Julia's Econ Final

thank you julia

what is scarcity?

condition that results from combination of UNLIMITED WANTS & LIMITED RESOURCES (fundamental problem in econ)
-producer cant offer a particular good or service at current price
-always exists

define tradeoff. give example

all the possible alternatives given up when a decision is made
ex. opportunity costs, what food you should eat in the fridge

Define opportunity cost. give example

most desirable alternative we give up when we make a decision
ex. picking only one candy out of bowl, rest you still want

guns or butter decision

phrase that describes whether gov spends $ on military or consumer goods

diff between goods and service

goods: physical objects such as clothes or shoes (food, clothing, cars)
service: actions or activities that performs for another (teaching, gardening, childcare, lawyer, doctor)

3 factors of production

Land: natural resources used to make g/s (coal, petroleum)
Labor: effort people devote to a task for which they are paidex. haircut, brain surgery
Captial: any human made resource that is used to create other g/s (2 kinds)physical and human capital

physical captial

all human made goods used to produce other g/s (tools, factories)

human capital

skills and knowledge gained by a worker through education and experience. (how much salt is too salty in fries)

Entrepreneur

someone who combines land, labor, and capital to create a new good or service

3 economic questions

1. what g/s should be produced?
2. how should g/s be produced
3. who consumes g/s?

what g/s should be produced?

what are our needs besides defense, education, public health, and consumer goods

how should g/s be produced

should electricity be produced w/ oil, water, power, nuclear power?

who consumes g/s?

how does abundance/wealth get dividedup? does everyone share resources equally? how does society decide how much diff professions get paid?

What are economic goals and values?

economic efficiency
economic freedom
economic stability
economic security
economic equality
economic growth & innovation

economic efficiency

making the most of resources and eliminating waste

economic freedom

-freedom from gov intervention when choices are made about how to produce and consme g/s.
-free to spend or save $
-free to own property and make profits
exceptions: gov does place limits on some economic activities
ex. gambling , age restrictions to purchase goods

economic stability

-g/s available when needed
-prices of goods are relatively stable
-in some societies, stability is not present

economic security

security of knowing that if we are ancient, unemployed, or sick, there are safety nets (protection by gov) provided by the gov
ex. finacial aid, obamacare, social security unemployment, welfare, etc

economic equality

should everyone be guaranteed the same standard of living? (should everyone be paid the same?)
-how should a society provide for those who are unwilling or unable to work?
-how should gov tax their citizens, diff rates depending on wealth?

economic growth & innovation

invention and change helps economy grow
-ex. of inventions that led to economic growth (TVs, cars, internet, phone)

capitalism

An economic system based on private ownership of capital (market system, free enterprice, free market system)

free enterprise

ppl free to enter any legal business and run it the way they want to (not completely free bc gov regulation)
-downside: scammers

advantages of market economic system

free enterprise
private property
profit motive
consumer sovereignty
competition

private property

ppl allowed to own property and use it the way they want to (also regulated)

profit motive

main reason to organize business is to earn money

consumer sovereignty

consumer decides what is made

competition

rivals compete for profits
- benefits for consumer: cheaper prices, better products, more g/s to choose from

Who makes production decisions in market economy?

the people

who was adam smith and what were his ideas?

formed theory of economies made
-invisible hand
-mostly free market
-laissez faire
-wrote wealth of nations (economic and social theory)

what is a free rider?

A person who enjoys the benefits of an action or a service without any effort on her or his part

invisible hand

term economists use to describe the self-regulating nature of the marketplace
-everyone does whats best for them in their own self interest

Laissez-faire

"hands off", government is not very involved in economic policies and businesses
-gov doesn't intervene

what are the motivating and regulating forces in free market?

self interest (motivating)
competition (competition)

what is centrally planned economy?

econ system in answers to 3 key econ questions are answered by gov
ex. north korea, china, cuba

what is the main goal of a centrally planned economy?

to provide econ equality to all

what is the main politcal term associated with centrally planned economies?

communism and socialism

what is the role of gov under centrally planned economy?

gov regulates factors of production in order to answer 3 econ questions
- gov owns all land (no priv property)
-gov owns labor (control wages and where people work)
gov sets quotas

quota

(output goal) a limited or fixed number or amount of people or things, in particular.

long term results for CPE

-stagnation
-inefficiency
-constant shortages
-corruption

stagnation

no innovation

inefficiency

waste resources

constant shortages

focus on some areas and ignore others

corruption

bribe officials to gain access to resources

problem of CPE

1. innovation is not rewarded in CPE
2. inefficiency
3. no incentives to cut cost
4. imbalance in spending

(problem of CPE 1) innovation is not rewarded in CPE

- managers of state owned factories are rewarded solely on their ability to meet a quota
- why not go above and beyond the quota? jobs are guaranteed as long as quota is met
- what might happen if you go above and beyong quote? quotas may be raised

(problem of CPE 2) inefficiency

what gets wasted in this economic system?- resources
why are resources like time and labor wasted? -everyone is doing the minimum
what would happen to business in free market system that wastes resources? -business would fail

(problems of CPE 3) no incentives to cut cost

problem of CPE 3 if you cut costs, what might happen? -budget may be cut
they spend as much as they can so the budget is not cut

(problems of CPE 4) imbalance in spending

what areas did the soviets try to show off during Cold War? -the arms race (weapons), space race, olympics, military strength
why show off these areas? -to show off their abilities to other nations around the world
what is the tradeoff of focusing so much attention on these specific areas?- other sectors of economy suffer

what is mixed economy

An economy with varying degrees of free enterprise and government control.
-A system in which economic decisions are made by individuals, businesses, and government.

why are economies mixed?

no nation can exist under a pure CPE or pure market system.
-market economies head gov intervention bc of public goods

why must gov spend money and where do they get money to spend?

to provide public goods and they get money from the people by taxing.

What is a recession?

economic downturn
1. unemployment rises
2. less new housing being built
3. GDP goes down

what is a stock?

A share of ownership in a company
-to raise $ to start, run or expand, business
-worth what someone is willing to pay for it
-not guaranteed return on investment

What is a stock split? Why do stock splits occur?

an issue of new shares in a company to existing shareholders in proportion to their current holdings.
- one share turns into 2, price splits as well

dividends

earnings distributed to stockholders
-some companies pay portion of profits to investor 4x a year

What is a bond?

IOU that represents debt a gov or corporation must repay to an investor

what are the safest type of bonds?

government bonds

What is liquidity?

How easy it is to turn an item into cash without losing any money

how do dividends work?

a share of a company's profits distributed to shareholders as either stock or cash,

Define law of demand

when good's price is lower, consumers buy more of it, when price is higher, consumers buy less of it

what factors cause shift in demand

- income
- population
- consumer expectations
- advertising
- price of related goods
- consumer tastes and fads
- consumer incentives
- elastic demand
- inelastic demand

income

you purchase more of certain goods when your income increases

population

if population increases, demand for certain products increaseex.) population increases, demand for homes increases

consumer expectations

current demand for a good is related to its expected future price

advertising

ads influence consumers to produce more products (michael jordan, mcdonalds, hanes)

prices of related goods

substitutes and complements

substitutes

goods used in place of one another
ex.) margarine instead of butter

compliments

two goods that are bought and used togetherex.) skis and ski boots

demand schedule

a table that lists the quantity of a good a person will buy at each different price

demand curve

a graph of the relationship between the price of a good and the quantity demanded

what is the difference between elastic and inelastic demand?

elastic demand:
demand is affected by change in priceex. pizza, movie tickets, (isnt an necessity so increase or decrease in price)
inelastic demand: demand is not affected by change in priceex.) perscription meds (you have to take meds so you will buy no matter how expensive they are)

factors that affect elasticity

availability of substitutes, relative importance, necessities vs. luxuries, change over time

availability if substitutes

can you substitute the good w. something else?

relative importance

How much of your budget is spent on the good?
- a price increase may force you to make choices

Necessities vs. Luxuries

you always buy a necessity even if price increases. if price of luxury item increases, demand may go down.
- example of yesterdays luxury becoming todays necessity

law of supply

suppliers offer more of good at higher price.- as price of item rises, quantity supplied increases.- as price decreases, quantity supplied decreases.
ex. one hit wonders in music, toys, hairstyles

supply schedule

a chart that lists how much of a good a supplier will offer at different prices

supply curve

A curve that shows the relationship between the price of a product and the quantity of the product supplied.

What are complementary products?

products whose demand curves are positively related, such that they rise or fall together; a percentage increase in demand for one results in a percentage increase in demand for the other
ex.) skis and ski boots

what are substitute products?

Products for which changes in demand are negatively related; that is, a percentage increase in the quantity demanded for product A results in a percentage decrease in the quantity demanded for product B.
ex.) margarine instead of butter

What is equilibrium price?

the point where the supply and demand curves intersect (come together)- quantity demanded equals quantity supplied

excess demand

(too much demand)quantity demanded is more than quantity supplied (ppl want to buy more than is supplied)
- as long as theres excess demand, suppliers will keep raising their prices

excess supply?

(too much supply)quantity supplied exceeds quantity demanded
ex.) pizzeria has left over slices at end of day, supplier will lower prices

what is diminishing marginal return?

The level of production decreases as the number of workers increases
- Still adds overall output but is it NOT AS VALUABLE, the marginal product of labor is still slowly going up
- as you consume more of something, value of item decreases

what is barter?

Trading/exchanging of goods and services without the use of money

what is a global economy?

economy where goods and services is being exchanged all over the world

what is inflation?

a general increase in prices

what are different theories on inflation?

creeping inflation, chronic inflation, hyperinflation

what happens to value of dollar during inflationary periods?

decreases the value of a dollar over time.

Hyperinflation

inflation that is out of control
ex. trillion dollar bill

creeping inflation

relatively low rate of inflation, usually 1 to 3 percent annually

chronic inflation

Inflation that rises steadily from month to month over a long period.

Why is inflation a problem?

-lowers the quality of life
-lowers the value of money
-inflation decreases the purchasing power of the dollar
-when inflation is unexpected, it can be very damaging to lenders such as banks (the money they lent out is not worth as much as the time when it was lent out)
-savers are hurt by unexpected inflation (the money is not worth as much)

what groups of people are most affected by inflation

poor people and those on fixed incomes the most.

4 types of unemployment

frictional, structural, cyclical, seasonal

frictional unemployment

unemployment that occurs when people take time to find a job

seasonal unemployment

unemployment that occurs as a result of harvest schedules or vacations, or when industries slow or shut down for a season

structural unemployment

unemployment that occurs when workers' skills do not match the jobs that are available

cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves

Why is unemployment a problem?

-lost incomes and production
-lost human capital