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Principles of Macroeconomics > Review CH 1-4 > Flashcards

Review CH 1-4 Flashcards

1
Q

What is economics?

A

Economics is the allocation of scarce resources: who gets what and why

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2
Q

What are the four categories of human needs/desires?

A
  1. Things perceived as needed for survival
  2. Perceived necessities (what you need as a person in society (i.e. cell phone, AC))
  3. Conveniences (makes life easier)
  4. Luxuries
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3
Q

What is the economic way of thinking?

A
  1. Use models
    a. Simplify
    b. Ceterus paribus
  2. Marginal thinking
  3. Incentives matter
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4
Q

What are the key principles of economics?

A
  1. Opportunity cost
  2. Marginal principle
  3. Principle of voluntary exchange
  4. Diminishing returns
  5. Real-nominal principle
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5
Q

What are the epistemic values?

A
  1. Predictive accuracy
  2. Internal coherence and external consistency
  3. Unifying power
  4. Fertility
  5. Simplicity
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6
Q

What are the cognitive biases?

A
  1. Availability bias
  2. Conformation bias (most important)
  3. Cognitive dissonance
  4. Festering
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7
Q

Availability Bias

A

people talk about what they’ve seen

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8
Q

Conformation Bias

A

bias that leads you to interpret, favor or recall information that confirms preexisting hypothesis; dismiss information that doesn’t fit your preexisting hypothesis and latch on to information that confirms it

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9
Q

Cognitive dissonance

A

mental stress or discomfort experienced by an individual who is confronted by new information that conflicts with existing beliefs, ideas, or values

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10
Q

Festering

A

cognitive dissonance becomes psychologically uncomfortable - resistant to information that goes against your own

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11
Q

What is the economic model?

A

a logical (usually mathematical) representation of whatever a priori or theoretical knowledge economic analysis suggests is most relevant for treating a particular problem (a priori: related to or derived by reasoning from self-evident propositions; being without examination or analysis)

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12
Q

Variable

A

quantity free to take on any number of permissible values. Exogenous and endogenous variables.

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13
Q

Exogenous variable

A

having a value determined outside the model. Value is taken as “God-given” and not to be determined by economists

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14
Q

Endogenous Varibale

A

having its value determined jointly by the particular values taken by the exogenous variables and by the logical relationships among variables within the model

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15
Q

Solution to Economic Model

A

relationship between each endogenous variable and only exogenous components of a model

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16
Q

What are the two assumptions made by the parsimonious model?

A
  1. Individuals pursue their own self-interest: incentives matter!
  2. In pursuit of self-interest, people exchange one thing for another (Principle of voluntary exchange)
17
Q

What is the parsimonious model?

A

people respond based on own self-interest

18
Q

What are the implications made by assumptions that people can advance their self-interest through trade?

A
  1. Price controls lead to shortages
  2. “Price gouging” but some benefits
  3. The Kaiser’s failed WW1 Submarine campaign
  4. Charges for directory assistance
19
Q

How do societies allocate scare resources?

A
  1. War
  2. Custom
  3. Commercial societies
  4. Command and control
20
Q

What are some features of a commercial society (market society)?

A
  1. Lots of specialization and division of labor
  2. Lots of markets - but lots of non-market arrangements as well
  3. Lots of anonymous exchanges - but lots of bargaining amongst a few as well
21
Q

What is a market transaction?

A

an exchange that is voluntary: each party can veto it, and (subject to the rules of the marketplace) each freely agrees to the terms

22
Q

What is a market?

A

the forum for carrying out such exchanges.

23
Q

What is a commodity market?

A

lots of buyers and sellers; fairly standardized, no question about what you are buying; markets of wheat, ready mix concrete, etc.; know what you are getting

24
Q

What is a matching market?

A

important group of market, the terms of the exchange/transaction, while they involve price, price is not the most important component; still matching two sides to a transaction of some sort; colleges/universities, fraternities/sororities, dating market

25
Q

What are the requirements for a successful market?

A
  1. Thick: lots of buyers and sellers (produced by money)
  2. Not congested: not a problem for commodity markets, but frequently a problem for matching markets
  3. Safe: monarchs used to guarantee safe roads for travelers to come to market towns
  4. Simple to participate
26
Q

What are institutions?

A

The laws, customs, moral principles, ideas and cultural influences that shape people’s behavior

27
Q

Relative Price

A

how much you exchange, relationship between two things exchanging

28
Q

What are three bargaining strategies?

A

treats, feints, bluffs

29
Q

What is good about the market system?

A
  1. Facilitates voluntary trades
  2. Consumer sovereignty (markets provide what consumers want)
  3. Innovation (rewarded by market system)
30
Q

Behavior assumption about demand

A

inverse relationship between price and quantity demanded; as price goes down, quantity demanded increases

31
Q

Behavior assumption about supply

A

as quantity demanded increases, price increases

32
Q

Assumption of equilibrium in the market

A

no incentive that will change the values of the endogenous variables, no force for anyone to change behavior, demand = supply

33
Q

What is necessary for the market system to work?

A
  1. norms and laws to minimize market frictions
  2. trust
  3. property rights
  4. minimal externalities
  5. no need for public goods

Principles of Macroeconomics (7 decks)

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