Summer Reading Quiz Flashcards
What does the word economy come from?
The Greek “one who manages a household”
Scarcity
Society has limited resources and therefore cannot produce all the goods and services people wish to have, can’t give every individual the highest standard of living to which they might aspire
The limited nature of society’s resources
Economics
The study of how society manages its scarce resources
What do economists study?
How people make decisions, how people interact with one another, and analyze forces and trends that affect the economy as a whole
What is an economy
A group of people interacting with one another as they go about their lives
Principle one
People face trade offs
Classic example of a trade off
Guns and butter: the more we spend on national defense (guns) to protect our shores from foreign aggressors the less we spend on consumer goods (butter) to raise our standard of living at home
Efficiency
Society is getting the most it can from its scarce resources (the size of the economic pie, increasing efficiency is increasing the pie)
Equity
The benefits of those resources are distributed fairly among society’s members (how the economic pie is divided, increasing equity means making the pie slices more equal)
Principle two
The cost of something is what you give up to get it
Opportunity cost
What you give up to get something
High opportunity cost
You are giving up a lot more than you are getting
Principle 3
Rational people think at the margin
Marginal changes
Small incremental adjustments to an existing plan of action (adjustments around the edge of what you’re doing)
Marginal benefits
Small little benefits you get from doing little things
Marginal costs
Small little costs you get from doing little things
Plane example
If have empty seat, better to sell for less than average because marginal cost is only price of peanuts and soda so actually making money
A rational depiction maker takes an action if
The marginal benefit of the action exceeds the marginal cost
Principle four
People respond to incentives
Why are incentives important to consider
Policies can have unknown effects, if the policy changes people’s incentives then it will alter their behavior
Principle five
Trade can make everyone better off
What does trade allow for
Trade allows people/countries to specialize in what they do best, by trading with others by can buy a greater variety of goods and services at a lower cost
Principle six
Markets are usually a good way to organize economic activity
Communist countries had what type of economic thing
Government planners to guide economic activity, central planning, the theory was that only the government could organize economic activity in a way that promoted economic well being for the country as a whole, it collapsed because the invisible hand was tied behind the back
Market economy
The decisions of a central planner are replaced by the decisions of millions of firms and households
An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
Firms and households roles
Firms decide whom to hire and what to make, households decide which firms to work for and what to buy with their incomes
1776 Adam Smith an inquiry into the nature and causes of the wealth of nations
He made a very famous economics observation that households and firms interacting in markets act as if they are guided by an invisible hand that leads them to desirable market outcomes
Invisible hand
Prices are the instrument with which the invisible hand directs economic activity
When the govErnment prevents prices from adjusting naturally to supply and demand, it impedes the invisible hand’s ability to coordinate the millions of households and firms that make up the economy—this is why too many taxes cause harm and policies that directly control prices cause even more harm
Principle seven
Governments can sometimes improve market outcomes
Two reasons for government to intervene in the economy
To promote efficiency and to promote equity
Market failure
A situation in which the market on its own fails to produce an efficient allocation of resources (doesn’t allocate resources efficiently)
Externality
The impact of one person’s actions on the well being of a bystander (ex pollution)
Market power
The ability of a single person (or small group) to unduly influence market prices (ex one well, the owner isn’t subjected to competition because there is only one well, can make the prices however high they want)
Principle eight
A country’s standard of living depends on its ability to produce goods and services
Productivity
The amount of goods and services produced from each hour of a worker’s time
Higher productivity
Nations with higher productivity have higher standards of living
Growth rate of a nation’s productivity determines
Growth rate of average income
Principle nine
Prices rise when the government prints too much money
Inflation
An increase in the overall level of prices in the economy
High inflation imposes various costs on society so keeping inflation at a low level is a goal of economic policy makers everywhere
Persistent inflation reason
The culprit is the growth in the quantity of money (large quantities of money mean the value of the money falls)
Principle ten
Society faces a short run trade off between inflation and unemployment
Results of government increasing amount of money in economy
Inflation and a lower level of unemployment (second one is in the short run)
Philips curve
Illustrates the short run trade off between inflation and unemployment
Trade off is faced regardless of whether inflation and unemployment start high, low, or in between
Crucial for understanding the business cycle
Business cycle
The irregular and largely unpredictable fluctuations in economic activity, as measured by the number of people employed or the production of goods and services
Scientific method
The dispassionate development and testing of theories about how the world works
Interplay between theory and observation
Assumptions
Economists make assumptions because assumptions can simplify the complex world and make it w skier to understand, allow economists to focus their thinking
Different assumptions used to answer different questions
Models
Economists use models to study the world, often diagrams or equations, omit details to show what’s important
All models are built with assumptions
Circular flow diagram
A visual model of the economy that show how dollars flow through markets among households and firms
Firs produce goods and services using inputs such as labor, land, and capital (these inputs are called factors of production)
Households own the factors of production and consume all the goods and s vices the firms produce)
Graphs
Offer a way to visually express ideas that might be les clear if described with equations or rods and they also provide a way of finding how variables are related to the world
Single variable graphs
Display one variable, pie charts, bar graphs, and time series graphs
Positive correlation
When the the two variables in a scatter plot move in the same direction
Negative correlation
When the two variables in a scatter plot move in opposite directions
Demand curve
Traces out the effect of a good’s price on the quantity of the good consumers want to buy, represents the relationship between price and quantity demanded
Negatively related and positively related
On a non scatter plot graph positive is when move in same direction negative is when move in opposite directions
When necessary to shift a curve
When a variable that is not named on either axis changes, the curve shifts
Slope
Change in y over change in x
Causality and reverse causality
Causality is when things cause each other, reverse is when you think one determines the other but it’s actually the reverse
Omitted variables
Variables that aren’t represented on the graph but may have something to do with the results
How it’s graded
10% participation
30% projects and homework
60% quizzes (20% short answers 40% multiple choice)
Each quarter 22.5%, midterm and final 5%
Podcasts per quarter
1 2 3 2
How to find percent change
(New - original) / original
