Economics Review Flashcards

Flashcards for vocabulary review.

Economics

A social science that studies how individuals and societies make choices under scarcity, influenced by incentives.

Scarcity

Limited resources and unlimited wants.

Microeconomics

Individual decisions, markets.

Macroeconomics

Aggregate economy.

5 Big Economic Questions

What, how, when, where, and for whom to produce.

Four Factors of Production

Land, Labor, Capital, and Entrepreneurship.

Opportunity Cost

What you give up when choosing one option over another.

Marginal Analysis

Decision-making based on comparing marginal benefits and marginal costs.

Institutions

They align self-interest with social interest through rules and laws.

Positive Statements

Fact-based statements.

Normative Statements

Opinion-based statements.

Economic Method Steps

Observation, model building, and testing.

Ceteris Paribus

Holding other variables constant while analyzing one.

Fallacy of Composition

What’s true for one may not be true for all.

Post Hoc Fallacy

Assuming that correlation implies causation.

Why Economic Problems Arise

Due to scarcity and infinite wants.

PPF (Production Possibilities Frontier)

A curve showing the maximum combinations of two goods an economy can produce.

Point Inside the PPF

Inefficient or underutilized resources.

Opportunity Cost on the PPF

The amount of one good given up to produce more of another.

Trade-off

Sacrificing one thing to gain another.

Marginal Cost

The additional opportunity cost of producing one more unit.

Marginal Benefit

The additional benefit from consuming one more unit.

Diminishing Marginal Benefit

The more we consume, the less we value each extra unit.

Productive Efficiency

Producing on the PPF—no waste.

Allocative Efficiency

When marginal benefit = marginal cost.

Causes of Economic Growth

Technological change and capital accumulation.

Comparative Advantage

Producing a good at a lower opportunity cost than others.

Absolute Advantage

Producing more with the same resources.

Learning by Doing

Efficiency improves with practice.

3 Coordination Mechanisms in Economics

Commands, Rules & Norms, and Markets.

What Enables Markets to Function

Property rights.

Circular Flow Model

Shows the flow of goods, services, and money between households and firms.

How Prices Coordinate Economic Activity

By signaling scarcity and value.

Law of Demand

As price falls, quantity demanded increases.

What Shifts the Demand Curve

Changes in income, tastes, related goods' prices, future expectations, and number of buyers.

Change in Demand vs. Quantity Demanded

Demand change = shift of the curve; Quantity demanded change = movement along the curve.

Law of Supply

As price rises, quantity supplied increases.

What Shifts the Supply Curve

Resource costs, technology, number of sellers, related goods' prices, expectations, productivity.

Change in Supply vs. Quantity Supplied

Supply change = shift of the curve; Quantity supplied change = movement along the curve.

Market Equilibrium

Quantity demanded equals quantity supplied.

What Happens in a Surplus

Price falls.

What Happens in a Shortage

Price rises.

9 Methods of Resource Allocation

Market price, Command, Majority rule, Contest, First-come-first-served, Equal sharing, Lottery, Personal characteristics, Force.

Allocative Efficiency

When MB = MC.

Consumer Surplus

Value - Price paid.

Producer Surplus

Price received - Cost of production.

When Markets Are Efficient

When MB = MC and there's no under/overproduction.

What Causes Market Failure

Regulations, taxes/subsidies, externalities, public goods, common resources, monopolies, transaction costs.

Two Views on Fairness

Fair rules (Nozick) vs. fair results (redistribution).

Big Trade-off in Fairness

Equity vs. efficiency.

Is Ticket Scalping Efficient?

Yes—tickets go to those who value them most.

GDP (Gross Domestic Product)

The total value of all final goods/services produced in a country in a period.

What Does 'Gross' Mean in GDP?

Includes depreciation.

2 Methods to Calculate GDP

Expenditure (C + I + G + (X - M)) and Income (Wages + Rent + Interest + Profit).

Nominal GDP

GDP at current prices.

Real GDP

GDP adjusted for inflation.

GDP Per Capita

Real GDP divided by the population.

PPP (Purchasing Power Parity)

Adjusts GDP for price differences between countries.

GDP's Limitations

Doesn’t measure unpaid work, informal economy, quality of life, or inequality.

Business Cycle

Fluctuations of real GDP: Expansion, Peak, Recession, Trough.

Lucas Wedge

Loss of income due to slower GDP growth.

Chain-Volume Method

Measures real GDP using year-to-year price changes.

Why Unemployment is a Problem

Loss of income and production; social issues.

Who is Counted as Unemployed

Those without work but actively seeking or awaiting a job.

Unemployment Rate Formula

(Unemployed / Labor Force) × 100.

Labor Force Participation Rate

(Labor Force / Working-Age Population) × 100.

Types of Unemployment

Frictional, Structural, Cyclical.

Full Employment

Only frictional and structural unemployment—no cyclical.

Potential GDP

Output if all resources were used efficiently.

Output Gap

Real GDP - Potential GDP.

CPI

Consumer Price Index—tracks changes in the cost of a fixed basket of goods.

How is Inflation Calculated?

((CPI this year - CPI last year) / CPI last year) × 100.

Biases in the CPI

Substitution, new goods, quality changes, outlet substitution.

Other Inflation Measures

Chained CPI, PCE deflator, GDP deflator.

Core Inflation

Excludes food and energy prices.

Economics as a science

A social science

The fundamental economic problem

Unlimited wants exceeding limited resources

Focus of microeconomics

Individual markets

Focus of macroeconomics

Economy-wide phenomena

Land

Natural resources

Labor

Human effort

Capital

Tools and machines

Entrepreneurship

Risk-taking

Opportunity cost

Next best alternative

Marginal benefit

Extra benefit

Marginal cost

Extra cost

Response to…

Incentives

Simplified representations

Economic models

Ceteris paribus isolates variables using…

Controlled experiments

Post hoc fallacy leads to…

Incorrect inference

PPF shows…

Societal limits

Inefficiency

Resources are not used efficiently

Marginal

One more unit

Diminishing marginal benefit

Decreasing satisfaction

Productive efficiency

On the PPF

Allocative Efficiency definition

MB = MC

Economic Growth results from…

Efficiency improvements

Comparative advantage is defined as…

Lower cost

Absolute advantage is defined as…

Less inputs

Market foundation

Property rights