ECONOMICS FLASH CARDS

Chapter 1: What is Economics

  • Economics: the study of how societies allocate scarce resources.

  • Command Economy:

    • Economic decisions are made by government officials.

    • Examples: China before 1980, USSR before 1991.

  • Market Economy:

    • Production and consumption are determined by decentralized decisions made by individuals.

    • Individuals produce for profit and consume as they choose.

    • Invisible Hand: Concept by Adam Smith illustrating self-interest benefiting society as a whole.

  • Microeconomics vs. Macroeconomics:

    • Microeconomics: Analysis of individual decisions.

    • Macroeconomics: Concerned with economy-wide phenomena.

  • Market Failure: Occurs when individual self-interest leads to worse outcomes for society, e.g., pollution, congestion.

  • Recession: Downturn in the economy.

  • Economic Growth: Capacity of the economy to produce goods/services.

Principles Underlying Economic Behavior

Individual Choice Principles

  1. Scarcity of Resources:

    • Choices must be made due to limited resources (land, labor, capital).

  2. Opportunity Cost:

    • The cost of something is what you forego to obtain it.

  3. Marginal Decisions:

    • Decisions made at the margin (e.g., how much more to produce).

  4. Response to Incentives:

    • Individuals respond to incentives that better their situation.

Interaction of Individual Choices

  • Gains from Trade: Benefits received by individuals engaging in trade.

  • Market Equilibrium: Occurs when no one can improve their situation by changing decisions.

  • Efficiency: Using resources to improve overall welfare without disadvantaging others.

  • Government Intervention: Can help improve market efficiency where necessary.

Economy-Wide Interactions

  • Spending and Income: Overall spending impacts total income in the economy.

  • Inflation: High levels of spending beyond productive capability leads to price increases.

  • Macroeconomic Policy Tools: Taxes and money control to adjust spending levels.

Chapter 2: Economic Models

  • Models: Simplified representations to understand real situations.

  • Production Possibility Frontier: Shows trade-offs and opportunity costs in production choices.

  • Comparative Advantage: Trade benefits arise from differences in opportunity costs between countries.

  • Circular-Flow Diagram: Illustrates flow of money, goods, and services in an economy.

  • Economic Growth: Driven by increase in factors of production and technology.

  • Positive vs. Normative Economics: Positive describes how the economy works; normative prescribes how it should work.

Chapter 3: Introduction to Macroeconomics

  • Market Definition: A venue where producers and consumers exchange goods/services.

  • Competitive Market: Many buyers/sellers can’t influence prices.

  • Demand & Supply Curves:

    • Demand: Higher prices lead to lower demand.

    • Supply: Price determines actual amount available for sale.

    • Equilibrium Price: Where demand meets supply, determining quantity transacted.

Chapter 4: Price Controls and Quotas

  • Price Controls: Government regulations on market prices.

    • Price Ceiling: Max price, can lead to shortages and inefficiencies.

    • Price Floor: Min price, can lead to persistent surpluses and inefficiencies.

  • Quantity Control/Quota: Limits on the number of goods sold, can lead to inefficiencies, and illegal activity.

Chapter 5: International Trade

  • Trade Definitions:

    • Imports: Goods/services purchased from abroad.

    • Exports: Goods/services sold abroad.

  • Comparative Advantage: A nation’s ability to produce goods at a lower opportunity cost.

    • Differences in climate and factor endowment lead to specialization and trade.

  • Effects of Trade: Expands industries, alters demand for factors, and leads to fluctuations in domestic industries.

Chapter 6: Understanding Macroeconomic Policy

  • Macroeconomic Objectives: Focus on achieving price stability and low unemployment.

  • Fiscal Policy: Government spending/taxation influence on the economy.

  • Monetary Policy: Control of money supply to influence economic activity.

  • Economic Fluctuations: Demand shocks or supply shocks affecting overall stability.

Chapter 7: Measuring Economic Activity

  • National Income Accounts: Track financial flows among households, firms, and government.

  • Gross Domestic Product (GDP): Total value of final goods/services produced.

    • Real GDP vs Nominal GDP: Adjusts for price level changes.

  • GDP per Capita: GDP/population, indicates average economic wellbeing.

Chapter 8: Unemployment and Inflation

  • Definitions:

    • Employment: Individuals working.

    • Unemployment: Individuals searching but not currently employed.

    • Labor Force: Includes both employed and unemployed individuals.

  • Types of Unemployment: Frictional, structural, and cyclical unemployment.

  • Inflation and Unemployment Relationship: Trade-off exists; can’t effectively target both simultaneously.

Chapter 9: Long-Run Economic Growth

  • Factors Influencing Growth:

    • Labor productivity, physical capital, human capital, and technological progress.

  • Sustainable Growth: Growth accommodating environmental preservation and resource limitations.

  • Globalization: Economic linkages increasing among nations; requires cooperation for growth sustainability.