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Econ 104 > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

3 key economic ideas

A
  1. people are rational
  2. people respond to economic incentives
  3. optimal decisions are made at the margin
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2
Q

What are the 3 questions trade offs force society to make?

A
  1. WHAT goods and services will be produced?
  2. HOW will the goods and services be produced?
  3. WHO will revieve the goods and services?
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3
Q

What is a centrally planned economy?

A

government decides WHAT HOW AND WHO

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4
Q

What is a Market economy?

A

Households decide WHAT is produced
Firms decide HOW they are produced
Market decides WHO will receive the goods

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5
Q

What is a mixed economy?

A
  • Most economic decisions result from the interaction of buyers and sellers in markets
  • But the government plays a significant role in the allocation of resources
    ex: social security, minimum wage, environmental laws
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6
Q

productive efficiency

A

A situation in which a good or service is produced at the lowest possible cost

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7
Q

allocative efficiency

A

A state of the economy in which production is in accordance with consumer preferences

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8
Q

voluntary exchange

A

A situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction

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9
Q

positive analysis

A

WHAT IS
you can test if something is true or false
fact

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10
Q

normative analysis

A

WHAT OUGHT TO BE

opinion

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11
Q

what are the factors of production

A

land, labor, capital

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12
Q

What are the centeris paribus (everything else held constant) assumptions in Production Possibilities Frontier

A

resources are fixed
technology is fixed
full employment of resources

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13
Q

Who decides which combo of military goods/consumer goods is best?

A

government

normative decision

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14
Q

What is the law of increasing opportunity cost?

A

the opportunity cost increases as the production of one output expands

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15
Q

How does the production of the USA economy change over time?

A

increase in resources, technological change and advance

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16
Q

What is economic growth?

A

When there is an increase resource base or increase in technological advances, and the standard of living increase in terms of goods and services available

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17
Q

What is an entrepreneur?

A

One who organizes, manages and assumes the risk of a business enterprise

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18
Q

GDP

A
  • Gross Domestic Product
  • The market value (todays $) of all final goods and services produced in a nation during a period of time
  • Only counts for new goods and final goods, not intermediate goods
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19
Q

What do we assume with GDP?

A
  • HH’s supply or own all the factors of production
  • HH’s don’t have savings or taxes, they spend everything on goods and services
  • Firms spend all their revenue on resources (land, labor, capital) from factor market
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20
Q

What is the Basic circular flow?

A

Households → factor markets → firms → product market → Households again

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21
Q

What are some things missing from the basic circular flow?

A

government, financial system, foreign trade

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22
Q

How do you calculate GDP?

A

multiply price x quantity and add them all up

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23
Q

what is C?

A

household consumption

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24
Q

What is I?

A

firms investment expenditures

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25
Q

what is G?

A

government

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26
Q

what is NX?

A

exports-imports

27
Q

What is the expenditure approach to calculating GDP?

A

C + I + G + NX

28
Q

what is saving

A

income - expenditures

29
Q

What is the income approach to calculating GDP?

A

national income + depreciation = GDP

30
Q

What is disposable personal income?

A

National income – taxes + transfers

tells how much you can spend after taxes and transfers

31
Q

How do you calculate growth in GDP from one year to another? (2011-2012 for example)

A

[(GDP 2012 - GDP 2011) / GDP 2011] x 100

32
Q

what is real GDP?

A

The value of final goods and services produced at base year prices

33
Q

What is GDP deflator?

A

a measure of the price level

(nominal GDP/real GDP) x 100

34
Q

how do you calculate inflation

A

[(GDP deflator 2010 - GDP deflator 2009)/GDP deflator 2009] x 100

35
Q

What does it mean if you are unemployed?

A

If you did not work over the previous week and are LOOKING FOR a job

36
Q

What does it mean if you are NOT in the labor force?

A

You are unemployed and NOT looking for work. Doesn’t count as unemployment

37
Q

labor force

A

employed + unemployed (those who are looking for jobs)

38
Q

Discouraged workers

A

workers who have been looking for work unsuccessfully and have dropped out of the labor force

39
Q

calculate unemployment rate

A

(# unemployed/labor force) x 100

40
Q

calculate labor force participation rate

A

labor force/ working age population

41
Q

What did Knotek and Terry find?

A
  1. Changes in the labor market altered the behavior of unemployment following the recession
  2. Recession combined with financial crisis made the situation worse
42
Q

In what ways did changes in the labor market alter the behavior of unemployment?

A
  1. Pattern of layoffs moved from temporary to permanent

2. Just-in-time employment practices (use of overtime, part-time workers, outsourcing)

43
Q

What were the effects of permanent layoffs and just-in-time employment?

A
  • permanent layoffs cause workers to switch jobs or find new careers which takes a long time
  • just in time workers can be hired to produce enough output to meet demand as needed. Short run.
44
Q

What happened with the Great recession combined with financial crisis?

A

Firms pay less because of difficulties in funding and operating expenses. Even when the economy improves firms will increase workers hours rather than hire new workers

45
Q

frictional unemployment

A

Reflects normal search time by workers with marketable skills to find a job or change jobs
-always exists but is temporary for workers

46
Q

structural unemployment

A
  • Resistant mismatch of the skills of workers without jobs and skills required for existing job opportunities
  • Can last a long time
  • Most serious type of unemployment because it requires retraining
47
Q

brain drain

A

when jobs offered in a state do not keep up with highly skilled and educated labor

48
Q

cyclical unemployment

A
  • Caused by a lack of jobs during recession
  • Decrease in demand for goods and services
  • Firms cut production and lay off workers
49
Q

full employment

A

when cyclical unemployment= 0

50
Q

What is unemployment insurance?

A

Decreases the opportunity cost of searching for a job

Workers receive a percent of previous wage from the government for a period of time

51
Q

What are pros and cons of minimum wage?

A

pros: moves workers above poverty line, increase in wage means increase in job satisfaction
cons: increases unemployment. If minimum wage rises, companies will fire workers because they don’t want to spend more money on people

52
Q

labor unions

A

Organization of workers that bargain with employers for higher wages

53
Q

What is the efficiency wage theory?

A

• Research shows that firms that offer wages greater than the market wage will receive higher profits because efficiency wages maximize workers efforts

54
Q

how do we measure inflation?

A

consumer pricing index (CPI)

55
Q

how do we calculate CPI?

A

(cost of basket in current year/cost of basket in base year) x 100

56
Q

what is the CPI of the base year?

A

always 100

57
Q

how do we calculate real income?

A

(nominal income)/(CPI/100)

58
Q

How do you calculate % change real income?

A

% change in nominal - % change in CPI

59
Q

How do you calculate % change nominal income?

A

% change real income + % change CPI

60
Q

when does inflation hurt us?

A

When it is unexpected (when unexpected inflation is greater than zero)

61
Q

real interest rate equation

A

r= i - inflation

62
Q

what causes inflation

A

When total demand is greater than the total output produced (real GDP)
-We typically see inflation when the economy is expanding

63
Q

What is deflation?

A
  • Total demand < total output produced
  • Creates a surplus
  • Negative inflation
64
Q

What are 3 effects of deflation?

A
  1. Borrowing rates change
  2. Real debt burden rises
  3. Prices fall but firms wait for prices to fall farther

Econ 104 (2 decks)

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