Test 1 Flashcards
Economics issues involve
Individual choice, decision by individuals about what to do
An economy is
A system that coordinates choices about production with choices about consumption
Market economy
The decisions of individual producers and consumers largely determine what, how, and for whom to produce
Command economy
Industry is publicly owned and a central authority makes production and consumptions decisions
Why have most command economies failed the test of history and market economies have succeeded? There are two primary reasons for the success of markets.
Incentives and property rights
What is a powerful incentive
Price
Why would the president of a company take good care of her factory and machinery if those capital resources were owned by the government?
She is unlikely to produce a high quality product, or invest in new and better ways of producing those goods, if she cannot enjoy the rewards from those investments.
In a command economy, the government owns the resources or property. So a farmer doesn’t
Own his land
What the four resources?
Land, labor, capital, and entrepreneurship
Labor
(the effort of workers)
Land
including timber, water, minerals, and all other resources that come from nature),
Capital
machinery, buildings, tools, and all other manufactured goods used to make other goods and services)
Entrepreneurship
risk taking, innovation, and the organization of resources for production).
Economic resources are
limited/scarce which implies that the goods/services they produce must be limited
Choices imply that
imply that things are given up
Opportunity cost
The Real Cost of Something is What You Must Give Up to Get It
Suppose you purchase a digital camera that costs $100, and you decided not to buy a pair of running shoes that also cost $100. The opportunity cost of buying the camera
buying the camera is $100, plus the forgone enjoyment of the running shoes.
The marginal benefit should always exceed
Marginal cost
Marginal decisions are
Involve trade-offs at the margin. Comparing the costs and benefits of doing more of an activity versus a little less
Marginal benefit
The gain of something doing one more time
Marginal analysis
The study of the costs and benefits of doing a little bit more of an activity than a little less
Microeconomics
The branch of economics concerned with how individuals make decisions and how these decisions interact. Microeconomics focuses on choices made by individuals, households, or firms—the smaller parts that make up the economy as a whole.
Macroeconomics
The branch of economics that studies the overall ups and downs of the economy.
Macro focuses on economic aggregates—economic measures such as the unemployment rate, the inflation rate, and gross domestic product—that summarize data across many different markets.
Macroeconomics focuses on the bigger picture.
Positive economics
Economic analysis used to answer questions about the way the world works.
Statements of “what is” or “what will be.” No value judgments are applied.
Normative economics
economic analysis that involves saying how the world should work. Statements of “what should be.” These involve value judgments of what is “right,” “wrong,” or “best.”
All production possibilities models have simplifying assumptions
Available supply of resources is fixed in quantity and quality at this point in time.
Technology is constant during analysis.
Economy produces only two types of products
Points on the curve represent
maximum possible combinations of Pizza and Bulldozers given resources and technology
Points inside the curve represent
underemployment or idle resources
Points outside the curve are
unattainable. We do not have the resources or technology to produce at point U
Efficient in allocation
refers to the point that this society wants above all others
When is the slope constant
When goods are perfectly interchangeable
Not every sector of the economy grows at
The same rate
The exact point to be efficient depends on the
Society; this is a normative decision
What is the opportunity cost?
The amount of other products that must be foregone to obtain more of any given product
Opportunity costs are measured in
in real terms rather than money
Increasing Oppurtunity cost
The slope of the production possibilities curve becomes steeper
Zero OC is represented by
A line parallel to y axis
Production of capital goods leads to
Economic growth in the future
Curve shifts outward
when resource supplies expand in quantity or quality.
2. when technological advances are occurring.
What is an implicit cost?
What you must pay to get that
What is implicit cost?
What you must give up
Economics
The study of scarcity and choice
Economic growth means an increase what the economy
Can Produce
Comparative advantage
Producing a good or service if the opportunity cost of producing the good or service is lower than for the individual or orther people
Absolute advantage
Producing a good or service if he or she can make more with a given amount of time or resources
Look at module 4 ?’s
Now
Market
an institution or mechanism which brings together buyers (demanders) and sellers (suppliers) of particular goods and services
Demand schedule
how much of a product consumers are willing and able to buy at each of a series of possible prices during a specified time period.
Law of demand
The demand schedule shows that when the price is high, the quantity of sodas demanded is low
Demand curve is an
Inverse relationship
Price will change the
Quantity demanded
Five shifts of demand curve
Prices of related goods, income, tastes, expectations., number of buyers
Substitute goods
(those that can be used in place of each other): Price of substitute and demand for the other good are directly related. If the price of Nike shoes rises, the demand for New Balance shoes should shift to the right
Complementary goods
(those that are used together like tennis balls and rackets): When goods are complementary, there is an inverse relationship between the price of one and the demand for the other. If the price of tennis rackets rises, demand for tennis balls will shift to the left.
Normal goods
More income leads to an increase in demand; less leads to decrease in demand for most goods and services. Steak is a normal good. So are textbooks, running shoes, and iPods
Inferior goods
For a few goods, more income leads to a decrease in demand. Chicken is an inferior good because of the price. City bus tickets are. So are second-hand clothing and store-brand food items.
Tastes
A favorable change in tastes leads to an increase in demand; an unfavorable change to a decrease.
Example Demand for a sport team’s apparel increases when the team is winning
Expectations
Consumers have expectations about future prices, product availability, and income, and these expectations can shift demand.
Number of buyers
the more buyers lead to an increase in demand; fewer buyers lead to decrease
Review end of module 5
Now
A movement along the supply curve
shows how a change in the price of good X causes a direct change in quantity of good X supplied (a to b).
A shift outward or inward
caused by an external factor (not the price of good X).
Market equilibrium
Equilibrium is a state where there is no tendency for anything to change.
Consumers won’t change their buying patterns, and producers won’t change their production patterns
Supply schedule
which shows amounts of a product a producer is willing and able to produce and sell at each of a series of possible prices during a specified time period
Law of Supply
when the price is high, the quantity of sodas supplied is high.
5 shifters of supply
Input prices, prices of related goods, technology, expectations, number of sellers
Input prices
A rise in an input price will cause a decrease in supply or leftward shift in supply curve; a decrease in an input price will cause an increase in supply or rightward shift in the supply curve.
An increase in the price of fertilizer would cause a decrease in supply of corn.
Prices of related goods
If the price of a substitute production good rises, producers might shift production toward the higher priced good causing a decrease in supply of the original good.
An increase in the price of soybeans may cause a farmer to decrease the supply of corn
Technology
A technological improvement means more efficient production and lower costs, so an increase in supply
or rightward shift in the curve results.
Genetically improved seeds will increase supply of corn.
Expectations
Expectations about the future price of a product can cause producers to increase or decrease current
supply.
Expectations of higher corn prices (next month) may cause farmers to decrease supply to the market today
Number of sellers
Generally, the larger the number of sellers the greater the supply
Equilibrium
market-clearing, price is the only price where Qd=Qs. At this price, there is no tendency for the price to rise or fall.
In other words, the market is in a state of balance.
What happens to the price of many items (like sweaters) right after Christmas?
Because the store has too many items that went unsold prior to Christmas. In other words, they have a surplus of sweaters, and the best way to get rid of a surplus of sweaters, is to lower the price.
Surplus = Qs > Qd
When you have a shortage of something, the best way to eliminate the shortage
Increase the price
As soft drink supply is very sensitive to price changes, soft drink supply is described as
Elastic
s physician services supply is relatively insensitive to price changes, physician services supply is described as
Inelastic
Module 6 practice
Now
