Unit 1 Flashcards
MACRO-economics
Studying the whole economy
Marginal Utility
Inputs are valuable because the end product brings utility
Water-Diamond Paradox
Why are diamonds more expensive than water? Scarcity of diamonds and surplus of water.
Keynesian Economics
Govts should step in and smooth out business cycles
Monetarism
Govt should maintain consistent growth in the supply of money to smooth out cycles
Austrianism
Focuses heavily on subjectivism and how prices communicate widely dispersed knowledge.
Classical Economics
Aristotle to Karl Marx
Focused on the production of goods; more inputs = higher value.
“Labor Theory of Value”
Neoclassical Economics
3 economists (separate in Europe) developed the theory that value is derived from marginal utility.
The Marginal Revolution
Split classical and neo-classical economics
5 Key Economic Assumptions
1) scarcity
2) Due to scarcity, choices must be made (trade off)
3) Everyone’s goal is to make choices that maximize their satisfaction (self interest)
4) Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice
Opportunity Cost
Most desirable alternative given up when you make a choice.
Allocate
Distribute
Consumer Goods
Created for direct consumption
Ex) pizza, video games
Capital Goods
Created for indirect consumption. Things companies buy to make consumer goods.
Ex) oven, blenders
4 factors of production
1) LAND - all natural resources that are used to produce goods and resources
2) LABOR - any effort a person devotes to a task for which a person is paid.
3) CAPITAL - physical and human
4) ENTREPRENEURSHIP- ambitious leaders that combine the other factors of production to create goods and services.
Physical Capital
Tools we use to create other goods
Human capital
Knowledge, skills and education (mental tools)
Constant Opportunity Cost
Resources are easily adaptable for producing either good. Result is a straight line PPC (not common)
Increasing Opportunity Cost
As you produce more of any good, the opportunity cost ( forgone production of another good) will increase.
Productive Efficiency
Products are produced with less cost. This is any point of the PPC
Allocative Efficiency
Products being produced are the ones most desired by society. This optimal point on the PPC depends on the desires of society.
Absolute advantage
Producer that can produce the most output of requires the least amount of inputs ( resources)
PPC Curve shifters
1) change in resource quantity or quality
2) change in technonlogy
3) change in trade
Decrease
1) destruction of resources (ex power plant blows up)
2) unemployment dot inside graph
Output
1x =y/x
Input
1x = x/y
Law of Demand
There is an INVERSE relationship between price and quantity demanded.
Substitution effect
If the price goes up for a product, consumers buy less of that product and more of a substitute project.
Income effect
If the price goes down, the purchasing power increases for consumers (wealthier)
The law of diminishing marginal utility
That as you consume anything, the additional satisfaction that you will receive will eventually start to decrease.
Ceteris paribus
When this assumption is dropped, movement no longer occurs along the demand curve.
This is a change in demand NOT a change in quantity demanded.
PRICE DOES NOT SHIFT THE CURVE
it only causes movement along the curve.
(Regular Demand Curve)
5 Shifters of Demand
1) Tastes and preferences
2) # of consumers
3) Price of related goods
4) Income
5) Future expectations
Complements
2 goods that are bought and used together.
Ex) if the price of hot dogs falls, demand for hot dog buns will….
Law of Supply
Direct relationship between price and quantity supplied.
As price increases quantity producers make increase
5 shifters of supply
1) Prices/ availibity of inputs/resources
2) Number of sellers
3) Technology
4) Government Action : Taxes and subsidies
5) Expectations of Future profit
Subsidy
Govt payment that supports a business or market. Subsidies cause the supply of a good to increase
Increase in supply…
Increases quantity, decreases price
Decrease in supply…
Price didn’t change but there is LESS product being produced. Price will eventually go up
BUT IT IS NOT AN DETERMINATE BUT AN EFFECT.
Disequilibrium
2 kinds
Shortage: when quantity supply is less than quantity demand. Happens when items are too cheap.
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