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100 Cards in this Set
- Front
- Back
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Cost of item or activity in terms of the next best alternative
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Opportunity Cost
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How are 3 Basic Questions of What, How, and Who answered in Traditional System?
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What? - Tradition + Custom
How? - Tradition + Custom Who? - Tradition + Custom |
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How are 3 Basic Questions of What, How, and Who answered in Command System?
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What? - Central Authority
How? - Central Authority Who? - Central Authority |
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How are 3 Basic Questions of What, How, and Who answered in Market System?
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What? - Individuals
How? - Individuals Who? - Individuals |
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A market characterized by a large number of independent sellers of standardized products, free flow of information, and free entry and exit. Each seller is a "price taker" rather than a "price maker"
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pure competition market
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A market structure in which several or many sellers each produce similar, but slightly differentiated products. Each producer can set its price and quantity without affecting the marketplace as a whole.
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monopolistic competition market
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A market dominated by a small number of participants who are able to collectively exert control over supply and market prices.
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oligopoly
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A firm that produces the entire market supply of a particular good or service
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monopoly
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5 Reasons for Change in Demand?
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1. Change in Income
2. Consumer Preferences Change 3. Number of people + composition 4. Future Expectations 5. Related Goods |
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5 Reasons for Change in Supply?
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1. Any change in cost of production
2. Change in Alternate Possibilities 3. Change in Number of Producers 4. Change in Expectations 5. Technology |
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Lower limit set for the price of a good
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price floor
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Upper limit imposed on the price of a good
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price ceiling
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Monetary value of all final goods and services produced inside a country in a year
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GDP
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Total income earned by current factors of production: NDP less depreciation and indirect business taxes
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national income
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Income received by households before payment of personal taxes
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personal income
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After-tax income of households
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disposable income
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Percentage of labor force that is unemployed
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unemployment rate
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Those not working, wanting to work, and have given up looking
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discouraged job seeker
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Part time and want full time or below skill level
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underemployed
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Unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs
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structural unemployment
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Unemployment attributable to a lack of job vacancies, that is, to inadequate aggregate demand
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cyclical unemployment
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Out of work but will get job relatively easily and quickly. Should be 3-4%
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frictional unemployment
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Rise in the average level of prices
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inflation
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Who is economic winner due to inflation?
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debtor
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Who is economic loser due to inflation?
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creditor
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What is added together to obtain the market rate of interest for long term loans?
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Real Interest Rate + Anticipated Inflation Rate
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What is the dominant factor affecting the level of consumption?
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Disposable Income
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What three secondary factors affect the level of consumer spending?
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1. Availability of Credit
2. Consumer Indebtedness 3. Satisfaction with Lifestyle |
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State three factors which affect the level of investment.
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1. Interest Rate
2. Past Profits 3. Expected Demand for Product |
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Explain why investment is unpredictable and irregular.
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It is autonomous, meaning it is not closely related to anything
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The quantity of a good demanded in a given time period increases as its price falls
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Law of Demand
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3 Reasons why Law of Demand is true?
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1. Substitution Effect
2. Income Effect 3. Diminishing Marginal Utility |
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Price of "A" goes up, so you use "B"
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Substitution Effect
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Your income stays same, as prices decrease, you are able to buy more units
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Income Effect
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Less and less usefulness from each additional unit
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Diminishing Marginal Utility
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The quantity of a good supplied in a given time period increases as its price increases
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Law of Supply
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2 Reasons why Law of Supply is true?
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1. Amount of Supply reflects production cost
2. Alternate Possibilities |
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Small output - best resources - low cost/unit - low selling price
Increase output - next best resource - inc. cost/unit - increased selling price High output - poor quality of resource - high cost/unit - high selling price |
Amount of supply reflects production cost
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As price of "A" goes up, it attracts resources from "B"
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Alternate Possibilities
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State the 2 basic facts leading to the need for an economic system.
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Supply and Demand
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Which market type has the most control over our prices?
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Monopoly
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Which market type has the least control over our prices?
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Pure Competition
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Apples - Bumper Crop (Too Many)
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Prices go down, increase in supply
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Fad - Caramel Apples
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Prices go up, demand increases
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Apples - Ecoli
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Prices go down, demand decreases
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Hail Winds Effect Apples
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Prices go up, decrease in supply
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State the resulting market problem of a price ceiling?
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Shortage
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State the resulting market problem of a price floor?
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Surplus
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Shortage on Supply and Demand Graph?
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Lower half
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Surplus on Supply and Demand Graph?
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Upper half
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Why a price ceiling?
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Help consumers get a "fair" price
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Why a price floor?
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Help producers get a "fair" price
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Define a positive externality?
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3rd party benefits without paying
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Define a negative externality?
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3rd party pays but gets no benefit
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Example of a positive externality?
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Neighbor security light
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Example of a negative externality?
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Drunk Driving or Second-hand Smoke
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Explain how a positive externality distorts the optimal output and use of resources?
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There is less demand, so there is less output
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Explain how a negative externality distorts the optimal output and use of resources?
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There is more supply, so there is more output
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What percent of GDP is Consumer Spending?
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65%-70%
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Explain Consumer Spending?
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1. "Big Ticket" durable goods - Long time
2. Cheaper = Non-durable goods - 2 yrs. or less 3. Services - activity; intangible |
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Explain Gross Private Domestic Investment?
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1. Plant and Equipment (Capital Goods)
2. Residential House Construction 3. Inventory adjustments |
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2 Rules of Gross Private Domestic Investment?
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1. If inventory goes up, ADD because we made it but didn't sell it.
2. When inventory goes down, we subtract the diff. because we sold it but didn't make it. |
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Explain Rule of Foreign Trade?
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Add Exports - We made it but didn't buy - Add in
Subtract Imports - We bought it (+ counted it) but didn't make it - Subtract |
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Explain Government Spending?
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All levels of gov. and all types
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What is the current GDP?
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15 Trillion
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Explain 3 problems in compiling or using National Income statistics.
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1. Avoid double counting
- Only count final output - Add up the "value added" at each stage of production 2. Only count new output 3. Non-market output - Work done but no buyer/ seller |
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Output of various years measured in the price of each particular year.
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Current $ or Nominal GDP
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Output of various years measured in the price of one "particular year" = Base Year
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Constant $ or Real GDP
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Should nominal or real GDP be used for year to year comparisons and why?
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Real; Because they factor out price changes so any change in GDP is a change in output
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Why is a 0% unemployment rate an unrealistic goal?
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Because it is impossible
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What is our unemployment rate goal?
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3-4%
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Unemployment does not affect all population sub-groups evenly. Give comparisons of how unemployment unequally affects 4 different sub-groups.
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White Adults just below
1.5x for Hispanic Adults 7x Black Teenagers 1.5x High School Dropouts |
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What are the 2 basic causes of inflation?
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Demand-Pull and Cost-Push
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When there's too much demand and output cannot keep up and prices go up.
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Demand-Pull Inflation
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Give an example of Demand-Pull Inflation?
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Social Security
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Solution to Demand-Pull Inflation?
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1. Less government spending
2. Feds need better information to make better decisions |
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Higher production costs are passed on to consumers, in form of higher prices
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Cost-Push Inflation
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Give an example of Cost-Push Inflation?
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OPEC raised prices of oil/dependency
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Solution to Cost-Push Inflation?
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Convince people there is no inflation.
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Comment on economic winners and losers due to inflation.
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Winner are the debtors and the losers are the creditors
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Comment on economic disruptions caused by inflation.
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1. Less productive investment, pay it off 10-15 years
2. Uncertainty 3. Wage + Price Controls |
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Describe Classical Economics Theory.
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1. Laissez-Faire
2. Supply creates Demand 3. Always at full employment |
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Describe Keynesian Economics Theory.
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1. Fiscal Policy
2. Financing Deficit 3. Disposing of Surplus 4. Demand creates Supply 5. Income effects Demand 6. Demand creates Output, Jobs, and Price Level |
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A theory holding that economic variations within a given system, such as changing rates of inflation, are most often caused by increases or decreases in the money supply.
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Monetarist Economics Theory
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An economic theory which holds that reducing tax rates, especially for businesses and wealthy individuals, stimulates savings and investment for the benefit of everyone
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Supply Side Economics Theory
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Explain 5 factors affecting the level of imports/exports.
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1. Exchange Rate
2. National Income 3. Nationalism/Attitudes 4. Relative Prices 5. Interest Rates |
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Depict Equilibrium GDP at full-employment GDP on a graph.
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Line is right on dot.
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Depict Inflationary Gap on a graph and 2 formulas to solve problem.
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Dot is after line.
1. Cut gov. spending 2. Raise taxes |
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Depict Recessionary Gap on a graph and 2 formulas to solve problem.
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Dot is before line.
1. Add Gov. Spending 2. Cut taxes |
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Identify the Federal Reserve organization.
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7 People are on the Board of the Federal Reserve, termed for 14 years so that they cannot be fired or influenced by political leaders.
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5 Functions of Federal Reserve?
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1. Control the Supply of Money
2. Check on Banks 3. Print Currency 4. Clear Checks for Banks 5. Many other things |
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Name the three functions of money.
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1. Medium of an exchange
2. Store Value 3. Unit of account, which measure the store value. |
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Define M1.
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Cash, Transactions balance, Checking and Savings.
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Name three factors which give value to money and then explain how each affects the value of money.
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1. Faith in economy - That there will be goods and services
2. Faith people will accept it later 3. Faith that gov't will keep it limited |
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Define M2.
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M1 plus regular savings sectors, money
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Use the Fed to adjust the money supply, which adjusts interest rates, to obtain the four goals of FE, MO, SP, and EG
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Monetary policy
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What are the three weapons of the Federal Reserve to control the amount of money in the economy?
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1. Fed can adjust the reserve ratio.
2. Fed buys and sells bonds on the open market known as Treasury Bonds. 3. Faith in God |
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the use of government spending and revenue collection to influence the economy
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Fiscal Policy
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any reduction in private consumption or investment that occurs because of an increase in government spending
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"crowding out effect"
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Explain MV=QP.
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M=Money
V=Velocity Q=Quantity of Goods P=Price of Goods |
