Microeconomics

What is scarcity?

The condition where human wants are greater than the available supply of time, goods, and resources

What does scarcity force people and societies to do?

Make choices

What are the three fundamental ecoomic questions every society must answer?

What to produce, how to produce, and for whom to produce

What is economics?

THe study of how society chooses to allocate scarce resources to produce goods and services to satisfy unlimited wants

What are resources?

basic categories of inputs used to produce goods and services

What is land as an economc resource

Natural resources provided by nature used to produce goods and services

What is labor?

the mental and physical capacity of workers to produce goods and services

What is capital?

Human made goods used to produce other goods and services

Why is money not considered a resource?

Money does not directly produce goods/ services; it only helps exchange resources and products

What is entrepreneurship?

The ability to take risks and combine resources to create innovative products

What are the steps in the economic methodology?

Identify the problem, develop a model, gather/test data, and forma a conclusion

What is an economic model?

a simplified description of reality used to understand and predict relationships between variables

What are two common pitfalls in economic thinking?

Failing to understand ceteris paribus and confusing correlation with causation

What does ceteris paribus mean?

All other things remain unchanged

What is correlation vs causation?

Just because two events occur together does not mean one caused the other

What is an opportunity cost?

The next best alternative that is sacrificed when making a choice

How is opportunity and cost measured?

By the highest valued good or use of time given up for the chosen option

Why doe sscarcity create opportunity costs?

Because resources are limited, choosing one thing that means giving up another

Example of opportunity cost?

Studying for economics instead of sleeping means sleep is the opporunity cost

What is marginal analysis?

Examining the effects of adding or subtracting small changes from a current situation

What does marginal analysis compare?

Marginal benefit versus marginal cost

When should you do something according to marginal analysis?

when the marginal benefit is greater than the marginal cost

Ex. of marginal analysis

Deciding whether one extra hour of studying is worth giving up one hour of sleep

What is a production possibilites curve (PPC)?

A curve showing the maximum combinations of two outputs an economy can produce with available resources and technology

What are the three assumptions of the PPC model?

Fixed resources, fully employed resources, and fixed technology

What is technology?

The knowledge used to produce goods

What is productive efficiency?

Producing the most possible with existing resources and technology

What are efficient points located on a PPC?

On the curve

What does a point inside the PPC represent?

Inefficient production or unused resources

What does a point outside the PPC represent?

A production level that cannot currently be reached

What is allocative efficiency?

Using resources to produce the goods most desired by society

Productive efficiency vs. allocative efficiency?

Productive = producing the maxmimum amount. Allocative = producing what people want most

What is the law of increasing opportunity costs?

Opportunity cost increases as production of one output expands

Why do increasing opportunity costs happen?

Resources are not equally suited to producing all goods

What shape does a PPC usually have because of increasing opportunity costs?

A bowed out curve

What causes economic growth?

More resources, improved technology, or better productivity

How is economic growth shown on a PPC graph?

The PPC shifts outward

What happens to the PPC if resources decrease?

It shifts inward

Why no nations trade?

Trade allows countries to consume combinations of goods beyond what they could produce alone

What are some major U.S exports?

Petroleum, cars, trucks, clothing, and electronics

What happens when countries specialize?

Total world output increases, allowing greater consumption

What is absolute advantage?

The ability of a country to produce a good using the same or fewer resources than another country

What is comparative advantage?

The ability of a country to produce a good at a lower opporunity cost than another country

What determines specialization and trade?

Comparative advantage, not absolute advantage

Why should countries specialize according to comparative advantage?

It maximizes world output and consumption

What is free trade?

The flow of goods between countries without restrictions or special taxes

What is protectionism?

Government restrictions used to protect domestic producers from foreign competition

What is an embargo?

A law that prevents trade with another country

What is a tariff?

A tax on imports

What is a quota?

a limit on the amount of a good that can be imported

What is the World Trade Organization (WTO)?

An organization that oversees international trade agreements and trade disputes

What are common argument for protectionism?

Infant industry, national defense, employment, cheap foreign labor, and free trade agreements

What is the infant industry argument?

New industries need protection until they can compete with foreign producers

What is the national security argument?

Critical industries should be protected so a nation is not dependent on foreign countries during war

What is the employment argument

Restricting imports can protect domestic jobs

What is the cheap foreign labor argument?

The idea that foreign low wages hurt domestic workers

What is a criticism of the cheap foreign labor argument?

U.S. workers often have higher productivity due to education, training, capital, and technology

What is the balance of payments?

a record of all international transcations between a country and other countries

What are the two major accounts of the balance of payments?

Current account and capital account

What does the current account include?

Trade in goods/services and income receipts/payments

What is the balance of trade?

The value of exports minus imports

What is a trade surplus?

Exports are greater than imports

What is a trade deficit?

Imports are greater than exports

What does the capital account include?

Financial capital flows such as stocks, bonds, real estate, and securities

What is an economic system?

The organizations and methods used to determine what goods and services are produced, how they are produced, and for whom they are produced

What are the three basic types of economic systems?

Traditional, Command, Market

What is a traditional economy?

An economy that answers the What, How, and for whom questions the way they have always been answered

Strength of a traditional economy?

Minimizes friction because little is disputed

Weakness of a tradtional economy?

Restructs initiative; does not produce advanced goods or growth

What is a command economy?

An economy where a dictator or central authority answers the basic economic questions

Wheakness of command economies?

Central planners can be absolutely wrong, quality and variety suffer

What is a market economy?

An economy using the prices determined by supply and demand

What is the invisible hand?

Scoiety benefits when individuals pursue their own interests

Weaknesses of market economies?

Lack of competition, externalities, lack of public goods, income inequality

Wha tis capitalism?

Private ownership + decentralized decision - making using markets

Weaknesses of capitalism?

Income inequality, lack of public goods, instability, environmental harm

What is socialism?

govenrment ownership + centralized decision - making

Strenghts of socialism?

Equitable income distribution; rapid growth via directed capital

Weaknesses of socialism?

Inefficiency, lack of innovation, planning errors, corruption

What is communism (Marx’s view)

A stateless, classless system where workers own all factors of production

What is privatization?

Turning a government enterprise into a private enterprise