ECON exam 1

0.0(0)
studied byStudied by 0 people
learnLearn
examPractice Test
spaced repetitionSpaced Repetition
heart puzzleMatch
flashcardsFlashcards
Card Sorting

1/109

flashcard set

Earn XP

Description and Tags

Study Analytics
Name
Mastery
Learn
Test
Matching
Spaced

No study sessions yet.

110 Terms

1
New cards
Economics
The study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.
2
New cards
3 central problems of economics:
1) What, and how much, to produce.

2) How to produce it.

3) For whom to produce it.
3
New cards
Coercion
Limiting people’s wants and increasing the amount of work individuals are willing to do to fulfill those wants.
4
New cards
Opportunity Cost
The benefit that you might have gained from choosing the next-best alternative. (Must give up something else).
5
New cards
Marginal cost
The additional cost to you over and above the costs you have already incurred.
6
New cards
Sunk costs
Costs that have already been incurred and cannot be recovered.
7
New cards
Marginal costs
The additional benefit above what you’ve already derived.
8
New cards
The economic decision rule:
If the marginal benefits of doing something exceed the marginal costs, do it.

If the marginal costs of doing something exceed the marginal benefits, don’t do it.
9
New cards
Economic forces
The necessary reactions to scarcity (rationing mechanisms).
10
New cards
Market force
An economic force that is given relatively free rein by society to work through the market.
11
New cards
Invisible hand
The price mechanism, the rise and fall of prices that guides our actions in a market
12
New cards
2 elements of scarcity
* Our wants
* Our means of fulfilling those wants
13
New cards
Economic reality is controlled by 3 forces:
1) Economic forces (the invisible hand)

2) Social and cultural forces

3) Political and legal forces.
14
New cards
Abduction
Method of analysis that uses a combination of inductive and deductive methods.
15
New cards
Economic model
A framework that places the generalized insights of the theory in a more specific contextual setting.
16
New cards
Economic principle
A commonly held economic insight stated as a law or general assumption.-ex: when you learned to add you didn’t memorize 147+138 (you learned a principle of addition).
17
New cards
Experimental economics
A branch of economics that studies the economy through controlled laboratory experiments.
18
New cards
Natural experiments
Naturally occurring events that approximate a controlled experiment where something has changed in one place but has not changed somewhere else.
19
New cards
Theorems
Propositions that are logically true based on the assumptions in a model.
20
New cards
Precepts
Policy rules that conclude that a particular course of action is preferable.
21
New cards
The Invisible Hand Theorem
A market economy, through the price mechanism, will tend to allocate resources efficiently.

* When the quantity supplied is greater than the quantity demanded, price has a tendency to fall.
* When the quantity demanded is greater than the quantity supplied, price has a tendency to rise.
22
New cards
Efficiency
Achieving a goal as efficiently as possible.
23
New cards
Microeconomics
The study of individual choice, and how that choice is influenced by economic forces.

* study things like pricing policies of firms, household decisions on what to buy etc
24
New cards
Macroeconomics
The study of the economy as a whole.

* study inflation, unemployment, business cycles, growth
25
New cards
Economic policies
Actions taken by government to influence economic actions.

* to carry out economic policy effectively, one must understand how institutions might change as a result of the economic policy
26
New cards
Positive economics
The study of what is, and how the economy works.

* explores the pure theory of economics (lots of assumptions)
27
New cards
Normative economics
The study of what the goals of the economy should be.

* What should distribution of income be?
* What should tax policy be designed to achieve?
28
New cards
Art of economics (political economy)
The application of knowledge learned in positive economics to the achievement of the goals one has determined in normative economics.

* To achieve the goals that society wants, how would you go about it, given the way the economy works?
* art of economics is about policy; designed to arrive at precepts (guides for policy)
29
New cards
Production possibility table
A table that lists a choice’s opportunity costs by summarizing what alternative outputs you can achieve with your inputs.
30
New cards
Output
A result of an activity.
31
New cards
Input
What you put into a production process to achieve an output.
32
New cards
Production possibility curve (PPC)
A curve measuring the maximum combination of outputs that can be obtained from a given number of inputs.
33
New cards
What does PPC demonstrate:

1. There is a limit to what you can achieve, given the existing institutions, resources, and technology.
2. Every choice you make has an opportunity cost. You can get more of something only by giving up something else.
34
New cards
Slope of PPC
Production Possibility Curves are downward sloping. Most are outward bowed because of increasing marginal opportunity cost; if opportunity cost doesn’t change, the PPC is a straight line.
35
New cards
The principle of increasing marginal opportunity cost
In order to get more of something, one must give up ever-increasing quantities of something else.
36
New cards
Comparative advantage
The ability to be better suited to the production of one good than to the production of another good.
37
New cards
Productive efficiency
Achieving as much output as possible from a given amount of inputs or resources.
38
New cards
Inefficiency
Getting less output from inputs that, if devoted to some other activity, would produce more output. (Inside the PPC so this is bad)
39
New cards
Efficiency
Achieving a goal using as few inputs as possible. (On the PPC)
40
New cards
Outside PPC…
Unattainable, given our resources and technology.
41
New cards
Trade and Comparative Advantage (Adam Smith)
Adam Smith argued that it is humankind’s proclivity to trade that leads to individuals using their comparative advantage.
42
New cards
Benefits of trade
Both parties benefit from a trade, otherwise why would they be doing it?
43
New cards
Laissez-faire
An economic policy of leaving coordination of individuals’ actions to the market.

* Laissez-faire is not a theorem; it is a precept
44
New cards
Outsourcing
The relocation of production once done in the U.S. to foreign countries.
45
New cards
Insourcing
The relocation of production done abroad to the U.S.
46
New cards
Comparative advantage (countries)
If one country has a comparative advantage in producing one set of goods, the other country has to have a comparative advantage in the other set of goods.
47
New cards
Globalization
The increasing integration of economies, cultures, and institutions across the world.

* In a globalized world economies of the world are highly integrated.
48
New cards
Affects of globalization on firms:
Positive: because the world economy is so much larger than the domestic economy, the rewards for winning globally are much larger than domestically.

Negative: it is much harder to win, or stay in business competing in a global market.
49
New cards
Exchange rate
The value of a currency relative to the value of foreign currencies.
50
New cards
The Law of One Price
The wages of workers in one country will not differ significantly from the wages of (equal) workers in another institutionally similar country.
51
New cards
Law of demand
Quantity demanded rises as price falls, other things constant

* or Quantity demanded falls as price rises, other things constant
* ex of “other things constant” = income, taste
52
New cards
Demand curve
The graphic representation of the relationship between price and quantity demanded.

* Slopes downward
53
New cards
Demand
A schedule of quantities of a good that will be bought per unit of time at various prices, other things constant.
54
New cards
Quantity demanded
A specific amount that will be demanded per unit of time at a specific price, other things constant.

* demand refers to entire demand curve
* quantity demanded refers to a point on a demand curve
55
New cards
Movement along a demand curve
The graphical representation of the effect of a change in price on the quantity demanded.
56
New cards
Shift in demand
The graphical representation of the effect of anything other than price on demand.
57
New cards
Shift factors of demand

1. Society’s income
2. The price of other goods
3. Tastes
4. Expectations
5. Taxes and subsidies to consumers
58
New cards
Types of goods
* Normal goods – rise in income = rise in demand (steak)


* Inferior goods – rise in income = decrease in demand (spam)
59
New cards
Substitutes vs Complements
* Substitutes – when price of substitute rises, demand for original good rises (ex. Jeans and khakis, when price of jeans rises and price of khakis stays the same, demand for khakis rises)
* Complements – when price of good goes down, the demand for the good’s complement goes up (ex. Movie tickets and popcorn)
60
New cards
Market demand curve
The horizontal sum of all individual demand curves.
61
New cards
Law of supply
Quantity supplied rises as price rises, other things constant

* or Quantity supplied falls as price falls, other things constant
* law of supply is based on substitution and the expectation of profit
62
New cards
Supply curve
The graphical representation of the relationship between price and quantity supplied.

* Slopes upward (quantity supplied varies directly with the price)
63
New cards
Supply
A schedule of quantities a seller is willing to sell per unit of time at various prices, other things constant. (refers to whole supply curve)
64
New cards
Quantity supplied
A specific amount that will be supplied at a specific price. (refers to point on supply curve)
65
New cards
Movement along a supply curve
The graphical representation of the effect of a change in price on the quantity supplied.

* ex. change in quantity supplied that occurs because of a higher price
66
New cards
Shift in supply
The graphical representation of the effect of a change in a factor other than price on supply.

* ex. change in supply that occurs because of one of the shift factors
67
New cards
Shift factors of supply

1. Price of inputs
2. Technology
3. Expectations
4. Taxes & Subsidies
68
New cards
Supply shift - Price of inputs
If costs rise, profits decline and supply falls.
69
New cards
Supply shift - Technology
Reduction in cost of production increases profits, leading to increase in supply.
70
New cards
Supply shift - Expectations
ex: if a supplier expects the price of his good to rise in the future, he may store some of today’s output in order to sell it later and make money (decrease supply now & increase it later)
71
New cards
Supply shift - Taxes & subsides
Taxes increase cost of production, profit declines, suppliers reduce supply

Subsidies to suppliers are payments by the gov to produce goods-

* they reduce cost of production
72
New cards
From a supply table to a supply curve
Supply curve represents the set of minimum prices an individual seller will accept for various quantities of a good.
73
New cards
Individual and market supply curves
Market supply curve is derived from individual supply curves (just like market demand curve).
74
New cards
Market supply curve
The horizontal sum of all individual supply curves.

* Slopes upward (rise in price leads to existing suppliers supplying more, and new suppliers entering the market).
75
New cards
Equilibrium
A concept in which opposing dynamic forces cancel each other out.

* upward pressure on price is exactly offset by downward pressure on price
76
New cards
Equilibrium quantity
The amount bought and sold at the equilibrium price.
77
New cards
Equilibrium price
The price toward which the invisible hand drives the market.

* quantity demanded = quantity supplied
78
New cards
Excess supply
Surplus, quantity supplied is greater than quantity demanded.
79
New cards
Excess demand
shortage, quantity demanded is greater than quantity supplied
80
New cards
Price adjusts
* Quantity demanded greater than quantity supplied = prices rise
* Quantity demanded less than quantity supplied = prices fall
81
New cards
Political and social forces on equilibrium
* Equilibrium is not good or bad (simply state in which dynamic pressures offset each other)


* In real world, political and social forces push supply/demand equilibrium away.
82
New cards
Fallacy of composition
The false assumption that what is true for a part will also be true for the whole.

* ex. a lone supplier lowers price of his good, so people substitute that good for other goods and quantity demanded increases
* but what if all suppliers lower prices?
83
New cards
Demand is elastic if…
Quantity demanded changes significantly as the result of the price change.
84
New cards
Demand is inelastic if…
Quantity demanded changes a small amount as the result of the price change.
85
New cards
Determinants of price elasticity of demand

1. Existence of substitutes


1. Goods with lots of substitutes vs Goods with no good substitutes
2. Share of the budget spent on the good


1. Demand is more elastic for big ticketitems that make up a large portion of income.
3. Time and adjustment process


1. Generally, demand for goods tends to become more elastic over time.
86
New cards
Elasticity - Midpoint Method equation
{(Q2 - Q1) / \[ (Q1 + Q2) / 2 \]} / {(P2 - P1) / \[ (P1 + P2) / 2 \]}
87
New cards
Total revenue =
Total revenues = Price x Quantity Purchased

* Graphically, this is a rectangle connecting the origin and a point on the demand curve.
88
New cards
E > 1
Elastic
89
New cards
E = 1
Unit elastic
90
New cards
E < 1
Inelastic
91
New cards
Income elasticity
EI = % change in Quantity demanded / % change in Income

* Tells us what kind of good (normal, inferior, etc.)
92
New cards
EI > 0 (positive)
Normal goods are positive, incomes increasing and quantity demanded increasing; incomes decreasing and quantity demanded is decreasing.
93
New cards
EI < 0 (negative)
Inferior goods are negative, decreasing income and increasing quantity demanded.
94
New cards
0 < EI < 1
Necessity (normal) good
95
New cards
EI > 1
Luxury (normal) good
96
New cards
Cross-Price elasticity
Ec = % change in Quantity demanded (A) / % change in Price (B)

Measures the responsiveness of the quantity demanded of one good to a change in the price of another good.

Substitute vs complement.
97
New cards
Ec > 0 (positive)
Substitutes
98
New cards
Ec < 0 (negative)
Complements
99
New cards
Price elasticity of supply
Es = % change in Quantity supplied / % change in Price

* Price elasticity of supply is positive because of the direct relationship between price and quantity supplied.
100
New cards
Determinants of price elasticity of supply
* Flexibility of producers
* More production flexibility implies more elastic supply.
* Firms will be very responsive to changes in price.
* A firm will have more production flexibility if it is able to:
* Have extra capacity
* Maintain inventory
* Relocate easily
* Time and adjustment process
* Immediate run
* Suppliers are stuck with what they have on hand; no adjustment.
* Short run, long run
* The more time that passes, the more the firm is able to adjust to market conditions.
* Supply becomes more elastic over time.