on current market conditions; firms should shut down if P < AVC

105
Q

exit

A

a firm’s long-run decision to leave the market; firms should exit if P < ATC

106
Q

Stolper-Samuelson trade model

A

trade model that states that components of production (workers, machinery) are freely mobile across industries

107
Q

Ricardo-Viner trade model

A

trade model that states that components of production are not mobile across industries; industries that benefit from comparative advantage will support free trade

108
Q

new trade theory

A

theory that states that industries participate in both exports and imports via intra-industry trade

109
Q

firm heterogeneity

A

firms differ in productivity and size; a minority of firms that are larger and more productive export products and import inputs

110
Q

new, new trade theory

A

only high productive firms can enter markets; less productive firms exit markets

111
Q

India’s trade liberalization in the 1990s

A

policies that led to decreases in prices for intermediary goods and production costs for final goods, which resulted in rising markups

112
Q

ramifications of India’s trade liberalization

A

short-term ramifications: declining costs and declining prices
long-term ramifications: firms increase production of high-quality products; firms with higher profits introduce new products

113
Q

creation of GDP

A

during the Great Depression when the U.S. needed a way to determine how bad the economic situation was

114
Q

gross domestic product

A

the market value of all final goods and services produced within a country in a given period

115
Q

exclusions from GDP

A

intermediate goods (unless in inventory), destructive values (externalities/liabilities), household production, illegally produced and sold products, products produced in other countries, second-hand sold goods

116
Q

components of GDP

A

GDP is the total sum of consumption, investment, government purchases, and net exports

117
Q

consumption

A

spending by households on goods and services; generally the largest component of GDP

118
Q

investment

A

the purchase of goods that will be used in the future to produce more goods and services; includes intermediary goods in inventory, rental properties, business capital

119
Q

government purchases

A

measures spending on goods and services by national, state, and local governments; includes salaries of government employees and public works projects but excludes transfer payments

120
Q

net exports

A

foreign purchases of domestically produced goods (exports) minus domestic purchases of foreign goods (imports)

121
Q

nominal GDP

A

the production of goods and services valued at current prices

122
Q

real GDP

A

production of goods and services valued at constant prices

123
Q

components of productivity

A

physical capital, human capital, natural resources, technological knowledge

124
Q

physical capital

A

stock of equipment and structures that are used to produce goods and services

125
Q

human capital

A

knowledge and skills acquired through education, training, and experience

126
Q

natural resources

A

renewable and non-renewable resources

127
Q

technological knowledge

A

understanding of the best ways to produce goods and services; includes common knowledge and proprietary knowledge

128
Q

aspects of economic growth

A

diminishing returns, catch-up effect, foreign investment, education, health and nutrition, property rights, free trade, and population growth

129
Q

diminishing returns

A

the benefit of an additional unit of capital falls as more capital is added; applies to developed countries

130
Q

catch-up effect

A

the benefit of an additional unit of capital increases significantly with a low starting point; applies to developing countries

131
Q

foreign direct investment

A

capital investment that is owned and operated by a foreign entity

132
Q

foreign portfolio investment

A

investment financed with foreign money but operated by domestic residents

133
Q

human development index

A

alternative to GDP that takes health (life expectancy at birth), education (expected schooling years), standard of living (gross national income per capita)

134
Q

better life index

A

alternative to GDP that focuses on living conditions (housing, income, jobs) and quality of life (community, education, environment, governance, health, life satisfaction, safety, work-life balance)

135
Q

genuine progress indicator

A

alternative to GDP that takes economic, environmental, and social factors into account

136
Q

functions of money

A

medium of exchange, unit of account, store of value

137
Q

medium of exchange

A

an item that buyers give to sellers when they want to purchase goods and services

138
Q

unit of account

A

the yardstick people use to post prices and record debts

139
Q

store of value

A

an item that people can use to transfer purchasing power from the present to the future

140
Q

commodity money

A

money that has an intrinsic value

141
Q

fiat money

A

money that has no intrinsic value; value is granted by governments

142
Q

money stock

A

the quantity of money circulating in the economy; includes currency, demand deposits, savings accounts, and money market mutual funds

143
Q

liquidity

A

ease with which an asset can be converted into the economy’s medium of exchange

144
Q

central banks

A

institutions designed to oversee the banking system and regulate the quantity of money in the economy; control the money supply using monetary policy

145
Q

reserves

A

deposits banks have received but have not loaned

146
Q

100% reserve banking

A

banking system in which no loans are provided and all reserves are held at the bank; leads to no change in the money supply

147
Q

fractional-reserve banking

A

banking system in which only a portion of deposits are held as reserves; money supply increases

148
Q

reserve ratio

A

the fraction of deposits banks are required to hold as reserves

149
Q

money multipiler

A

the amount of money that results from each dollar of reserves; the reciprocal of the reserve ratio

150
Q

monetary policy tools

A

open-market operations, discount rate, reserve requirements, and interest on reserve rate

151
Q

open-market operations

A

the purchase and sale of government bonds by the central bank; purchase leads to an increase in money supply, selling leads to a decrease in money supply

152
Q

discount rate

A

interest rate on loans to banks within the economy; higher rate leads to decrease in money supply, lower rate leads to increase in money supply

153
Q

reserve requirements

A

determines the minimum amount of reserves that banks must hold against deposits; increase leads to reduced money supply, decrease leads to increased money supply

154
Q

interest on reserves

A

interest rate paid to banks on reserves held at the central bank; higher rate leads to decrease in money supply; lower rate leads to increase in money supply

155
Q

inflation

A

the increase in the overall level of prices in an economy; describes the value of money, not the value of goods

156
Q

money demand

A

how much wealth people want to hold in liquid form; affected by average price levels

157
Q

money supply

A

quantity fixed by central banks through monetary policy; increasing money supply leads to an increase in demand

158
Q

money neutrality

A

the proposition that changes in the money supply do not affect real variables, which are measured in physical units (e.g. relative prices)

159
Q

inflation tax

A

government raise revenue by printing money

160
Q

nominal interest rate

A

at banks, how fast the number of dollars in an account will rise over time

161
Q

real interest rate

A

how fast the purchasing power of a savings account will rise over time

162
Q

fisher effect

A

nominal interest rate minus inflation rate = real interest rate

163
Q

shoeleather costs

A

resources wasted when inflation encourage people to reduce their money holdings

164
Q

menu costs

A

the costs of changing prices due to inflation

84110 Foundations of Political Economy (3 decks)

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