Unit 1 Test Flashcards
The dispassionate development and testing of
theories about how the world works, including observation, theory, more observation.
Scientific Method
Because conducting experiments in economics is often impractical, economists play close attention to the __________ __________ offered by _________.
Natural Experiments
History
_________ can simplify the complex world and make
it easier to understand.
Assumptions
_________ __________ are built with assumptions.
Economic Models
_________ __________ are diagrams and equations that simply reality (omit many details) to improve our understanding of it.
Economic Models
Name two economic models.
Circular-flow Diagram
Production Possibilities Frontier
In which economic model is the economy is simplified to include only two types of decision makers?
Circular-flow Diagram
Name the two decision makers in the circular-flow diagram.
Firms
Households
Name the two markets in the circular-flow diagram.
Goods and Services
Factors of Production (Inputs)
What are the three categories of factors of production?
Land, labor and capital
In the circular-flow diagram, what do firms produce and sell?
Goods and Services
In the circular-flow diagram, what do firms hire and use?
Factors of Production
In the circular-flow diagram, what do households own and sell?
Factors of Production
In the circular-flow diagram, what do households buy and consume?
Goods and Services
In the circular-flow diagram, who are the sellers and buyers in the market for goods and services?
Firms are sellers
Households are buyers
In the circular-flow diagram, who are the sellers and buyers in the market for factors for production?
Firms are buyers
Households are sellers
Which economic model is a graph that shows the combinations of output that the economy
can possibly produce given the available factors of production and production technology?
Production Possibilities Frontier
Points on the production possibilities frontier represent an _________ level of production.
Efficient
Points within the production possibilities frontier represent an _________ level of production.
Inefficient
Points outside the production possibilities frontier represent an _________ level of production.
Impossible
What does the slope of the production possibilities frontier represent?
Opportunity Cost
How does a technological advance affect the production possibilities frontier?
Outward shift
The study of how households and firms
make decisions and how they interact in
markets.
Microeconomics
The study of economy-wide phenomena,
including inflation, unemployment, and
economic growth
Macroeconomics
What are the two types of statements made in economics?
Positive
Normative
What type of statement is descriptive?
Positive
What type of statement is prescriptive?
Normative
What type of statement describes the world as it is and can be confirmed or refuted by examining evidence?
Positive
What type of statement attempts to prescribe how the world should be?
Normative
The terms _________and _________refer to the behavior of people as they interact with one another in competitive markets.
Supply
Demand
A _________ is a group of buyers and sellers of a
particular good or service.
Market
The _________as a group determine the demand for the product.
Buyers
The _________as a group determine the supply for the product.
Sellers
In a __________ market, there are so many buyers and so many sellers that each has a negligible impact on the market price.
Competitive
In a _________ _________ market, the goods offered for sale are all exactly the same and the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price.
Perfectly Competitive
In a _________ _________ market, at the market price buyers can buy all they want and sellers can sell all they want.
Perfectly Competitive
The type of market that has only one seller that sets the price.
Monopoly
The amount of a good that buyers are willing
and able to purchase.
Quantity Demanded
Other things equal, when the price of a good rises, the quantity demanded of the good falls. And when the price falls, the quantity demanded rises.
Law of Demand
A table that shows the relationship between the price of a good and the quantity demanded.
Demand Schedule
A graph of the relationship between the price of a good and the quantity demanded.
Demand Curve
Sum of all individual demands for a good
or service.
Market Demand
Sum the individual demand curves
horizontally.
Market Demand Curve
A good for which, other things being equal, an increase in income leads to an increase in demand.
Normal Good
A good for which, other things being equal, an increase in income leads to a decrease in demand.
Inferior Good
Two goods for which an increase in the price of one leads to an increase in the demand for the other
Substitutes
Two goods for which an increase in the price of one leads to an decrease in the demand for the other
Complements
Name the five variables that shift the demand curve.
Income Prices of Related Goods Tastes Expectations Number of Buyers
Any change that increases the quantity demanded at every price.
Increase in Demand
Any change that decreases the quantity demanded at every price.
Decrease in Demand
What are the two types of goods related to changes in income?
Normal Good
Inferior Good
What are the two types of goods related to changes in prices of related goods?
Substitutes
Complements
The amount of a good that sellers are willing and able to sell.
Quantity Supplied
Other things being equal, when the price of a good rises, the quantity supplied of the good also rises, and when the price falls, the quantity supplied falls as well.
Law of Supply
Relationship between the price of a good
and the quantity supplied.
Supply
A table that shows the relationship between the price of a good and the quantity supplied.
Supply Schedule
A graph of the relationship between the price of a good and the quantity supplied.
Supply Curve
The sum of the supplies of all sellers.
Market Supply
Sum of individual supply curves horizontally
Market Supply Curve
Name the four variables that shift the supply curve.
Input Prices
Technology
Expectations
Number of Sellers
Any change that increases the quantity
supplied at every price.
Increase in Supply
Any change that decreases the quantity
supplied at every price.
Decrease in Supply
Higher input prices will cause a ________ in supply.
Decrease
A situation in which the market price has reached the level at which quantity supplied equals quantity demanded
Equilibrium
The price that balances quantity supplied and quantity demanded
Equilibrium Price
The quantity supplied and the quantity demanded at the equilibrium price
Equilibrium Quantity
The equilibrium price is also called the _________ price.
Market-clearing
An the _________ price, buyers have bought all they want to buy, and sellers have sold all they want to sell.
Market-clearing / Equilibrium
A situation in which quantity supplied is greater than quantity demanded.
Surplus
When there is excess supply, there is a _________ pressure on prices.
Downward
A situation in which quantity demanded is greater than quantity supplied
Shortage
When there is excess demand, there is a ________ pressure on prices.
Upward
Regardless of whether the price starts off too high or too low, the activities of the many buyers and sellers automatically push the market price toward the ___________price.
Equilibrium
The price of any good adjusts to bring the quantity supplied and quantity demanded of that good into balance
The Law of Supply and Demand
How many steps are there when analyzing changes in equilibrium?
Three
What is the first step when analyzing changes in equilibrium?
Decide whether the event shifts the supply or demand curve (or perhaps both).
What is the second step when analyzing changes in equilibrium?
Decide in which direction the curve shifts.
What is the third step when analyzing changes in equilibrium?
Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity.
If both the supply curve and demand curve are shifting, either the equilibrium price or the equilibrium quantity will be _________.
Ambiguous
If there is an increase in supply and no change in demand, how are the equilibrium price and equilibrium quantity affected?
The equilibrium price will go down and the equilibrium quantity will go up.
If there is a decrease in demand and no change in supply, how are the equilibrium price and equilibrium quantity affected?
The equilibrium price will go down and the equilibrium quantity will go down.
If there is a decrease in supply and an increase in demand, how are the equilibrium price and equilibrium quantity affected?
The equilibrium price will go up and the equilibrium quantity is ambiguous.
Signals that guide the allocation of
resources.
Prices
Mechanism for rationing scarce resources
Prices
Determine who produces each good and
how much is produced
Prices
Measures the total income of everyone in
the economy.
Gross Domestic Product
Measures the total expenditure on the
economy’s output of goods and services.
Gross Domestic Product
The market value of all final goods &
services produced within a country
in a given period of time.
Gross Domestic Product
Goods intended for the end user.
Final Goods
Goods used as components
or ingredients in the production of other
goods.
Intermediate Goods
Does GDP include goods produced in the past?
No
Y = C + I + G + NX
Equation for GDP
What is the equation for GDP?
Y = C + I + G + NX
In the GDP equation, what does the Y stand for?
GDP
In the GDP equation, what does the C stand for?
Consumption
In the GDP equation, what does the I stand for?
Investment
In the GDP equation, what does the G stand for?
Government Purchases
In the GDP equation, what does the NX stand for?
Net Exports
What component of GDP does spending by households on goods and services (except purchases of new housing) represent?
Consumption
What component of GDP does spending on goods that will be used in the future to produce more goods represent?
Investment
Name three things that are included in the investment component of GDP.
Business Capital
Residential Capital
Inventory Accumulation
Business structures, equipment, and intellectual property products belong to what sub-component of GDP?
Business Capital (Investment)
Landlords’ apartment buildings and homeowners’ personal residences belong to what sub-component of GDP?
Residential Capital (Investment)
How do you calculate the net exports (NX)?
Exports - Imports
Production of goods and services valued at current prices.
Nominal GDP
Production of goods and services valued at constant prices.
Real GDP
_________GDP reflects both the quantities of goods and services the economy is producing and the prices of those goods and services.
Nominal
By holding prices constant at base-year levels, _________GDP reflects only the quantities produced.
Real
A GDP statistic which reflects only the prices of goods and services.
GDP Deflator
What is the equation for GDP deflator?
( Nominal GDP / Real GDP ) * 100
( Nominal GDP / Real GDP ) * 100
Equation for GDP Deflator
The _________ _________ measures the current level of prices relative to the level of prices in the base year.
GDP Deflator
Calculating the percentage change in the GDP
deflator from one year to the next gives you the economy’s _________ _________ .
Inflation Rate
[ ( GDP Deflator for year 2 - GDP Deflator for year 1 ) / GDP Deflator for year 1 ] * 100
Equation for Inflation Rate for Year 2
Equation for Inflation Rate for Year 2
[ ( GDP Deflator for year 2 - GDP Deflator for year 1 ) / GDP Deflator for year 1 ] * 100
Name four measures of well-being that GDP does not include.
Leisure
Value of activity that takes place outside markets
Quality of the environment
Distribution of income
Quantity of goods and services produced from each unit of labor input.
Productivity
Growth in __________is the key determinant of growth in _________ __________ .
Productivity
Living Standards
Name the four determinants of productivity.
Physical Capital
Human Capital
Natural Resources
Technological Knowledge
Stock of equipment and structures used to produce goods and services.
Physical Capital
Knowledge and skills that workers acquire
through education, training, and
experience.
Human Capital
Inputs into the production of goods and
services provided by nature, such as land, rivers,
and mineral deposits.
Natural Resources
Society’s understanding of the best ways
to produce goods and services.
Technological Knowledge
__________ __________ refers to society’s understanding about how the world works. _________ __________refers to the resources expended transmitting this under-standing to the labor force.
Technological Knowledge
Human Capital
The property whereby the benefit from an extra unit of an input declines as the quantity of the input increases.
Diminishing Returns
The property whereby countries that start off poor tend to grow more rapidly than countries that start off rich.
Catch-Up Effect
When policies are put in place that raise saving and investment, ewer resources are used to make
_________ goods and more resources are used to make _________ goods.
Consumption
Capital
In the long run, a higher savings rate (will / will not) lead to higher growth in productivity and income.
Will Not
Capital investment that is owned and
operated by a foreign entity.
Foreign Direct Investment
Investment financed with foreign money but
operated by domestic residents.
Foreign Portfolio Investment
Even though some of the benefits from foreign investment flow back to the foreign owners, name four benefits to the domestic economy.
Increases the economy’s stock of capital
Higher productivity
Higher wages
State-of-the-art technologies
What is the opportunity cost for investing in human capital via education?
Forgone wages students could have earned as members of the labor force.
The emigration of many of the most highly educated workers to rich countries, where these workers can enjoy a higher standard of living.
Brain Drain
Name five ways policies can be used to increase a country’s productivity and growth.
Investing in physical capital Investing in human capital via education Investing in human capital via health and nutrition Protecting property rights Promoting political stability
Poor countries are poor because their populations are not healthy. Populations are not healthy because they are poor and cannot afford better healthcare and nutrition.
Vicious Circle
Policies that lead to more rapid economic
growth would naturally improve health outcomes, which in turn would further promote economic growth.
Virtuous Circle
An important prerequisite for the price system to work is an economy-wide respect for _________ ________ .
Property Rights
Ability of people to exercise authority over the
resources they own.
Property Rights
