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Macroeconomics > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

Scarcity

A

The limited nature of society’s resources

Nothing is infinite in nature—not even air and water!

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2
Q

Economics

A

The study of how people allocate their limited resources to satisfy their nearly unlimited wants
The study of how people make decisions

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3
Q

Macroeconomics

A

Looks at the broader economy, including inflation, growth, employment, interest rates, and productivity

What happens to the economy if there is widespread unemployment?

The Federal Reserve decreases interest rates to spur spending and kick start the economy

The study of the broader economy

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4
Q

The Five Foundations of Economics

A

Incentives matter

Life is about trade-offs

Opportunity costs

Marginal thinking

Trade creates value

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5
Q
  1. Incentives Matter
A

Incentives - Factors that motivate you to act or
exert effort

People respond to incentives!

Incentives are everywhere, and
financial gain often plays a prominent role

Positive incentives -
Tax refund, pay raise, employee of the month award, sticker and a smiley face, extra credit

Negative incentives -
Taxes, jail, fees, fines, spankings, getting grounded, getting fired, failing class

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6
Q
  1. Life is About Trade-offs
A

With scarcity, decisions incur costs
Individual examples

Go to theater: do I watch the action movie or the romantic comedy?

Go to food court: do I eat at Sbarro’s or Fuji Garden?

After high school: do I attend Ohio State or Michigan?

Which president do I vote for?

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7
Q
  1. Opportunity Cost
A

Opportunity Cost
The highest-valued alternative that must be sacrificed in order to get something else

Multiple trade-offs, but only one opportunity cost

Not all alternatives, just the next best choice

In economics:
The cost of something is what you give up to get it

Scarcity–> Choice –>Opportunity Cost

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8
Q

Opportunity Cost

A

go to the mall or the pool?

Opportunity cost of going to the mall:
Lost opportunity to go to the pool
Opportunity cost of going to the pool:
Lost opportunity to go to the mall
Decision-making key:
Minimize opportunity cost by selecting the option that has the largest benefit. Go to whichever you enjoy more, the pool or mall.
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9
Q
  1. Marginal Thinking
A

Evaluate whether the benefit of one more unit of something is greater than the cost

Margin examples: one more unit (slice of pizza), one more hour of activity (studying, sleeping)

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10
Q
  1. Trade Creates Value
A

Markets
Bring buyers and sellers together to exchange goods and services

Trade
The voluntary exchange of goods and services between two or more parties

Key word = voluntary

You don’t engage in trade if it makes you worse off; therefore, trade only occurs if both parties feel they gain from the trade!

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11
Q

Comparative Advantage

A

The situation in which an individual, business, or country can produce at a lower opportunity cost than a competitor

Allows gains from trade to occur

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12
Q

Trade Specialization

A

You go to Starbucks to get coffee.

You go to the doctor when you’re sick.

You don’t have to do everything yourself: people specialize in what they’re best at (lowest opportunity cost) and you can trade with them.

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13
Q

What can be said about scarcity?

A

Scarcity forces us to make choices.
Scarcity doesn’t affect the super-wealthy.
Scarcity only affects commodities such as oil.
Scarcity generally doesn’t affect our day-to-day living.

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14
Q

Positive statement

A

A claim that can be tested to be true or false

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15
Q

Normative statement

A

Statement of opinion; cannot be tested to be true or false

What “ought to be” or “should be”

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16
Q

Why is the PPF downward-sloping?

A

Must give up one good to increase production of another

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17
Q

Why are we unable to produce certain combinations for the PPF?

A

Scarcity and limited resources

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18
Q

Efficient points for the PPF

A

Points ON the PPF (A, B, C, and D)

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19
Q

Inefficient points for the PPF

A

Points INSIDE the PPF (F)

Workers goofing off, unused buildings

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20
Q

Unattainable (for now) points for the PPF

A

Points OUTSIDE the PPF (E)

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21
Q

Law of increasing relative cost

A

Refers to the increasing opportunity cost of production that occurs as you move along the production

As we produce more of good A, we have to give up increasingly larger amounts of good B.

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22
Q

The PPF could shift graphically in two ways

A

New resources or technology could be introduced that either… Affect the production of one good, or Affect the production of both goods.

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23
Q

Absolute advantage

A

One person can perform each task more effectively than the other person.

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24
Q

Consumer goods

A

Goods produced for current consumption

Food, housing, clothing, entertainment

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25
Capital goods
Goods that help produce other valuable goods Buildings, factories, roads, machinery, computers
26
Investment
Using resources to make new capital
27
Elasticity
Responsiveness of buyers and sellers to changes in market conditions.
28
Why is Elasticity Important
Prices or other demand and supply determinants could change. Understanding elasticity will help us improve the predictive power of our basic economic model. Instead of just knowing the direction of a variable change, we can study the size of the change
29
Price elasticity of demand
A measure of the responsiveness of quantity demanded to a change in price This gives us the sensitivity of the relationship between these two variables.
30
Demand is elastic if
Quantity demanded changes significantly as the result of the price change Elastic = “sensitive” or “responsive”
31
The Determinants of the Price Elasticity of Demand
Existence of substitutes Share of the budget spent on the good (expensive items) Time adjustment process
32
Existence of substitutes
Goods with lots of substitutes Canned vegetables, breakfast cereals, many types of products with multiple brands More elastic Goods with no good substitutes Broadway theatre, rare coins, autographs, drinking water, electricity, Super Bowl tickets, medication. More inelastic
33
Share of the budget spent on the good
Demand is more elastic for “big ticket” items that make up a large portion of income. Demand is more inelastic for inexpensive items. Which would you react to more? 20% sale on a new vehicle you want 20% sale on candy bar
34
Time and adjustment process
Generally, demand for goods tends to become more elastic over time. Over time, consumers are More able to find substitutes More able to adjust for price changes in other ways
35
Market economy
Resources are allocated among households and firms with little or no government interference. The “main” economic structure of the United States Prices are determined by the forces of supply and demand. Buying and selling is voluntary.
36
Characteristics of a competitive market
Many buyers and sellers No one individual has any influence over the price. The price is determined by the entire market
37
Quantity demanded
The amount of a good purchased at a given price
38
Law of demand
All other things equal, there is an inverse relationship between price and quantity demanded Inverse: two variables move in opposite directions Income, diminishing marginal utility, and the substitution effect dictate the law of demand
39
Income effect
as prices go up, income stays relatively steady so if the price goes above someone’s income, they are out of the market
40
Diminishing marginal utility
The satisfaction of doing something goes down every time that you use it
41
Substitution effect
when something gets too expensive, we look for an alternative
42
Market demand
Horizontal sum of all individual quantities demanded by each buyer in the market at each price
43
Movement along a demand curve
Caused by a change in the price of the good Inverse relationship between price and quantity demanded
44
Shift in demand
Caused by changes in non-price factors Events that change the entire market Entire demand curve will shift to the left or right
45
Demand Shifters
1. Changes in income 2. Price of related goods 3. Changes in Tastes and Preferences 4. Future expectations 5. Number of buyers
46
1. Changes in income
Normal good - Good in which we buy more of when we get more income Off brand items to name brand items As income goes up, the demand for higher quality goods goes up Direct relationship between income and demand Inferior good - Good in which we buy less of when we get more income Name brand goods to off brand goods As income goes down, demand for less quality goods goes up Inverse relationship between income and demand
47
2. Price of related goods
Complements - Two goods used together If the price of ski’s go down, the demand for ski boots would go up because people who bought the ski’s now need boots Inverse relationship between the price of good X and demand for good Y Substitutes - Goods that can be used in place of each other If the price of Coke goes down, the demand for Pepsi would go down Direct relationship between the price of good X and demand for good Y
48
3. Changes in Tastes and Preferences
A good may become more fashionable or may come into season. ``` New style becomes popular Demand increases (shifts right) as a result ``` A good may go out of style or out of season. Demand decreases (shifts left) Lower demand for frozen pizza in summer New information about a good Can change tastes for better or worse Taking an asprin a day will help reduce the risk of heart attack
49
4. Future expectations
Our consumption today may depend on what we think the price may be tomorrow.
50
5. Number of buyers
Recall the market demand curve More individual buyers means more market demand. Aging, immigration, war, and birth rates can affect the number of buyers for various goods.
51
Assume you like Pepsi, and your income increases. | What happens to the demand/quantity demanded
The demand for Pepsi increases.
52
Assume the price of Pepsi decreases. | What happens to the demand/quantity demanded
The quantity demanded for Pepsi increases.
53
Assume the price of Coke decreases. | What happens to the demand/quantity demanded
The demand for Pepsi decreases.
54
Factors that shift the Demand Curve to the left
Income falls (Demand for a normal good) Income Rises (Demand for an inferior good) The price of a substitute falls The price of a complementary good rises The good falls out of style There is a belief that the future price of this good will decline The number of buyers in the market falls
55
Factors that shift the Demand Curve to the right
Income rises (Demand for a normal good Income Falls (Demand for an inferior good) The price of a substitute good rises The price of a complementary good falls The good is currently in style There is a belief that the future price of the good will rise The number of buyers in the market increases
56
Which of the following would increase the demand for drinks the most?
Reduction in the price of a complementary good such as an appetizer and the Reduction in the price of drinks
57
Law of supply
All other things equal, there is a direct relationship between price and quantity supplied. Direct: two variables move in the same direction
58
Market supply
Horizontal sum of all individual quantities supplied by each seller in the market at each price
59
Movement along a supply curve
Caused by a change in the price of the good Direct relationship between price and quantity supplied
60
Shift in supply
Caused by non-price factors Entire supply curve will shift to the left or right
61
Supply Shifters
1. The cost of inputs 2. Changes in technology 3. Taxes and subsidies 4. Number of sellers 5. Price expectations
62
1. The cost of inputs
Inputs - Resources used in the production process Direct relationship between input costs and supply curve If per unit cost of production goes up, the amount of units available to the market will go down
63
2. Changes in technology
Knowledge that producers have about how to produce a product Direct relationship between level of technology and supply
64
3. Taxes and subsidies
Tax paid by producer --> added cost of production Inverse relationship between taxes and supply As taxes go down, production cost goes down so production goes up Subsidy “Opposite” of a tax; government pays sellers to produce goods. Direct relationship between subsidies and supply As subsidies go up, production also goes up
65
4. Number of sellers
Recall the market supply curve More individual sellers means more market supply.
66
5. Price expectations
Higher price expected tomorrow? If so, delay sales until future, if possible. Inverse relationship between tomorrow’s expected price and today’s supply
67
Assume the price of cheese decreases. What will happen in the pizza market?
The supply of pizza increases. – because it didn’t say that the price of pizza changed
68
Which of the following will cause the supply curve for oranges to shift to the left?
Ice storm strikes Florida
69
In general, why would the government enact tougher pollution standards or tax a polluting firm?
Pollution is bad! Political reasons Encourage the firm to invest in cleaner production methods
70
How is the price of a good determined?
The market forces of supply AND demand work simultaneously to determine the price.
71
The law of supply and demand
The price of any good will adjust to bring the quantity supplied and quantity demanded into balance.
72
Equilibrium point
Graphically, the intersection of supply and demand
73
Equilibrium price
The price that causes quantity supplied to equal quantity demanded. The price that “clears the market”
74
Equilibrium quantity
The numerical quantity (supplied and demanded) at the equilibrium price
75
Shortage
QD > QS Occurs at any price below equilibrium Price will rise over time toward equilibrium
76
Why does price rise over time with a shortage?
Consumers who value the product will “outbid” other consumers or otherwise show a higher willingness to pay. Suppliers will see that the price can be raised without a decrease in sales.
77
Surplus
QS > QD Occurs at any price above equilibrium Price will fall over time toward equilibrium.
78
Why does price fall over time with a surplus?
Firms will have to eventually get rid of mounting inventories of goods. To do this, they must lower their prices.
79
PPC Shifters
Change in resource quality/quantity Change in technology Change in trade
80
What is the difference between a change in Qd and a change in demand itself?
Change in demand is caused by non-price factors while a change in Qd comes from a change in price
81
Demand related to substitutes (linear/inverse)
Linear (as price for A goes up, demand for B goes up)
82
Demand related to complements (linear/inverse)
Inverse (as price for A goes up, demand for B goes down)
83
Demand related to normal goods (linear/inverse)
Linear (as income for A goes up, demand for B goes up)
84
Demand related to inferior goods (linear/inverse)
Inverse (as income for A goes up, demand for B goes down)
85
Price Ceiling
Maximum legal price a seller can charge for a product. | Goal: Make affordable by keeping price from reaching Eq.
86
Price Floor
Minimum legal price a seller can sell a product. | Goal: Keep price high by keeping price from falling to Eq.
87
Subsidies
The government just gives producers money. | The goal is for them to make more of the goods that the government thinks are important.
88
Double Shift Rule
If TWO curves shift at the same time, EITHER price or quantity will be indeterminate (ambiguous).
89
Consumer surplus graphically:
The height of the demand curve is our maximum willingness to pay for that unit of the good. Consumer surplus is the area below the demand curve and above the price, for all units purchased.
90
Producer surplus graphically:
The height of the supply curve is the firm’s lowest price it is willing to accept to sell that unit of the good. Producer surplus is the area above the supply curve and below the price, for all units sold.

Macroeconomics (7 decks)

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