EC-209 Test 1

Chapters 1-5

Economics

The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.

Opportunity cost

The best alternative we forgo when making a decision.

Marginalism

The process of analyzing the additional, or incremental, costs or benefits of a situation.

Efficient market

A market in which profit opportunities are eliminated almost instantaneously.

What discipline did the Industrial Revolution give rise to?

Economics

Microeconomics

Examines the functioning of individual industries and the behavior of firms and households (individual units).

Macroeconomics

Examines the behavior of aggregates: income, employment, output, etc.; on a national basis.

Microeconomic concerns: production

Production/output in individual industries and businesses.

Microeconomic concerns: production

How much steel, how much office space, how many cars

Microeconomic concerns: prices

Prices of individual goods and services.

Microeconomic concerns: prices

Price of medical care, price of gasoline, food prices, apartment rent

Microeconomic concerns: income

Distribution of income and wealth.

Microeconomic concerns: income

Wages in the auto industry, minimum wage, executive salaries, poverty

Microeconomic concerns: employment

Employment by individual businesses and industries.

Microeconomic concerns: employment

Jobs in the steel industry, number of employees in a firm, number of accountants

Macroeconomic concerns: production

National production/output.

Macroeconomic concerns: production

Total industrial output, GDP, growth of output

Macroeconomic production: prices

Aggregate price level.

Macroeconomic concerns: prices

Consumer prices, producer prices, rate of inflation

Macroeconomic concerns: income

National income.

Macroeconomic concerns: income

Total wages and salaries, total corporate profits

Macroeconomic concerns: employment

Employment and unemployment in the economy.

Macroeconomic concerns: employment

Total number of jobs, unemployment rate

Positive economics

An approach to economics that seeks to understand behavior and the operation of systems without making judgements. It describes what exists and how it works.

Normative economics

An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. Also called policy economics.

Model

A formal statement of a theory, usually a mathematical statement of a presumed relationship between two or more variables.

Variable

A measure that can change from time to time or over observations.

Ockham’s razor

The principle that irrelevant detail should be cut away. Choose the theory with fewer assumptions, or the simplest theory is usually the best.

Ceteris paribus

All else equal. A device used to analyze the relationship between two variables while the values of other variables are held unchanged.

Post hoc, ergo propter hoc

After this, therefore because of this. A common logical error made; Event B, even though occurred after Event A, was not necessarily caused by Event A.

Empirical economics

The collection and use of data to test economic theories.

(Allocative) efficiency

An efficient economy is one that produces what people want at the least possible cost.

Equity

Fairness

Economic growth

An increase in the total output of the economy.

Stability

A condition in which the national output is growing steadily, with low inflation and full employment of resources.

Slope

A measurement that indicates whether the relationship between variables is positive or negative and how much of a response there is in y when x changes.

The Fed

The central Federal Reserve Banks of the United States. There are 12.

What interest rate does the Fed directly affect?

The Fed Fund Rate.

What does the Fed do when inflation is high?

They raise the Fed Fund Rate. They also employ a contractionary fiscal policy: taxes are raised and government spending decreases

What does the Fed do when the economy slows (goes to Recession)?

They lower the Fed Fund Rate. They also employ an expansionary fiscal policy: taxes are lowered and government spending increases.

CPI

The Consumer Price Index tracks how much consumers are spending at the retail level. Goods included are gas, food, rent, etc..

PPI

The Producer Price Index tracks selling price over time at the wholesale level. Goods included are crude oil and raw materials.

PCE

The Personal Consumption Price Expenditures Index is the Consumer Price Index minus volatile food/gas prices. The Fed uses this measurement to gauge for inflation of consumer goods they have control over, unaffected by politics.

Personal debt outline

If income < spending, there is a deficit. This leads to borrowing, or debt.

Federal debt outline

If revenues < expenditures, there is a budget deficit. This leads to financing.

Where do Federal Government revenues come from?

Taxes

What are Federal Government expenditures?

Public works, social programs, military spending, interest payments on debt.

How does the Federal Government finance debt?

They can increase revenues, cut expenditures, print money, and borrow by issuing securities.

Who makes up an economic society? (4)

Consumers, producers, financial institutions, and the foreign sector.

What are a society’s economic resources? (4)

Land (natural resources), labor (human resources), capital (tools, equipment, machinery), and entrepreneurship (human resources).

Aggregate

Formed by the collection of units into a body, mass, or amount.

In terms of GDP, what do consumers do?

Consume

In terms of GDP, what do businesses do?

Invest

In terms of GDP, what does the Government do?

Spend

In terms of GDP, what is the role of the foreign sector?

Imports/exports

Define Recession.

Two quarters of negative GDP.

Per capita GDP

GDP divided by population. This is a measure of the economic standard of living.

Higher consumer confidence leads to more spending, which could increase GDP.

Higher consumer confidence leads to more spending, which could increase GDP.

Low consumer confidence can lead to less spending and slowed economic growth. Economic progress (real income, income inequality gap) vs. economic growth (GDP).

Low consumer confidence can lead to less spending and slowed economic growth. Economic progress (real income, income inequality gap) vs. economic growth (GDP).

Capital

Things that are produced and then used in the production of other goods and services.

Factors (of production)

The inputs into the process of production. Another term for resources.

Production

The process that transforms scarce resources into useful goods and services.

Inputs/resources

Anything provided by nature or previous generations that can be used directly or indirectly to serve human needs.

Outputs

Goods and services of value to households.

The three basic economic questions

What gets produced? How is it produced? Who gets what is produced?

Theory of comparative advantage

Specialization and free trade will benefit all trading parties, even those that may be “absolutely” more efficient producers.

Absolute advantage

A producer can produce a product using fewer resources.

Comparative advantage

The advantage in the production of a good enjoyed by one country over another when that good can be produced at a lower cost (in terms of other goods that must be forgone) than it could be in the other country.

Consumer goods

Goods produced for present consumption.

Investment

New capital additions to a firm’s capital stock.

Production possibility frontier (PPF)

A graph that shows all the combinations of goods and services that can be produced if all of society’s resources are used efficiently.

Marginal rate of transformation

The value of the slope of a society’s PPF. How much a society must give up of one output to get a unit of another.

The Law of Increasing Opportunity Cost

The slope of a PPF may drop off dramatically as resources were better-suited for producing the other unit.

Output efficiency

When the economy is operating at the best point on the PPF for that society.

Economic growth

An increase in the total output of an economy; occurs when a society acquires new resources or learns to produce more using existing resources.

Command economy

An economy where the central government either directly or indirectly sets output targets, incomes, and prices.

Laissez-faire economy

An economy where individuals and firms pursue their own self-interest without government direction or regulation.

Market

A mechanism/channel to bring buyers and sellers together to conduct trade.

Consumer sovereignty

The idea that consumers dictate what will and what will not be produced by choosing what and what not to purchase.

Specialization

Becoming an expert in a task will make society more efficient.

Ch. 3: Income

The sum of all a household’s wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure.

Ch. 3: Wealth/net worth

The total value of what a household owns minus what it owes. It is a stock measure.

PPF assumptions (3)

Two-good economy: consumer and capital. Fixed conditions: quality and quantity of resources are not changing. Full employment of resources and full production.

All points on the PPF are ________. Use the market to figure out ________ ________ of resources.

efficient; optimal allocation

Capital goods

Are used indirectly.

Constant opportunity cost

Slope is linear.

Price theory

The free market, with no central government plan or directives, no interference, and full pursuit of self-interest.

Ch. 3: Firm

The primary producing unit of the economy. An organization that comes into being when a person or group of people decides to produce a good or service to meet a perceived demand. Transforms inputs into outputs.

Ch. 3: Entrepreneur

A person who organizes, manages and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.

Ch. 3: Households

The consuming units of an economy.

Ch. 3: Product/output markets

Where goods and services intended for households are exchanged. Households demand, firms supply.

Ch. 3: Input/factor markets

Where the resources used to provide goods and services are exchanged. Firms buy inputs from households, households supply.

Ch. 3: Labor market

The input/factor market in which households work for wages, supplying labor to firms.

Ch. 3: Capital market

The input/factor market in which households supply their savings either for interest or future profit (stock) to firms that demand funds to buy capital goods.

Ch. 3: Land market

The input/factor market in which households supply land or property in exchange for rent.

Ch. 3: What is this diagram called?

The circular flow diagram.

Ch. 3: Factors of demand in product/output market include (6):

Product price, household available income, household accumulated wealth, prices of comparable available products, preferences, and the household’s expectations about future income, wealth, and prices.

Ch. 3: Quantity demanded

The number of units of a product a household would buy in a given period if it could buy all it wanted (if quantity supplied = quantity demanded) at the current market price.

Ch. 3: Factors that affect quantity demanded (1)

Changes in product price.

Ch. 3: Demand schedule

Shows how much of a given product a household would be willing to buy at different prices for a given time period.