chapter 1 - 4 exam Flashcards
(124 cards)
1
Q
Three core choices that confront every nation
A
- What to produce with our limited resources
- How to produce the goods and services we select
- For Whom goods and services are produced - that is, who should get them
2
Q
Scarcity
A
is the lack of enough resources to satisfy all desired uses of those resources.
- Scarcity of resources limits the amount of goods and services that can be produced
- This means that somebody’s wants will have to go unfulfilled
- Scarcity requires economic choices to be made
3
Q
Factors of Production
A
is resource inputs used to produce goods and services
The four factors of production are labor, land, capital, & entrepreneurship
4
Q
Labor
A
is the skills and abilities of all humans at work
5
Q
Capital
A
is the final goods produced for use in further production
- Capital is what money buys
- For example, at McDonald’s capital would be the grill or fryer
- Capital is what produces revenue
6
Q
Entrepreneurship
A
is the assembling of resources to produce new or improved products, and or technologies
7
Q
Economics
A
is the study of how best to allocate scare resources among competing uses
8
Q
When choosing to use resources to produce one thing we must …
A
give up producing something else with those resources.
9
Q
We allocate resources by
A
by price
- If a brand can’t sell a particular product they cut the price.
- They want people to buy it cheap
10
Q
Opportunity cost
A
is the most desired goods or services forgone to obtain something else
- Opportunity cost are associated with every decision.
11
Q
Production possibilities
A
- are the combinations of final goods and services that could be produced in a given time period with all available resources and technology
- The production Possibility model illustrates the economic concepts of scarcity, tradeoffs, opportunity cost
- For example, one factory can produce either trucks or tanks, or some of each with the limited resources available. To increase production of one, resources must be shifted away from the production of another
12
Q
The production Possibility model illustrates…
A
the economic concepts of scarcity, tradeoffs, opportunity cost
13
Q
Production possibility curve (ppc) example
A
- Scarcity is equal to a limit on output
- Trade-offs are equal to producing more and giving up the production of another
- Opportunity cost is equal to the number of resources given up to produce another
14
Q
Increasing opportunity cost
A
Each time we give up on resource, we get less of another back in production. This is because resources are specialized to produce one good better than another
15
Q
Economic Growth
A
is an increase in output and an expansion of production possibilities
- This is caused by increasing the available resources or by technology advancing
- It raises our standard of living, satisfies more wants and needs, and creates jobs
16
Q
What to produce
A
s the point we choose on the production possibilities curve that determines what mix of output gets produced
- Produce goods and services that customers want
17
Q
How to produce
A
is when someone must decide which production methods and technologies to use
- Profitably; produce goods and services while keeping production costs low
18
Q
For Whom to produce
A
there must be a mechanism to determine whose wants and needs will be satisfied and who must go without.
- Produce for those who are both willing and able to pay for it
- The poor can’t afford to pay for it so we have programs to help take care of the poor
- If the poor don’t have the money we provide for them
- It is morally and economically acceptable
19
Q
The Invisible hand
A
is the use of market prices and sales to signal desired outputs and resource allocations.
20
Q
The index of Economic Freedom categorizes nations by
A
the extent of their actual market reliance
- Market: dominated economies rank high
- Government: run economies rank low
21
Q
If the market does not produce the mix of goods that society desires,
A
market failure is said to occur.
This provides an opening for the government to step in
22
Q
If the government can move us closer to the mix society desires
A
the intervention is successful.
- However, the government can do the opposite, or impose such high costs that a government failure occurs.
23
Q
Positive analysis
A
focuses on “what is” and it based on facts
24
Q
Normative analysis
A
focuses on “what should be” and is based on opinions and judgements
25
Macroeconomics
is the study of aggregate economic behavior, of the economy as a whole
- The "big picture"
26
Microeconomics
is the study of individual behavior in the economy, of the components of the larger economy
What are the goals of individual economic actors?
27
Ceteris paribus
is the assumption of nothing else changing
28
A measure of an economy's size is
gross domestic product (also known as GDP) which is defined as the total market value of all final goods and services produced within a nation's borders in a given timer period.
- is all the goods and services produced
29
One measure of a country's standard of living
is per capital GDP
- To find you must calculate the GDP divided by the population
- An indicator of how much output the average person would get if all output were divided evenly among the population
30
If GDP grows faster than the population grows,
per capita GDP rises, and the standard of living rises
31
Economic Growth refers to
an increase in output or, on other words, an expansion of production possibilities
32
Regardless of how much output a nation produces
the mix of output always includes both goods and services.
33
How a country produces depends on
what resources inputs are available
34
Human capital
is the knowledge and skills possessed by the workforce
35
Physical capital
is the facilities, tools, equipment, and infrastructure available to the workforce
36
Richer countries tend to be capital-intensive, while
poorer countries tend to be labor intensive
37
Capital-intensive
- Capital is abundant and relatively low-cost
- Labor is costly
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Labor- intensive
- Capital is unavailable or very expensive
- Labor is cheap
39
Reasons why the U.S. continues to sustain a high level of productivity
- factor mobility
- technological advancement
- outsourcing and trade
40
Factor mobility
rapid reallocation of resources from declining industries to expanding industries in response to changing demand and technology
41
Technological advancement
finding new and better ways to produce products. When technology advances, an economy can produce more output with existing resources. Its production possibilities curve shifts outward.
42
Outsourcing and trade
U.S. workers have a comparative advantage in high-skill, capital-intensive jobs.
Workers in other countries have a comparative advantage in lower-skill, labor-intensive jobs.
By outsourcing routine tasks to foreign workers, U.S. workers are able to focus on higher-value jobs
43
In assessing how goods are produced and economies grow...
we must also take heed of the role of the government plays
44
Market-reliant economies
grow faster than government-dominated economies
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When the government owns the factors of production, imposes high taxes, or tightly regulates output,
there is little incentive to design new products or pursue new technology
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Allocating the products to the users can be done by
- The government
- The market mechanism
- A mixture of the two
47
In market distribution, the higher the income
the greater the ability to buy goods and services
48
Market Participants
try to obtain the maximum return from the scare resources they have
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Consumers
maximize utility (satisfaction) they get from available incomes
50
Business
maximize profits by selling goods that satisfy demand while keeping costs low
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Government
maximize general welfare of society
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We are driven to buy and sell goods and services because
most of us cannot produce everything we want to consume and we face time, talent, and resource constraints
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Product market
any place where finished goods and services (products) are bought and sold
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Factor market
any place where factors of production (e.g., land, labor, capital) are bought and sold
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Four Participants
- consumers
- business firms
- governments
- International participants
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Consumers: Supply factors of production (e.g. labor) to business firms in the factor market in exchange for
income and purchase goods and services in the product market
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Business firms Produce goods and services for the product market using the
factors of production they purchased in the factor market
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Governments: Acquire resources in the factor market and provide services to
consumers and firms
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International Participants: Supply imports and purchase exports in
the product market and buy and sell resources in the factor market
60
Every market transaction involves an
exchange of dollars for goods and services (in product markets) or resources (in factor markets).
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The two sides of each market transaction are called
supply and demand
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Supply:
the ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus.
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Demand
the ability and willingness to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus
64
The Law of Demand
is the quantity of a good demanded in a given time period increases as its price falls (and vice versa), ceteris paribus
- The inverse relationship between price (P) and quantity demanded (Qd)
- Results in a downward-sloping curve
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The determinants of market demand include
1. Tastes
2. Income
3. Expectations
4. Other goods:
a. Substitutes
b. Complements
5. Number of buyers
66
A demand behavior change
is shown by shifting the demand curve
- Increase in demand shifts the curve right
- Decrease in demand shifts the curve left
67
Demand increases (curve shifts right) when:
1. Taste for the good increases
2. Income Increases
3. Price of a Substitute rises
4. Price of a complement falls
5. Future prices are expected to rise
6. Number of buyers increases
68
Demand decreases (curve shift left) when
1. Taste for the good decreases
2. Income decreases
3. Price of a Substitute decreases
4. Price of a complement rises
5. Future prices are expected to decrease
6. Number of buyers decreases
69
Change in quantity demanded:
movement along a demand curve in response to a change in price
70
Change in demand
a shift of the demand curve due to a change in one or more of the determinants of demand, but NOT in response to a change in price
71
Each of us demand a good or service if we
are willing and able to pay for it
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The amount we buy depends on
its price
- If the price goes up, we buy less
- If the price goes down, we buy more
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Market demand
is the collective summation of all buyers' individual demands
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Law of Supply
the quantity of a good supplied in a given time period increases as its price increases, ceteris paribus, and vice versa
- Direct relationship between price (P) and quantity supplied (Qs)
-Results in an upward-sloping curve
75
The determinants of market supply
1. Technology
2. Factor Costs
3. Taxes and Subsidies
4. Expectations
5. Other goods
6. Number of Sellers
76
Supply increases (curve shifts right) when
1. New Technology lowers operating costs
2. Factor costs decrease
3. Taxes decrease or Subsidies increase
4. Future Prices are expected to Rise
5. Price of Alternative Good Fall
6. Number of Sellers Increases
77
Change in quantity supplied
movement along the supply curve due to a change in price
78
Change in Supply
a shift in the supply curve due to one or more changes in the determinants of supply, but NOT in response to change in price
79
The amount produced depends on
its price
- If the price goes up, more will be produced
- If the price goes down, less will be produced
80
Market Supply
is the collective summation of all Producers' individual supply
81
Equilibrium
is the one price and quantity combination that is compatible with the intentions of both buyers and sellers
- Equilibrium is located where the demand curve and supply curve intersect
- Equilibrium price and quantity reflect a compromise between buyer and sellers
- No other compromise yields a quantity demanded that's exactly equal to the quantity supplied
82
Markets reach equilibrium because
buyers act on their demand behavior (raise price, buy less, and vice versa) and sellers act on their supply behavior (raise price, supply more, and vice versa)
- No one is in charge!
- The market mechanism leads the market to equilibrium and signals the desired outcome of quantity at Pe
- Quantity Demanded (Qd) equals quantity supplied (Qs) at the equilibrium price (Pe)
83
Market Surplus
is the amount by which quantity supplied (Qs) exceeds quantity demanded (Qd) at a given price; excess supply
- Price is too high
- Qs > Qd , a surplus
- Buyer and seller behaviors kick in
- Price will fall to equilibrium price, Pe
84
Market Shortage
is the amount by which quantity demanded (Qd) exceeds quantity supplied (Qs) at a given price; excess demand
- Price is too low
- Qs < Qd, a shortage
- Buyer and seller behaviors kick in
- Price will rise to equilibrium price, Pe
85
The equilibrium price and quantity will be impacted
by changes in the determinants of supply or demand
- Change in buyers' behavior (determinants) shifts demand
- Change in sellers' behavior (determinants) shifts the supply
86
The market mechanism affects
WHAT, HOW, and FOR WHOM to produce
- WHAT? Markets determine which goods are desired and which are profitable
- HOW? Profit-seeking producers will strive to produce goods in the most efficient way
- FOR WHOM? To obtain a good, one must be both willing and able to purchase it
87
Price Controls
Governments may impose an arbitrary price on a market
- A maximum price is the price ceiling
- A minimum price is the price floor
The result is that the market cannot reach an equilibrium
88
Price Ceiling
Government Imposes a maximum price less the Pe
- This generates a shortage (Qd > Qs)
- The market mechanism cannot clear the market
- A permanent shortage exists
89
Price Floor
Government imposes a minimum price greater than Pe
- This generates a surplus: (Qs > Qd)
- The market mechanism cannot clear the market
- A permanent surplus exists
90
The market mechanism produces
goods and services and yields, jobs, wages, and distribution of income.
91
Optimal mix of output
the most desirable combination of output attainable using existing resources, technology, and social values
92
Specific sources of market failure are
- Public goods
- Externalities
- Market power
- Inequity
93
Private good
a good or service whose consumption by one person excludes consumption by others
94
Public goods
- They are goods and services whose consumption by one person does not exclude consumption by others
- National defense
95
The free-ride dilemma
the communal nature of public good may cause some consumers to try for a free ride
96
Free rider
an individual who reaps direct benefits from someone else's purchase (consumption) of a public good.
97
Externalities
are the second justification for government intervention
- External costs (or benefits) borne by a third party when a two-party (buyer and seller) transaction occurs
- The difference between the social and private costs (benefits) of a market activity
- When externalities are present, market prices are not a valid measure of a good's value to society
98
Negative externality
- Third parties are hurt (suffer a cost) because of a market transaction
- Too much is produced and sold at price P1 because society's cost are greater than market costs
- Government steps in to shift costs from society to the produce and the buyer, causing the supply curve to shift left
- Government action causes less to be produced and sold at a higher price P2
Example: Pollution
99
Positive externality
- Third parties benefit because of a market transaction
- Not enough is produced and sold at price P1 because society's benefits are greater than market benefits
- Government steps in and causes more to be produced by subsidizing production or purchases
Product is sold at price P3
100
Positive externality
- Society's benefit > market benefit
- The market underproduces
- The government subsidizes to shift demand right
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Negative externality
- Society's cost > market cost
- The market overproduces
- The government restricts production to shift the supply left
102
Market power
is the third justification for Government intervention
- The ability of a firm to manipulate the price of a good in the market
103
Inequity
is the fourth justification for Government intervention
- Reduces income inequality through income redistribution
- Provides a minimum amount of merit goods
104
A merit good
is a good society believes everyone is entitled to some minimal quantity of
105
Government role
a redistribute income using a progressive income tax and provide transfer payments
106
The government uses macroeconomic policies in an attempt to...
meet three goals
1. Foster economic growth by moving the economy out of inefficiency and onto the PPC by reducing unemployment
2. Increase production capabilities by shifting PPC outward
3. Maintain a stable price level
107
Each level of government (federal, state, and local) creates
a budget of fund inflows and outflows
108
Inflows (sources of funds)
- Taxes (and fees/ user charges)
- Borrowing
109
Outflows (uses of funds)
- Purchase of goods and services
- Payments for resources used
- Transfer payments
110
Federal Growth
- Direct government expenditures grew a bit more slowly than private sector expenditures from 1950 to 2008
- Most of the growth in federal spending has been from increased transfer payments, which now account for over half of the spending
111
Tax revenue pays
for governement spending
112
Taxation
- There is a change in the output mix as more government spending absorbs factors of production that could be used to produce consumer goods
- The opportunity cost of taxation is measured by the private-sector output sacrificed when government employs scarce factors of production
- The primary function of taxes is to transfer command over resources (purchasing power) from the private sector to the public sector
113
Income taxes are
the largest single source of governement revenue
114
Social security tax
is a regressive tax system
- As income rises, the tax rate falls
- Compared to those with lower incomes, those with higher incomes
- Pay more taxes
- But pay a smaller fraction of their income in taxes
115
Corporate taxes
- A progressive tax system for the corporation
- Is usually passed on to the customer at higher prices
116
Excise taxes
- Imposed on a specific good or service
- Some are imposed to discourage the production and consumption of these goods
117
Property tax
- Major source of local taxes
- Is a regressive tax, since poorer people devote a larger portion of their income to housing costs
118
Sales tax
- Another major source of local taxes
- Is also a regressive tax, since poorer people tend to spend all of their income while richer people do not
119
Government failure
- The goal of government intervention is to move the mix of output closer to society's desired mix
- Government failure: occurs when government intervention fails to improve economic outcomes and may worsen outcomes
120
Public perception
is that the government isn't producing as many services as it could with the resources at its disposal
- This inefficiency pushes the economy inside the PPC
121
Additional public-sector activity
is desirable only if the benefits from that activity exceed its opportunity costs
- How do we identify the benefits?
- How do we enumerate the costs?
Whose values should be used to do this?
122
Public choice
a theory of public-sector behavior emphasizing rational self-interest of decision-makers and voters
- Government decision-makers are supposed to serve the people
- Many, however, set their own agenda. Some give higher priority to personal advancement than public welfare
- Bureaucrats are just as "selfish" (utility-maximizing) as everyone else
123
Private-sector
- Benefits and costs usually accrue to the same person
Makes it easy to compare the two and make a decision
124
Government
- Benefits and costs usually accrue to different groups
- Makes it more difficult for the decision maker
- Politics enter into the decision
- The decision maker may have no stake in the outcome
