Unit 1

Question 1

MACRO-economics

Answer 1

Studying the whole economy

Question 2

Marginal Utility

Answer 2

Inputs are valuable because the end product brings utility

Question 3

Water-Diamond Paradox

Answer 3

Why are diamonds more expensive than water? Scarcity of diamonds and surplus of water.

Question 4

Keynesian Economics

Answer 4

Govts should step in and smooth out business cycles

Question 5

Monetarism

Answer 5

Govt should maintain consistent growth in the supply of money to smooth out cycles

Question 6

Austrianism

Answer 6

Focuses heavily on subjectivism and how prices communicate widely dispersed knowledge.

Question 7

Classical Economics

Answer 7

Aristotle to Karl Marx
Focused on the production of goods; more inputs = higher value.
“Labor Theory of Value”

Question 8

Neoclassical Economics

Answer 8

3 economists (separate in Europe) developed the theory that value is derived from marginal utility.

Question 9

The Marginal Revolution

Answer 9

Split classical and neo-classical economics

Question 10

5 Key Economic Assumptions

Answer 10

1) scarcity
2) Due to scarcity, choices must be made (trade off)
3) Everyone’s goal is to make choices that maximize their satisfaction (self interest)
4) Everyone makes decisions by comparing the marginal costs and marginal benefits of every choice

Question 11

Opportunity Cost

Answer 11

Most desirable alternative given up when you make a choice.

Question 12

Allocate

Answer 12

Distribute

Question 13

Consumer Goods

Answer 13

Created for direct consumption

Ex) pizza, video games

Question 14

Capital Goods

Answer 14

Created for indirect consumption. Things companies buy to make consumer goods.
Ex) oven, blenders

Question 15

4 factors of production

Answer 15

1) LAND - all natural resources that are used to produce goods and resources
2) LABOR - any effort a person devotes to a task for which a person is paid.
3) CAPITAL - physical and human
4) ENTREPRENEURSHIP- ambitious leaders that combine the other factors of production to create goods and services.

Question 16

Physical Capital

Answer 16

Tools we use to create other goods

Question 17

Human capital

Answer 17

Knowledge, skills and education (mental tools)

Question 18

Constant Opportunity Cost

Answer 18

Resources are easily adaptable for producing either good. Result is a straight line PPC (not common)

Question 19

Increasing Opportunity Cost

Answer 19

As you produce more of any good, the opportunity cost ( forgone production of another good) will increase.

Question 20

Productive Efficiency

Answer 20

Products are produced with less cost. This is any point of the PPC

Question 21

Allocative Efficiency

Answer 21

Products being produced are the ones most desired by society. This optimal point on the PPC depends on the desires of society.

Question 22

Absolute advantage

Answer 22

Producer that can produce the most output of requires the least amount of inputs ( resources)

Question 23

PPC Curve shifters

Answer 23

1) change in resource quantity or quality
2) change in technonlogy
3) change in trade

Decrease

1) destruction of resources (ex power plant blows up)
2) unemployment dot inside graph

Question 24

Output

Answer 24

1x =y/x

Question 25

Input

Answer 25

1x = x/y

Question 26

Law of Demand

Answer 26

There is an INVERSE relationship between price and quantity demanded.

Question 27

Substitution effect

Answer 27

If the price goes up for a product, consumers buy less of that product and more of a substitute project.

Question 28

Income effect

Answer 28

If the price goes down, the purchasing power increases for consumers (wealthier)

Question 29

The law of diminishing marginal utility

Answer 29

That as you consume anything, the additional satisfaction that you will receive will eventually start to decrease.

Question 30

Ceteris paribus

Answer 30

When this assumption is dropped, movement no longer occurs along the demand curve. This is a change in demand NOT a change in quantity demanded. PRICE DOES NOT SHIFT THE CURVE it only causes movement along the curve. (Regular Demand Curve)

Question 31

5 Shifters of Demand

Answer 31

1) Tastes and preferences 2) # of consumers 3) Price of related goods 4) Income 5) Future expectations

Question 32

Complements

Answer 32

2 goods that are bought and used together. | Ex) if the price of hot dogs falls, demand for hot dog buns will….

Question 33

Law of Supply

Answer 33

Direct relationship between price and quantity supplied. | As price increases quantity producers make increase

Question 34

5 shifters of supply

Answer 34

1) Prices/ availibity of inputs/resources 2) Number of sellers 3) Technology 4) Government Action : Taxes and subsidies 5) Expectations of Future profit

Question 35

Subsidy

Answer 35

Govt payment that supports a business or market. Subsidies cause the supply of a good to increase

Question 36

Increase in supply…

Answer 36

Increases quantity, decreases price

Question 37

Decrease in supply…

Answer 37

Price didn’t change but there is LESS product being produced. Price will eventually go up BUT IT IS NOT AN DETERMINATE BUT AN EFFECT.

Question 38

Disequilibrium

Answer 38

2 kinds Shortage: when quantity supply is less than quantity demand. Happens when items are too cheap. QsQd