Micro Midterm 1 Review

Spontaneous Order

Product of human action but not human design

Economics is a bridge between….

individual values and social order

Positive Statement

Reality (T/F) - Factual

Normative Statement

“What should be” statements - Bias

Define Theory

An abstract explanation of some phenomenon

Abstraction

Unrealistic & Useful

Market Economy

a social system in which resources are privately owned

Command Economy

Resources are collectively owned & controlled (government)

Mixed Economy

A social system in which some resources are privately owned and some are controlled by the government ( U.S. has this)

What are the 4 starting points of economics?

1. Scarcity

2. Unlimited Desires

3. Methodological Individualism

4. Rational Choice

Scarcity

unlimited wants but limited resources

Unlimited Desires

no matter what one’s current circumstances are, it is always possible to imagine and achieve a more desirable state of affairs

Methodological Individualism

You are studying each individuals choices as those choices make add up and determine prices, sales, and markets.

The Price System

A network of interrelated prices of goods and services

Exchange of Equivalents

To trade individuals need to have unequal values. People exchange one good for another when both parties value the goods equally.

Just Price Theory

The theory that there is a single just price at which each good should be sold

Mercantilisms 4 core beliefs

1. Social Order requires government planning

2. Money constitutes real wealth for a nation (nominal vs. real)

3. Exchange is a zero-sum game

4. There is a “public interest” separate from the interests of actual individuals

Nominal Value

The face value of certain amount of money

Real Value

the goods and services that can be purchased with a certain amount of money

Zero-Sum Game

for one party to win, another must lose

The Invisible Hand

Adam Smith’s metaphor implies that individual self-interest to create spontaneous order. (People act out of their own self-interest but by doing so they can help society as a whole).

Subjective Theory of Price

Theory that the price of a good is determined by an individuals preference

Labor Theory of Price

1. They theory that the price of a good is determined by the cost of its production

   1. The theory that the price of a good is determined by the amount of labor to produce it

What are the problems with the labor theory of price

1. How do you measure of labor?

2. Labor also has a price

3. It is a theory of intrinsic value

4. It ignores the context of the exchange

The Iron law of Wages

The theory that the price of labor is determined by the cost of human subsistence and reproduction

Intrinsic Value of Theory

The theory that the value of an object is inherent in the object itself. (value comes from the good itself)

The Marginal Revolutionaries / The Marginal Revolution

The discovery of the theory of marginal utility in early 1870s

Consumer Good

• First order good

• A good that serves our desires directly

Producer Good

• Higher Order Good

• A good that is used in the production of another good

Structure of Production

The set of steps by which producer goods are used to produce a consumer good

Derived Demand

The higher order good gets it’s value from the lower order good

Define Marginal

At the edge (additional)

Marginal Unit

The next unit gained or given up

Marginal Utility

The additional utility that a person gets from having one more unit of a good, or loses from having one less unit of good

Theory of Marginal Utility

The theory that the price of a good is determined by it’s marginal utility

Ordinal Ranking

A list in order of preference

Opportunity Cost

The best alternative given up when making a choice

Diminishing Marginal Utility

As a person aquires more units of a good, the satisfaction they derive from each new unit decreases

4 conditions for trade

1. Parties must have reverse values

2. Both parties must recognize opportunity for exchange

3. Both parties must have the power to transact

4. Benefits of transaction must outweigh the cost

Whats something that contradicts the Subject Theory of Price

Water-Diamonds Paradox : Water is very useful but has a low price, while a diamond has less use but a higher price

4 requirments for something to be a good

1. The human need must exist

2. Must have properties that allow it to satisfy this need

3. Humans must know of this causal connection

4. Need to be able to control

What is Economics?

The social science that studies production and trade

Why is economics important?

Helps with business and social issues

Is there a difference between rational and moral?

What does it mean when they say LTV ignores the context of exchange?

The value of a good is also determined by exchange - how much a person desires the good. Labor ignores that factor (supply and demand)

Increasing Marginal Opportunity Cost

As a person gives up more units of good, the satisfaction they give up with each new good is higher than the previous unit