Econ midterm 1

Who is the father of modern economics?

Adam Smith

What book started economics?

The Wealth of Nations

Who wrote The Wealth of Nations?

Adam Smith

People got much richer after what event

The Industrial Revolution.

When was The Wealth of Nations written?

1776

Almost everything consumed today is made by ___

Strangers

The increase in wealth causes

An increase in population

The increase in populations causes

An increase in wealth

Who wrote The Ultimate Resource?

Julian Simon

What is the ultimate resource?

The human mind/creativity

To produce requires ____

A coordination of resources

Prices play a key role in ___

Creating the coordination of resources

What are the twelve foundation stones of economic theory?

1. Ours is a world of inescapable scarcity

2. Human wants are unlimited

3. Scarcity implies choice, which implies cost

4. All costs are nonmonetary

5. Typical people are rational & self interested

6. Individuals respond predictably to incentives

7. Only individuals choose and act

8. Actions speak louder than words

9. Tastes and preferences are subjective

10. Intentions are not results

11. We assume human character is largely unchanging

12. Almost all decisions are made at the margin

What is ad hominem?

Committed when someone judges the merit of an argument exclusively by the identity of the person making the argument

What is post hoc?

When someone concludes that because A happened before B, A must have caused B

What is the fallacy of composition?

When someone concludes that which is true of a part, must be true for the whole

What is the naturalistic fallacy

When someone concludes that just because something is, that therefore it should be that way

The division of labor/specialization leads to ___

greater wealth

Least important reason specialization leads to greater wealth

When people specialize, they don’t waste time moving from one task to another

Second most important reason specialization leads to greater wealth

When people specialize, people become more skilled at doing one thing

Most important reason specialization leads to greater wealth

When people specialize, it is more likely that a machine will be invented to substitute for that worker

What is the Luddite concern?

the fear that we will automate jobs faster than we can automate them

Who wrote On the Principles of Political Economy and Taxation in 1817

David Ricardo

What did David Ricardo discover?

Comparative advantage

Trade is NOT ___

zero sum

When are people better at something?

when the opportunity cost to get it is lower

If someone has a comparative advantage, they also have ___

a comparative disadvantage

What are capital goods?

a good that helps you to produce other goods

In order to produce a capital good ___

someone needs to save a little

Money is three things:

1. A medium of exchange

2. A unit of account

3. A store of value

In order for money to be useful ___

people need some sense of what it’s worth

The main function of banks is ___

to serve as a financial intermediary

A production possibilities curve shows____

all of the possible things that can be produced

Economic growth is___

the moving outwards of a society’s production possibilities curve

The general way to make a production possibilities curve is___

to draw a line that shows the possibilities of two goods

What three things moves the curve outwards?

• Specilization

• Technological innovation

• Discovery of natural resources

Utility is ___

whatever motivates people to do what they are doing

The law of diminishing marginal utility says that ___

the greater a consumer’s access to a good or service, the less is the utility that a consumer gains from one unit of that good or service

Marginal utility decreases as

supply increases

Price decreases as

supply increases

The law of demand says that ____

the higher the price of a good, the lower the quantity demanded of that good, and that the lower the of a good, the higher is the quantity demanded of that good

A change in the price NEVER causes

the demand to change

The six conditions of demand are:

1. Consumer tastes and preferences

2. Consumer’s income

3. Information about the good

4. The prices of related goods

5. Expectations of the future availability of the good

6. The more people in a market, the further right the demand curve is

A good is an inferior good if as income changes ___

the consumer’s demand for the good changes in the opposite direction

Two goods are substitutes for each other if the as the price for one of the goods changes ___

the demand for the other changes in the same direction

The more horizontal demand curve is more ___

elastic

E = 

percent change in quantity demanded divided by percent change in price

If E is > 1, then

demand is elastic

Revenue is __

the amount of money consumers spent to buy stuff

Total revenue equals ___

price times quantity

If price and total revenue move in opposite direction from each other,

demand is elastic

If price and total revenue move in the same direction,

demand is inelastic

The greater the percentage of the budget spent on the good,

the more elastic the demand is for the good

The more available substitutes,

the more elastic the demand is

The longer the amount of time buyers have to adjust to a price change,

the more elastic is demand

The cost of producing something increases as

more things must be created

Normal profit is

the cost of the firm owner’s time and effort put into running the business

The owner of a firm is the

residual claimant

If the cost of production falls,

the supply rises

If the price of inputs falls,

the supply rises

The price where the demand and supply curves overlap is the

equilibrium price

A surplus is when

quantity supplied is greater than quantity demanded

A shortage is when

the price is lower than the equilibrium

Prices are always moving towards

the equilibrium price