midterm 1 Flashcards
(144 cards)
1
Q
Who is John Maynard Keynes?
A
An influential 20th-century economist who argued that economics is a way of thinking rather than a doctrine.
2
Q
What did Keynes say about economics?
A
Economics is “a method rather than a doctrine, an apparatus of the mind, a technique of thinking.”
3
Q
What is a theory in economics?
A
A simplified representation of how two or more variables interact, used to understand complex real-world issues.
4
Q
What is a model in economics?
A
An applied or empirical representation used to test theories; models and theories are often used interchangeably.
5
Q
What is the circular flow diagram?
A
A model that shows how households and firms interact in the goods and services market and the labor market.
6
Q
What do arrows “A” and “B” represent in the circular flow diagram?
A
Arrow “A” represents firms producing and selling goods/services to households, while arrow “B” represents households paying firms for those goods/services.
7
Q
What do arrows “C” and “D” represent in the circular flow diagram?
A
Arrow “C” represents households providing labor to firms, while arrow “D” shows firms paying households wages for labor.
8
Q
What is a traditional economy?
A
An economy where occupations stay in the family and economic progress is minimal, often found in parts of Asia, Africa, and South America.
9
Q
What is a command economy?
A
An economy where the government makes all decisions about production, pricing, and wages. Examples include Cuba and North Korea.
10
Q
What is a market economy?
A
An economy where economic decisions are decentralized, and private individuals own resources and businesses.
11
Q
What is a mixed economy?
A
An economy that combines elements of both command and market systems, such as the U.S., which is market-oriented but still has some government involvement.
12
Q
What is the significance of the Heritage Foundation’s Index of Economic Freedom?
A
It ranks countries based on the extent of their economic freedom, assessing how free individuals and businesses are to make economic decisions.
13
Q
What are underground economies or black markets?
A
Markets where transactions occur without government approval, often found in heavily regulated command economies.
14
Q
What is globalization?
A
The increasing cultural, political, and economic connections between people across the world, often driven by trade and technology.
15
Q
What is Gross Domestic Product (GDP)?
A
The total value of goods and services produced in a country over a specific period, used to measure the size of an economy.
16
Q
What is fiscal policy?
A
Economic policies that involve government spending and taxation to influence the economy.
17
Q
What is monetary policy?
A
Policies that involve controlling interest rates and credit availability to manage the economy’s money supply.
18
Q
What is scarcity in economics?
A
The condition where human wants for goods and services exceed the available supply.
19
Q
What is specialization?
A
When workers or firms focus on tasks for which they are well-suited within the production process, increasing efficiency.
20
Q
What is the goods and services market?
A
The market in which firms sell what they produce and households buy these goods and services.
21
Q
What is the labor market?
A
The market where households sell their labor as workers to firms or other employers in exchange for wages, salaries, and
22
Q
What is a budget constraint?
A
The limitation of an individual’s choices based on their income, prices of goods and services, and the amount of resources they have.
23
Q
What is marginal analysis?
A
The process of examining the additional benefits of an activity compared to the additional costs incurred by that same activity.
23
Q
What is opportunity cost?
A
The cost of the next best alternative that is forgone when making a choice.
24
What are incentives in economics?
Factors that motivate individuals and businesses to make decisions, such as profits, wages, and subsidies.
25
What is the difference between microeconomics and macroeconomics?
Microeconomics focuses on individual consumers and firms, while macroeconomics looks at the economy as a whole, including inflation, unemployment, and growth.
26
What is positive economics?
The branch of economics that focuses on facts and cause-and-effect relationships, describing and explaining economic phenomena.
27
What is normative economics?
The branch of economics that expresses value judgments about what the economy should be like, focused on opinions and fairness.
28
What is a production possibilities frontier (PPF)?
A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.
29
What does the slope of the PPF represent?
The opportunity cost of one good in terms of the other good.
30
What is the law of demand? a.
The principle that, all else equal, an increase in the price of a good will lead to a decrease in the quantity demanded, and vice vers
31
What is the law of supply?
The principle that, all else equal, an increase in the price of a good will lead to an increase in the quantity supplied, and vice versa.
32
What is equilibrium in a market?
The point where the quantity demanded equals the quantity supplied, resulting in no surplus or shortage in the market.
33
What is a surplus?
A situation where the quantity supplied of a good exceeds the quantity demanded at the current price.
34
What is a shortage?
A situation where the quantity demanded exceeds the quantity supplied at the current price.
35
What is price elasticity of demand?
A measure of how much the quantity demanded of a good responds to a change in the price of that good.
36
What is price elasticity of supply?
A measure of how much the quantity supplied of a good responds to a change in the price of that good.
37
What are externalities in economics?
Unintended side effects of an economic activity that affect third parties, can be positive or negative (e.g., pollution).
38
What is the tragedy of the commons? .
A situation where individuals overuse a shared resource, leading to its depletion or degradation, due to a lack of private ownership.
39
What is a public good?
A good that is non-excludable and non-rivalrous, meaning it can be used by anyone without reducing its availability to others (e.g., national defense).
40
What is the free rider problem?
When individuals benefit from resources or services without paying for them, often associated with public goods.
41
What is a monopoly?
A market structure where a single seller dominates the market, with no close substitutes for the product, often leading to higher prices.
42
What is monopolistic competition?
A: A market structure where many firms sell similar but not identical products, with some control over their prices.
43
What is perfect competition?
A market structure where many firms sell identical products, and no single firm can influence the market price.
44
What is an oligopoly?
A market structure where a few large firms dominate the market, often leading to collusion and price-setting.
45
What is scarcity? Can you think of two causes of scarcity?
Scarcity is the fundamental economic problem of having limited resources to meet unlimited wants. Two causes of scarcity are limited natural resources and the high cost of producing goods.
46
Residents of the town of Smithfield like to consume hams, but each ham requires 10 people to produce it and takes a month. If the town has a total of 100 people, what is the maximum amount of ham the residents can consume in a month?
The maximum number of hams the residents can produce is 10 hams per month. This is because it takes 10 people to make one ham, and with 100 people, 100 ÷ 10 = 10 hams.
47
A consultant works for $200 per hour. She likes to eat vegetables, but is not very good at growing them. Why does it make more economic sense for her to spend her time at the consulting job and shop for her vegetables?
It makes more economic sense for the consultant to work because she earns $200 per hour, which is likely far more than the value of the vegetables she could grow in that time. She can use her earnings to buy vegetables and still have money left over.
48
A computer systems engineer could paint her house, but it makes more sense for her to hire a painter to do it. Explain why.
It makes more sense for the engineer to hire a painter because her time is more valuable spent working in her specialized field. The painter can do the job efficiently, allowing the engineer to focus on her higher-paying work.
49
What would be another example of a “system” in the real world that could serve as a metaphor for micro and macroeconomics?
An example could be a sports league. Microeconomics focuses on individual teams and their strategies, while macroeconomics focuses on the overall performance of the league, rules, and regulations affecting all teams.
50
What is an example of a problem in the world today, not mentioned in the chapter, that has an economic dimension?
Climate change is a problem with an economic dimension. It affects industries like agriculture, energy, and insurance, and requires global cooperation and economic resources to address.
51
The chapter defines private enterprise as a characteristic of market-oriented economies. What would public enterprise be?
Public enterprise refers to government-owned and operated businesses or industries, which are typical in command economies. Examples include state-run utilities or public transportation systems.
52
Why might Belgium, France, Italy, and Sweden have a higher export-to-GDP ratio than the United States?
These countries have smaller economies relative to the U.S. and may rely more on international trade to drive their economies, leading to a higher export-to-GDP
53
Give the three reasons that explain why the division of labor increases an economy’s level of production.
1. Specialization allows workers to focus on tasks where they have an advantage.
2. Increased efficiency comes from workers becoming more skilled at specific tasks.
3. Time-saving by avoiding switching between tasks.
54
What are three reasons to study economics?
1. To understand how economies operate.
2. To make informed decisions as a consumer or business owner.
3. To contribute to debates on public policy and economic issues.
55
What is the difference between microeconomics and macroeconomics?
Microeconomics focuses on individual consumers, firms, and markets. Macroeconomics looks at the economy as a whole, dealing with issues like inflation, unemployment, and GDP.
56
What are examples of individual economic agents?
Examples include consumers, workers, firms, and governments.
57
What are the three main goals of macroeconomics?
The three main goals are economic growth, low unemployment, and stable inflation.
58
How did John Maynard Keynes define economics?
Keynes defined economics as a method for thinking about and solving problems, rather than just a set of doctrines or laws.
59
Are households primarily buyers or sellers in the goods and services market? In the labor market?
In the goods and services market, households are primarily buyers. In the labor market, households are sellers of labor.
60
Are firms primarily buyers or sellers in the goods and services market? In the labor market?
A: In the goods and services market, firms are sellers. In the labor market, firms are buyers of labor.
61
What are the three ways that societies can organize themselves economically?
1. Market economies rely on individual decisions.
2. Command economies rely on centralized government control.
3. Mixed economies combine elements of both.
62
What is globalization? How do you think it might have affected the economy over the past decade?
Globalization is the process of increased interdependence and connectivity between countries through trade, investment, and cultural exchange. Over the past decade, it has led to greater international trade, innovation, and changes in employment patterns.
63
What is scarcity?
The limited availability of resources to meet unlimited wants.
64
What does the production possibilities frontier (PPF) illustrate?
The maximum possible output combinations of two goods with limited resources.
65
What does a point inside the PPF represent?
Inefficiency in resource allocation.
66
What indicates economic growth in a PPF?
An outward shift of the PPF.
67
What does the slope of the PPF represent?
Opportunity cost of producing one good over another.
68
Define comparative advantage.
The ability to produce a good at a lower opportunity cost than another producer.
69
What is absolute advantage?
The ability to produce more of a good than another producer using the same amount of resources.
70
How do countries benefit from trade?
By specializing in goods where they have a comparative advantage.
71
What is a trade-off?
The alternative that must be given up when making a choice.
72
What happens to the opportunity cost as production of a good increases?
It usually increases (increasing opportunity cost).
73
What does an outward shift of the PPF signify?
Economic growth, due to an increase in resources or improvements in technology.
74
What do positive economic statements focus on?
Describing how the economy functions and can be tested.
74
What is a budget constraint?
A representation of all possible combinations of goods that a consumer can purchase with limited income.
75
What does economic efficiency mean?
Resources are allocated in a way that maximizes total surplus.
75
What are normative economic statements?
Opinions or value judgments about how the economy should work.
76
What type of PPF curve represents constant opportunity costs?
A straight line.
77
What does a bowed-out PPF indicate?
Increasing opportunity costs as production shifts from one good to another.
78
What is the main principle behind comparative advantage?
Specializing in goods with the lowest opportunity costs benefits all parties involved.
79
How can governments influence economic outcomes?
By regulating markets and redistributing resources.
80
What are the effects of trade restrictions?
They can limit comparative advantages and increase costs.
81
Define opportunity cost.
The cost of the next best alternative forgone when making a decision.
81
How does specialization impact productivity?
A: It increases productivity by allowing individuals or countries to focus on what they do best.
82
What does consumer surplus measure?
The difference between what consumers are willing to pay and what they actually pay.
83
What is producer surplus?
The difference between what producers are willing to accept and the market price.
84
How is efficiency achieved in an economy?
By ensuring resources are allocated to their most valued uses.
84
What role does technology play in the PPF?
Technological advancements can shift the PPF outward.
85
What is the relationship between PPF and opportunity cost?
The slope of the PPF represents the opportunity cost of one good in terms of the other.
86
Why is trade beneficial even when one country has an absolute advantage in all goods?
Because countries can still have comparative advantages in specific goods.
87
What does it mean when an economy operates on the PPF?
The economy is using all its resources efficiently.
88
What is the impact of a recession on the PPF?
It may cause the economy to operate inside the PPF.
89
What is the significance of a linear PPF?
It suggests constant opportunity costs between the two goods.
89
What does a production possibilities schedule show?
The different quantities of two goods that can be produced with fixed resources.
90
Why do economists use models like the PPF?
To simplify complex economic realities for analysis and understanding.
91
What does an increase in resources do to the PPF?
It shifts the PPF outward, allowing for more production.
92
What is the role of prices in resource allocation?
Prices signal to producers and consumers how to allocate resources efficiently.
93
How does trade enhance welfare?
By allowing access to a wider variety of goods at lower prices.
94
How do changes in consumer preferences affect the PPF?
They can shift the PPF depending on the demand for goods.
95
What is the purpose of economic models?
To provide simplified representations of complex real-world processes.
96
What does the concept of diminishing returns imply?
As more resources are devoted to producing one good, the additional output will eventually decline.
97
What is a mixed economy?
An economic system that incorporates elements of both capitalism and socialism.
98
What is the significance of the market equilibrium?
It represents the price and quantity where supply equals demand.
99
How does a government subsidy affect the PPF?
It can effectively shift the PPF outward by providing additional resources.
100
What are public goods?
Goods that are non-excludable and non-rivalrous, meaning they can be consumed by everyone without depletion.
101
What is the importance of voluntary exchange in trade?
It benefits both parties involved by allowing them to specialize.
102
What is the concept of externalities?
Costs or benefits of economic activities that affect third parties not directly involved in the transaction.
103
What does the law of demand state?
As the price of a good decreases, the quantity demanded increases, and vice versa.
104
What is the difference between explicit and implicit costs?
Explicit costs involve direct monetary payments, while implicit costs represent the value of foregone alternatives.
105
Why are resources considered scarce?
Because they are limited in availability compared to the infinite wants of individuals.
106
What is the role of incentives in economics?
Incentives influence behaviour and decision-making in both consumers and producers.
107
What is absolute advantage?
When one country can use fewer resources to produce a good compared to another country.
108
What is comparative advantage?
When a country can produce a good at a lower opportunity cost than another country.
109
What do absolute and comparative advantages explain?
Global trading patterns.
110
What is intra-industry trade?
International trade of goods within the same industry.
110
What are the two advantages of intra-industry trading?
1) Division of labor leads to learning and innovation; 2) Economies of scale.
111
What percentage of U.S. trade is intra-industry trade?
About 60%.
112
How do economies of scale relate to international trade?
As output increases, average production costs decline, allowing large producers to compete globally.
113
Why do similar economies engage in intra-industry trade?
Due to specialized learning and economies of scale.
114
What is the value chain?
How a good is produced in stages, often split across different countries.
115
What are tariffs?
Taxes imposed by governments on imported goods.
116
Why do countries impose tariffs?
To protect sensitive industries and for various political reasons.
117
What is the role of the WTO?
To negotiate and reduce barriers to international trade.
118
Why might lower-income countries benefit more from trade?
They often have fewer competitive firms and limited trade opportunities internally.
119
How does international trade relate to interpersonal trade?
Both increase economic gains through specialization and trade.
120
What happens if a country has a high level of productivity in all goods?
It can still benefit from trade through comparative advantage.
121
What is dynamic comparative advantage?
The evolving nature of comparative advantage due to skills development and value chain splitting.
122
What is the opportunity cost of producing a good?
The value of the next best alternative foregone when making a choice.
123
What is the benefit of intra-industry trade?
.
It allows firms to specialize and innovate within the same industry
124
How does specialization affect productivity?
It increases productivity through learning and practice.
125
What is the significance of competition in international trade?
It leads to innovation and better responsiveness to consumer needs.
126
What can happen if a country has only one or two large factories in an industry?
There may be little consumer choice and competition.
127
How do countries benefit from splitting up the value chain?
It allows for specialized production across different regions.
128
What is an example of intra-industry trade in the U.S.?
The U.S. both exports and imports autos.
129
How do tariffs affect consumer choice?
They can limit consumer choice by restricting imports.
130
What is the relationship between learning and specialization?
Specialization leads to learning, which improves productivity.
131
Why might larger economies have less need for international trade?
They can benefit from internal trade due to their size.
132
What is a gain from trade?
When a country can consume more than it can produce due to specialization and trade.
133
How does international trade contribute to competition and variety for consumers?
It allows consumers to choose from a wider range of products.
134
How does trade facilitate the transfer of knowledge?
A: It allows countries to learn from each other's practices in production and management.
135
What role does technology play in the evolution of comparative advantage?
It helps firms innovate and adapt, affecting their comparative advantage over time.
136
Why are smaller economies often more reliant on international trade?
They have fewer competitive firms and limited internal trade options.
137
Who is Adam Smith?
introduced the idea of dividing labour into discrete tasks. The study began when Adam Smith published his famous book The Wealth of the Nations. He came up with the idea of division of labour, which means that the way one produces a good or service is divided into a number of tasks that different workers perform instead of all the tasks being done by the same person.
