Econ 162

Economics

the study of choices that arise from scarcity
-limited resources to satisfy unlimited wants

Economics provides tools to

measure and analyze the costs and benefits of different actions

economists

analyze risks, to track the macroeconomy, and to judge the performance of specific stocks and bonds

Economic goods

goods that are scarce, have a positive price

example of economic good

pb sandwich

Free goods

Goods that are unlimited in supply and which therefore have no opportunity cost
-zero price

example of a free good

air

global footprint

tries to measure all of the consequences of economic activity on the land and water by including all of the costs of extraction, use and disposal in determining our use of land

land

provides natural resources

labor

time and metal efforts humans spend in production process
-enhanced though improvements in human capital

capital

physical objects use in production
(machinery in factory, notebooks in classroom)

Labor return

wage-compensation

Capital return

interest (need to borrow initially to produce)

Land return

rent (fixed factor in production)

Entrepreneurship

the willingness and ability to take the risks involved in starting and managing a business

Entrepreneurship return

profit

People respond to incentives

Behavior changes when costs or benefits change.

markets

help allocate (consumption/distribution) of resources

Benefits of specialization

higher standard of living, increase efficiency

supply chains face constraints

inflation

INPUTS (resources)

production-->OUTPUTS (goods and services)

positive analysis

"What is"
-descriptive
-factual/objective
-if X, then Y

normative analysis

"What ought to be"
-not testable/opinion
subjective

model building

simplify and understand the world-make assumptions (fewest variables)

Overriding assumptions

rational self interest
more is better
ceteris paribus

GDP

increase in output per person over time

opportunity cost

every time we make a decision we are sacrificing something
-Benefit foregone from not choosing the next best alternative

PPC

Shows the maximum combinations of two goods that can be produced, given a certain quantity of resources/state of technology

points on PPC

attainable and efficient

points under PPC

inefficient

points above PPC

unattainable

opportunity cost is on

horizontal axis

Why is the PPC bowed?

increasing opportunity cost

Time is not specialized

True

economic data is cyclic

True

free trade

increases income, lower prices and greater variety

law of increasing costs

As production of a good is increased, the opportunity costs
of additional units of that good will also increase, as long as resources used in production
are specialized.

shift in PPC

change in resources or technology

consumption goods

goods that are used up for the current enjoyment of consumers

steel used to make a car

consumption good

steel used to build car factory

capital good

countries who devote more resources to capital formation

higher rates of economic growth in future

principle of comparative advantage

Each party to a trade should specialize in the
production of that good in which it is relatively more efficient (or has a lower opportunity
cost).

corollary

Mutual benefits arise from specialization and trade.

absolute advantage

whoever can produce more-one party has a lower resource cost than another

comparative advantage

when one party has a lower opportunity cost than another

Thomas Hobbs

People are selfish, self-serving, and brutal. Without specialization, society would be chaotic

terms of trade

rate at which both countries/parties would be willing to trade

consumption possibilities curve

shows all combinations that are possible through trade

Microeconomics

the study of how households and firms make decisions and how they interact in markets

normative economics

The part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics.

consumption possibilities curve

a curve showing the combinations of two goods that can be consumed when a nation specializes in a particular good and trades with another nation

absolute advantage

the ability to produce a good using fewer inputs than another producer

rational self-interest

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

minimun wage

a minimum price that an employer can pay a worker for an hour 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

complements in production

goods that must be produced together

Substitutes in economics

goods that are consumed in replacement of eachother

Determinants of Demand

Factors other than price that determine the quantities demanded of a good or service

Determinants of Supply

factors other than price that determine the quantities supplied of a good or service

equillibrium price

the price at which the quantity of a good demanded in a given time period equals the quantity supplied

equillibrium 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 that parties incur in the process of agreeing to and following through on a bargain

private sector

the part of the economy that involves the transactions of individuals and businesses

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 system based on private ownership of capital

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 policy

The typical system of regulation whereby government tells business how to reach certain goals, checks that these commands are followed, and punishes offenders.

traditional economies

things are done the way they have always been done; economic decisions are based on custom or habit

market economy

Economic decisions are made by individuals or the open market.

consumer sovereignty

the power of consumers to decide what gets produced

Four Basic Economic Questions

What to produce?
How to produce?
How much to produce?
For whom to produce?

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

Laissez-faire

Idea that government should play as small a role as possible in economic affairs.

resource allocation

Assigning available resources, or factors of production, to specific uses chosen among many possible and competing alternatives. It involves answering "What to produce" and "How to produce".

Adam Smith

Scottish economist who wrote the Wealth of Nations a precursor to modern Capitalism.

public goods

Goods that are neither excludable nor rival in consumption

Externalities

A side effect of an action that affects a third party other than the buyer or seller.

negative externality

too much produce compared to social optimum

positive externality

a benefit that is enjoyed by a third-party as a result of an economic transaction-not enough produced

voting paradox

When majority rule is used to determine the outcome of public policy, often the results may be inconsistent. The policy that wins may depend on the order of the vote. It may not be clear what the will of the majority may actually be.

Globalization

Actions or processes that involve the entire world and result in making something worldwide in scope.

WTO/GATT, NAFTA

world trade organization; general agreement of tariffs and trade - wanted to not regulate; wanted to get rid of all barriers to trade; Clinton was trying to extend NAFTA - both tried to make the world a free trade zone, bad for US because we lost jobs; North American Trade Agreement; Lifted trade barriers among the US, MX, and Canada

Jerome Powell

Current Chairman of the Federal Reserve