Econ Midterm

Economics

The study of how people make choices when resources are limited relative to wants.

Scarcity

Limited resources relative to people's wants.

Resources

Inputs available for use, including time, labor, land, materials, and tools.

Trade-off

What must be given up to obtain something else.

Opportunity cost

The value of the next-best alternative given up when making a choice.

TANSTAAFL

“There Ain’t No Such Thing As A Free Lunch.” Even something with a zero purchase price can require sacrificing time or other opportunities.

Real wealth

Goods and services that satisfy people's wants.

Rational behavior

Acting purposefully to achieve a goal; it does not require perfect information or guarantee success.

Self-interest

Pursuing goals a person values, which can include helping others.

Incentive

A benefit or cost that encourages or discourages an action.

Subjective preferences

People have different tastes and assign different values to things.

Unintended consequences

Results of an action or policy that were not its intended goal.

Marginal

Additional; referring to one more unit or a small change.

Marginal benefit

The additional benefit from one more unit or a small increase in an activity.

Marginal cost

The additional cost from one more unit or a small increase in an activity.

Marginal thinking

Comparing the additional benefits and costs of a small change in an activity.

Diamond–water paradox

The puzzle that essential water is often cheaper than diamonds; the value of an additional unit depends on its availability rather than just the good's overall importance.

Positive statement

A claim that evidence can test as true or false. It does not have to be correct.

Normative statement

A judgment about what ought to happen.

Ceteris paribus

Holding other relevant factors constant while examining the effect of one change.

Logical fallacy

A mistake in reasoning.

Ad hominem

Judging an argument solely by the identity of the person making it rather than evaluating the argument itself.

Post hoc

Assuming that because one event happened before another, it caused the second event.

Fallacy of composition

Assuming that what is true for one part must also be true for the whole group.

Naturalistic fallacy

In your professor's usage, assuming something should exist or continue simply because it exists or has existed for a long time.

Adam Smith

The economist associated with The Wealth of Nations and explaining how division of labor increases productivity.

Division of labor

Dividing production into narrower tasks performed by different workers.

Specialization

Concentrating on a narrower task or activity.

Productivity

Output produced per unit of input, such as output per worker per hour.

Expertise

Skill and knowledge developed through practice and experience.

Mechanization

Using machines to perform production tasks.

Benefits of specialization

Less time switching tasks, greater worker skill, and more opportunities to develop machines.

David Ricardo

The economist associated with the principle of comparative advantage.

Absolute advantage

The ability to produce more with the same resources, or the same output using fewer resources.

Comparative advantage

The ability to produce a good at a lower opportunity cost than another producer.

Comparative disadvantage

Having a higher opportunity cost of producing a good than another producer.

Opportunity-cost calculation

For maximum-output tables with constant trade-offs, divide the maximum output of the other good by the maximum output of the good being produced.

Gains from trade

Benefits from exchange compared with the next-best alternative without that exchange.

Mutually beneficial trade price

In the two-good example, a price strictly between the producers' opportunity costs allows both to gain.

Production

Making goods or providing services.

Consumption

Using goods or services to satisfy wants.

Consumption good

A good used to satisfy a want directly.

Capital good

A produced good used to produce other goods or services.

Saving

Giving up some current consumption so resources are available for later use.

Investment

In the production example, creating or acquiring productive capital.

Principal

The original amount borrowed or lent.

Interest

The additional payment for borrowing funds, which helps compensate lenders for waiting and repayment risk.

Money

A generally accepted means of payment that also measures economic values and carries purchasing power into the future.

Medium of exchange

The function of money that facilitates buying and selling.

Unit of account

The function of money that measures prices and records economic values.

Store of value

The function of money that carries purchasing power into the future.

Barter

Directly exchanging goods or services without money.

Bank

A financial institution that accepts deposits and makes loans.

Pooling funds

Combining funds from many depositors to support lending.

Screening borrowers

Evaluating borrowers' plans and ability to repay before making loans.

Banking's role in investment

Connecting depositors' funds with borrowers, including businesses seeking productive equipment.

What is living at a level that barely meets basic needs called?

Subsistence.

What does “living standard” mean?

The material goods and services people can access, such as food, housing, transportation, and medical care.

What historical pattern does the “hockey stick” describe?

Relatively slow improvement in living standards for much of history followed by a sharp rise more recently.

What four sources of prosperity did we discuss?

Innovation, specialization, productive capital, and exchange.

Who wrote The Ultimate Resource?

Julian Simon.

What did Julian Simon identify as the ultimate resource?

Human knowledge and creativity.

How can human creativity make materials more useful?

People discover new uses for materials and better ways to transform them into valuable goods and services.

Does a larger population automatically produce higher living standards?

No. More people can contribute ideas and specialization, but productivity and the ability to cooperate also matter.

What is an innovation?

A new or improved product, production method, or way of organizing activities.

What is the main lesson of the Prosperity Pool?

Many individually small improvements can collectively produce a substantial increase in prosperity.

How can minor improvements make goods more affordable?

Together, they can save materials, energy, and time, lowering production costs.

What reasoning error appears in “Each improvement has little effect, so all improvements together have little effect”?

Fallacy of composition.

What is the central economic lesson of I, Pencil?

An ordinary product depends on many specialists whose knowledge and work are connected through exchange.

Why does producing a pencil involve more than knowing how to assemble its parts?

Its materials must be obtained and processed using tools, machinery, transportation, and the work of many other people.

What is knowledge spread across many different people called?

Dispersed knowledge.

What is concentrating on a narrower task or activity called?

Specialization.

What is people's reliance on one another's work and knowledge called?

Economic interdependence.

What does the invisible hand describe?

How people pursuing their own goals can, under suitable market conditions, contribute to useful outcomes for others through exchange.

How can a baker pursuing their own goals benefit customers?

The baker earns a living by providing bread that customers value.

Does pursuing personal goals always benefit society?

No. The invisible-hand idea does not guarantee that every self-interested action produces benefits for others.

How are separate buyers' and sellers' activities connected across a market?

Through prices, exchange, competition, and consumer choices.

What is the main lesson of It's Wonderful Loaf?

Bread production can be coordinated across many people without one person directing the entire economy.

What three market mechanisms were emphasized in It's Wonderful Loaf?

Prices, competition, and consumer choice.

How do prices help coordinate economic activity?

They communicate information and create incentives about what to buy and produce.

How does competition influence sellers?

It encourages them to attract customers through price, quality, and service.

How do consumers influence production?

Their spending choices help determine which products and sellers receive business.

What does methodological individualism mean?

Explaining social and economic outcomes by tracing them to individuals' choices and actions.

How would methodological individualism explain “the market produced more apples”?

Individual growers made decisions about planting, harvesting, hiring, and equipment that collectively increased production.

Why can modern people access some things unavailable to historical billionaires?

New technologies and services have been developed; money cannot buy something that has not yet been invented.

Does access to modern technology prove every modern person is wealthier in every respect than a historical billionaire?

No. It shows greater access to certain possibilities, rather than superiority in every dimension of wealth.