ECON 102 UIUC MIDTERM 1 FLASHCARDS

Economics

The social science that studies production and trade.

Spontaneous Order

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

Macroeconomics

The subfield of economics that focuses more specifically on money and banking and economic growth (microeconomics is economics itself).

Positive Analysis

Analysis that attempts to describe the way things are in reality ("what is").

Normative Analysis

Analysis that describes a value judgment ("what should be").

Theory

An abstract explanation of some phenomenon.

Society

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

Social System

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

Market Economy

A social system in which resources are privately owned and controlled. Also called a free market, free enterprise, or laissez-faire capitalist system.

Property Right

A moral and legal right to control a resource, and to exclude others from using it; based on the concept of consent.

Command Economy

A social system in which resources are collectively owned or controlled, typically through a government; examples include socialism, corporatism/mercantilism, feudalism, slave labor, and prison labor.

Mixed Economy

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

Scarcity

The amount of goods available is not sufficient to satisfy all human desires.

Unlimited Desires

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

Methodological Individualism

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

Rational Choice

The idea that people pursue their values; people are goal directed, self-interested, and respond to incentives.

The Four Starting Points of Economics

Scarcity, Unlimited Desires, Methodological Individualism, and Rational Choice.

Price System

A network of interrelated prices of goods and services.

Exchange of Equivalents Theory (4th Century B.C.)

The theory that people exchange one good for another when both parties value the goods equally.

Just Price Theory (8th Century A.D.)

The theory that there is a single just price at which each good should be sold.

Mercantilism (17th Century A.D.)

The school of thought holding that: social order requires government planning; money constitutes real wealth for a nation; exchange is a zero-sum game; and there is a "public interest" separate from the interests of actual individuals.

Nominal Value of Money

The face value of a certain amount of money.

Real Value of Money

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

Zero-sum Game

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

Mutually Beneficial Exchange

An exchange that benefits both parties.

Invisible Hand

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

Utility

Usefulness in satisfying human desires.

Subjective Theory of Price

The theory that the price of a good is determined by its utility (rejected by the Classical economists).

Water-Diamonds Paradox (Paradox of Value)

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

Labor Theory of Value

The theory that the price of a good is determined by its cost of production, or equivalently, by the amount of labor used to produce it.

Problems with the Labor Theory of Value

1) How do you measure labor? 2) Labor has a price. 3) It is a theory of intrinsic value. 4) It ignores the context of the exchange.

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, by Carl Menger, William Stanley Jevons, and Leon Walras.

Good (Menger)

A useful thing that is subject to human control.

Four Requirements for Something to Be a Good

1) A human need must exist. 2) The object must have properties that allow it to satisfy this need. 3) Humans must know of this causal connection. 4) Humans must have sufficient control over the object to make use of it.

Consumer Good (First Order Good)

A good that serves our desires directly.

Producer Good (Higher Order Good)

A good that is used in the production of another good.

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.

Marginal

At the edge.

Marginal Unit

The next unit gained or given up.

Marginal Utility

The additional utility that a person gets from having one more unit of a good, or loses from having one less unit of a good.

Theory of Marginal Utility (Marginal Theory of Value)

The theory that the price of a good is determined by its marginal utility.

Ordinal Ranking

A list in order of preference.

Opportunity Cost

The 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.

Four Conditions for Trade to Take Place (Menger, Ch. 4)

1) The parties have reverse values. 2) Both parties must recognize the opportunity for exchange. 3) Both parties must have the power to transact. 4) The benefits of the transaction must outweigh the costs.

Range of Indeterminacy

The range of potential prices, bounded by the maximum buying price and the minimum selling price.

Market Clearing Price (Menger's definition)

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

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 it more. 3) The price for all traders is set by the marginal (last) buyers and sellers. 4) As more parties enter the market, the range of indeterminacy tends to shrink.

Quantity Demanded

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

Demand Curve

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

Law of Demand

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

Ceteris Paribus

Holding all other variables constant (all else equal).

Quantity Supplied

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

Supply Curve

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

Law of Supply

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

Market Clearing Price (Marshall's definition)

A price where the quantity demanded and quantity supplied are equal.

Market Clearing Quantity

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