Economics 5-19

Which 1776 work outlined modern economic analysis?

"An Inquiry into the Nature and Causes of the Wealth of Nations"

Who wrote "An Inquiry into the Nature and Causes of the Wealth of Nations"?

Adam Smith

Which ancient philosopher discussed topics relevant to economics?

Aristotle

What is economics?

The study of how individuals make choices about how to allocate scarce resources in order to satisfy virtually unlimited human wants and about how individuals interact with one another.

What analogy does Adam Smith utilize to describe how economics are driven by self-benefitting decisions?

By stating that it is not from the benevolence of the butcher, brewer, or baker that gives us our dinner, but rather their self-love

How much items does the average supermarket contain?

31,530

What do economists base a majority of their work on?

Five basic assumptions

What are the five basic assumptions of economics?

Scarcity, trade-offs, opportunity cost, rationality, and gains from trade

True or false: scarcity is an inescapable fact of human existence.

True

What is one aspect of humanity that is not scarce?

Desires

What does the existence of scarcity imply?

That every choice we make requires us to give up something else

What are trade-offs?

The choices that require us to give up something else

What is an opportunity cost?

The cost of what you have to give up to get something else

IMPORTANT NOTE ABOUT OPPORTUNITY COST:

They are not necessarily the same as the monetary price you pay

What is the biggest cost of attending college for most people?

The value of their time

What is rationality?

The assumption that people make choices by comparing the benefits of each action with the opportunity cost of that action, and then select the greatest benefit

What does economics assume people perform before they make a purchae?

A cost-benefit analysis

How can trade with other people make them better off?

By specializing in the things that we like and do the best

Under what conditions can gains from trade be achieved?

When it is voluntary

What does economic analysis rely on?

Careful observation, description, measurement, and theory

What are the most common models in economics?

Diagrams or mathematical formulas

How does the simplicity of economic models aid our understanding?

By capturing aspects of reality and allowing us to identify what assumptions/characteristics are important

What is positive economics?

A mode of economic analysis where value-free judgements are made by describing and explaining economic phenomena and to make predictions about what will happen under particular circumstances

What does positive economics focus on?

Identifying cause-and-effect relationships and measuring their size

What is normative economics?

A mode of economic analysis where value judgements are used to guide decisions about what should be as opposed to what is

What mode of economic analysis are cost-benefit comparisons?

Normative economics

What is Pareto efficiency?

A criterion of economics where there is no way to improve one person's well-being without reducing the well-being of someone else

Who created Pareto efficiency?

Italian economist Vilfredo Pareto

What are the two broad subfields of economics?

Microeconomics and macroeconomics

What does microeconomics concentrate on?

Individual behavior and the operation of particular markets

What does macroeconomics concentrate on?

The overall performance of the national economy

How are macroeconomics and microeconomics similar?

They share the same assumptions about human behavior

How does macroeconomics and microeconomics differ?

They focus on economic activity on different scales

what mechanism makes our modern economy achieve high degree of coordination?

supply and demand

how do individual buyers and sellers respond to market prices?

in predictable ways

what is a market?

a group of all the buyers and sellers of a particular good or service

what are some examples of a market?

New York Stock Exchange, Chicago Mercantile Exchange

who sets the price?

an auctioneer

how can we constitute a market?

as the interaction between buyers and sellers

how does a perfectly competitive market determine it's prices?

by its collective amount of sellers and buyers. no one single person can affect the market price

how do you define a perfectly competitive market?

if the good or service being bought and sold is highly standardized, the number of buyers and sellers is large, and all of the participants are well informed about the market price

what are most markets characterized as?

high degree of competition, and can be descried in terms of the perfect competition assumption

what type of market is gasoline?

nearly competitive market

what is the law of demand?

the negative relationship between a good's price and the quantity demanded. ex. if a good's price is high then buyers won't buy that much.

what is the law of demand a result of?

the cost-benefit analysis that rational decision-makers use when deciding how to allocate their resources

what happens as the price of a good increases?

the opportunity cost of consuming that good also increases since consumers must cut back on their consumption of other goods to afford the higher price

what is a demand schedule?

a table showing how much of a product an individual is willing and able to buy

what is a demand curve?

the downward-sloping line relating price and quantity demanded

how much gas does steve buy when the price of gas goes from $3 to $5?

40 galls a month to 30 gallons

what is the difference between quantity demanded and demand?

quantity demanded is a point on the curve, while demand is the entire curve

what does a shift left in a market mean?

it means that at each price a lower quantity is demanded

how can you classify normal goods?

as having demand that is positively (when income rises, the demand for the good rises, vice versa)

what does it mean for a good to have demand that is positively?

when income rises, the demand for the good rises

how can you classify inferior goods?

whenever income rises, demand falls

what is a good example of a inferior good?

bus rides, as whenever income rises. people are going to buy a car and drive instead of taking the bus

what are substitutes?

when a decline in the price of one good causes a reduction in the demand for another

what are complements?

when a lower price for one good causes demand for another good to increase

what is taste?

if the perceived benefits of consumption change, then so will the demand. ex. if environmental impacts of driving cause people to be more concerned about pollution. This will likely be a reduction in the demand for gasoline

what is expectations?

changes that you expect to occur in the future may also affect the demand. ex. if steve thinks he is going to lose his job in a month, he might cut back on driving for the change in his income.

what is the law of supply?

a positive relation that states "the higher the prices is, the greater the quantity that supplies will want to produce"

who is the gasoline supplier named?

Shelly

what is shelly's supply curve?

upward sloping

quantity supplied is a point on the curve while supply is the entire curve. true or false?

true

what are the factors of demand?

income, the prices of related goods, tastes, expectations, and number of buyers

what are the factors of supply?

input prices, technology, expectations, number of sellers

what are inputs?

any of the things that suppliers have to purchase to supply a product

what device did apple create?

the ipad

where will the market settle at?

equilibrium

how is equilibrium defined?

as a point at which all the forces at work in a system are balanced by other forces, resulting in a stable and unhanging situation

when is a market in equilibrium?

when no participant in the market has any reason to alter their behavior

where does the market equilibrium occur?

at the combination of price and quantity where the market supply and demand curves intersect

what is an important feature of market equilibrium?

is that the market has an automatic tendency to gravitate toward this combination of price and quantity

when does excess supply (surplus) occur?

whenever the supplier supplies too much than the buyers demand. ex. gasoline suppliers supplied 10,600 gallons of gas, but buyers only demand 8,500 gallons of gas

when does excess demand occur?

whenever buyers demand more than suppliers can supply. ex. when gas has a price of $1.50, buyers are going to demand 999,000 Billion trillion gallons of gas. But suppliers can only supply 9.6 gallons