Midterm 1 Study Guide Flashcards
1
Q
macroeconomics
A
the study of economy-wide phenomena, including inflation, unemployment, GDP, and economic growth
2
Q
microeconomics
A
the study of how households and firms make decisions and how they interact in markets
3
Q
“invisible hand”
A
unseen forces of the marketplace that guide self-interested firms and households to desirable outcomes; works through price adjustments
4
Q
People face trade-offs
A
1st principle of economics (individual)
5
Q
efficiency
A
the property of society getting the most it can from its scarce resources
6
Q
equality
A
the property of distributing economic prosperity uniformly among the members of society
7
Q
opportunity cost
A
what must be given up to obtain some item; 2nd principle of economics (individual)
8
Q
Rational people think at the margin
A
3rd principle of economics (individual)
9
Q
marginal change
A
an incremental adjustment to a plan or action
10
Q
marginal benefit
A
the benefit that comes with an additional unit purchased
11
Q
People respond to incentives
A
4th principle of economics (individual)
12
Q
incentive
A
something that induces a person to act
13
Q
Trade can make everyone better off
A
5th principle of economics (interactions)
14
Q
Markets organize economic activity
A
6th principle of economics (interactions)
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
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)
17
Q
property rights
A
the ability of an individual to own and exercise control over scarce resources
18
Q
A country’s standard of living depends on its ability to produce goods and services
A
8th principle of economics (overall economy)
19
Q
productivity
A
the quantity of goods and services produced from each unit of labor input
20
Q
Prices rise when the government prints too much money
A
9th principle of economics (overall economy)
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)
22
Q
business cycle
A
fluctuations in economic activity, such as employment and production
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
24
Q
assumption
A
a simplification of a more complex process; allows for easier understanding
25
circular flow model
a model that indicates how dollars flow through markets among households and firms
26
market for factors of production
market in which households sell labor, land, capital, entrepreneurial ability to firms
27
market for goods and services
market in which households buy goods and services from firms
28
production possibilities curve
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
29
positive economics
describes the world as it is
30
normative economics
describes how the world ought to be; involves values and facts
31
Why isn't economic advice followed?
economic policy is made in a political context; different values of political parties; impact of global events
32
comparative political economy
variations in domestic institutions (executive, legislative, union structures) and domestic economies
33
logic of markets
channel resources to the most competitive and profitable economic activity
34
logic of governments
states that governments should exercise authority on behalf of the interest of the public
35
market failure
a situation in which a market left on its own does not allocate resources efficiently
36
externality
the impact of one person's actions on the well-being of a bystander; for market failure, global events
37
government interventions
when markets fail, government provide public goods, place regulations to combat externalities, and impose standards
38
state capacity
the ability of a state to translate policies into binding public policies and remedy market failures (how well-funded governments are)
39
economic voting
influence of economy on election outcomes
40
principle-agent problem
people find it difficult to hold the government accountable
41
rent-seeking
converting political power to advance government and/or business interests at the expense of the public interest
42
international politics and the economy
the way political and economic factors interact at the global level; includes power, international institutions, inter- and intra-state conflict, and interconnectedness
43
market
a group of buyers and sellers of a good or service
44
competitive market
a market in which there are numerous buyers and sellers, each of which has a negligible impact on the market price
45
perfectly competitive markets
markets in which 1) all goods offered are the same, and 2) there are numerous buyers and sellers
46
price-takers
buyers and sellers in a perfectively competitive market who must accept the price set
47
monopoly
non-competitive markets with only one seller; control price and are not affected by supply and demand
48
market power
the ability of an economic actor to have substantial influence on market prices
49
quantity demand
amount of any good that buyers are willing and able to purchase
50
law of demand
other things being equal, when the price of a good rises, the quantity demanded falls; when the price declines, the quantity demanded rises
51
demand schedule
a table that shows the relationship between price and quantity demanded
52
demand curve
a graph of the relationship between the price of a good (vertical axis) and quantity demanded (horizontal axis); generally slopes negatively
53
movements along the demand curve
caused by a change in price (e.g. inflation) or possibly a change in supply of the good
54
shifts in demand curve
caused by a change in quantity demanded at any price; impacted by income, prices of related goods, tastes, expectations, and number of buyers
55
normal good
a good whose demand is positively correlated with income
56
inferior good
a good whose demand is negatively correlated with income
57
substitutes
two goods for which an increase in the price of one leads to an increase in demand for the other
58
complements
two goods in which an increase in the price of one leads to a decrease in the demand for the other
59
quantity supplied
the amount of a good that sellers are willing and able to sell
60
law of supply
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
61
supply schedule
a table that shows the relationship between the price of a good and the quantity supplied
62
supply curve
a graph of the relationship between the price of a good (vertical axis) and the quantity supplied (horizontal axis)
63
movements along the supply curve
caused by a change in price (e.g. inflation) or change in demand of the good
64
shifts in supply curve
caused by a change in quantity supplied at any price; impacted by input prices, technology, expectations, number of sellers
65
equilibrium
a situation in which the market price has reached the level at which the quantity supplied equals the quantity demanded
66
market-clearing prices
equilibrium price at which buyers buy all they want to buy and sellers sell all they want to sell
67
surplus
producers are unable to sell all they want at the going prices; excess supply
68
shortage
consumers are unable to buy all they want at the going prices; excess demand
69
law of supply and demand
the price of any good adjusts to bring the quantity supplied and the quantity demanded into balance
70
elasticity
a measure of the responsiveness of the quantity demanded/supplied to a change in price
71
price elasticity of demand
how much quantity demanded responds to a change in the price of a good; percentage change in quantity demanded / percentage change in price
72
variations in elasticity of demand
includes availability of substitutes, necessities vs. luxuries, defining market broadly or narrowly, and time horizon (tends to be more elastic in long-term)
73
total revenue
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
inelastic good
a good whose quantity demanded/supplied responds slightly to a change in price
75
elastic good
a good whose quantity demanded/supplied responds significantly to a change in price
76
price elasticity of supply
how much the quantity supplied responds to a change in the price; percentage change in quantity supplied / percentage change in price
77
variations in elasticity of supply
depend on limits of firms' production capacity
78
resilient supply chains
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
disruptions in supply chains and shortages
include lack of resilient supply chains, change to consumer preferences, declining output
80
supply chains in India
impact observed by red, orange, green zones during COVID-19; complex supply chains more resilient
81
complex vs. simple supply chains
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
firm responses to supply chain disruptions
firms change their supply chains toward larger, more connected, and/or more important suppliers; minimize distance from supplies
83
automotive supply lines
complex supply chains that are geographically concentrated with final assembly close to demand location
84
environmental effects on automotive supply lines
due to flooding in 3 out of every 4 plants, affected plants shut down for months, leading to production standstill
85
manufacturers' responses and ramifications
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
total cost
the market value of the inputs a firm uses in production
87
explicit cost
input costs that require money or funds by the firm
88
implicit cost
non-monetary input costs such as time, physical labor, effort, etc. by the firm
89
profit
total revenue minus total cost
90
economic profit
total revenue minus total cost, including both explicit and implicit costs
91
accountant profit
total revenue minus total explicit cost
92
production function
the relationship between quantity of inputs (employees) and quantity of outputs (products)
92
fixed costs
costs that do not vary with the quantity of output produced
92
variable costs
costs that vary with the quantity of output produced
92
diminishing marginal product
the property whereby the marginal product of an input declines as the quantity of inputs increase
92
average total cost
total cost divided by the quantity of output
93
average fixed cost
fixed cost divided by the quantity of output
94
average variable cost
variable cost divided by the quantity of output
95
marginal cost
the increase in total cost that arises from an extra unit of production
96
cost curves
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
time horizons
cost varies between short-term and long-term periods: long-run average total cost is flatter; firms have different long-run cost expectations
98
economies of scale
long-run average total cost declines as production increases (negative slope on average total cost curve); more employees leads to specialization
99
diseconomies of scale
long-run average total cost increases as production increases; more employees leads to coordination problems
100
constant returns to scale
long-run average total cost remains the same as the quantity of output changes
101
average revenue
total revenue divided by the quantity sold; for all firms, equal to the price of the good
102
marginal revenue
change in total revenue divided by the change in quantity sold; for competitive firms, equal to price
103
maximizing profit from quantity production
if MR > MC, increase production
if MC > MR, decrease production
profit is maximized when MR = MC
104
shutdown
a firm's short-run decision to not produce anything based on current market conditions; firms should shut down if P < AVC
105
exit
a firm's long-run decision to leave the market; firms should exit if P < ATC
106
Stolper-Samuelson trade model
trade model that states that components of production (workers, machinery) are freely mobile across industries
107
Ricardo-Viner trade model
trade model that states that components of production are not mobile across industries; industries that benefit from comparative advantage will support free trade
108
new trade theory
theory that states that industries participate in both exports and imports via intra-industry trade
109
firm heterogeneity
firms differ in productivity and size; a minority of firms that are larger and more productive export products and import inputs
110
new, new trade theory
only high productive firms can enter markets; less productive firms exit markets
111
India's trade liberalization in the 1990s
policies that led to decreases in prices for intermediary goods and production costs for final goods, which resulted in rising markups
112
ramifications of India's trade liberalization
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
creation of GDP
during the Great Depression when the U.S. needed a way to determine how bad the economic situation was
114
gross domestic product
the market value of all final goods and services produced within a country in a given period
115
exclusions from GDP
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
components of GDP
GDP is the total sum of consumption, investment, government purchases, and net exports
117
consumption
spending by households on goods and services; generally the largest component of GDP
118
investment
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
government purchases
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
net exports
foreign purchases of domestically produced goods (exports) minus domestic purchases of foreign goods (imports)
121
nominal GDP
the production of goods and services valued at current prices
122
real GDP
production of goods and services valued at constant prices
123
components of productivity
physical capital, human capital, natural resources, technological knowledge
124
physical capital
stock of equipment and structures that are used to produce goods and services
125
human capital
knowledge and skills acquired through education, training, and experience
126
natural resources
renewable and non-renewable resources
127
technological knowledge
understanding of the best ways to produce goods and services; includes common knowledge and proprietary knowledge
128
aspects of economic growth
diminishing returns, catch-up effect, foreign investment, education, health and nutrition, property rights, free trade, and population growth
129
diminishing returns
the benefit of an additional unit of capital falls as more capital is added; applies to developed countries
130
catch-up effect
the benefit of an additional unit of capital increases significantly with a low starting point; applies to developing countries
131
foreign direct investment
capital investment that is owned and operated by a foreign entity
132
foreign portfolio investment
investment financed with foreign money but operated by domestic residents
133
human development index
alternative to GDP that takes health (life expectancy at birth), education (expected schooling years), standard of living (gross national income per capita)
134
better life index
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
genuine progress indicator
alternative to GDP that takes economic, environmental, and social factors into account
136
functions of money
medium of exchange, unit of account, store of value
137
medium of exchange
an item that buyers give to sellers when they want to purchase goods and services
138
unit of account
the yardstick people use to post prices and record debts
139
store of value
an item that people can use to transfer purchasing power from the present to the future
140
commodity money
money that has an intrinsic value
141
fiat money
money that has no intrinsic value; value is granted by governments
142
money stock
the quantity of money circulating in the economy; includes currency, demand deposits, savings accounts, and money market mutual funds
143
liquidity
ease with which an asset can be converted into the economy's medium of exchange
144
central banks
institutions designed to oversee the banking system and regulate the quantity of money in the economy; control the money supply using monetary policy
145
reserves
deposits banks have received but have not loaned
146
100% reserve banking
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
fractional-reserve banking
banking system in which only a portion of deposits are held as reserves; money supply increases
148
reserve ratio
the fraction of deposits banks are required to hold as reserves
149
money multipiler
the amount of money that results from each dollar of reserves; the reciprocal of the reserve ratio
150
monetary policy tools
open-market operations, discount rate, reserve requirements, and interest on reserve rate
151
open-market operations
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
discount rate
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
reserve requirements
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
interest on reserves
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
inflation
the increase in the overall level of prices in an economy; describes the value of money, not the value of goods
156
money demand
how much wealth people want to hold in liquid form; affected by average price levels
157
money supply
quantity fixed by central banks through monetary policy; increasing money supply leads to an increase in demand
158
money neutrality
the proposition that changes in the money supply do not affect real variables, which are measured in physical units (e.g. relative prices)
159
inflation tax
government raise revenue by printing money
160
nominal interest rate
at banks, how fast the number of dollars in an account will rise over time
161
real interest rate
how fast the purchasing power of a savings account will rise over time
162
fisher effect
nominal interest rate minus inflation rate = real interest rate
163
shoeleather costs
resources wasted when inflation encourage people to reduce their money holdings
164
menu costs
the costs of changing prices due to inflation
