Mod 1 Flashcards
(103 cards)
1
Q
Economics
A
Economics is the study of how individuals and societies choose to allocate scarce resources, why they choose to allocate them that way, and the consequences of those decisions.Economics is the study of how individuals and societies choose to allocate scarce resources, why they choose to allocate them that way, and the consequences of those decisions.
2
Q
Any economic system must provide society with a means of making choices that answer three basic questions:
A
What will be produced with society’s limited resources?
How will we produce the things we need and want?
How will society’s output be distributed?
3
Q
Scarcity
A
Scarcity is sometimes considered the basic problem of economics. Resources are scarce because we live in a world in which humans’ wants are infinite but the land, labor, and capital required to satisfy those wants are limited. This conflict between society’s unlimited wants and our limited resources means choices must be made when deciding how to allocate scarce resources.
4
Q
economics
A
the study of how individuals and societies choose to allocate scarce resources.
5
Q
economic resources
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also called the factors of production; these are the land (natural resources such as minerals and oil), labor (work contributed by humans), capital (tools, equipment, and facilities), and entrepreneurship (the capacity to organize, develop, and manage a business) that individuals and businesses use in the production of goods and services.
6
Q
models
A
graphical and mathematical tools created by economists to better understand complicated processes in economics.
7
Q
ceteris paribus
A
a Latin phrase meaning “all else equal”.
8
Q
agent
A
some entity making a decision; this can be an individual, a household, a business, a city, or even the government of a country.
9
Q
incentives
A
rewards or punishments associated with a possible action; agents make decisions based on incentives.
10
Q
rational decision making
A
an agent is “rational” if they use all available information to choose an action that makes them as well off as possible; economic models assume that agents are rational.
11
Q
positive analysis
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analytical thinking about objective facts and cause-and-effect relationships that are testable, such as how much of a good will be sold when a price changes.
12
Q
normative analysis
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unlike positive analysis, normative analysis is subjective thinking about what we should value or a course of action that should be taken, such as the importance of environmental factors and the approach to managing them.
13
Q
microeconomics
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the study of the interactions of buyers and sellers in the markets for particular goods and services
14
Q
macroeconomics
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the study of aggregates and the overall commercial output and health of nations; includes the analysis of factors such as unemployment, inflation, economic growth and interest rates.
15
Q
economic aggregates
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measures such as the unemployment rate, rate of inflation, and national output that summarize all markets in an economy, rather than individual markets; economic aggregates are frequently used as measures of the economic performance of an economy.
16
Q
Economics is a social science.
A
This means that economists, in their study of human interactions, use models to simplify, analyze, and predict human behavior. Models include graphs and mathematical models.
17
Q
use of models,
A
economists usually make the assumption, when analyzing the effect of a particular change on a market or on a nation’s economy, that all else is held constant.
18
Q
ceteris paribus.
A
The term we use for “all else equal” is the Latin expression
19
Q
economic agents are rational and have an incentive
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to make decisions that are always in their own self-interest.
20
Q
While in reality human beings often
A
act irrationally, by assuming people, businesses, governments, and other agents are rational decision-makers, and by assuming ceteris paribus, economists attempt to establish laws and make predictions about how human interactions will affect society.
21
Q
positive analysis
A
is objective, fact-based, and cause-and-effect thinking about problems.
22
Q
normative analysis
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When economists disagree it is typically due to different normative analysis. When using normative analysis, the focus is on what should happen or how desirable one action is compared to a different action.
23
Q
microeconomics
A
Microeconomics examines the interactions of buyers and sellers in individual markets for goods and services, the competitive structure of markets, and the markets for resources.
24
Q
macroeconomics
A
Macroeconomics examines the interactions and behavior of entire nations’ economies, such as why recessions occur, what causes economic growth, and how countries can benefit from specialization and trade.
25
economics is
a social science that seeks to better understand and predict human interactions; unlike business and finance, which focus on how to manage a business organization and invest money in a way to earn the highest return for investors.
26
One essential assumption made in most economic analysis is
that all humans are rational and will make choices based on what is always in their best interest. In the real world, obviously, people, businesses, and even entire societies can be highly irrational.
27
what if a decision is "irrational" in the economic sense,
that doesn't mean that it is inherently wrong, bad, or lesser than what an economist would call a "rational" decision. In fact, the field of Behavioral Economics seeks to understand better the many reasons humans choose to make economically "irrational" choices in their decision making.
28
capital
One of the four economic resources that societies must decide how to allocate
29
In economics, capital is defined as
the already-produced goods (tools, machinery, equipment, and physical infrastructure) that are used in the production of other goods or services. A robot on a car factory floor is defined as capital in economics; money you borrow to start your own business is not.
30
Production Possibilities Curve (PPC) is
a model used to show the tradeoffs associated with allocating resources between the production of two goods. The PPC can be used to illustrate the concepts of scarcity, opportunity cost, efficiency, inefficiency, economic growth, and contractions.
For example, suppose Carmen splits her time as a carpenter between making tables and building bookshelves. The PPC would show the maximum amount of either tables or bookshelves she could build given her current resources. The shape of the PPC would indicate whether she had increasing or constant opportunity costs.
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production possibilities curve (PPC)
(also called a production possibilities frontier) a graphical model that represents all of the different combinations of two goods that can be produced; the PPC captures scarcity of resources and opportunity costs.
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opportunity cost
the value of the next best alternative to any decision you make; for example, if Abby can spend her time either watching videos or studying, the opportunity cost of an hour watching videos is the hour of studying she gives up to do that.
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efficiency
the full employment of resources in production; efficient combinations of output will always be on the PPC.
34
inefficient use (under-utilization) of resources
the underemployment of any of the four economic resources (land, labor, capital, and entrepreneurial ability); inefficient combinations of production are represented using a PPC as points on the interior of the PPC.
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growth
an increase in an economy's ability to produce goods and services over time; economic growth in the PPC model is illustrated by a shift out of the PPC.
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contraction
a decrease in output that occurs due to the under-utilization of resources; in a graphical model of the PPC, a contraction is represented by moving to a point that is further away from, and on the interior of, the PPC.
37
constant opportunity costs
when the opportunity cost of a good remains constant as output of the good increases, which is represented as a PPC curve that is a straight line; for example, if Colin always gives up producing 2 fidget spinners every time he produces a Pokemon card, he has constant opportunity costs.
38
increasing opportunity costs
when the opportunity cost of a good increases as output of the good increases, which is represented in a graph as a PPC that is bowed out from the origin; for example Julissa gives up 222 fidget spinners when she produces the first Pokemon card, and 444 fidget spinners for the second Pokemon card, so she has increasing opportunity costs.
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productivity
(also called technology) the ability to combine economic resources; an increase in productivity causes economic growth even if economic resources have not changed, which would be represented by a shift out of the PPC.
40
The Production Possibilities Curve (PPC) is
a model that captures scarcity and the opportunity costs of choices when faced with the possibility of producing two goods or services. Points on the interior of the PPC are inefficient, points on the PPC are efficient, and points beyond the PPC are unattainable. The opportunity cost of moving from one efficient combination of production to another efficient combination of production is how much of one good is given up in order to get more of the other good.
The shape of the PPC also gives us information on the production technology (in other words, how the resources are combined to produce these goods). The bowed out shape of the PPC in Figure 111 indicates that there are increasing opportunity costs of production.
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Key Equations and Calculations: Calculating opportunity costs:
```
To find the opportunity cost of any good X in terms of the units of Y given up, we use the following formula:
\text{Opportunity cost of each unit of good X}=(Y_1-Y_2) \div (X_1-X_2) \text{ units of good Y}Opportunity cost of each unit of good X=(Y
1
−Y
2
)÷(X
1
−X
2
) u
```
42
Opportunity costs are
expressed in terms of how much of another good, service, or activity must be given up in order to pursue or produce another activity or good. For example, when you head out to see a movie, the cost of that activity is not just the price of a movie ticket, but the value of the next best alternative, such as cleaning your room.
43
Absolute advantage
describes a situation in which an individual, business or country can produce more of a good or service than any other producer with the same quantity of resources.
The United States, for example, has a skilled workforce, abundant natural resources, and advanced technology. Because of these three things, the US can produce many goods more efficiently than potential trading partners, giving it an absolute advantage in the production of goods from corn to computers, to maple syrup and cars. This does not, however, mean that the US does not benefit from trading for these goods with other nations.
44
Comparative advantage
describes a situation in which an individual, business or country can produce a good or service at a lower opportunity cost than another producer.
For example, because it has an abundance of maple trees, Canada can produce maple syrup at a very low opportunity cost in relation to avocados, a fruit for which its climate is less suited.
Mexico, on the other hand, with its ample sunshine and warm climate. can grow avocados at a much lower opportunity cost in terms of maple syrup given up than Canada.
45
Production specialization
according to comparative advantage, not absolute advantage, results in exchange opportunities that lead to consumption opportunities beyond the PPC. Trade between two agents or countries allows the countries to enjoy a higher total output and level of consumption than what would have been possible domestically.
46
Comparative advantage and opportunity costs
determine the terms of trade for exchange under which mutually beneficial trade can occur.
In order for Canadians to benefit from trade with Mexico, they must be able to import avocados at a lower opportunity cost than it would cost them to grow domestically. Likewise, Mexico must get maple syrup more cheaply (in terms of avocados given up) than it could have produced it for domestically. The terms of trade refer to the trading price agreed upon by two agents, which when beneficial, will allow both countries to enjoy gains from trade.
Key terms
47
absolute advantage
the ability to produce more of a good than another entity, given the same resources. For example, in a single day, Owen can embroider 101010 pillows and Penny can embroider 151515 pillows, so Penny has absolute advantage in embroidering pillows.
48
comparative advantage
the ability to produce a good at a lower opportunity cost than another entity. For example, for every pillow Owen embroiders his opportunity cost is 222 scarves knitted, while Penny must forego 333 scarves for every pillow she embroiders, so Owen has comparative advantage in embroidering pillows.
49
specialization
when an individual or a country allocates most or all of its resources towards the production of a particular good or service. For example, Sal (an individual) specializes in producing educational videos, and Bangladesh (the country) specializes in producing textiles.
50
trade
the exchange of goods, services or resources between one economic agent and another
51
international trade
the exchange of goods, services, or resources between one country and another
52
gains from trade
the ability of two agents to increase their consumption possibilities by specializing in the good in which they have comparative advantage and trading for a good in which they do not have comparative advantage
53
terms of trade (also called “trading price”)
the price of one good in terms of the other that two countries agree to trade at; beneficial terms of trade allows a country to import a good at a lower opportunity cost than the cost for them to produce the good domestically, thus the country gains from trade.
54
The gains from trade can be shown in a PPC by
drawing a line originating at the point on the axis on which an agent is specializing its production (in the good it has a comparative advantage in) out to a point on the opposite axis beyond what it could have achieved without trade.
55
A country that has an absolute advantage in producing all goods still stands to benefit from trade with other countries, since
the basis of the gains for trade is comparative advantage, not absolute advantage.
56
It is not possible for an individual or country to have a comparative advantage in all goods.
There will be some other individual or country that can produce some things at lower opportunity costs.
57
"Self-sufficiency"
is not necessarily a trait to be strived for in the global economy. Individuals or nations who try to produce everything for themselves are likely to end up poorer than those that engage in specialization and trade.
58
In a competitive market, demand for and supply of a good or service
determine the equilibrium price.
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Markets have two agents: buyers and sellers. Demand represents
the buyers in a market.
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Demand is a description of
all quantities of a good or service that a buyer would be willing to purchase at all prices.
61
According to the law of demand, this relationship is
always negative: the response to an increase in price is a decrease in the quantity demanded.
For example, if the price of scented erasers decreases, buyers will respond to the price decrease by increasing the quantity of scented erasers demanded. A market for a good requires demand and supply.
62
What influences demand besides price?
Factors like changes in consumer income also cause the market demand to increase or decrease. For example, if the number of buyers in a market decreases, there will be less quantity demanded at every price, which means demand has decreased.
For instance, if scented erasers are normal goods, then when buyers have more income they will buy more scented erasers at every possible price; this would also shift the demand curve to the right.
63
.demand
all of the quantities of a good or service that buyers would be willing and able to buy at all possible prices; demand is represented graphically as the entire demand curve.
64
demand schedule
a table describing all of the quantities of a good or service; the demand schedule is the data on price and quantities demanded that can be used to create a demand curve.
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demand curve
a graph that plots out the demand schedule, which shows the relationship between price and quantity demanded
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law of demand
all other factors being equal, there is an inverse relationship between a good’s price and the quantity consumers demand; in other words, the law of demand is why the demand curve is downward sloping; when price goes down, people respond by buying a larger quantity.
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quantity demanded
the specific amount that buyers are willing to purchase at a given price; each point on a demand curve is associated with a specific quantity demanded.
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change in quantity demanded
a movement along a demand curve caused by a change in price; a change in quantity demanded is a movement along the same curve
69
change in demand
when buyers are willing to buy a different quantity at all possible prices, which is represented graphically by a shift of the entire demand curve; this occurs due to a change in one of the determinants of demand.
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determinants of demand
changes in conditions that cause the demand curve to shift; the mnemonic TONIE can help you remember the changes that can shift demand (T-tastes, O-other goods, N-number of buyers, I-income, E-expectations)
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normal good
a good for which demand will increase when buyers’ incomes increase.
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inferior good
a good for which demand will decrease when buyers’ incomes increase.
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substitute goods
goods that can replace each other; when the price of a good increases, the demand for its substitute will increase.
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complement goods
goods that tend to be consumed together; when the price of a good increases the demand for its complement will decrease.
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A change in demand and a change in quantity demanded are not the same thing. Tell why.
Demand changes only when one of the determinants of demand change (recall the elements of the mnemonic TONIE). For instance, rising consumer incomes (one of the determinants) will increase demand for new cars, a normal good, which would shift the entire demand curve to the right. More cars will be demanded at every price when demand increases.
76
Price is not a determinant of demand, because?
thus a change in price does not cause demand to increase or decrease. If the price of new cars changes, ceteris paribus, there will be a change in the quantity demanded and a movement along the demand curve.
77
A change in the price of a good will cause?
the quantity demanded for that good to change, but a change in the demand for related goods (complements and substitutes) causes the demand curve to shift.
For example, when the price of hot dogs falls three things happen: Quantity demanded for hot dogs increases, demand for hot dog buns (a complement) increases, and demand for hamburgers (a substitute) decreases
78
The law of supply states
that there is a positive relationship between price and quantity supplied, leading to an upward-sloping supply curve. Sellers like to make money, and higher prices mean more money!
For example, let’s say that fishermen notice the price of tuna rising. Because higher prices will make them more money, fishermen spend more time and effort catching tuna. As a result, as the price rises, the quantity of tuna supplied increases.
79
Factors that influence producer supply will
cause the market supply curve to shift.
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one of the determinants of supply in the market for tuna is
the availability and the price of fishing permits. If more fishing permits are made available and the permit fee is lowered, we can expect more fisherman to enter the market; as a result, the supply of tuna will likely increase. Now, at every price, a greater quantity of tuna will be supplied to the market.
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supply
a schedule or a curve describing all the possible quantities that sellers are willing and able to produce, at all possible prices they might encounter in a particular period of time; supply is represented in a graphical model as the entire supply curve.
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law of supply
all other factors being equal, there is a direct relationship between a good’s price and the quantity supplied; as the price of a good increases, the quantity supplied increases; similarly, as price decreases, the quantity supplied decreases, leading to a supply curve that is always upward sloping.
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quantity supplied
the amount of a good or service that sellers are willing to sell at a specific price; quantity supplied is represented in a graphical model as a single point on a supply curve.
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change in quantity supplied
a movement along a supply curve resulting from a change in a good’s price
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change in supply
a movement or shift in an entire supply curve resulting from a change in one of the non-price determinants of supply
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determinants of supply
changes in non-price factors that will cause an entire supply curve to shift (increasing or decreasing market supply); these include 1) the number of sellers in a market, 2) the level of technology used in a good’s production, 3) the prices of inputs used to produce a good, 4) the amount of government regulation, subsidies or taxes in a market, 5) the price of other goods sellers could produce, and 6) the expectations among producers of future prices.
87
You may often hear people say, incorrectly, that higher prices lead to “more supply” and that lower prices lead to “less supply.” However, this is an incorrect use of the terms.
because...Higher prices will result in an increased quantity supplied and lower price will result in a decrease in quantity supplied. Only a change in a non-price determinant of supply causes a good's supply to increase or decrease.
88
In a competitive market, demand for and supply of a good or service determine ?
the equilibrium price.
89
Equilibrium is achieved at?
the price at which quantities demanded and supplied are equal. We can represent a market in equilibrium in a graph by showing the combined price and quantity at which the supply and demand curves intersect.
For example, imagine that sellers of squirrel repellant are willing to sell 500 units of squirrel repellant at a price of \$5 per can. If buyers are willing to buy 500 units of squirrel repellent at that price, this market would be in equilibrium at the price of \$5 and at the quantity of 500 cans.
90
Whenever markets experience imbalances—creating disequilibrium prices, surpluses, and shortages...
market forces drive prices toward equilibrium.
91
A surplus exists when the price is
above equilibrium, which encourages sellers to lower their prices to eliminate the surplus.
92
A shortage will exist at any price below equilibrium, which leads to
the price of the good increasing.
For example, imagine the price of dragon repellent is currently \$ 6 per can. People only want to buy 400 cans of dragon repellent, but the sellers are willing to sell 600 cans at that price. This creates a surplus because there are unsold units. Sellers will lower their prices to attract buyers for their unsold cans of dragon repellant.
93
Changes in the determinants of supply and/or demand result in
a new equilibrium price and quantity. When there is a change in supply or demand, the old price will no longer be an equilibrium. Instead, there will be a shortage or surplus, and price will subsequently adjust until there is a new equilibrium.
For example, suppose there is a sudden invasion of aggressive unicorns. There will be more people who want to buy unicorn repellent at all possible prices, causing demand to increase. At the original price, there will be a shortage of unicorn repellant, signaling sellers to increase the price until the quantity supplied and quantity demanded are once again equal.
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market
an interaction of buyers and sellers where goods, services, or resources are exchanged
95
shortage
when the quantity demanded of a good, service, or resource is greater than the quantity supplied
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surplus
when the quantity supplied of a good, service, or resource is greater than the quantity demanded
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equilibrium
in a market setting, an equilibrium occurs when price has adjusted until quantity supplied is equal to quantity demanded
98
disequilibrium
in a market setting, disequilibrium occurs when quantity supplied is not equal to the quantity demanded; when a market is experiencing a disequilibrium, there will be either a shortage or a surplus.
99
equilibrium price
the price in a market at which the quantity demanded and the quantity supplied of a good are equal to one another; this is also called the “market clearing price.”
100
equilibrium quantity
the quantity that will be sold and purchased at the equilibrium price
Key Graphical Models - Th
101
When both supply and demand change at the same time, the impact on equilibrium price and quantity
cannot be determined for certain without knowing which changed by a greater amount.
102
When showing an equilibrium price and quantity, it is important to
clearly label these on the appropriate axis, not just the interior of the graph. Remember that the point on either axis represents the market price and the market quantity, not a point in the middle of the graph.
103
When both supply and demand change at the same time,
we will not be able to make a statement about what happens to both price and quantity, one of these will be uncertain.
