UIUC ECON 102 DiIanni Midterm #1

Economics

The social science that studies production and trade. Economics builds the bridge between individual values and social order.

Spontaneous order

Order that is the product of human action, but not human design

Micro vs Macro

Micro is econ, macro is a subfield within econ. They cover similar topics.

Why is econ important?

It helps us make better decisions and we learn critical thinking that we can apply to all social sciences. Econ is helpful for everyone.

Positive analysis

Analysis that attempts to describe the way things are in reality. The "what is". Even if you say a statement that isn't true, if it is meant to be a fact and not an opinion, then it is still positive.

Normative analysis

Analysis that describes a value judgement. "What should be".

What is a theory?

An abstract explanation of some phenomenon.

What is a society?

A group of people who have moral, political or economic relationships with each other.

What is a social system?

A set of rules that determine the role of physical force in human relationships

What is a market economy? + examples

A social system in which all resources are privately owned and controlled. Ex: free market, free enterprise, laissez-faire

What is property right? In context of a market economy

A moral and legal right to control a resource and to exclude others from using it

What is a command economy? + examples

A social system in which all resources are collectively owned or controlled, typically through a government. Ex: Socialism, communism, fascism, syndicalism

What is a mixed economy?

A social system in which some resources are privately owned and controlled, and some are owned by the government

Starting points of Econ: Scarcity

The amount of goods available is not sufficient to satisfy all human desires (scarcity is inevitable. at least one resource will forever be scarce)

Starting points of Econ: Unlimited Desires

No matter what one's current circumstance, it is always possible to imagine and achieve a more desirable state of affairs

Starting points of Econ: Methodological Individualism

The principle that the individual human being is the basic unit of research in social sciences.

Starting points of Econ: Rational choice

People pursue their values. People are goal directed, self-interested and responsive to incentives.

What is the price system?

A network of interrelated prices of goods and services.

What is the exchange of equivalents theory (4th century BC)?

Aristotle. The theory that people exchange one good for another when both parties value the goods equally. This isn't true though.

What is the Just Price theory (8th century AD)?

The theory that there is a single just price at which each good should be sold. Sellers always ask for more and customers always want to pay less. Doesn't work

True or false: Social order requires government planning (mercantilism)

True

Mercantilism: Nominal value of money

The face value of a certain amount of money. Doesn't necessarily translate what you can buy with the money.

Mercantilism: Real value of money

The goods and services that can be purchased with a certain amount of money.

Mercantilism: Zero-sum game

A situation in which for one party to gain, another must lose.

Mercantilism: Mutually Beneficial Exchange

An exchange that benefits both parties.

What is the invisible hand? (classical economic theory)

Adam Smith's metaphor for the power of the individual self-interest to create spontaneous order

Classical Price Theory: Utility

-Usefulness in satisfying human desires determines the price of a good

Classical Price Theory: Subjective Theory of Price

The theory that the price of a good us determined by its utility

Classical Price Theory: Water-Diamonds Paradox

Water is very useful but has a low price, while a diamond is not

Classical Price Theory: Labor Theory of Value (2 definitions)

1. The theory that the price of a good is determined by its cost of production

2.The theory that the price

of a good is determined by the amount of labor used to produce it

Iron Law of Wages

The theory that the price of labor is determined by the cost of human subsistence and reproduction

Intrinsic Value Theory

The theory that the value of an object is inherent in the object itself

Marginal Revolution

The discovery of the theory of marginal utility in the early 1870s

What are the four requirements for something to be a good?

-A human need must exist

-The object must have properties that allow it to satisfy this need

-Humans must know this causal connection

-Humans must have sufficient control over the object to make use of it

The Causal Connection Between Goods: Consumer Good (First Order Good)

A good that serves our desires directly

The Causal Connection Between Goods: Producer Good (Higher Order Good)

A good that is used in the production of another good

The Causal Connection Between Goods: Structure of Production

The set of steps by which producer goods are used to produce a consumer good.

Theory of Derived Demand

The [value] of goods of higher order is derived

from that of the corresponding goods of lower

order

Water in the Desert: Ordinal Ranking

Opportunity Cost

The next best alternative given up when making a choice

Diminishing Marginal Utility

As a person acquires more units of a good, the satisfaction they derive from each new unit is lower than the previous unit

Increasing Marginal Opportunity Cost

As a person gives up more units of a good, the

satisfaction they give up with each new unit is higher than the previous unit

The Theory of Price (Carl Menger): Range of Indeterminacy

The range of potential prices

The Theory of Price (Carl Menger): Price of Determination

The Theory of Price (Carl Menger): Market Clearing Price (first definition)

A price at which anyone who wants to buy or sell can find a willing trade partner

The Theory of Price (Carl Menger): Four implications of the Price Determination Model

1. Buyers who value the good more exclude buyers who value it less.

2. Sellers who value the good less exclude sellers who value the good more.

-Goods will tend to end up in the hands of those buyers and sellers who want

them the most.

3. The price for all traders is set by the marginal traders. In other words, the

price for all buyers and sellers is set by the maximum buying price and

minimum selling price of the marginal buyers and sellers.

4. As more parties enter the market, the range of indeterminacy tends to

shrink

Supply and Demand (Alfred Marshall): Quantity Demanded

The amount of a good a person is willing and able to buy at each price

Supply and Demand (Alfred Marshall): Demand Curve

The curve that shows the relationship between the price of a good and the quantity demanded.

Supply and Demand (Alfred Marshall): Law of Demand

Ceteris paribus, there is a negative relationship between the price of a good and the quantity demanded.

Supply and Demand (Alfred Marshall): Ceteris Paribus

Holding all other variables constant (all else equal)

Supply and Demand (Alfred Marshall): Quantity Supplied

The amount of a good a person is willing and able to sell at each price

Supply and Demand (Alfred Marshall): Supply Curve

The curve that shows the relationship between the price of a good and the quantity supplied

Supply and Demand (Alfred Marshall): Law of Supply

Ceteris paribus, there is a positive relationship between the price and the quantity supplied

Supply and Demand (Alfred Marshall): Market clearing price (second definition)

A price where the quantity demanded and quantity supplied are equal

Supply and Demand (Alfred Marshall): Market Clearing Quantity

The number of exchanges that take place at a market clearing price