Exam 1 Micro & Macro Economics Flashcards

Flashcards covering core economic concepts, factors of production, analytical fallacies, trade theories, market structures, business organizations, macroeconomics, and international finance.

What is economic theory?

A simplification of economic reality used to make predictions about cause and effect in the real world.

What are secondary effects in economics?

Unintended consequences of economic actions that may develop slowly over time as people react to events.

How is economics defined?

The study of how people use their scarce resources to satisfy their unlimited wants.

When does scarcity occur?

When the amount people desire exceeds the amount available at a zero price.

What is utility, and who is noted for this concept?

The satisfaction or sense of well being received from consumption, associated with Jeremy Bentham.

What is rational self-interest?

The principle that each individual tries to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit.

What does the term "marginal" describe in economics?

Incremental, additional, or extra; used to describe a change in an economic variable.

What is marginal benefit?

The additional benefit to a consumer from consuming one more unit of a good or service.

What is marginal cost?

The additional cost of producing one more unit of output.

What is opportunity cost?

The value of the next best alternative that must be forgone as a result of a decision.

What is a sunk cost?

A cost that has already been incurred in the past, cannot be changed or recovered by any decision made now or in the future, and is irrelevant for present and future decisions.

What are resources, and what are the four main categories?

Resources are the inputs, or factors of production, used to produce goods and services; they consist of labor, capital, natural resources, and entrepreneurial ability.

How is labor defined as a factor of production?

The physical and mental effort used to produce goods and services.

How is capital defined as a resource?

The buildings, equipment, and human skills used to produce goods and services.

What are natural resources?

Gifts of nature used to make goods and services.

What is entrepreneurial ability?

The imagination required to develop a new product or process, the skill needed to organize production, and the willingness to take the risk of profit or loss.

What are the four payments made to resource owners for labor, capital, natural resources, and entrepreneurial ability?

Wages for labor, interest for capital, rent for natural resources, and profit (sales minus resource cost) for entrepreneurial ability.

What is a variable in economic models?

A measure, such as price or quantity, that can take on different values at different times.

What is the other-things-constant assumption (ceteris paribus)?

The assumption, when focusing on the relation among key economic variables, that other variables remain unchanged.

What is a behavioral assumption?

An assumption that describes the expected behavior of economic decision makers and what motivates them.

What is a positive economic statement?

A statement that can be proved or disproved by reference to facts.

What is a normative economics statement?

A statement that reflects an opinion, which cannot be proved or disproved by reference to the facts.

What is the association-is-causation fallacy?

The incorrect idea that if two variables are associated in time, one must necessarily cause the other.

What is the fallacy of composition?

The incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or the whole.

What is the Production Possibilities Frontier (PPF)?

A curve showing the maximum attainable combinations of two products that may be produced when available resources and current technology are used fully and efficiently.

What is economic efficiency?

The condition that exists when there is no way resources can be reallocated to increase the production of one good without decreasing the production of another good.

What does the law of increasing opportunity cost state?

To produce more of one good, a successively larger increment of an alternate good must be sacrificed if the economy's resources are already being used efficiently.

What is economic growth and how is it shown on a PPF graph?

An increase in the economy's ability to produce goods and services, reflected by an outward shift of the economy's production possibilities frontier.

How do division of labor and specialization of labor differ?

Division of labor is organizing production of a good into its separate tasks, whereas specialization of labor is focusing work effort on a particular product or a single task.

Who introduced the concept of absolute advantage and in what work?

Adam Smith from Great Britain in Wealth of Nation (1776).

What is comparative advantage and who formulated the law of comparative advantage?

Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer; the law of comparative advantage was formulated by David Ricardo.

What is Mercantilism?

An economic system before contemporary capitalism.

What does Laissez-faire mean?

The idea that the government needs to stay away from the economy.

What is the invisible hand?

A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all.

Which country is given as an example of Pure Capitalism in the text?

New Zealand.

Which country is given as an example of a Pure Command System in the text?

North Korea.

Which countries are given as examples of Socialism/Mixed Economy in the text?

Norway and Sweden.

What is Microeconomics?

The study of the economic behavior in particular markets, such as that for computers or unskilled labor.

What is a market and what is a product market?

A market is a set of arrangements by which buyers and sellers carry out exchange at mutually agreeable terms; a product market is a market where goods and services are bought and sold.

What is the difference between a good and a service?

A good is a tangible product used to satisfy human wants, while a service is an activity or intangible product used to satisfy human wants.

What is demand?

A relationship between the price of a good and the quantity that consumers are willing and able to buy during a given period.

What is the circular flow model?

A diagram that traces the flow of resources, products, income, and revenue among economic decision makers.

What is market failure?

A condition that arises when the unregulated operation of markets yields socially undesirable results.

What is a natural monopoly?

One firm that can serve the entire market at a lower per-unit cost than two or more firms can.

How do private goods and public goods differ?

Private goods are both rival in consumption and exclusive (such as pizza), while public goods are nonrival and nonexclusive once produced (such as national defense).

What is an externality?

A cost or a benefit that affects neither the buyer nor seller, but instead affects people not involved in the market transaction.

What is a Sole Proprietorship?

A firm with a single owner who has the right to all profits but who also bears unlimited liability for the firm's losses and debts.

What is a Corporation?

A legal entity owned by individual stockholders whose liability is limited to the value of their stock.

When and where did the Industrial Revolution begin?

It began in Great Britain around 1750 as the development of large-scale factory production and spread to Europe, North America, and Australia.

What is Macroeconomics?

The study of the economic behavior of entire economies, as measured, for example, by total production and employment.

What is fiscal policy?

The use of government purchases, transfer payments, taxes, and borrowing to influence economy-wide activity such as inflation, employment, and economic growth.

What is monetary policy and which institution handles it in the US according to the text?

Regulation of the money supply to influence economy-wide variables such as inflation, employment, and economic growth; handled by the FED.

What are transfer payments?

Cash or in-kind benefits given to individuals as outright grants from the government.

How do the ability-to-pay tax principle and benefits-received tax principle differ?

The ability-to-pay principle states that those with greater ability to pay should pay more taxes, whereas the benefits-received principle states that those who receive more benefits from a government program funded by a tax should pay more taxes.

What is proportional taxation versus regressive taxation?

Proportional taxation (flat tax) keeps the tax percentage of income constant as income increases, while a regressive tax decreases the tax percentage as income increases.

What is the difference between a tariff and a quota?

A tariff is a tax on imports, whereas a quota is a legal limit on the quantity of a particular product that can be imported or exported.

What is the merchandise trade balance?

The value of a country's exported goods minus the value of its imported goods during a given period.

What is the balance of payments?

A record of all economic transactions between residents of one country and residents of the rest of the world during a given period.