Economic Way of Thinking. Flashcards
(52 cards)
1
Q
Wages
A
Largest source of income in any economy.
2
Q
Underproduction
A
Where MB exceeds MC
3
Q
Two Flows in a Circular Model
A
- Money Flows (Wages, rent, interest profit)
Input (Factors of Production) and Output flows.
4
Q
Two Economic Agents (Circular Flow)
A
Households and Biz
5
Q
Tradeoffs
A
- DVDs vs. Cell phones (0,15) to (5,0)
- An exchange. Give up one thing to get something else.
Reduce DVD production, to increase cell phones.
6
Q
Scarcity and Choice
A
- Resources are limited (scarce)
- Human wants exceed the resources available to satisfy them.
- Choices must be made:
Make the best choice from the available - Choice is a tradeoff (e.g. products that you want to buy, versus what you want)
- No free lunch. Everything comes with cost.
7
Q
Reward
A
- Wash the car, get to drive the car.
2. School: Gov?t provides grants/loans
8
Q
Revenue
A
Have to pay for the consumption.
9
Q
Resources (Circular Flow)
A
In a circular flow, it is resource market to biz
10
Q
Profit
A
Total revenue minus Total Cost
11
Q
Production Possibilities Frontier / PPC Definition
A
- PPF shows the combinations of goods and services (in the world) that can be produced given the available factors of production and the state of technology.
- PPF is a valuable tool for illustrating the effects of scarcity and its consequences. (get something, give up something)
- Tradeoffs, Production, Combinations.
- A graph representing production tradeoffs of an economy given fixed resources.
- The graph shows the various combinations of amounts of two commodities that an economy can produce (e.g., number of guns vs kilos of butter) using a fixed amount of each of the factors of production.
- Graphically bounding the production set for fixed input quantities, the PPF curve shows the maximum possible production level of one commodity for any given production level of the other, given the existing state of technology.
- By doing so, it defines productive efficiency in the context of that production set: a point on the frontier indicates efficient use of the available inputs, while a point beneath the curve indicates inefficiency.
- A period of time is specified as well as the production technologies and amounts of inputs available.
The commodities compared can either be goods or services.
12
Q
Production Inefficiency (PPF Curve)
A
- More of either good can be produced without forgoing the other good.
- Move Pt. H where DVD (Product A) is not a tradeoff (free lunch)
13
Q
Production Efficiency (PPF Curve)
A
- Inside the PPF, where it is not the equilibrium (e.g. Point C)
Where you?d sacrifice one product for the other product.
14
Q
Presentville vs. Futureville
A
- Capital vs. Consumption (Any country will produce these)
- Same PPF for both.
- Each economy will choose a different combo
- Presentville: Don?t produce a lot of goods
- Futureville: Produce a lot of goods.
- A country that invests in their capital goods, their country will grow faster than one that invests in consumption goods.
- US vs. Thailand: US puts a lot of resources of capital
15
Q
Penalty
A
- Don?t eat dinner, won?t play with your friends
2. Pollution: Gov?t levies fines
16
Q
Paid Income
A
Rent, Wages, Interest Profit
17
Q
Overproduction
A
Where Marginal Costs exceeds Marginal Benefits
18
Q
Opportunity Costs
A
- Think of cost and benefits.
- People make rational choices by comparing costs and benefits
- The value of the best alternative that you must give up to get something.
- The value of the best forgone alternative.
(e. g. Studying instead of making money)
19
Q
Opportunity Cost for Tank Production (Country A vs. Country B)
A
Country A: 1 Tank = 2 Cars
Country B: 1 Tank = 3 Cars
It takes country A less than country B to produce one tank.
20
Q
Opportunity Cost for Car Production
A
Country A: 1 Car = 0.5 Tank
Country B: 1 Car = 0.3 Tank
It takes country B less than country A to produce one car.
21
Q
Money Income (Circular Flow)
A
In a circular flow, Resource market to household: money income
22
Q
Market
A
- A place where buyers and sellers come together to generate economic activity
- Markets for goods and services
Markets for factors of production
23
Q
Marginal Cost
A
- What you have to give up getting one additional unit of something (e.g. paying for one additional slice of pizza.)
- Upward sloping
24
Q
Marginal Benefit
A
- What you gain when you get one additional unit of something. (e.g. another slice of pizza)
- Downward sloping
25
Marginal Analysis
1. Refers to a comparison of marginal benefit and marginal cost
2. Make a rational choice when you take those actions for which marginal benefit equals marginal cost.
26
Margin
1. Extra or additional.
| 2. A choice is made at the margin by comparing all the alternative
27
Land
How much does land mean to you? (Rent)
28
Labor
Paycheck = Wages
29
Input Factor
1. Vector of production
| Household to Resource Market
30
Incentives
1. Created by Reward and Penalties
| People respond to incentives
31
How is Economic Growth Generated
1. Better or more resources (e.g. labor, capital, better technology)
Result: PPF Shifts outward (e.g. China)
32
Household
1. Own and sell factors of production
| Buy and consume goods and services
33
Growth on One Axis (PPF)
1. Increase on one Axis.
2. Pizza vs. Industrial Robots. An increase in Pizza would shift axis out more.
We can consume at a point outside our original PPF
34
Goods and services
1. Households buy finished products from firms that are looking to sell what they make.
2. In this transaction, money flows from households to firms
3. (Note that money, by definition, flows from buyer to seller in all markets.)
4. On the other hand, finished products flow from firms to households in goods and services markets.
5. The fact that the arrows on the money lines and the arrows on the product lines go in opposite directions simply represents the fact that market participants always exchange money for other stuff.
35
Full Employment (PFF Curve)
1. Any point on the PPF
| Utilize all the resources of the economy.
36
Firms
1. Hire and use factors of production
| Produce and sell goods and services
37
Factors of Production
1. Anything that is used by a firm in order to make a final product.
2. Households and firms play different roles than they do in the markets for goods and services.
3. Households provide labor to firms, they can be thought of as the sellers of their time or work product. (Technically, employees can more accurately be thought of as being rented rather than being sold, but this is usually an unnecessary distinction.)
4. The functions of households and firms are reversed in factor markets as compared to in goods and services markets.
5. On the other side of exchange, firms provide money to households as compensation for the use of factors of production
6. Input / Productive Resources
7. Productive resources used to produce goods and services
Land, labor, capital
38
Factor Markets
1. Markets for factors of production
| Land, labor, capital, and entrepreneurship
39
Equilibrium
Where Marginal Benefits = Marginal Costs
40
Entrepreneurship
Human resource that organizes land, labor and capital.
41
Efficient and Inefficient Production (PPF Curve)
1. Point C:
2. A situation in which we cannot produce more of one good or service without producing less of something else.
3. Tradeoff
42
Economic Way of Thinking Summary
1. Resources are Limited
2. There is a tradeoff when choices are made.
3. People respond to incentives.
4. People always compare marginal cost and marginal benefit
5. Economists look at opportunity cost (what do you have to give up to get it. Value of next best alternative)
6. Rewards and penalties create people incentives.
7. Factors of production include labor, capital and entrepreneurship
8. Wages, rents, interest and profit are the returns to the factor of production
9. Circular flow model shows the interaction between household and firms as they trade factors of production and products
10. PPC is also known as the PPF
11. Any point on PPF is efficient
12. In order to produce more of one good, another good will have to be given up.
13. The points on PPF also indicate full employment of resources
14. Any point inside PPF is inefficient so the production of either or both goods can be increased.
15. Economic growth Is good and will shift PPF outward
16. Theory: If a person or country takes less time to produce a product, it has an absolute advantage over the other person or country.
17. Comparative advantage is the driving force of trade
Comparative advantage is based on opportunity cost.
43
Economic Way of Thinking
1. Scarcity of Choice
2. Marginal Analysis
Incentives
44
Costs (Circular Flow)
In a circular flow, from business to resource market.
45
Cost
What you give up to get something (e.g. pizza = benefits, cost = money)
46
Comparative Advantage
1. Any country that can complete a task with lower opportunity cost, there will be a comparative advantage.
2. Driving force of trade!
3. Nations can gain from specializing in the production of goods in which they have a comparative advantage and then trading.
Thailand: Can produce Rice over the US.
47
Circular Flow Model
1. Model of the economy that shows that flow of incomes, expenditures, inputs and output.
2. The model represents all of the actors in an economy as either households or firms (companies)
3. Divides markets into two categories:
4. markets for goods and services
5. Resource Market, Household, Product Market, Businesses
6. Household vs. Business
7. Household is counter clockwise: Input factors, Resources, Goods and services.
8. Biz is clockwise: Costs, Money Income, Consumption, Revenue
48
Capital Goods
Infrastructure : Roads, streets, etc.
49
Capital
1. Tools, instruments, equipment, machinery, buildings and other items that business used to produce goods and service
2. e.g. Rent out equipment = Interest
50
Benefit
What is your gain from something (consume/produce)
51
Attainable / Unattainable Combinations
1. Inside the PPF: Attainable (?X?)
2. Outside the PPF: Unattainable. (?Y?)
PPF shows the limit to production. It separates attainable combos from unattainable
52
Absolute Advantage
1. When one person (or nation) is more productive than another.
2. Takes less time to produce a good or perform an activity
(e. g. Tom has an absolute advantage in producing pens over Ben, because he produces 8 pens vs. 4)
