ECO 155

Where did economics start?

1776 Wealth of Nations by Adam Smith

What is Mercantilism?

exports > imports

What drives wealth of nations?

gold and silver

What is scarcity?

not enough resources for goods and services

What is modern economics ran by?

Invisible Hand by Adam Smith

4 Resources or Factors of Production and their Factor Payment

Land (rent)
Labor (wages)
Capital (interest)
Entrepreneurship (profit)

Positive Economics

what is testable

Normative Ecomnomics

what should/ought to be (opinion)

What is opportunity cost?

1 resource to produce one good, diverts resources from alt. goods

the alt. good is the opportunity cost (highest valued alt.

2 things people use to economize

equal benefit = lowest cost
equal cost = greatest benefit

What will incentives do?

alter people's behavior

What do economic agents make decisions off of?

Marginal benefits vs. Marginal cost

How much information do we collect?

until marginal benefits of more info = marginal cost

What should we avoid?

changing more than one thing at a time, bias, fallacy of composition, post hoc fallacy and not defining your terms

How to make goods and services?

Resources are made into goods and services

What does PPC stand for?

Production Possibilities Curve

What is full employment?

using all available resources

What is full production?

using resources where they have greatest effect on output

When changing an assumption what else changes?

the PPC

List assumptions:

two goods, efficiently operating economy, quantity of resources is fixed, quality of resources is fixed, political and social structure is fixed

What is an absolute advantage?

When an economic agent can make more of a good than another economic agent

What is a comparative advantage?

When an economic agent can make a good a lower opportunity cost than another economic agent.

What is a traditional economy?

output based on luck

What is a command economy?

information problem

What is a market economy?

supply and demand prices to retain resources

What is demand?

a schedule

What is the law of demand?

price increases the quantity demand decreases

What is the income effect?

prices decrease, as you get more income

What is the substitution effect?

prices decreases, sub towards the cheaper good

What is utility?

happiness/ satisfaction

What is marginal utility?

additional utility you get from consuming another unit of a good

What is diminishing Marginal Utility?

as we consume more units of a good, each additional unit gives less and less utility

What does the height of the demand curve show?

willing to pay for that unit of the good

What is supply?

the schedule which shows the various amounts of a product that producers are willing and able to bring to market at each price in a series of possible prices during some specified time frame

What is the law of supply?

price increases, the quantity of supply increases

The height of the supply curve is what?

marginal cost

What does surplus do to prices?

decrease

What does a shortage do to prices?

increase

What is deadweight loss?

Check graph

What is waste?

Check graph

ceteris paribus

everything is equal

Law of Increasing Opportunity Cost

as you make more units of a good, the opportunity cost of making more increases