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AEDECON 2001 > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.

A

Economics

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2
Q

Economics is a behavioral, or ____ science. It is the study of how people make ______.

A
  • Social

- Choices

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3
Q

What are the four main reasons to study economics?

A
  1. To learn a new way of thinking
  2. To understand society
  3. To understand global affairs
  4. To be an informed voter
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4
Q

____ means limited resources.

A

Scarcity

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5
Q

The best alternative that we forgo, or give up, when we make a choice or decision.

A

Opportunity Cost

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6
Q

The process of analyzing additional or incremental costs or benefits arising from a choice or decision

A

Marginalism

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7
Q

Costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred

A

Sunk Costs

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8
Q

What is an example of a sunk cost?

A

Dropping a class after doing bad on the first exam, even though you cannot get your tuition money back

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9
Q

What is an efficient market?

A

A market in which profit opportunities are eliminated almost instantaneously, such as in the stock market or commodity markets

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10
Q

The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units– that is, business firms and households

A

Microeconomics

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11
Q

The branch of economics that examines the economic behavior of aggregates– income, employment, output, and so on– on a national or aggregate scale.

A

Macroeconomics

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12
Q

An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works.

A

Positive Economics

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13
Q

An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. Also called policy economics.

A

Normative Economics

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14
Q

Understanding and predicting job changes or losses as a result of a change in minimum wage is an example of ____ economics. Deciding whether a change in minimum wage is good or bad is an example of ____ economics.

A
  • Positive

- Normative

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15
Q

A statement or set of related statements about cause and effect, action and reaction

A

Economic Theory

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16
Q

Give an example of an economic theory. Give an example of a model of that theory.

A
  • If the price of pepsi increases, sales will decrease

- Pcoke + –> Qdemand -

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17
Q

A formal statement of a theory, usually a mathematical statement of a presumes relationship between two or more variables.

A

Model

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18
Q

Models are meant to do what?

A

Simplify reality

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19
Q

The principle that irrelevant detail should be cut away to focus on the more important details and simplify reality.

A

Ockham’s Razor

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20
Q

True or False: According to Ockham’s razor, if we want to look at shopping decisions at Target, the prices of products and parking lot crowdedness should be considered.

A

False, only the important part (parking lot prices) should be considered

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21
Q

A concept used to analyze the relationship between two variables while the values of other variables are held unchanged.

A

Ceteris paribus, all else equal

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22
Q

What is the Post Hoc fallacy?

A

A common error in thinking that if A happens before B, A caused B. For example, thinking if the Colts win the superbowl, then the stock market will do well this year.

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23
Q

What is the Fallacy of Composition?

A

The erroneous belief that what is true for a part is true for the whole. For example, if I don’t do my taxes, that is good for me. But if all of society does not do their taxes, everyone is worse off.

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24
Q

What are the four criteria for judging economic policy?

A
  1. Efficiency
  2. Equity
  3. Growth
  4. Stability
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25
Q

What is an efficient economy?

A

One that produces what people want at the least possible cost

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26
Q

Equity means _____. What is the quandary between equity and efficiency?

A
  • Fairness

- policies that improve efficiency often lead to reduced equity

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27
Q

An increase in total output of an economy that occurs when a society acquires new resources or learns to produce more using existing resources

A

Growth

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28
Q

A condition in which national output is growing steadily, with low inflation and full employment of resources

A

Stability

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29
Q

What are the three basic questions that must be answered in order to understand an economic system?

A
  1. What gets produced
  2. How is it produced
  3. Who gets what is produced
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30
Q

The inputs into the process of production, another word for ____

A
  • Factors of Production

- Resources

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31
Q

What are key examples of factors of production?

A

Land, labor, and capital

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32
Q

Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants

A

Inputs or resources

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33
Q

Things that are themselves produced and that then used in the production of other goods and services. Give some examples.

A
  • Capital

- Machines, computers

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34
Q

The process that transforms scarce resources into usable goods and services

A

State production

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35
Q

Usable products

A

State outputs

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36
Q

Why are frozen foods a good example of opportunity cost?

A

People trade healthy, low-cost food for more expensive food that is easy to prepare

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37
Q

What is the theory of comparative advantage?

A

The theory that specialization and free trade will benefit all trading parties, even those that may be absolutely more efficient producers

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38
Q

A producer has a/an _____ advantage when they can produce a product using fewer resources. A producer has a/an ______ advantage when it can produce the product at a lower opportunity cost.

A
  • Absolute

- Comparative

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39
Q

Absolute advantage looks at your _____ cost, while comparative advantage looks at your _____ cost.

A
  • Monetary

- Opportunity

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40
Q

Goods produced for present consumption

A

State consumer goods

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41
Q

The process of using resources to produce new capital

A

Investment

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42
Q

A graph that shows all the combinations of goods and services that can be produced if all society’s resources are used efficiently

A

Production Possibility Frontier

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43
Q

What does a point beneath the PPF curve represent?

A

Inefficiency. It can be due to unemployment, waste, or mismanagement causing a firm to operate below its potential

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44
Q

What is the Marginal Rate of Transformation?

A

The slope of the production possibility frontier that determines the opportunity cost

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45
Q

What does a point lying on the PPF curve represent?

A

Production at maximum efficiency

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46
Q

What does a point lying outside the PPF curve represent?

A

It is unattainable due to a lack of knowledge or resources

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47
Q

In times of economic growth, what happens to the PPF curve?

A

It shifts up and to the right. What was previously unattainable is now attainable

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48
Q

What causes the gap between rich and poor countries?

A

Rich countries find it easier to invest in capital, causing greater economic growth.

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49
Q

An economy in which a central government either directly or indirectly sets output targets, incomes, and prices. Give examples of this economy.

A
  • Command economy

- Soviet Union, North Korea

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50
Q

An economy in which individual people and firms pursue their own self-interests without any central direction or regulation. Give an example of this economy.

A
  • Laissez-faire economy

- Hong Kong

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51
Q

The institution through which buyers and sellers interact and engage in exchange

A

Market

52
Q

The idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).

A

Consumer Sovereignty

53
Q

The freedom of individuals to start and operate private businesses in search of profits

A

Free enterprise

54
Q

In the distribution of output, the amount that any one household gets depends on its ____ and ____.

A

Income and wealth

55
Q

_____ is the amount that a household earns each year.

A

Income

56
Q

_____ is the amount that households have accumulated out of past income through saving or inheritance.

A

Wealth

57
Q

What is price theory?

A

The theory that price of products, labor or wages is the driving factor in a free market system. High prices attract resources, and low prices repel or redirect resources to higher valued uses.

58
Q

True or False: In reality, economic systems are mixed. Pure forms do not exist in the real world.

A

True

59
Q

An organization that transforms resources (inputs) into products (outputs).

A

State: Firm

60
Q

_____ are the primary producing units in a market economy.

A

Firs

61
Q

A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.

A

Entrepreneur

62
Q

The consuming units in an economy

A

State: Households

63
Q

The markets in which goods and services are exchanged.

A

Output markets

64
Q

The markets in which the resources used to produce products are exchanged.

A

Input Markets

65
Q

Households generally sell their services on the _____ market buy on the ____ market.

A
  • Input

- Output

66
Q

True or False: Firms generally sell their services on the input market and buy on the output market.

A

False, sell on the output and buy on the input

67
Q

The input/factor market in which households supply work for wages to firms that demand labor

A

Labor market

68
Q

The input/factor market in which households supply their savings, for interest or for claims to future profits (stock capital gains, profits and/or dividends), to firms that demand funds to buy capital goods

A

Capital market

69
Q

How are input and output markets connected through the behavior of firms and households?

A
  • Firms determine the quantities and character of outputs produced and the types of quantities of inputs demanded
  • Households determine the types and quantities of products demanded and the quantities and types of inputs supplied
70
Q

A change in price of a product changes _____ ____ or _____ _____ a curve.

A
  • Quantity demanded

- Movement along

71
Q

Changes such as income, wealth, prices of other available products, tastes and preferences, or expectations cause what to happen to a demand curve?

A

-A shift in the entire curve

72
Q

The number of units of a product that a household would buy in a given period if it could buy all it wanted at the current market price, holding all other things constant.

A

Quantity demanded

73
Q

What is the most important relationship in individual markets?

A

Market price and quantity demanded

74
Q

A table showing how much of a given product a household would be willing to buy at different prices

A

Demand Schedule

75
Q

What is a reservation price?

A

The price at which you are not willing to buy any of the product. For example, if pepsi was $5.00/can, I may buy one can. If it was $2.00/can, I may buy two cans. If it was $10.00/can, I wouldn’t buy any. $10.00 is the reservation price.

76
Q

A graph showing how much of a given product a household would be willing to buy at different prices

A

Demand Curve

77
Q

What is the law of demand?

A

The negative relationship between prices and quantity demanded. As price increases, quantity demanded decreases.

78
Q

Why is there a negative relationship between price and quantity demanded?

A
  1. Diminishing marginal utility –> Each new unit of consumption provides less and less satisfaction
  2. As the price increases, the opportunity cost from foregone consumption of other items rises
79
Q

Demand curves have a _____ slope.

A

Negative

80
Q

Why do demand curves intersect the X axis? Why do they intersect the Y axis?

A
  • X Axis: A result of time limitations and diminishing marginal utility (Demand in a given time period is limited)
  • Y Axis: there are limited incomes and wealth. Where it intersects the Y axis is reservation price.
81
Q

Goods for which demand goes up when income is higher and for which demand goes down when income is lower

A

Normal Goods

82
Q

Goods for which demand tends to fall when income rises

A

Inferior Goods

83
Q

Goods that can serve as replacements for one another

A

Substitutes

84
Q

Identical product that can serve as replacements for one another

A

Perfect substitutes

85
Q

Goods that “go together”. A decrease in the price of one results in an increase in demand for the other.

A

Complements

86
Q

How do tastes and preferences affect demand curves?

A

Marketing and fads cause more or less demand

87
Q

How do expectations affect demand curves?

A

If someone expects to lose their job, they will buy less. If someone expects the price to decrease tomorrow, they will buy less today.

88
Q

The change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought about by a change in the original conditions, such as income or price of related goods

A

Shift of a demand curve

89
Q

The change in quantity demanded brought about by a change in price

A

Movement along a demand curve

90
Q

A change in price leads to what? A change in income, preferences, or prices of other goods leads to what?

A
  • A change in quantity demanded

- A change in demand

91
Q

The sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

A

Market Demand

92
Q

_____ is the difference between revenues and costs. What is included in costs?

A
  • Profits

- All opportunity costs such as foregone earnings or returns on other investments

93
Q

The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.

A

-Quantity supplied

94
Q

True or False: A change in price would lead to a change in supply

A

False, a change in quantity supplied

95
Q

A table showing how much of a product firms will sell at different prices

A

Supply schedule

96
Q

The positive relationship between price and quantity of a good supplied: An increase in market price will lead to an increase in quantity supplied

A

Law of Supply

97
Q

A graph illustrating how much of a product a firm will sell at different prices.

A

Supply Curve

98
Q

What is another example of a determinant of supply besides market price for a product?

A

The cost of production, or prices of related products

99
Q

The change in quantity supplied brought about by a change in price.

A

Movement along a supply curve

100
Q

The change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions.

A

Shift in supply curve

101
Q

The sum of all that is supplied each period by all producers of a single product.

A

Market Supply

102
Q

The condition in which the price is such that quantity supplied equals quantity demanded. There is no tendency for price to change.

A

Equilibrium

103
Q

The condition that exists when quantity demanded exceeds quantity supplied at the current price. It is below equilibrium.

A

Excess demand/shortage

104
Q

Bidding at an auction is an example of what?

A

An excess demand/shortage that ends up with the quantity demanded equaling the quantity supplied. It shows how the market forces push prices back to equilibrium

105
Q

The condition in which quantity supplied exceeds quantity demanded at the current price. The price is above equilibrium.

A

Excess supply/surplus

106
Q

What happens to equilibrium when supply and demand curves shift?

A

Equilibrium shifts

107
Q

What 5 things is the demand for a good determined by?

A
  1. Price
  2. Household income/wealth
  3. Prices of other goods and services
  4. Taste/preferences
  5. Expectations
108
Q

What three things is the supply of a good determined by?

A
  1. Price
  2. Costs of production (technologies of production, input prices)
  3. Prices of related products
109
Q

The process by which the market system allocates goods and services to consumers when quantity demanded is greater than the quantity supplied.

A

Price Rationing

110
Q

High prices ration out _____ and low prices ration out _____.

A
  • Buyers

- Sellers

111
Q

Price rationing occurs in the ____ system.

A

Market

112
Q

A maximum price that sellers may charge for a goo, usually set by a government

A

Price Ceiling

113
Q

What are examples of a price ceiling?

A
  • Government sets a ceiling on gas prices during a shortage during a hurricane
  • Rent controls
114
Q

Waiting in line as a means of distributing goods and services. A non-price rationing system.

A

Queuing

115
Q

Those who receive special treatment from dealers during situations of excess demand

A

Favored Customers

116
Q

Tickets or coupons that entitle individuals to purchase a certain amount of a given product per month

A

Ration coupons

117
Q

A market in which illegal trading takes place at market-prices. When free-markets are constrained, these develop. They usually occur in developing countries with price controls.

A

Black Market

118
Q

A minimum price below which exchange is not permitted.

A

Price Floor

119
Q

A price floor set under the price of labor.

A

Minimum wage

120
Q

What happens when governments or private firms decide to use some means other than the market system to ration an item for which there is excess demand at the current price?

A

This leads to unexpected results. The “Cure” can be worse than the “disease.”

121
Q

The difference between the maximum amount a person is willing to pay for a good and its current market price.

A

Consumer Surplus

122
Q

The difference between the current market price and the full cost of production for the firm

A

Producer Surplus

123
Q

Producer surplus is closely associated with firm _____.

A

Profits

124
Q

Competitive markets maximize the sum of producer and consumer ________.

A

Surplus

125
Q

The net loss of producer and consumer surplus from underproduction or overproduction

A

Deadweight loss

126
Q

What does the dead weight loss reflect?

A

Waste or lost to society from market inefficiency

AEDECON 2001 (1 decks)

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