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193 Cards in this Set
- Front
- Back
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lack of enough resources to satisfy all desired uses of those resources
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scarcity
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Resource inputs used to produce goods and services, such as land, labor, capital, and entrepreneurship
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factors of production
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Final goods produced for use in the production of other goods, e.g., equipment, structures
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capital
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The assembling of resources to produce new or improved products and technologies
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entrepreneurship
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the study of how best to allocate scarce resources among competing uses
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economics
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the most desired goods or services that are forgone to obtain something else
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opportunity cost
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the alternative combinations of final goods and services that could be produced in a given time period with all available resources and technology
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production possibilities
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maximum output of a good from the resources used in production
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efficiency
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an increase in output (real GDP); an expansion of production possibilities
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economic growth
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the use of market prices and sales to signal desired outputs (or resource allocations)
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market mechanism
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the doctrine of "leave it alone," of nonintervention by government in the market mechanism
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laissez faire
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an economy that uses both market signals and government directives to allocate goods and resources
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mixed economy
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an imperfection in the market mechanism that prevents optimal outcomes
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market failure
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government intervention that fails to improve economic outcomes
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government failure
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the study of aggregate economic behavior, of the economy as a whole
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macroeconomics
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the study of individual behavior in the economy, of the components of the larger economy
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microeconomics
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the assumption of nothing else changing
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ceteris paribus
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the total market value of all final goods and services produced within a nation's borders in a given time period
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gross domestic product
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the dollar value of GDP divided by total population; average GDP
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per capita GDP
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an increase in output (real GDP); an expansion of production possibilities
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economic growth
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expenditures on (production of) new plant, equipment, and structures (capital) in a given time period, plus changes in business inventories
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investments
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payments to individuals for which no current goods or services are exchanged, e.g., Social Security, welfare, unemployment benefits
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income transfers
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goods and services sold to foreign buyers
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exports
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goods and services purchased from foreign sources
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imports
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the value of exports minus the value of imports
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net exports
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the ability of a country to produce a specific good at a lower opportunity cost than its trading partners
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comparative advantage
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resource inputs used to produce goods and services, such as land, labor, capital, entrepreneurship
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factors of production
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the knowledge and skills possessed by the workforce
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human capital
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production processes that use a high ratio of capital to labor inputs
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capital-intensive
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output per unit of input, such as output per labor-hour
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productivity
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costs (or benefits) of a market activity borne by a third party
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externalities
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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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one-fifth of the population, rank-ordered by income (e.g., top fifth)
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income quintile
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any place where factors of production (e.g., land, labor, capital) are bought and sold
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factor market
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any place where finished goods and services (products) are bought and sold
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product market
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the most desired goods or services that are forgone in order to obtain something else
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opportunity cost
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the ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus
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supply
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the ability and willingness to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus
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demand
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a table showing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus
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demand schedule
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a curve describing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus
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demand curve
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the quantity of a good demanded in a given time period increases as its price falls, ceteris paribus
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law of demand
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Goods that substitute for each other; when the price of good x rises, the demand for good y increases, ceteris paribus
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substitute goods
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Goods frequently consumed in combination; when the price of good x rises, the demand for good y falls, ceteris paribus
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complementary goods
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the assumption of nothing else changing
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ceteris paribus
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a change in the quantity demanded at any (every) given price
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shift in demand
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the total quantities of a good or service people are willing and able to buy at alternative prices in a given time period; the sum of individual demands
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market demand
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the total quantities of a good that sellers are willing and able to sell at alternative prices in a given time period, ceteris paribus
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market supply
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the quantity of a good supplied in a given time period increases as its price increases, ceteris paribus
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law of supply
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the price at which the quantity of a good demanded in a given time period equals the quantity supplied
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equilibrium price
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the use of market prices and sales to signal desired outputs (or resource allocations)
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market mechanism
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lower limit set for the price of a good
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price floor
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the amount by which the quantity supplied exceeds the quantity demanded at a given price; excess supply
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market surplus
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the amount by which the quantity demanded exceeds the quantity supplied at a given price; excess demand
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market shortage
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upper limit imposed on the price of a good
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price ceiling
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the most desirable combination of output attainable with existing resources, technology, and social values
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optimal mix of output
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the use of market prices and sales to signal desired outputs (or resource allocations)
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market mechanism
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an imperfection in the market mechanism that prevents optimal outcomes
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market failure
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a good or service whose consumption by one person excludes consumption by others
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private good
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a good or service whose consumption by one person does not exclude consumption by others
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public good
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an individual who reaps direct benefits from someone else's purchase (consumption) of a public good
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free rider
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costs (or benefits) of a market activity borne by a third party; the difference between the social and private costs (benefits) of a market activity
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externalities
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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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the ability to alter the market price of a good or a service
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market power
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government intervention to alter market structure or prevent abuse of market power
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antitrust
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an industry in which one firm can achieves economies of scale over the entire range of market supply
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natural monopoly
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payments to individuals for which no current goods or services are exchanged, like Social Security, welfare, and unemployment benefits
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transfer payments
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a food or service society deems everyone is entitled to some minimal quantity of
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merit good
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the inability of labor-force participants to find jobs
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unemployment
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an increase in the average level of prices of goods and services
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inflation
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the most desired goods or services that are forgone in order to obtain something else
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opportunity costs
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a tax system in which tax rates rise as incomes rise
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progressive tax
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a tax that levies the same rate on every dollar of income
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proportional tax
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a tax system in which tax rates fall as incomes rise
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regressive tax
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government intervention that fails to improve economic outcomes
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government failure
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theory of public-sector behavior emphasizing rational self-interest of decision makers and voters
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public choice
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3 Basic Economic Questions?
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1. What shall be produced
2. How shall we produce goods and services 3. To whom shall goods and services be distributed |
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4 Limited Resources?
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1. Land
2. Labor 3. Capital (goods) 4. Entreprenuerial Skills |
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Windquest; Group of rich people who lend money to entreprenuers
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venture capitalist
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3 Features of Goods?
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1. Tangible
2. Consumer - used up 3. Capital - tools and equipment |
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1 Example of Services?
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Activities
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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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Why does opportunity cost exist?
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Because we can only use our scarce resources in one way, giving up the opportunity to use them in other ways
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2 Examples of opportunity cost?
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1. Buying poptarts instead of a drink
2. Working instead of going to class |
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shows various combinations of output at full employment and demonstrates opportunity cost or trade offs
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production possibilities curve
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What is the goal of the production possibilities curve?
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You want to be on the curve
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Being on the curve?
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economically efficient
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Being inside the curve?
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Possible - Under production
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Being outside the curve?
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Impossible - Not enough resources
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What? - Tradition and Custom
How? - Tradition and Custom Who? - Tradition and Custom Ex.= Primitive Societies |
Traditional System
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What? - Central Authority
How? - Central Authority Who? - Central Authority Needs lots of planning in order to be successful and is usually based upon personal preference or ideology Ex. = Dictatorship |
Command System
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Minimum of government involvement = Should be an umpire, not a player in economic game
Make and enforce rules, administer games, money, weights and measures |
Market System
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Example of Mixed System?
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United States of America
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How do we decide what we are going to produce in Mixed System?
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Consumers 70%
Government 20% Business Investment 10% |
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How can we produce in a Mixed System?
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Businesses must be efficient but government rules must still apply
Ex. = Health Dept. and OSHA |
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Who gets the product in Mixed System?
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Distribution based on productivity
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Method by which a society does three things: Chooses, produces, and distributes goods and services to satisfy needs and wants
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economics
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deals with whole economy, national situations, GDP, money supply, inflation/deflation
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macroeconomics
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looks at individual units - company, consumer behavior, sectors
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microeconomics
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fair share
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"equity"
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Centralization of Market System?
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No Central Control
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Planning in Market System?
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No System Planning
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Interest/Values in Market System?
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Individual
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Individual Freedom/ Government Control in Market System?
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Unlimited
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Risk/Security in Market System?
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Lots of Risk
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Personal Incentive in Market System?
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Lots of Incentive
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Satisfaction in Market System?
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Individuals
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Competition in Market System?
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Much Fierce
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Large Projects in Market System?
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Can't Do
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Public Protection in Market System?
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Government Too Weak
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Government Power in Market System?
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Very Limited
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Planning Mistakes in Market System?
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None, because they don't do any planning
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Response to Change in Market System?
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Very Fast
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Reward Basis in Market System?
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Reward by Productivity
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Centralization of Command System?
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Government
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Planning in Command System?
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Detailed Plans
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Interest/Values in Command System?
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Theory - Society
Real World - Government |
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Individual Freedom/ Government Control in Command System?
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Less freedom
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Risk/Security in Command System?
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Lots of security
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Personal Incentive in Command System?
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No Personal Incentive
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Satisfaction in Command System?
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Government
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Competition in Command System?
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No Competition
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Large Projects in Command System?
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Can Be Done
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Public Protection in Command System?
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Much in Theory
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Government Power in Command System?
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Too Powerful
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Planning Mistakes in Command System?
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Yes, little mistakes can make big mistakes
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Response to Change in Command System?
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Very Slow
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Reward Basis in Command System?
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Everybody makes same amount
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determines what gets produced, how, and for whom
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"invisible hand" - Adam Smith - 1776 - "The Wealth of Nations"
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Schedule of the amounts of a product buyers are willing to buy at all possible prices during the same time period
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demand schedule
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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 Your $ goes farther Your purchasing power increases Your real income increases |
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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movements along a given demand curve, in response to price changes of that good
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changes in quantity demanded
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shifts of the demand curve due to changes in tastes, income, other goods, or expectations
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changes in demand
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6 Reasons for Change in Demand?
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1. Change in Income
2. Consumer Preferences Change 3. Number of People and Composition 4. Future Expectations 5. Related Goods 6. Technology |
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More income equals increased demand
Less income equals decreased demand |
Change in Income
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-Taste
-Government Report -Advertising -Fad |
Consumer Preference Change
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-Price goes up, buy now to beat price increase
-Availability - Won't be available - Income goes up |
Future Expectations
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Gasoline goes up, cars go down
Airfare goes up, car rentals go down |
Related Goods
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A schedule of the amounts of a product producers are willing to offer for sale at all possible prices during the same time period
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supply schedule
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2 Reasons for Law of Supply?
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1. Production costs
2. Alternate Possibilities (Substitute) |
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Small output - best resources - low cost/unit - low selling price
Increase output - next best resource - inc. cost/unit - increase selling price High output - poor quality of resource - High Cost/Unit - High Selling Price |
Production Costs
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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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Movements along a given supply curve
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changes in quantity supplied
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shifts of the supply curve
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changes in supply
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4 Causes for Change in Supply?
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1. Change in Cost of Production
2. Change in Alternative Possibilities 3. Change in # of Producers 4. Change in Expectations |
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Price goes up, supply goes up
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Cost of Production
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Housing Market Flop For Carpenters
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Alternative Possibilities
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Increase in supply
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# of Producers
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You think price will be higher in future, so you keep your product and today's supply goes down
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Expectations
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competition among sellers drives price down
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surplus
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"Beauty of Market"?
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1. Self-Adjusting
2. People (businesses) acting in their own self-interest gets society's works accomplished |
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Solutions to Price Floor?
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Government buys surplus and dump it and sell it on world market at cheaper price
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Why is pure capitalism bad? Several examples from the first 1 1/2 columns.
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Just as brutal and cruel as communism
Low wage, unsafe work environments, no workman's compensation and no benefits |
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Reese believes in...but also believes in...(second column paragraph)
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Maximum possible freedom and community and responsibility to that community
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Why can't you be truly self-made in our USA community?
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Because you must live entirely off your own labor
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Total freedom would mean...so Reese wants to fall in with ___-_________ _____________ who believes in...
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Freedom is not a virtue; old-fashioned conservatives who believe in ordered liberty, strict observances of the Constitution and a mind-our-own-business foreign policy
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What does he say we should strive for?
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Something short of pure, unregulated capitalism and pure, overregulated socialism
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What is happening in the USA? (all of first column) Give 2 or 3 proof statements. Is this process slow or rapid?
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We are slowly moving towards socialism; Statism is coming by slow rot and the federal government has added more than 30,000 new employees to its payroll
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Why is socialism attractive? (2 Paragraphs) Cite 2-3 Reasons
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1. Government is responsible for implementing altruism throughout society
2. Government must control all available resources with a view toward equality and fairness 3. Government must fight the selfish impulse of people to keep the fruits of their own labor |
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Why does socialism require force?
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Sacrificing the fruit of one's own labor for the achievement of a larger social goal is not natural behavior and cannot be maintained on a voluntary basis
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Why did communism in the Soviet Empire fail?
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Humans are innately drawn to act in their own self-interest; Running head on against the grain of this basic human drive is doomed to fail
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What conclusions does Bowles make in the last three paragraphs?
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They no longer serve; they rule a nation of the government, by the government and for the government.
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4 Specific Sources of Market Failure?
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1. Public Goods
2. Externalities 3. Market Power 4. Equity |
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Must share, if shared, you don't lose and has a huge spillover benefit
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Public Good
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You don't have to share it, if shared, you lose
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Private Good
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In which situation has demand increased?
A. Store normally sells 20 shirts per day but sells 40 when sale-priced at "1/2 off normal price." B. A store normally sells 5 snow blowers a week but during a snowy November week sells 10 snow blowers in a week. |
B
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When supply is decreased, what happens to the equilibrium price and quantity trade?
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Quantity demand goes down
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Which would cause the demand for air conditioners to decrease?
A. Price increase B. Cooler weather |
B
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A price cut on air fare to the Caribbean would;
A. Cause an increase in demand B. Cause a increase in demand for hotel space in Caribbean hotels C. Both of the above |
A
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Assume people have a choice of watching the Red Wings or Pistons play and are equally interested in both teams, but the Red Wings increase their ticket prices.
Then: A. The demand for Piston's tickets will increase B. The demand for Red Wings tickets will decrease |
A
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The supply of electricity to the market will increase when:
A. People demand more electricity B. Production costs decrease |
B
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The government of a developing nation (most citizens of which are poor) desires to make cars more affordable to its citizens and imposed a price ceiling on car prices. The result is that fewer citizens than ever are able to buy a car. Why?
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Create a shortage, everyone can't afford it
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For one reason or another, the $.25 selling price of a package of gum is below its production cost and producers will be forced to close. To forestall this event, the government orders gum may not be sold for less than $.50/package. The result would be:
A. Demand for gum would fall B. Supply of gum will increase C. The sellers will be able to stay in business D. More sellers will be forced to close than before |
D
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How does market fail to operate properly regarding public goods?
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Works efficiently only if benefits of consuming particular good are available only to the individuals who purchase that product
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How does market fail to operate properly regarding externalities?
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Spilling over to "third parties"
Ex. Second-hand smoke |
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How does market fail to operate properly regarding market power?
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Market may fail because response to price signals may be flawed
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How does market fail to operate properly regarding equity?
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Distributing a larger share of total output to those with the most income
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How does market fail to operate properly regarding instability?
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The micro failures of the marketplace imply that we're at the wrong point on the production possibilities curve or inequitably distributing the output produced
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Why is U.S. Government growing in size?
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Increased responsibilities have greatly increased the size of the public sector
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Why is U.S. Government becoming relatively smaller?
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Since the 1950s the public sector has grown a bit more slowly than the private sector, slightly reducing its relative size
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As federal government grows, what category of spending is increasing most rapidly?
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Income transfers
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Name the two largest sources of income for the federal government?
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Income Taxes and Social Security Taxes
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Largest source of income for state governments?
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Sales Tax
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Largest source of income for local governments?
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Property Taxes
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What is government failure?
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Government intervention that fails to improve economic outcomes
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What are the two key questions to be asked when considering the issue of governmental waste?
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Efficiency and Opportunity Cost
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What does cost-benefit analysis purport to do?
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Locate the optimal mix of output - the point at which no further increase in public-sector spending activity is desirable.
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Why is cost-benefit analysis difficult to apply in real life?
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Must be estimated because they don't have (reliable) market prices
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In practice, on what do we rely to decide the output of the public sector?
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Voting mechanisms
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What is ballet box economics?
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Government chooses level and mix of output that seems to command the most votes
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How is public-choice theory similar to the market process?
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A central tenet of public-choice theory is that bureaucrats are just as selfish as everyone else
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