Economics Lecture Notes Flashcards

Flashcards covering key economics concepts, principles, and practice problems from Weeks 1 through 4, including PPF diagrams and the Circular-Flow Diagram.

What is hedonic adaptation as described in the lecture notes?

The tendency to absorb improvements as a baseline or normalcy until they no longer seem like improvements to our lives.

According to Article 1, what percentage of Americans say it is more expensive to buy a home and raise a family now compared to previous generations?

Roughly $80\%$ of Americans.

Why is buying a home and raising a family considered more expensive now compared to 50 years ago?

Labor force participation among married mothers has increased, and mortgage payments, health insurance, and child-rearing services have more than doubled.

What is the crystal-clear economic rationale for attending class?

By attending class, you will have more success in understanding the material, and you will be a better person and student because of it.

What is the Greek origin and literal translation of the word 'economy'?

It comes from the Greek word meaning 'one who manages a household'.

How is scarcity defined in economic terms?

A condition where society has limited resources and cannot produce all the goods and services people wish to have.

What is the definition of economics?

The study of how society manages its scarce resources.

What is Principle 1 of economics?

People face trade-offs: to get something we like, we usually have to give up something else that we also like.

What is the difference between efficiency and equality in economics?

Efficiency refers to society getting the maximum benefits from its scarce resources (the size of the economic pie), while equality refers to distributing those benefits uniformly among society's members (how the pie is divided).

What is Principle 2 of economics, and what is opportunity cost?

Principle 2 states that the cost of something is what you give up to get it. Opportunity cost is whatever item or benefit must be given up to obtain another item.

How do rational people make decisions according to Principle 3?

Rational people think at the margin by comparing marginal benefits and marginal costs.

What is a marginal change?

A small incremental adjustment to an existing plan of action.

What is Principle 4 of economics?

People respond to incentives, as rational people make decisions by comparing costs and benefits.

What is Principle 5 of economics?

Trade can make everyone better off by allowing people and countries to specialize in what they do best and enjoy a greater variety of goods and services.

What is a market economy according to Principle 6?

An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

What did Adam Smith state about government intervention in market prices?

When a government prevents prices from adjusting naturally to supply and demand, it impedes the invisible hand's ability to coordinate the decisions of households and firms.

According to Principle 7, why is government needed in a market economy?

To enforce rules and maintain institutions key to a market economy (such as property rights) and to intervene in cases of market failure.

What are the two main causes of market failure?

Externalities (the impact of one person's actions on the well-being of a bystander) and market power (the ability of a single actor to substantially influence market prices).

What is productivity, and how does it affect a country's standard of living?

Productivity is the quantity of goods and services produced from each unit of labor input (total volume of goods and services divided by laborers). A country's standard of living depends directly on its productivity.

What causes inflation according to Principle 9?

Inflation, an increase in the overall level of prices, is caused when a government creates large quantities of the nation's money, reducing its value.

What inflation example from Germany between January 1921 and November 1922 is given in the notes?

In January 1921, a daily newspaper cost $0.30\text{ marks}$, but less than two years later in November 1922, the same newspaper cost $70,000,000\text{ marks}$.

What short-run trade-off does society face according to Principle 10?

Society faces a short-run trade-off between inflation and unemployment.

What economic model is illustrated in this diagram showing how dollars and inputs/outputs flow between households and firms?

The Circular-Flow Diagram.

In the Circular-Flow Diagram, what are the two types of markets?

The Market for Goods and Services (where households buy and firms sell) and the Market for Factors of Production (where households sell and firms buy).

What graphical model is shown in this diagram displaying the combinations of output an economy can produce given its available technology?

The Production Possibilities Frontier (PPF).

What are the definitions of microeconomics and macroeconomics?

Microeconomics studies how households and firms make decisions and interact in markets; Macroeconomics studies economy-wide phenomena such as inflation, unemployment, and economic growth.

How do positive statements and normative statements differ?

Positive statements attempt to describe the world as it is (descriptive and testable with data), while normative statements attempt to prescribe how the world should be (prescriptive and based on values).

What is the difference between absolute advantage and comparative advantage?

Absolute advantage is the ability to produce a good using fewer inputs than another producer. Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer.

What is the general rule regarding opportunity cost for both parties to gain from trade?

The price at which two parties trade must lie between their respective opportunity costs.

In the example of Frank and Ruby, what are their production times for meat and potatoes?

Frank produces meat in $60\,\text{mins}$ and an ounce of potatoes in $15\,\text{mins}$. Ruby produces meat in $20\,\text{mins}$ and an ounce of potatoes in $10\,\text{mins}$.

If you win $100\text{ dollars}$ in a pool and can spend it now or put it in a bank account paying $5\%$ interest for a year, what is the opportunity cost of spending it now?

You lose out on the value of allowing the money to grow into $105\text{ dollars}$ in the bank account over the year.

A company invested $5\text{ million dollars}$ in a product, but expected sales dropped to $3\text{ million dollars}$. If it costs $1\text{ million dollars}$ to finish development, should the company proceed?

Yes, because the additional gain from finishing is $2\text{ million dollars}$ ($3\text{ million} - 1\text{ million} = 2\text{ million}$), and the initial $5\text{ million dollars}$ spent is a sunk cost.

What happens to the Production Possibilities Frontier for milk and cookies if a disease kills half of the economy's cows?

Maximum milk output decreases while cookie output remains constant, causing the production possibilities frontier to shrink or rotate inward.

If Maria reads $20$ pages of economics or $50$ pages of sociology per hour and studies $5$ hours per day, what is her opportunity cost of reading $100$ pages of sociology?

$40$ pages of economics.