Econ 201H Chapters 1-3 Test 9/28/23

capital

resources a company has to make their goods/services 

Utility

the total satisfaction or benefit derived from consuming a good or service 

Economics

a social science concerned with making optimal choices under conditions of scarcity

economic perspective

• Scarcity and choice 

• Opportunity cost 

• Purposeful behavior to increase utility 

• Marginal analysis --> marginal=extra/additional --> think of restaurant reference professor gave --> staying open an hour longer is not worth it since there isn’t enough revenue (not attracting enough crowd) 

Ceteris Paribus/Other-things-equal assumption

the assumption that factors other than those being considered don’t change so you can just focus on how one variable impacts another variable

Positive economics

factual statements (i.e., inflation rate is 3.3%, unemployment rate is 3.8%)

Normative economics

statements based on judgement (i.e., the minimum wage should be $20) 

The economizing problem

limited income and unlimited wants 

Per capita

income/population

assumptions for ppc

• Full employment 

• Fixed resources 

• Fixed technology 

• Two goods (consumer good, capital good) 

• Anything below budget line/ppc

• Anything above budget line/ppc

• wasting resources; attainable but inefficient 

• unattainable given the resources they have 

Calculate opportunity cost

what you give up/what you gained --> answer is always what you gave up

The law of increasing opportunity costs

as you increase production of one good, the opportunity cost to produce an additional good will increase.

a straight budget line/ppc means that

opportunity cost is constant

PPC (out bending curve) means that the opportunity cost is

increasing

Optimal Output/Break-Even Point

Marginal Benefit=Marginal Cost

what pushes ppc outward?

economic growth —> Technology, more resources, etc

what do you look at to analyze a comparative advantage

opportunity cost

Country with ___ in producing a good has a ____ in that good, meaning they specialize in that good

lower OC, comparative advantage

opportunity cost

give up one thing to get another

purposeful behavior

people make decisions with a desired outcome in mind

generalizations

economic principles are generalizations, meaning they’re based on typical consumers/workers/business firms

macro vs micro

macro: overall economy

micro: individual businesses/people

what does macroeconomics specifically focus on?

economic growth, the business cycle, interest rates, inflation, and the behavior of major economic aggregates such as govt, household, and business sectors

what is an aggregate?

a collection of specific economic units treated as if they were one unit

budget line

seeing what is attainable with fixed income —> for individuals —> similar to ppc —> usually two products to generalize

an increase in income shifts the budget line to the right whereas a decrease in income shifts the budget line to the left —> more income=more to work with in terms of obtaining wants

four categories of economic resources

land, labor, capital, and entrepreneurship

what does the land aspect of economics pertain to?

natural resources (ie, forests, mineral/oil deposits, water resources, wind power, sunlight, etc)

what does the labor aspect of economics pertain to?

physical/mental activities that people contribute to the production of goods and services.

what does the capital aspect of economics pertain to?

all manufactured aids used in producing consumer goods and services. includes factory, storage, transportation, and distribution facilities, as well as tools and machinery. basically the things that assist in producing the desired goods and services.

what is an investment in economics?

spending that pays for the production and accumulation of capital

what does the entrepreneurship aspect pertain to in economics?

supplied by entrepreneurs, the driving force behind production

• take initiative in combining resources t produce a good or a service

• make strategic business decisions

• innovate —> new production techniques, new products, etc

  • take risks

what grows an economy and shifts the ppc right?

increase in resources supplies, advances in technology

unemployment causes an economy to

operate at a point inside its production possibilities curve —> inefficient

an economy’s present choice of capital and consumer goods determine

the future ppc

____ enable a nation to obtain more goods that its ppc indicates (unattainable becomes attainable)

international specialization and trade

economic system

a particular set of institutional arrangements and a coordinating mechanism

an economic system responds to the

economizing problem

what does the economic system determine?

what goods are produced, how they are produced, who gets them, how to accommodate change, and how to promote technological progress

economic systems differ as to

1. who owns the factors of production

2. the method used to motivate, coordinate, and direct economic activity

economic systems can be classified by their degree of centralized or decentralized decision making

laissez-faire capitalism (pure capitalism)

government intervention is minimal and markets and prices direct nearly all economic activity

keep the government from interfering with the economy

command systems

governments have total control over all economic activity

examples: soviet union, cuba, china, venezuela, belarus

the vast majority of national economies lie somewhere in-between laissez-faire capitalism and command systems, known as

market systems or mixed economies

the market system (capitalism/mixed economy)

• characterized by a mixture of centralized government economic initiatives and decentralized actions taken by individuals and firms

  • in the usa and other countries the gov plays a substantial role in the market system

main characteristics of the market system

• private property

• freedom of enterprise and choice

• self-interest

• competition

• markets and prices

• technology and capital goods

• specialization

• use of money

• active, but limited, govt

private property

• private individuals and firms (not the gov) own most of the property resources (land and capital) —> allows individuals and businesses to obtain, use, and dispose of property resources as they see fit

• property rights encourage mutually agreeable economic transactions —> a person who wants something must pay for it

freedom of enterprise

ensures that entrepreneurs and private business are free to obtain and use economic resources to produce their choice of goods and services and to sell them in their chosen markets

freedom of choice

• allows owners to employ or dispose of their property and money as they see fit

• allows workers to try to enter any line of work for which they are qualified

• consumers are free to buy the g/s that best satisfy their wants and that their budgets allow

legal limitations: human trafficking, drugs

self-interest

• the motivating force of the market system

• each economic unit tries to achieve its own particular goal (entrepreneurs try to maximize profit and minimize loss, workers try to maximize their utility, etc)

competition requires

• two or more buyers and two or more sellers acting independently in a particular product or resource market (usually there are many more than two buyers and two sellers)

• freedom of sellers and buyers to enter or leave (exit) markets, on the basis of their economic self-interest

competition diffuses economic power and limits the actions of any single seller or buyer

markets and prices

?

advanced technology and capital goods are important because

efficient production —> new products/techniques=monetary rewards for the innovator

specialization

using the resources of an individual, firm, region, or nation to produce one or a few g/s rather than the entire range of desired goods and services —> look more into it

division of labor (human specialization)

• specialization makes use of differences in ability (ie, if lebron is good at basketball and beyonce is good a singing, their talents are most efficiently used if lebron plays professional basketball while beyonce records songs and gives concerts)

• specialization fosters learning by doing (by devoting time to a single task, people are more likely to develop the skills required and to improve their techniques)

• specialization saves time (by devoting time to a single task, a person avoids the loss of time incurred in shifting from one job to another)

geographic specialization

geographic aspects impact the production of goods and how costly that production would be

use of money

• a medium of exchange (money) makes it easier to trade in a market system

• barter: swapping goods for goods (ie, wheat for oranges)

active, but limited, govt

• govts can often increase the overall effectiveness of a market system

• govts have their own set of shortcomings that can cause substantial misallocations of resources

five fundamental questions of the market system

• what goods and services will be produced?

• how will the goods and services be produced?

• who will get the output?

• how will the system accommodate change?

• how will the system promote progress?

how does a market system decide on what goods are produced?

the g/s that gain profit will produce

the g/s that earn a loss will be discontinued

profits and losses are the

difference between total revenue (TR) and total cost of production (TC)

consumer sovereignty

the determination by consumers of the types and quantities of goods and services that will be produced with the scarce resources of the economy —> dollar votes

how will g/s be produced in a market system?

in combos and ways that minimize the cost per unit of output

who will get the output in a market system?

any product will be distributed to consumers on the basis of their ability and willingness to pay its existing market priceh

how will the market system accommodate change?

based on consumer preferences and available resources

how till the system promote progress

technological advance, capital accumulation

creative destruction

the creation of new products and production methods completely destroys the market positions of firms that are wedded to existing products and older ways of doing business (ie, when online streaming displaced compact disks in the 2000s)

the invisible hand (adam smith in the wealth of nations in 1776)

the ability for the economy to self-correct

three virtues of the economic system

efficiency, incentives, freedom

why command systems fail

• coordination problem and incentive problem

households

households buy the g/s that businesses make available in the product market —> households obtain the income needed to buy those products by selling resources in the resource market

businesses

commercial establishments that attempt to earn profits for their owners by offering g/s for sale

sole proprietorship

business owned and managed by a single person

partnership

two or more individuals agree to own and operate a business together

corporation

independent legal entity that can acquire resources, own assets, produce and sell products, etc on its own behalf

product market

households purchase the g/s produced by businesses

resource market

households sell resources to businesses

demand

a schedule or a curve that shows the

demand schedule

a table of numbers showing the amounts of a good or service buyers are willing and able to purchase at various prices over a specified period of time

law of demand

• inverse/negative relationship

• as price increases, quantity demanded decreases

• as price decreases, quantity demanded increases

diminishing marginal utility

the principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the g/s decreases

income effect

a lower price increases the purchasing power of a buyer’s money income, enabling the buyer to purchase more of a product than before

substitution effect

buyers have an incentive to substitute a product whose price has fallen for other products whose price has remained the same

explanations for law of demand

• diminishing marginal utility

• income effect

• substitution effect

demand curve

the downward slope reflects the law of demand —> people buy more of a product, service, or resource as the price falls

calculate market demand with small table

add all the individual demans

determinants of demand

known as demand shifters as well because changes in determinants can move the curve from left to right

remember INSECT

• I = Income

• N = Number of Buyers/Consumers

• S = Substitutes

• E = Expectations of Future Price

• C = Complements

• T = Tastes and Preferences

complements=buy them together

substitute good

one good that can be used in place of another good

complementary good

one good that can be used with another

change in quantity demanded

movement along demand curve

change in demand

shift of demand curve

supply

a schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period, other things equal

law of supply

as price rises, quantity supplied rises

as price falls, quantity supplied falls

marginal cost

the added cost of producing one more unit of output

slope of supply curve

upward

determinants of supply

think ROTTEN

R: resource prices

O: other good prices

T: taxes/subsidies

T: technology

E: expectations of the supplier

N: number of competitors/sellers

a change in one or more of these shift curve left or right

change in quantity supplied

movement along curve

equilibrium price (market-clearing price)

the price where the intentions of buyers and sellers match

surplus

the amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above-equilibrium) price

shortage

quantity demanded exceeds quantity produced

rationing function of prices

refers to the ability of the forces of supply and demand to establish a price at which selling and buying decisions are consistence