ECON 2010 Exam 1

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Four characteristics of science

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Four characteristics of science

  1. Fact

  2. Theory

  3. Narrative 4 Metaphor

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3 fundamental econ questions

  1. what to produce and in what quantities

  2. how to produce

  3. for whom to produce

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what is economics

the science of choice

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three economic models/ways to answer the fundamental Qs

  1. traditional

  2. central planning/socialism

  3. market/free enterprise/capitalism/price system

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four preconditions for markets

  1. working for wages (must be well-established and culturally acceptable)

  2. markets must exist (places to voluntarily exchange goods)

  3. people must be able to own private property

  4. must permit the existence of economic "winners and losers"

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three elements of private property rights

  1. right to consume what is yours

  2. right to exclude others from consuming what is yours

  3. right to transfer property rights to someone else

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economic coordination

how the three fundamental Qs are answered

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how do economies deal with scarcity

coercion

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macroeconomics

the study of the economy as a whole

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microeconomics

the study of how individual choice is influenced by economic forces

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sunk cost

costs already incurred that cannot be recovered

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marginal cost

additional cost beyond what's already incurred

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marginal benefit

additional benefit beyond what's already derived

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economic decision rule

if marginal benefit > marginal cost, do it if marginal benefit < marginal cost, don't do it

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opportunity cost

the value of the next-best alternative

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implicit cost

costs of a decision not part of normal accounting

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illusionary sunk costs

costs part of normal accounting that shouldn't be

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economic forces

reactions to scarcity/rationing mechanisms

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market force

rationing using prices/supply and demand

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invisible hand

the price mechanism

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what else shapes economic reality other than economic forces?

social and political forces

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economic model

a framework that puts a theory in context

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economic principle

commonly held economic insight

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experimental economics

using controlled experiments (including lab, field, or natural)

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economic theorems

logically-true propositions which when combined with real world knowledge and value judgements creates policy precepts

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policy precepts

the conclusion that a certain course of action is preferable

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efficiency

achieving a goal as cheaply as possible

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invisible hand theorem

the price mechanism tends to allocate resources efficiently

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positive economics

the study of what is

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normative economics

the study of what should be

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the art of economics

the study of how to make the economy the way it should be through policy

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what causes a straight PPC?

the tradeoff between the cost of one good in terms of another is constant

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increasing marginal opportunity cost

to get more of something, one generally has to give up ever-increasing quantities of something else

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why are PPCs often bowed-out?

increasing marginal opportunity cost

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comparative advantage

a quality of resources that makes them more suited for the production of one good over another

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what is the reason for increasing marginal opportunity cost?

comparative advantage

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what are two reasons why markets lead to economic growth?

  1. markets allow specialization and encourage trade

  2. competition sparks innovation, productivity, and learning

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what is the principle that underlies laissez-faire policy?

voluntary trade is a win-win

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globalization

increasing integration of economies, cultures, and institutions across the world

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the Law of One Price

wages in one country will not significantly differ from the wages of equal workers in another institutionally similar country

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what are the 3 general economic sectors?

  1. households

  2. businesses

  3. government

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entrepreneurship

the ability to organize and innovate to start a business

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sole proprietorship

businesses directly owned and controlled by one owner, has limited ability for funding and unlimited personal liability

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partnership

businesses owned by a small group of owners with shared work and risks, has limited ability for funding and unlimited personal liability

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corporation

businesses that are legally owned by stockholders who are not liable for actions of the corporate "person"

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which general economic sector is the most powerful and why?

households—they ultimately control the government with votes and businesses with dollar votes and labor

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what are government's two roles in the economy

  1. actor

  2. referee

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6 roles of government

  1. providing a stable set of institutions and rules

  2. promoting effective and workable competition

  3. correcting for externalities

  4. ensuring economic stability and growth

  5. providing public goods

  6. adjusting for undesirable market results

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externality

the effect of a decision on a third party not taken into account by the decision maker

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macroeconomic externality

effect of an individual decision that impacts unemployment, inflation, or economic growth

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demerit goods and activities

things that the government decides are undesirable

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merit goods and activities

things that the government decides are desirable

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market failure

when the market doesn't lead to the desired result

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government failure

when government intervention makes things worse

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global corporation

when both production and sales happen in multiple countries

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accounting cost

what you write in a checkbook

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economic cost

includes opportunity cost

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what were the two options for incentivizing parents to pick up their kids on time in econ minute #1

  1. lump-sum fine

  2. time-function penalty

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shift factors of demand

  1. taste

  2. income

  3. expectations

  4. the price of other goods

  5. taxes and subsidies

  6. number of consumers

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law of demand

if prices go down, demand increases

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rule of supply

generally at higher prices, the seller will offer higher quantities

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supply shift factors

  1. changes in technology

  2. change in input prices

  3. expectations

  4. taxes and subsidies

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equilibrium

the price at which people will continue trading; the market is "at rest" or "has cleared"; when opposing dynamic forces cancel each other out

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tatonnement

the movement towards equilibrium

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english auction

ascending price, last bidder wins

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dutch auction

descending price, first bidder wins

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first price auction

highest bidder wins

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second price auction

highest bidder wins, buy pays the second highest price

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how to determine the market demand curve

horizontal sum of individual demand curves

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equilibrium price

the price toward which the invisible hand drives the market

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equilibrium quantity

amount bought and sold at equilibrium price

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the fallacy of composition

the false assumption that what is true for a part will also be true for a whole

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what affects tastes

  1. advertising

  2. science

  3. religion

  4. government

  5. celebrities

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arbitrageur

people who buy law, stockpile, and sell higher; they smooth out the trend of prices over time

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principle of rational self interest

we would rather have more than less; we would rather things cost less than more

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alfred marshall's metaphor for how price and demand work to affect price

scissors

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rational self interest

the behavior of people to make decisions based on cost benefit analysis

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network externalities

greater use of a product increases the benefit of that product to everyone else

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2 effects of a price ceiling

  1. shortage

  2. people wait in line

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2 unintended consequences of price controls

  1. discrimination; allocation based on seller's preferences

  2. black markets

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black market

when people sell illegally above the price ceiling

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why do disasters have no economic blessing?

repairing the damage just takes the PPC back to where it was before

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three methods of non-market allocation

  1. lottery

  2. producer preferences

  3. black markets

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consequence of a price floor

surplus

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