Introduction to Microeconomics Final Exam

Economics

 the study of how people use their scarce resources to satisfy their unlimited wants

Resources

the inputs, or factors of production, used to produce the goods and services that people want resources consist of labor, capital, natural resources, and entrepreneurial ability.

Labor

the physical and mental effort used to produce goods and services

Capital

 the buildings, equipment, and human skills used to produce goods and services

Natural Resources

All gifts of nature used to produce goods and services included renewable and exhaustible resources.

Entrepreneurial Ability

the imagination required to develop a new product or process, the skill needed to organize production, and the willingness to take the risk of profit or loss.

Entrepreneur

A profit-seeking decision maker who starts with an idea, organizes an enterprise to bring that idea to life, and assumes the risk of the operation. 

Wages

Payment to resource owners for their labor.

Interest

Payment to resource owners for the use of their capital. 

Rent

Payment to resource owners for the use of their natural resources. 

Profit

Reward for entrepreneurial ability; sales minus resource cost. 

Goods

A tangible product used to satisfy human wants

Service

An activity, or intangible product, used to satisfy human wants.

Scarcity

Occurs when the amount people desire exceeds the amount available at zero price.

Market

A set of arrangements by buyers and sellers carry out exchange at mutually agreeable terms. 

Product Market

A market in which a good or service is bought and sold. 

Resource Market

A market in which a resource is bought and sold. 

Circular Flow Model

A diagram that traces the flow of resources, products, income, and revenue among economics decision making. 

Rational Self-Intrest

Each individual tries to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit. 

Marginal

 Incremental, additional, or extra used to describe a change in an economic variable

Microeconomics

the study of economic behavior in particular markets, such as that for computers or unskilled labor.

Macroeconomics

the study of economic behavior of entire economics, as measured, for example, by total production and employment. 

Economic Fluctuation

The rise and fall of economic activity relative to long-term growth trend of the economy; also called business cycle. 

Economic Theory (Model)

A simplification of reality used to make predictions about cause and effect in the real world.

The Scientific Method

Begins with a question

Variable

A measure, such as price or quantity, that can take on different values at different times. 

Other-things-constant assumption

The assumption when focusing on the relation among the key economic variables, that other variables remain unchanged in Latin, ceteris paribus. 

Behavioral assumption

An assumption that describes the expected behavior of economic decision makers; what motivates them.

Hypothesis

A theory about how key variables relate to each other.

Positive Economic Statement

A statement that can be proved or disproved by reference to facts. 

Normative Economic Statement

A statement that reflects an opinion, which cannot be proved or disproved by reference to the facts. 

Association

is causation fallacy the incorrect idea that if two variables are associated in time, one must necessarily cause the other. 

Fallacy of Composition

the incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or the whole. 

Secondary effects

Unintended consequences of economic actions that may develop slowly over time as people react to events.

Opportunity Cost

the value of the best alternative for when an item or activity is chosen. 

Production Possibilities Frontier (PPF)

A curve showing the alternative combinations of goods that can be produced when available resources are used fully and efficiently; (a boundary between inefficient and unattainable combinations)

Efficiency

the condition that exists when there is no way resources can be reallocated to increase the production of one good without decreasing the production of another good. 

Law of increasing opportunity Cost

to produce each additional increment of a good, a successively larger increment of an alternative good must be sacrificed if the economy’s resources are being used efficiently. 

Economic Growth

An increase in the economy’s ability to produce goods and services; an upward shift of the production possibilities frontier (technology.)

Sunk Cost 

 A cost that has already been incurred in the past, cannot be recovered, and thus is irrelevant for the present and future economic decisions. 

Barter

the direct exchange of one good for another without using money (then and now) relevance today.

Absolute Advantage

the ability to produce something using few resources than other producers use 

(Adam Smith 1723-1790) Great Britain

• Laissez-Faire – Leave it be/Hands Off

• Invisible Hand - the free market will regulate itself

Division of Labor

Organizing production of a good into its separate tasks

Specialization of Labor

Focusing work effort on a particular product or a single task.

Law of Comparative Advantage

 the individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good

(David Ricardo 1772-1823) Great Britain

• The Principles of Political Economy and Taxation 1817

Comparative Advantage

the ability to produce something at a lower opportunity cost than other producers face.

Pure Capitalism

An economic system characterized by the private ownership of resources and the use of prices coordinate economic activity in unregulated markets 

Private Property Rights

An owner’s right to use, rent, or sell resources or property. 

Mixed System

An economic system characterized by the private ownership of some resources and the public ownership of some resources and the public ownership of other resources; some markets are unregulated and others are regulated.

Socialist Society

Denmark, Norway, Sweden 

• Government owns some of the industries 

• Planned Economy (5 years)

Pure Command System

An economic system characterized by the public ownership of resources and centralized planning. 

Factors of a Pure Command System:

• Venezuela not doing well

• Soviet Union 

• In today’s society North Korea is an example of a pure command system. 

• Somalia is the most impoverished country.

Convergence Theory

Convergence theory states that as nations transition from the beginning stages of industrialization to highly industrialized nations, the same societal patterns will emerge, eventually creating a global culture.

Clar Kerr (1911-2003)

Industrialism and Industrial Man, 1960 

Utility

 the satisfaction or sense of well being received from consumption. 

Jeremy Bentham

 Utilitarianism 

Transfer Payments

Cash or in-kind benefits given to individuals as outright grants from the government 

Examples of Transfer Payments

Welfare, Medicaid, Veterans’ Disability etc.

Industrial Revolution

 Development of large-scale factory production that began in Great Britain around 1750 and spread to the rest of Europe, North America, and Australia. 

Firms

Economic units formed by profit-seeking entrepreneurs who use resources to produce goods and services for sale.

Sole Proprietorship

A firm with a single owner who has the right to all profits and who bears unlimited liability for the firm’s debts.

Partnership

A firm with multiple owners who share the firm’s profits and bear unlimited liability for the firm’s debts.

Corporations

A legal entity by stockholders whose liability is limited to the value of their stock. 

Cooperative

An organization of people who pull their resources to buy and sell more efficiently than they could individually. 

Non-profit Institutions

Groups that do not pursue profit as a goal; they engage in charitable, educational, humanitarian, cultural, professional, or other activities often with a social purpose. 

Market Failure

A condition that advises when the unregulated operation of markets yields socially undesirable results.

Antitrust Laws

Prohibitions against price fixing and other anticompetitive practices.

Monopoly

A sole product of a product for which there are no close substitutes. 

Natural Monopoly

One firm that can serve the entire market at a lower per-unit cost than can two or more firms.

Private Goods

A good that is both rival in consumption and exclusive such as pizza. 

Public Good

A good that, once produced, is available for all to consume, regardless of who pays and who doesn’t such a good is nonrival and nonexclusive (such as national defense.)

Externality

A cost or a benefit that falls on a third party and is therefore ignored by the two parties to the market transaction (Negative/Positive) 

John Maynard Keynes

The General Theory (1936) 

• The government needs to foster demand 

Fiscal Policy

the use of government purchases, transfer payments, taxes, and borrowing to influence economy-wide activity such as inflation, employment, economic growth (Government)

Monetary Police

 Regulation of the money supply to influence economy-wide activity such as inflation, employment, and economic growth. 

Wage Price Spiral 

Ability-to-pay Tax Principle

Those with a greater ability to pay such as those with a higher income or those who own more property should pay more taxes. 

Benefits-Recieved Tax Principle

Those who receive more benefits from the government program funded by a tax should pay taxes. 

Tax Incidence:

The distribution of tax burden among taxpayers; who ultimately pays the tax (expression) 

Proportional Taxation

The taxation as a percentage of income remains constant as income creases; also called a flat tax.

Progressive Taxation

The tax as a percentage of income increases as income increases.

Marginal Tax Rate

 the percentage of each additional dollar of income that goes to the tax.

Recessive Taxation:

the tax as a percentage of income decreases as income increases. 

Merchandise Trade Balance:

the value of a country’s exported goods minus the value of its imported goods during a given period. 

Balance of Payments:

A record of all economic transactions between residents of one country and residents of the rest of the world during a given period.

Foreign Exchange

 Foreign money needed to carry out international transactions.

Tariff-

Tax on imports

Quota

A legal limit on the quantity of a particular product that can be imported or exported. 

Demand:

A relationship between the price of a good and the quantity that consumers are willing and able to buy during a given period. 

Law of Demand:

 the quantity of a good demanded during a given period relates inversely to its price. 

Substitution effect of a price change:

When the price of a good falls, consumers substitute that good for other goods, which become relatively more expensive. 

Money Income:

the number of dollars a person receives per period, such as $400 a week.

Real Income

Income measured in terms of goods and services it can buy. 

Income effect of a price change:

A fall in the price of a good increases consumers’ real income making consumers more able to purchase goods; for a normal good, the quantity demand increases. 

Demand Curve

A curve showing the relation between the price of a good and the quantity demanded during a given period. 

Quantity Demanded:

The amount demanded at a particular price, as reflected by a point on a given demanded curve.

Market Demand:

Sum of the individual demand of all consumers in the world

Normal Good

A good, such as new clothes for which demand increases, or shifts rightward, as consumers' income rises

Inferior Good

A good, such as used clothes, for which demand decreases or shifts leftward, as consumers income rises.