ECON 162 Midterm

economics

is the study of choices that arise from scarcity

scarcity

Limited quantities of resources to meet unlimited wants

choice

Decision made or course of action taken when faced with a set of alternatives.

technology

constantly introducing new products that increase our wants and needs

land

is the physical topography used for production, not only the real estate where business are located but all of the resources that are extracted from the land and utilized in production

labor

is the time and physical and mental efforts spent by humans in the production process

capital

includes the physical objects that are actually used for production, includes tools, machinery, equipment and factories

Entrepreneurship

the willingness to take risks to combine resources in new ways, to invent original products and to find new ways of manufacturing old products, or to combine old products in new ways

wage

return to labor

rent

return to land

interest

return to capital

profit

return to entrepreneurs

Microeconomics

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Macroeconomics

the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth

positive economics/analysis

concerned with what is, causative; "If A, then B". Usually facts that are true or false and testable in the real world

ex: the temperature outside is 80ºF

normative economics/analysis

concerned with what ought to be, involves statements of opinion and are NOT testable in the real world.

ex: ur dad is hot

economic good

goods that are scarce; because they are scarce, they have a positive price. You have to sacrifice something to obtain an economic good.

ex: peanut butter sandwich

free good

goods that are abundance; because they are abundant. they have zero price. You do not have to sacrifice anything to obtain a free good.

ex: oxygen

models

Rather than including as many variables as possible in trying to explain human behavior, economists seek models with the fewest possible variables. We simplify the world through the use of assumptions
ex: maps.
(dont know if this is right lol)

Ceteris Paribus

"everything else held constant"

Scientific Method

recognize a problem → make assumptions → build a model → make predictions → test the model

opportunity cost

is the benefit foregone from not choose the next best alternative

What you sacrifice / What you gain = opportunity costs

ex: if you study for economics all friday night, you cant go to the rat

Type I and Type II Errors

Type 1= false-positive error
Type 2= false-negative error (?? dont know tbh)

production possibilities curve (PPC)

a model that shows the maximum combinations of two goods that can be produced, given a certain quantity of resources and state of technology

specialization

the concentration of the productive efforts of individuals and firms on a limited number of activities, leads to Law of Increasing Cost

Law of increasing cost

when resources are specialized, then as production increases, the opportunity cost of additional units of that good will also increase

comparative advantage

Each party to a trade should specialize in the production of that good in which it is relatively more efficient

absolute advantage

lower resource cost

terms of trade

rate at which both parties would be willing to make a trade, depends on opportunity cost

ex: chapter 2 (page 31)

consumption possibilities curve

shows all of the combinations that can be consumed through trade

market

a collection of buyers and sellers meet to exchange goods or services

supply

The amount of goods available

demand

the quantity of a good or service that consumers are willing and able to buy

supply curve

a model that describes the behavioral of producers in a market

demand curve

a model that describes behavioral of consumers in a market

change in demand

shift of entire curve

INCREASE IN DEMAND MAY BE CAUSED BY:
→an increase in price of a substitute
→a decrease in price of a complement
→an increase in income if good is /normal/
→a decrease in income if good is /inferior/
→an increase in taxes
→ in increase in population

change in quantity demanded

results from a change in Px (particular price) only, movement along a given demand curve

change in supply

is shown as a shift of the entire supply curve

INCREASE IN SUPPLY MAY BE CHANGED BY
→a difference in resource prices
→an increase in technology
→an increase in business expectations
→an increase on # of firms
→ a decrease in the price of related goods

change in quantity supplied

results from a change in Px (particular price) only, movement along a given supply curve
↓ P, ↓Qs

rational self-interest

Individuals try to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit

minimum wage

a price floor set for the price of labor

normal good

a good that consumers demand more of when their incomes increase

inferior good

a good that consumers demand less of when their incomes increase
ex: ramen noodles, spam

Complement goods

Two or more goods that tend to be used together. If two goods are complements, an increase in the price of one will lead to a decrease in the demand of the other.

substitutes

goods used in place of one another

Determinants of Demand

→ price of good (Px)
→ Resource Prices (Pr)
→Technology (TECH)
→Business expectation (EXP)
→ Number of firms (N)
→Prices of related goods (Pz)

equilibrium price

quantity supplied equals quantity demanded

equilibrium price

the price at which the quantity demanded equals the quantity supplied

equilibrium quantity

the quantity bought and sold at the equilibrium price

shortage

A situation in which quantity demanded is greater than quantity supplied

surplus

A situation in which quantity supplied is greater than quantity demanded

price floor

A legal minimum on the price at which a good can be sold

surplus

price ceiling

A legal maximum on the price at which a good can be sold

shortage

transaction costs

the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services

private sector

the part of the national economy that is not under direct government control.

public sector

the part of the economy that involves the transactions of the government

socialism

A system in which society, usually in the form of the government, owns and controls the means of production.

Capitalism

an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.

Communism

A theory or system of social organization based on the holding of all property in common, actual ownership being ascribed to the community as a whole or to the state.

command and control economy

economic decisions are made by government bureaucrats

Traditional Economy

economic decisions are based on what is done in the past

Market Economies

economic decisions are decentralized through price mechanism

consumer sovereignty

markets respond to changes in consumer preferences, markets are relentless in giving consumers what they want

Four Basic Economic Questions

1) What and how much to produce?
2) How to produce?
3) For whom to produce?
4) When to consume?

Mercantilism

An economic policy under which nations sought to increase their wealth and power by obtaining large amounts of gold and silver and by selling more goods than they bought

Laissiez Faire

The idea that government should not interfere with or regulate industries and business

French for: "to leave be"

resource allocation

in markers, prices and profits act as signals to firms to guide resources to their most valuable uses.

Adam Smith

Wrote "The Wealth of Nations", which involved self-interest, invisible hand and division of labor + specialization


" Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only.... It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest."

"By directing that industry in such a manner as its produce may be of greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he intends to promote it."

public goods

non-rival and non-excludable

Externalities

cost or benefits that accrue to individuals not directly involved in the transaction

voting paradox

A simple demonstration of how majority-rule voting can lead to seemingly contradictory and inconsistent results. A commonly cited illustration of the kind of inconsistency described in the impossibility theorem.

free trade

international trade free of government interference

fair trade

trade in which fair prices are paid to producers in developing countries.

Globalization

the process by which businesses or other organizations develop international influence or start operating on an international scale.

WTO (World Trade Organization)

the only global international organization dealing with the rules of trade between nations

GATT (General Agreement on Tariffs and Trade)

international agreement first signed in 1947 aimed at lowering trade barriers

NAFTA (North American Free Trade Agreement)

An agreement for free trade between the United States and Canada and Mexico

Jerome Powell

Chairman of the Federal Reserve