CH 1+2+3

Question 1

economic interaction

Answer 1

how my choices affect other’s choices and vice versa

Question 2

The 4 Principles that underlie individual choice: core of economics

Answer 2

1. people must make choices because resources are scarce
2. opportunity cost of an item
3. “How much” decisions require trade-offs at the margin
4. people respond to incentives

Question 3

resource

Answer 3

anything that can be used to produce somthing else

Question 4

scarce

Answer 4

not enough of resource

Question 5

overal choice

Answer 5

sum of individual decisions

Question 6

People must make choices because resources are scarce (explanation)

Answer 6

societies as a whole needs to make choices when resources are scarce
Example:
- what purchase has priotity–> limited income
- buy at more expensive local store because it’s closer by–> limited time

Question 7

opportunity cost

Answer 7

what you haveto give up in order to get it

Question 8

trade-off

Answer 8

comparison of costs and benefits

Question 9

marginal decisions

Answer 9

comparing the costs and benefits of doing a little more of an activity vs doing a bit less

Question 10

incentives

Answer 10

anything that offers rewards to people to change their behaviour

Question 11

4 principles underlying economics of interaction of individual choices:

Answer 11

1. there are gains from trade
2. markets move towards equilibrium
3. resources should be used efficiently to achieve society’s goals
4. markets usually lead to efficiency, but if not: government intervention can improve society’s welfare

Question 12

There are gains from trade (explanation)

Answer 12

people get more of what they want if they’re selfsufficient–> arises because of specialisation–> therefore more products can be produced than if in autarky

Question 13

markets move towards equilibrium (explanation)

Answer 13

markets move to equilibrium because people tend to respond to incentives–> after using up the incentives they are in the same boat as the rest of the people–> equilirbium usually reached because changes of prices–> rises+fall so no opportunities for individual to be better off than others–> EVERY TIME THERE’S A CHANGE, MARKET MOVES TO EQUILIBRIUM

Question 14

Resources should be used efficiently to achieve society’s goals (explanation)

Answer 14

resources are used in a way that has fully exploited all opportunities to make everyone better off, so not some people worse–> not rearanging resources so some better off, other wise inefficient

Problem: efficiency not always in line with goal society–> for example if they want equity–> equity promoting policies at the cost of efficiency and vice versa

Question 15

equity

Answer 15

everyone gets a fair shae, what’s fair is subjective so not a well defined concept

Question 16

markets usually lead to efficiency, but if not: government intervention can improve society’s welfare (explanation)

Answer 16

most of time invisible hand does the trick, incentives built into market economy to ensure resources are usually put to good use because in market economy people usually take opportunities for mutual gain (gains from trade)

BUT in case fo market failure: individual pursuit of self interest found in markets makes society worse off (because no incentives) –> market outcom einefficient–> in that case government can intervene with for example providing incentives which changes how resources are used

Question 17

Principles of Economy-Wide interactions:

Answer 17

1. one person’s spending is another person’s income
2. overall spending sometimes gets out of line with economy’s productive capacity; when it does governmengt policiy can change spending
3. increase in economy’s potential leads to economic growth pver time

Question 18

One person’s spending is another person’s income (explanation)

Answer 18

if spend less, other their incomes will fall and vice versa–> chain reaction of changes in spending behaviour tends to have repercussions that spread economy wide
IMPORTANT ROLE IN UNDERSTANDING CYCLE OF RECESSIONS&RECOVERIES!!!!

Question 19

overall spending sometimes gets out of line with economy’s productive capacity; when it does government policy can change spending (explanation)

Answer 19

• if spending falls short: causes unemployment which results in economic slump
• if spending too high: causes inflation, occurs when demand is higher than supply–> demand will still buy it even if prices rise

When slump/inflation occurs government policies can help to addres the inbalances: think linke taxes, control of amount of money in circulation etc

Question 20

increase in economy’s potential lead to economic growth over time (explanation)

Answer 20

Technological advancement leads to the rising of economic potential –> increases in economy’s potential leads to economic growth in the long term, while short term creating winners and losers

Question 21

economic growth

Answer 21

an increase in the amount of goods+services produced per head of the population over a period of time
IN SHORT: the increase of living standards over time

Question 22

economy’s potential

Answer 22

total amount of goods/services economy can produce
–> can rise due to technological advancememt

Question 23

model

Answer 23

a simplified respresentation of an economic reality–> allows us to understand the variety of economic issues

Question 24

other things equal assumption/Ceteris paribus

Answer 24

all other relevant factors remain unchanged

Question 25

Production Possibility Frontier (PPF)

Answer 25

illustrates the tarde-offs facing an economy that produces only two goods--> shows the maximum quantity of one good that can be produced for ant given quantity produced of the other product - resources are scarce--> trade offs--> on eproduct takes away resources of other products that also need it - production feasible or non feasible - illustrates the general economic concept of efficiency+inefficiency - opportunity cost - economic growth

Question 26

efficient in production (in PPF)

Answer 26

economy as a whole couldn't produce more of product without producing less of something else

Question 27

efficiency in allocation (PPF)

Answer 27

economy allocates its resources so consumers are as well off as possible--> production is aligned with consumers preferences

Question 28

opportunity cost (PPF)

Answer 28

if producing more of one good (a) other good (b) is less produced--> thus good (a) has an opportunity cost of good (b) - If PPF straighht slope--> means constant slope--> constant opportunity cost - if bowed out curve insted straightline--> increasing opportunity cost

Question 29

economic growth (PPF)

Answer 29

when economic growth occurs--> more can be produced of everything--> so outward shift of the frontier

Question 30

2 sources of economic growth

Answer 30

- increase in economy's factors of production - progress in technology

Question 31

factors of production

Answer 31

resources used to produce goods+services--> refers to resources that are NOT used up in production: land, labour, physical capital (machines, buildings), hunman capital (education, skills of labour force--> enhance productivity)

Question 32

comparative advantage (definition)

Answer 32

country/person has comparative advantage in producing good/service if its opportunity cost of producing is lower that the other country's/person's cost--> voluntarily willing to trade if price of product each country obtains in the trade is less than own opportunity cost if would produce the product themselves domestically NOTE: everyone has a comparitive advantage+disadvantage in something!!!!

Question 33

absolute advantage (definition)

Answer 33

country/individual can produce more output per worker for certain production than other countries/individuals NOTE: what matter in trade is opportunity cost--> if other country's opportunity cost is lower even though you have an absolute advantage, still beneficial to trade with them because they have the comparative advantage!!!

Question 34

The Circular flow diagram

Answer 34

diagram that represents the transactions in an economy by two kinds of flow around in a circle: 1. flows of physical things like goods/services/labour/raw material in one direction 2. flow of money to pay for these physical things in the opposite direction

Question 35

income distribution

Answer 35

how total income that is created in an economy is divided among less/high skilled workers, aowners of capital/land etc

Question 36

households

Answer 36

individual, family etc

Question 37

firm

Answer 37

organisation that produces goods/services for sale and that employs members out of households

Question 38

markets for goods+services

Answer 38

where househol buys goods/services they want from firms

Question 39

Criticism CFD and its ignoring of real world complications with it's simplicity:

Answer 39

- distinctions between firms+households not always clear cut--> family run business--> is it a firm or a household? - many sales firms make goes to other firms--> intermediate goods--> more complete would be to include flows of goods, services and money within the business sector - doesn't show government--> does divert lot of moeny out of CFD--> think of taxes+government spending--> thus taking money in+out of the flow

Question 40

positive economics

Answer 40

economic analysis that tries to answer questions about the way world actually works--> has definite right and wrong answers --> models play a big role

Question 41

normative economics

Answer 41

makes prescriptions about how the world should work --> economists engage+give policy advice but may be no "right" answer --> economic analysis can be used to show objectively that some policies clearly better than others

Question 42

competitive market

Answer 42

market in which many buyers+sellers of same good/service Key feature: no individuals action can influence price good/service is sold at

Question 43

supply&demand model (function)

Answer 43

model that shows how a competitive market behaves

Question 44

5 key elemenyts supply+demand model:

Answer 44

1. demand curve 2. supply curve 3. the set of factors that cause the demand curve+supply curve to shift 4. market equilibrium--> includes equilibrium price+quantity 5. way market equilibrium changes when supply/demand curve shifts

Question 45

demand curve

Answer 45

shows relationship between quantity demanded+price x-axis: shows amount of quantity y-axis: shows price

Question 46

quantity demanded

Answer 46

actual amount good/service consumers willing to buy at specific price: - falls when price rises - rises when price falls

Question 47

law of demand

Answer 47

as price rises--> quantity of goods demanded falls as price falls--> rise in quantity demanded --> therefore demand curve downwards sloping

Question 48

shift of demand curve

Answer 48

change in quantity demanded at any given price--> represented by shift of original demand curve to a new position NOTE: not the same as movement along!!!!

Question 49

movement along the demand curve

Answer 49

moving down from one point to another point on the demand curve--> results of fall in price of good+rise of quantity at that price NOTE: not the same as shift!!!

Question 50

rightward shift of demand curve when:

Answer 50

increase in demand--> at any given price, consumers demand larger quantity of good/service than before

Question 51

leftward shift of the demand curve when:

Answer 51

decrease in demand--> at any given price, consumer demands less quantity of good/service than before

Question 52

changes in demand

Answer 52

shift of demand curve

Question 53

changes in Quantity of demand

Answer 53

movement along demand curve

Question 54

5 factors that shift demand curve for a good/service

Answer 54

1. changes in prices of related goods/services 2. changes in income 3. chnages in taste 4. changes in expectations 5. changes number of consumers

Question 55

substitutes

Answer 55

if rise in price of one good leads to increased demand other good --> substitutes are alternative goods that serve in a similar function

Question 56

complements

Answer 56

if a rise of price of one good leads to decrease in demand other good --> because consumers like to consume good and its complement together, so if one falls in demand, so does the other

Question 57

normal goods

Answer 57

demand for these goods increases when consumer income rises

Question 58

inferior goods

Answer 58

goods which demand decreases when income rises--> usually considered less desirable than more expensive alternatives--> example: bus vs taxi

Question 59

individual demand curve

Answer 59

shows relationship between quantity demanded+price for individual customer (market) demand curve

Question 60

quantity supplied

Answer 60

amount of good/service people willing to sell at a specific price

Question 61

supply curve

Answer 61

shows relationship between quantity supplied and price--> higher price leads to higher quantity supplied--> naturally slopes upward

Question 62

shift of the supply curve

Answer 62

change in quantity supplied good/service at any given price

Question 63

rightward shift supply cirve

Answer 63

increase in supply

Question 64

leftward shift supply curve

Answer 64

decrease in supply

Question 65

5 factors of shift supply curve

Answer 65

1. changes in input prices 2. changes in prices of related goods/services 3. changes in technology 4. changes in expectations 5. changes in number of producers

Question 66

input

Answer 66

any good/service that is used to produce other good/service

Question 67

individual supply curve

Answer 67

shows relationship between quantity supplied and price for individual producer

Question 68

competitive market is in equilibiurm when:

Answer 68

price has moved to level where quantity demanded=quantity supplied

Question 69

equilibrium price

Answer 69

price that matches quantity supplied+quantity demanded

Question 70

market-clearing price

Answer 70

price that clears the market by ensuring every buyer willing to pay that price, finds a seller willing to sell at that price and vice versa

Question 71

equilibrium quantity

Answer 71

quantity bought+sold at equilibrium price

Question 72

3 reasons sure market will arrive at equilibrium price:

Answer 72

1. all sales and purchases in market take place at same price--> aka the market price 2. market price fall if its above the quilibrium price 3. the market price rises if below equilibirum price

Question 73

surplus

Answer 73

when quantity supplied exceeds quantity demanded--> happens when price is above equilibrium level

Question 74

shortage

Answer 74

when quantity demanded exceeds quantity supplied--> occurs when price is below equilibiurm level

Question 75

when demand good/service increase (right shift) the equilibrium...

Answer 75

equilibrium price +quantity of good/service both rise

Question 76

when demand for good/service decreases (left shift) the equilibrium...

Answer 76

the equilibrium price+quantity of good/service both fall

Question 77

when supply of good/service increases (right shift) equilibrium...

Answer 77

equilibrium price of good falls and equilibrium quantity good rises

Question 78

when supply good/service decreases (shift left) the equilibrium...

Answer 78

equilibrium price of good rises and equilibrium quantity falls

Question 79

When demand decreases+supply increases (2 shift in opposite direction)

Answer 79

equilibrium price falls but change in equilibrium quantity is ambigious (not clearly decided)

Question 80

When demand increases+supply decreases (2 shift in opposite direction)

Answer 80

equilibrium price rises but change in equilibrium quantity is ambigious (not clearly decided)

Question 81

Commparitive advantage model (illustrates...)

Answer 81

- there are gains from trade - each country has a comparative advantage in producing something, and everyone has a comparative disadvantage in something

Question 82

increase/decrease in demand means

Answer 82

shift of demand curve to left or right!!!

Question 83

why does the supply slope upwards?

Answer 83

because the higher the price, the higher the quantity supplied is

Question 84

why does the demand curve slope downwards?

Answer 84

because the higher the price, the less demanded quantity

Question 85

changes in prices related goods/services supply (explanation)

Answer 85

- When goods complements of production: higher price of one good, more willing to supply other good at any given price - when goods substitutes of production: if one price falls, more willing to supply other product at any price given

Question 86

which curve shifted if both quantity sold+price shift in the same direction?

Answer 86

the demand curve

Question 87

which curve shifted if quantity+price move opposite directions?

Answer 87

supply