principles of economics robert Flashcards
what is important precondition for specialization?
population density
outsourcing
a term increasingly used to connote having services performed by low- wage workers overseas
In the book The New Division of Labor, economists Frank Levy and Richard Murnane attempt to identify the characteristics of a job that make it a likely can- didate for outsourcing.
- any job that is amenable to computerization is also vulnerable to outsourcing.
- Levy and Murnane describe a second category of tasks that are less vulner- able to outsourcing—namely, those that for one reason or another require the worker to be physically present.
Writing in the late nineteenth century, the British economist Alfred Marshall was among the first to
show clearly how costs and value interact to determine both the prevailing market price for a good and the amount of it that is bought and sold.
buyer’s reservation price
the largest dollar amount the buyer would be willing to pay for a good
cash on the table
an economic metaphor for unexploited gains from exchange
Flows
physical quantities per unit of time—in this case, pints per year. Consumption is always measured as a flow.
When we have more than three goods, the budget constraint becomes what mathematicians call a hyperplane, or multidimensional plane. The only real difficulty is in representing this multidimensional case geometrically. We are just not very good at visualizing surfaces that have more than three dimensions.
The nineteenth-century economist Alfred Marshall proposed a disarmingly simple solution to this problem.
It is to view the consumer’s choice as being one between a particular good—call it X—and an amalgam of other goods denoted Y. This amalgam is called the composite good. We may think of the composite good as the amount of income the consumer has left over after buying the good X.
hurdle method of price discrimination
the practice by which a seller offers a discount to all buyers who overcome some obstacle
cost-plus regulation
Government regulators gather data on the monopolist’s explicit costs of production and then permit the monopolist to set prices that cover those costs, plus a markup to ensure a normal return on the firm’s investment.
For games in which timing matters,
a decision tree, or game tree, is a more useful way of representing the payoffs than a traditional payoff matrix. This type of diagram describes the possible moves in the sequence in which they may occur, and lists the final payoffs for each possible combination of moves.
The late Nobel laureate Herbert Simon (1984) was the first to
to impress upon economists that human beings are incapable of behaving like the rational beings portrayed in standard rational choice models.
availability heuristic
a rule of thumb that estimates the frequency of an event by the ease with which it is possible to summon examples from memory. Murders are easier to recall not because they are more frequent, but because they are more salient.
Representativeness heuristic
heuristic a rule of thumb according to which the likeli- hood of something belonging to a given category increases with the extent to which it shares characteristics with stereotypical members of that category. For example, because librarians are stereotypically viewed as introverted while salespersons are viewed as gregarious, the representativeness heuristic suggests that a given shy person is more likely to be a librarian than a salesperson.
regression to the mean
the phenomenon that unusual events are likely to be followed by more nearly normal ones
Another common judgmental heuristic is called anchoring and adjustment.
It holds that when we try to estimate something, we often begin with a tentative initial estimate, called the anchor, which we then adjust in the light of whatever additional information is avail- able. A common bias pattern observed in anchoring and adjustment is that the anchors are sometimes of questionable relevance, and the adjustments people make are often insufficient.
Weber-Fechner law
the relationship according to which the perceived change in any stimulus varies according to the size of the change measured as a proportion of the original stimulus. Buyers might be reluctant to spend $5,000 for a jacuzzi for a house they already owned, but might see the same expense as far less daunting if it meant paying $250,000 for a new house instead of $245,000.
status quo bias
the general resistance to change, often stemming from loss aversion
present-aim standard of rationality
a variant of the rational choice model that permits greater flexibility in assumptions about preferences
the adaptive rationality standard
assumes that people choose efficient means to achieve their ends. But unlike the other conceptions, which take goals as given, adaptive rationality regards goals as objects of choice themselves and, as such, subject to a similar efficiency requirement.
theory of natural selection
Charles Darwin’s
ultimatum bargaining game
a game in which the first player has the power to confront the second player with a take-it or-leave-it offer
Many traditional economic models assume that well-being depends on current and future levels of absolute consumption. Considerable evidence suggests, however,
that well-being depends as much or more on current and future levels of relative consumption.
The late British economist Fred Hirsch coined the term positional good to
describe things that derive their value primarily from their relative scarcity rather than from their absolute characteristics.
positional good
good a good whose value depends relatively heavily on how it compares with other goods in the same category
nonpositional good
a good whose value does not depend heavily on how it compares with other goods in the same category
positional externality
this occurs when an increase in one person’s performance reduces the expected reward of another’s in situations in which reward depends on relative performance
If nominal wages and prices are not flexible, which of the following must be true when the economy has a severe recessionary gap?
The short run aggregate supply curve is horizontal
If a country is experiencing a recessionary gap, which of the following fiscal and monetary policy combinations would be most likely to move the nation closer to full employment with a minimum change in interest rates?
An increase in government spending and the purchase of bonds on the open market
The basic Keynesian model is built on a key assumption:
In the short run, firms meet the demand for their products at preset prices.
In the Keynesian model, output is determined by
planned aggregate expenditure, or planned spending, for short.
The original purpose of the IMF
was to help manage the system of fixed exchange rates, called the Bretton Woods system, put in place after the war. Under Bretton Woods, the IMF’s principal role was to lend international reserves to member countries that needed them so that those countries could maintain their exchange rates at the official values. However, by 1973 the United States, the United Kingdom, Germany, and most other industrial nations had abandoned fixed exchange rates for flexible rates, leaving the IMF to find a new mission. Since 1973, the IMF has been involved primarily in lending to developing countries. For example, during the currency crises of the 1990s, it lent to Mexico, Russia, Brazil, and several East Asian countries. During the 2008 crisis, it again made loans to countries that saw their currencies under pressure. During the 2010s, the IMF joined European countries in making loans to Greece—a developed country—with the Europeans providing two-thirds of the money Greece needs to pay its gov- ernment debts, and the IMF providing one-third. And in early 2020, the IMF made available $50 billion for low-income and emerging-market economies seeking loans related to addressing the global coronavirus epidemic.
aggregate expenditure
the sum of consumer expenditures, firms’ investment, government purchases, and net exports
aggregation
the adding up of individual economic variables to obtain economywide totals
autarky
a situation in which a country is economically self-sufficient
autonomous consumption
consumption spending that is not related to the level of disposable income
autonomous expenditure
the portion of planned aggregate expendi ture that is independent of output
balance-of-payments deficit
the net decline in a country’s stock of international reserves over a year
bequest saving
saving done for the purpose of leaving an inheritance