Basic economic concepts Flashcards
Two fundamental facts that define the economizing problem are that Society’s material wants are _________, while the means for producing these wants (economic resources) are scarce.
unlimited
Explanation
The problem lies in the fact that economic resources (land, capital, labor, enterprise) are limited or scarce and therefore society will not be able to produce and consume all the goods and services it wants. Economics, then, is the science of efficiency; concerned with allocating these scarce resources so as to achieve maximum fulfillment of our material wants.
When all available resources are being used, economists call this full __________.
employment
Explanation
Full employment means that all workers who are capable of working have the opportunity to do so i.e. no worker is involuntarily out of work. It also means that all capital equipment is in productive service and that all arable land is being used.
When all available resources are making the most valuable contributions to output it is called full __________.
production
Explanation
For full production to be achieved, resources must be allocated and used in the best possible way. If we fail to achieve full production then our resources are underemployed.
When resources are dedicated to the goods society wants most it is called _______ efficiency.
allocative
Explanation
When determining how to employ society’s resources we need to consider what it is that society wants and allocate the resources accordingly. For example it is more efficient to allocate resources to the production of compact disks than 8-track tapes. Likewise, we want to produce the goods that are most sought after (have the most utility) at the lowest possible price.
_________ efficiency is achieved when the least costly method of production is used to produce goods and services.
Productive
Explanation
We do not want farmers to use manual harvesting methods (scythes or hand picking) when sophisticated harvesting equipment will produce results at a lower cost.
Full employment and full production are both necessary to achieve ________ efficiency.
economic
Explanation
However, because resources are scarce, a full employment, full production economy cannot have an unlimited output of goods and services. Therefore, choices must be made regarding those goods and services that are produced and those that are not.
The amount of other products that must be forgone or sacrificed to obtain some amount (an additional unit) of any given product is called the ___________ cost of that good.
opportunity
Explanation
If we suppose you have a budget of $10 for party decorations for your son’s birthday party and you can buy balloons or streamers or a combination of both, the following table represents your consumption possibilities:
A ________ sloped line reflects the notion of opportunity cost graphically.
downward
Explanation
The line in this graph represents the different possibilities for spending your money. As you can see, as you buy more of one, you have to sacrifice some of the other. For example, you can buy 5 balloons, and no streamers, or 10 streamers and no balloons, or any combination in between.
A graph that depicts the boundary between those production levels that can be attained and those that cannot is called the production _____________ curve.
possibilities
Explanation
A) Each point on the production possibilities curve (or frontier) represents some maximum output of any two products. Society must choose the product mix it most desires: more computers mean less hamburgers and vice versa. Thus the production possibilities curve illustrates the problem of choice for a society with scarce/limited resources.
B) The production possibilities curve operates under 4 assumptions: (1) the economy is fully efficient meaning that it is operating at full production and full employment; (2) Resources are fixed; (3) Technology is fixed; and (4) there are only two products. These assumptions are necessary for economists to illustrate the opportunity cost of producing one product over another.
Any point on the production possibilities curve represents a ________ output of two products that is both attainable and efficient.
maximum
Explanation
At all of the points (A through E), society’s resources are being used optimally to produce the given levels of computers and hamburgers. We cannot say which point on the curve is “best” though, because that is a very subjective or normative determination. The type and quantity of goods produced is based on what society values at the time and is highly variable.
A point lying outside the production possibilities curve represents a production level that is __________.
unattainable
Explanation
Given that two of the assumptions of the Production Possibilities Curve are that resources and technology are fixed, it is impossible to produce any combination of product that lies beyond the boundary of the curve i.e. society could not produce 3 (hundred thousand) hamburgers and 7(thousand) computers (point W) even though that would be superior to points on the curve. There simply are not enough available resources to achieve this.
A point lying inside the production possibilities curve represents a level of production that is attainable but ___________.
inefficient
Explanation
Society could choose to produce 2 (hundred thousand) hamburgers and 4 (thousand) computers but that would mean that some of its resources were sitting idle because it actually has the capacity to produce 7 (thousand) computers. This is not an efficient use of resources and thus is not a desirable level of output.
The shape of the production possibilities curve is _______, and this reflects the notion of increasing opportunity costs.
concave
Explanation
A) The cost to produce the first 100,000 hamburgers is 1000 computers (move from point A to Point B)
B) The cost to produce the next 100,000 hamburgers is 2000 computers (move from point B to point C)
C) The cost to produce the next 100,000 hamburgers is 3000 computers (move from point C to point D)
D) The cost to produce the next 100,000 hamburgers is 4000 computers (move from point D to point E)
As we move down the curve, the cost of producing one more unit of product X results in a larger decrease in production of product Y. The reason this occurs is that not all resources are equally well adaptable to producing hamburgers and computers.
As society tries to increase hamburger production it becomes necessary for it to use some of its computer resources to do so. The resources used for making computers are not easily adapted to making hamburgers and thus as more hamburgers are produced the more resources intended for computer making need to be modified. Almost every productive resource is better at producing some things than others. Some machines are good at digging holes and others are better at moving dirt, some land is good for farming and some is best for mining. This lack of perfect flexibility or interchangeability is what defines the law of increasing opportunity costs.
In an economy of underemployment or underproduction the economy will be producing ___ than any point on the production possibilities curve.
less
Explanation
The economy is said to be inefficient and efforts need to be made to move toward the production possibilities curve as illustrated by the arrows.
If we drop the assumptions of fixed resources and fixed technology, then the production possibilities curve can shift. A shift to the _____ represents economic growth.
right
Explanation
When the production possibilities curve shifts to the right that means that any point along its curve is superior to the original curve.
Economic growth implies a greater total output; society found more resources, or improved technology to exploit the resources more efficiently (or any combination of the two) thus allowing more units of either product, or both, to be produced.
If the production possibilities curve shifts to the left that means output of one or both of the products has declined.
________ growth is determined by the amount of capital goods a society produces.
Economic
Explanation
1) Capital goods such as education and research enable society to improve the quality of resources and allow us to make technological advances. These advances are what foster economic growth, society finds new and better ways to produce things and the production possibilities curve shifts to the right.
2) It is wise, then, for society to forego some consumer goods (present goods) in the short-run and invest resources in capital improvements allowing long-term advances.
3) In the first graph, society favored consumer goods (present goods) and did not invest in technology that would improve production in the future. The second graph shows a society that favored Capital Goods (Future Goods) and the Production Possibilities Curve has shift much further to the right meaning increased overall economic output.
The market that is characterized by public ownership of resources and centralized economic planning is called Communism, or a _________ Economy.
Command
Explanation
This is the exact opposite system of capitalism and in it government determines what is produced, what quantities are produced and determines the price of goods and services. Business firms are government owned and the division of output between capital and consumer goods is determined according to long-term state planning. Individual consumer desires have little influence on economic activity.
Most economic systems are considered _______, or somewhere in between these two extremes.
mixed
Explanation
1) The United States has a mixed economy wherein government plays an active role in the economy promoting economic growth and stability, supplying resources that might be under produced or not produced at all in a pure market system (education, defense, healthcare), modifying the distribution of income, etc
2) China, on the other hand, has a mostly command economy however, price is a somewhat market determined and there are some forms of private ownership.
Most of the Eastern European nations are moving their command economies more toward market-oriented systems.
Many of the developing or undeveloped countries of the world have a ___________ economy.
traditional
Explanation
In a traditional economy, custom and culture define how resources are produced and exchanged and how income is distributed. Technology is often constrained when it threatens to clash with tradition. Religious and cultural values dictate economic development and policy making.
If all other things remain the same, the higher the price of a good, the lower is the quantity demanded of that good. This is called the Law of ______.
Demand
Explanation
As the price goes up, the demand for the product goes down. Demand is defined as a schedule that shows the various amounts of a product that consumers are willing and able to purchase at each specific price during some specified time period while holding all other things constant. The following graph is a typical demand curve:
1) When tapes are priced at $5 (Point e) the demand is 2 million per week but when the tapes drop to $2 (Point b) the demand increases to six million per week. When the price of a good changes, there is a change in the quantity demanded, which is shown by a movement along the demand curve (points a through e).
The __________ effect suggests that a lower price provides incentive to substitute a cheaper good for similar goods that are now more expensive.
substitude
Explanation
To illustrate: At a lower price, bananas are more attractive than other fruits like grapes and strawberries. This then is incentive for consumers to purchase bananas instead of the higher priced fruit. This substitution then creates an increased demand for bananas.
The ______ effect indicates that at a lower price you can afford more of the good without giving up other goods.
income
Explanation
If we take our fruit example again, when the price of bananas lowers we can afford to purchase more bananas and not have to give up any other fruit in return. Thus the purchasing power of consumer income increases making them more willing to buy more of the lower priced good.
When an influence other than price changes the demand for a good, there is a change in demand represented by a _____ of the demand curve.
shift
Explanation
The chart shows the distinction between a change in the quantity demanded and a change in demand. When the demand curve shifts it means that the demand increases even though the price has stayed the same. Why does demand shift?
1) One reason for this to happen is a change in consumer tastes. Maybe a very effective advertising campaign just came out and more consumers want to buy the product at any given price.
2) An increase in the number of buyers in the market will also increase demand at each price - the number of baby-boomers graduating in the 1970’s led to an increased housing demand at all house price levels.
3) If consumer income rises the demand curve for most commodities will shift. With more income consumers can buy more steak, more televisions, more cars, etc.
A change in the price of a related good will either increase or decrease demand of the product under consideration. If the price of Coke goes up we buy Pepsi instead these are substitute goods when the price of one goes up the demand for the other goes up and vice versa. When two goods complement one another, golf balls and gold clubs for instance, when the price of golf clubs goes up, less consumers buy clubs, which means less people are golfing and thus the demand for gold balls goes down. The increase in price of one good results in the decreased demand for another good.
The Law of ______ states that as price rises, the corresponding quantity supplied also rises and likewise when the price falls, the quantity supplied decreases.
Supply
Explanation
As the price goes up, the supplier will make more product available in hopes of generating more revenue. For example, if the price of basketball shoes begins to rise, a shoe manufacturer will make more basketball shoes and may decrease men’s dress shoes. The following graph is a typical supply curve:
1) When tapes are priced at $5 (Point e) the supply is 6 million per week but when the tapes drop to $2 (Point b) the demand falls to three million per week. When the price of good changes, there is a change in the quantity supplied, which is shown by a movement along the demand curve (points a through e).
When an influence other than price changes the supply of a good, there is a change in supply represented by a shift of the _____ curve.
supply
Explanation
The chart shows the distinction between a change in the quantity supplied and a change in supply. When the supply curve shifts it means that the supply increases even though the price has stayed the same. Why does supply shift?
1) One reason for this to happen is a change in technology. A technological improvement results in less resources (human or material) needed to produce and the cost of production goes down so the producer can supply more of the units without having to increase costs.
2) A change in resource prices will closely affect the supply of a product. As it becomes less expensive to produce a product the supply will increase, and if resource prices increase the producer will not be able to supply as much as before.
3) Taxes and subsidies will also affect the cost of production. Increased taxes will increase cost and increased subsidies will decrease costs and vice versa. Again, the more it costs to produce a good the less quantity will be available and the supply curve will shift to the left.
4) A change in the price of other goods can increase or decrease the supply of a given good. If the price of minivans suddenly drops then automobile manufacturers will increase the supply of other types of cars or trucks. Similarly, if the price of cargo pants goes up it is likely clothing manufacturers will supply less jeans.
5) The number of sellers is the last factor that can cause supply to shift. As more firms enter the market the supply will increase and as firms exit the market supply will decrease.
The point at which the quantity demanded equals the quantity supplied is the ________ price.
equilibrium
Explanation
Price is the regulator of quantity. The higher the price, the greater the quantity supplied but the lower the quantity demanded so at some point the quantity supplied equals the quantity demanded. This point is the intersection of the demand curve and the supply curve.
At any price _____ the equilibrium price there will be a surplus of product.
above
Explanation
On the other hand, at any point below the equilibrium price there will be a shortage.
1) At a price of $2, consumers demand 6 million tapes yet producers will only supply 3 million thus there is a shortage of 3 million tapes. Competition among buyers for the tapes will bid up the price causing producers to supply more tapes.
2) At the increased price of $4 per tape producers will supply 5 million tapes but consumers are not willing to pay that much and thus demand for the tapes drops to 3 million.
3) This situation creates a surplus of tapes in the market and the producers must lower prices in order to get rid of the excess inventory. The only price point where supply equals demand is the equilibrium price of three dollars. The demand curve shows the most that buyers are willing to pay and the supply curve shows the least that sellers are willing to accept. Equilibrium is the best deal available for both buyers and sellers.
