ECON 2010 Exam 1

Four characteristics of science

1. Fact
2. Theory
3. Narrative
4 Metaphor

3 fundamental econ questions

1. what to produce and in what quantities
2. how to produce
3. for whom to produce

what is economics

the science of choice

three economic models/ways to answer the fundamental Qs

1. traditional
2. central planning/socialism
3. market/free enterprise/capitalism/price system

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"

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

economic coordination

how the three fundamental Qs are answered

how do economies deal with scarcity

coercion

macroeconomics

the study of the economy as a whole

microeconomics

the study of how individual choice is influenced by economic forces

sunk cost

costs already incurred that cannot be recovered

marginal cost

additional cost beyond what's already incurred

marginal benefit

additional benefit beyond what's already derived

economic decision rule

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

opportunity cost

the value of the next-best alternative

implicit cost

costs of a decision not part of normal accounting

illusionary sunk costs

costs part of normal accounting that shouldn't be

economic forces

reactions to scarcity/rationing mechanisms

market force

rationing using prices/supply and demand

invisible hand

the price mechanism

what else shapes economic reality other than economic forces?

social and political forces

economic model

a framework that puts a theory in context

economic principle

commonly held economic insight

experimental economics

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

economic theorems

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

policy precepts

the conclusion that a certain course of action is preferable

efficiency

achieving a goal as cheaply as possible

invisible hand theorem

the price mechanism tends to allocate resources efficiently

positive economics

the study of what is

normative economics

the study of what should be

the art of economics

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

what causes a straight PPC?

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

increasing marginal opportunity cost

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

why are PPCs often bowed-out?

increasing marginal opportunity cost

comparative advantage

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

what is the reason for increasing marginal opportunity cost?

comparative advantage

what are two reasons why markets lead to economic growth?

1. markets allow specialization and encourage trade
2. competition sparks innovation, productivity, and learning

what is the principle that underlies laissez-faire policy?

voluntary trade is a win-win

globalization

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

the Law of One Price

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

what are the 3 general economic sectors?

1. households
2. businesses
3. government

entrepreneurship

the ability to organize and innovate to start a business

sole proprietorship

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

partnership

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

corporation

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

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

what are government's two roles in the economy

1. actor
2. referee

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

externality

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

macroeconomic externality

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

demerit goods and activities

things that the government decides are undesirable

merit goods and activities

things that the government decides are desirable

market failure

when the market doesn't lead to the desired result

government failure

when government intervention makes things worse

global corporation

when both production and sales happen in multiple countries

accounting cost

what you write in a checkbook

economic cost

includes opportunity cost

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

shift factors of demand

1. taste
2. income
3. expectations
4. the price of other goods
5. taxes and subsidies
6. number of consumers

law of demand

if prices go down, demand increases

rule of supply

generally at higher prices, the seller will offer higher quantities

supply shift factors

1. changes in technology
2. change in input prices
3. expectations
4. taxes and subsidies

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

tatonnement

the movement towards equilibrium

english auction

ascending price, last bidder wins

dutch auction

descending price, first bidder wins

first price auction

highest bidder wins

second price auction

highest bidder wins, buy pays the second highest price

how to determine the market demand curve

horizontal sum of individual demand curves

equilibrium price

the price toward which the invisible hand drives the market

equilibrium quantity

amount bought and sold at equilibrium price

the fallacy of composition

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

what affects tastes

1. advertising
2. science
3. religion
4. government
5. celebrities

arbitrageur

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

principle of rational self interest

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

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

scissors

rational self interest

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

network externalities

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

2 effects of a price ceiling

1. shortage
2. people wait in line

2 unintended consequences of price controls

1. discrimination; allocation based on seller's preferences
2. black markets

black market

when people sell illegally above the price ceiling

why do disasters have no economic blessing?

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

three methods of non-market allocation

1. lottery
2. producer preferences
3. black markets

consequence of a price floor

surplus

result of a concurrent supply and demand shift

you can only know either price or quantity, the other shift is indeterminate

centeris paribus

all other things being equal

voltaire's observation at the london stock exchange

markets cause people to set aside religious differences

ways to deal with surplus

1. store
2. destroy
3. allocate elsewhere
4. increase demand
5. decrease supply

important example of a floor price

minimum wage

what is the economic term for a labor surplus

unemployment

6 types of elasticity

1. price elasticity of demand
2. supply elasticity
3. income elasticity
4. market share elasticity
5. advertising elasticity
6. cross price elasticity

who invented price elasticity of demand

alfred marshall

price ceiling

a government-imposed limited on how high a price can be charged

rent control

a price ceiling on rents, set by government

price floor

government imposed limited on how low a price can be charged

minimum wage law

laws specifying the lowest wage a firm can legally pay an employee

excise tax

tax that is levied on a specific good

tariff

an excise tax on an imported good

third-party-payer market

the person who receives the good differs from the person paying for the good (health insurance)

result of 3rd party payer markets

equilibrium quantity and total spending are much higher