ECON 200 Exam 1

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Scarcity

The core of economics; forces choice in decision making

Opportunity Cost

What is given up in exchange for the choice that is made

The Margin

The costs and benefits of one more of something weighed together

Rational Behavior

Doing what is best for one’s self

Utility

Happiness or satisfaction from a good or service

Disutility

Anything that causes dissatisfaction

Capital

Human-made goods that produce other goods

John Locke

Believed all men had property rights over themselves; “life, liberty, and property”

Classical Liberals

The theory that all men have power over themselves; the populace gives power to the king; John Locke

Competition

Different economic bodies offering similar goods or services, forcing a choice to be made between them

Public Good

A good maintained by the government that benefits everyone; nonrivalous and nonexclusive

Common Property Resource

Something jointly owned by all (i.e. the fish in a public lake)

Moral Hazard

To enter a contract where either party withholds relevant information from the other

Socialism

An economic system where the government owns the capital

Social Darwinism

The idea that people’s economic standing is predetermined (i.e. the poor are supposed to be poor)

Scientific Socialism

Often used to describe Karl Marx’s theory of socialism

Fascism

An economic system in which capital is privately owned, but production is determined by the government

Legislative Branch

The branch of the US government that creates laws

Montesquieu

Attributed by the Founding Fathers with the theory of separation of powers/checks and balances

President

Commander in Chief (though only Congress can declare war); may make treaties and appoint ambassadors and Supreme Court Justices (with Congress’ advice and consent); minimum 35 years old

Electoral College

A system in which each state gets one elector for each senator and representative to vote for the president; candidate with the most votes gets all of that states’ electoral votes

Explicit Powers

Powers that are granted to the federal government by the Constitution

Distribution

the manner in which income is distributed to the people by the government’s actions

Social Welfare Function

The ordering/prioritization of people’s utilities

Equity

The equal distribution of wealth to the people; inherently traded off for efficiency in a capitalist system

Republic

A system of government in which elected representatives vote on behalf of their constituents

Explicit Cost

The measurable monetary cost

Marginal Cost

The costs and benefits weighed of “one more”

Good

Something that creates utility; consumers are willing to pay to own it

Bad

Something that creates disutility; consumers are willing to pay to get rid of it

Land

Naturally occurring resources from the ground, air, and water

Entrepreneur

A person or business that takes economic risk to earn greater economic rewards

Mercantilism

The belief that all trades have a “winner” (i.e. the one who profits) and a “loser”

Adam Smith

Economist that coveted the idea that economies should be run by individuals, not governments; proposed the government should provide defense, police, courts, and education

Natural Price

A theoretical equilibrium price achieved if markets are left alone; both price and quantity are satisfactory for consumers and sellers

Externality

The effects of a decision made by one party onto another that was not part of making said decision

3 Questions

What to produce? How to produce? Who benefits from production?

Communism

Similar to socialism, but often with more worker involvement

Laissez Faire

The idea that economies function best with minimal government intervention

Planning

The idea that businesses in a socialist model must defer to the government’s verdict in production matters

Shortage

When there are more buyers than goods available

Executive Branch

The branch of the US government that carries out the laws

Senate

Part of the Legislative Branch; 100 members, two from each state; minimum 30 years old; six year terms

Cabinet

Made up of 15 Departments established by Congress and headed by Secretaries; Secretaries nominated by President

Free Rider

People who benefit from public goods who do not pay for them (i.e. through taxes); lead to underproduction of public goods

Implied Powers

Powers not explicitly granted by the Constitution, but are understood or interpreted to be done so, especially if “necessary and proper”

Interpersonal Utility Comparison

The idea that utility is not measurable; one’s utility can’t be compared to another’s

Normative Theories

An evaluation of economic policies, statements, and projects as morally good or bad

Efficiency

Getting the most output for the least input

Economic Problem

Unlimited wants; limited resources

Implicit Cost

A non-quantitave cost of a choice that’s made

Labor

The work done by people

Incentive

Any force driving particular decision to be made

Natural Law

The idea that certain values are known implicitly

Just Price

The term for a price that is decided solely by the cost to produce

Market

Any place where buyers and sellers negotiate exchanges

Equilibrium

A mutually beneficial pricepoint that true markets will inherently trend towards

Nonrivalous

A good that cannot be divided, capable of being “shared”

Nonexclusive

A good that is shared among the public (e.g. national defense)

Asymmetric Information

A trade or contract in which one party holds more relevant knowledge than the other

Capitalism

An economic model in which capital is privately owned

Self-interest

A motivation of what is best for one’s self; driving factor behind capitalism

Utopian Socialism

The belief that a universally beneficial society can be achieved through scientific methods

Command Economy

An economy where workers and consumers have little choice

Separation of Powers

The division of powers between branches of government

Judicial Branch

The branch of the US government that interprets the laws

House of Representatives

Part of the Legislative Branch; 435 members apportioned by state population; minimum 25 years old; two year terms

Advice and Consent

The Senate’s power to approve or reject presidential appointments

“General Welfare”

Allocation

The way the government distributes resources

Pareto Optimality

The concept that the only way the government can be truly effective is to improve people’s situations while not negatively impacting anyone else’s

Positive Theories

An evaluation of economic systems based on objective analysis of facts and evidence without consideration for moral standing

Congress

Overseen by Speaker of the House; President of the Senate (e.g. Vice President) may break tie votes; create their own rules; may not hold an office of the US

Why do economists think that maximizing is rational even if it makes us act in bad ways?

Because rationality to economists only means to do what is best for one’s self, meaning it is considered rational to maximize for your benefit even if it’s at the detriment of others

How do we analyze something in a scientific way?

You must present a testable hypothesis and analyze it against collected evidence

How did folks before Adam Smith see the world differently than Smith did? Why did Smith believe in the power of the free market?

Before Adam Smith, mercantilism was the prevalent ideology, while Adam Smith believed that since trades were voluntary, there were no “losers” in the sense mercantilism believed

Why is competition essential to Adam Smith’s theory?

Competition in the market creates value, and ill drive people to do what’s best for society as if driven by an “invisible hand”

What are the essential elements of capitalism and socialism? What was Marx’s critique of capitalism? What do modern economists think about socialist economies?

In capitalism, capital is privately owned, while in socialism it is owned by the government. Marx believed that capitalism was exploitative, in that businesses wanted to pay the least amount possible while workers wanted a satisfactory pay, and businesses would usually prevail. Most modern economists believed socialism has generally lead to economic failure or stagnation.

Why do most economists like capitalism? What are the concerns with modern capitalism?

Modern economists like capitalism because it allows for more upward mobility and drives innovation. They are concerned that it inherently creates inequality and that competition can erode over time (i.e. monopolies).

Explain why the production of public goods, according to most economists, will not work if left to the market.

Companies will attempt to do as little work as possible to meet demand, and the existence of free riders creates a misrepresentation of such demand and leads to underproduction.

What was Adam Smith’s view of government? What other things do modern economists debate whether they should be included in government’s role?

Adam Smith believed that the government should provide police, education, defense, and courts. Of these, education is contested by economists