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74 Cards in this Set
- Front
- Back
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How are choices made?
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People compare benefits to cost.
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Should you be attending college?
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Costs: Tuition, Time --> Opp. Cost, Psychological Cost (Stress)
Benefits: Knowledge, Skills, Social Network Yes. |
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Suppose that if you were not attending college, you would be working and making a net income of $15,000 a year. Based on this information alone, what is the opp. cost of attending college?
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$15,000
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Suppose you have a full-time job that pays a net income of $15,000. You got an offer to work for another full-time job that pays a net income of $12,000 and another offer from another company to work for $13,000 (also full-time). All jobs are equally enjoyable, have the same time schedule, and are located at the same building (a mall). What is the opportunity cost of working at the current job?
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$13,000
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the study of how choices are made and the implications of these choices
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economics
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the value of the best alternative
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opportunity cost
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costs that involve money payment
E.g., a heating bill payment |
explicit costs
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costs that are not explicit
E.g., the opportunity cost of getting job A rather than another job or going to college |
implicit costs
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revenue minus all explicit and implicit costs
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economic profit
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revenue minus explicit costs
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accounting profit
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Suppose a group of investors invested $10 million in a company to produce commercial coffee machines. They are just investors and won't work for the company. In the last year, the company made $5 million in revenues. The interest rate for Certificate of Deposits for that year was 4%. The company incurred the following explicit costs during that year:
Supplies and distribution: $2,000,000 Bills, taxes: $500,000 Building and machinery rents: $200,000 Wages: $2,000,000 What was the accounting profit? |
$300,000
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Suppose a group of investors invested $10 million in a company to produce commercial coffee machines. They are just investors and won't work for the company. In the last year, the company made $5 million in revenues. The interest rate for Certificate of Deposits for that year was 4%. The company incurred the following explicit costs during that year:
Supplies and distribution: $2,000,000 Bills, taxes: $500,000 Building and machinery rents: $200,000 Wages: $2,000,000 What was the economic profit? |
$-100,000
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When you attend college, some of the benefits come from personal life experiences (like making friends, building a social network, dating interesting people, learning to be responsible, disciplined, organized, etc.). If decisions are made by comparing benefits and costs, we must somehow assign values to all benefits and costs in order to compare them and reach a conclusion. How do we assign a numerical value to something that has no price? For instance, what is the equivalent monetary value of all college life experiences that you had and expect to have?
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You make offers to give up those experiences
$8 Million |
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If you consider the value of all benefits and costs of attending GVSU, do you conclude that coming to GVSU was the right choice? Explain.
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Because social skills are just as important as your education
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Not everybody decides to attend college. Why? To answer this question, consider the benefits and costs of attending college discussed before. Why would the benefits be less than the costs for those people?
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Not enough money to get credits.
Some may be heading into family-run business. They didn't study hard enough to be prepared for college. |
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When analyzing choices that people make, in Economics we assume that people are rational. Basically, this means that:
(i) each person does the best for herself. Example: |
Giving money to charity, you get tax-credits
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When analyzing choices that people make, in Economics we assume that people are rational. Basically, this means that:
(ii) each person makes decisions using all information available to her. Example: |
If you see weather forecast, you will be better prepared
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When analyzing choices that people make, in Economics we assume that people are rational. Basically, this means that:
(iii) people learn, thus avoiding future mistakes Example of learning by induction: |
Europeans thought all swans were white before they had traveled to Australia
You think sun will rise tomorrow because it always rises |
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When analyzing choices that people make, in Economics we assume that people are rational. Basically, this means that:
(iii) people learn, thus avoiding future mistakes Example of learning by deduction: |
You think pen will drop when you let go of it, because logically it makes sense
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What are the implications of rationality?
a) People respond to incentives. For instance: (i) If the instructor of a course starts to assign grades for attendance, then ____ (more/ fewer/ the same number of) students would start attending classes. |
more
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What are the implications of rationality?
a) People respond to incentives. For instance: (ii) Wearing a seat-belt when driving became a requirement in the 1970s. After that, the number of deaths due to car accidents was reduced, but the number of accidents increased. Why? |
People felt safer, so they drove more recklessly.
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What are the implications of rationality?
b) When choice involves amounts, benefits, and costs are compared at the margin. For instance: (i) Suppose a ticket to a hockey game costs $10, but your willingness to pay for one ticket for this week's game is $20, while your willingness to pay for next week's game's ticket is $5. If you can buy tickets for each game separately, would you buy a ticket for both games? If you had to buy tickets for both games together (in a bundle/package), would you buy both tickets? Explain. |
No.
Yes. Ticket Price = $10 x 2 = $20 Willingness to Pay This Game = $20 Next Game = $5 = $25 Total |
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What are the implications of rationality?
b) When choice involves amounts, benefits, and costs are compared at the margin. For instance: (ii) If seats are still available a couple of days before a flight, would the airline company be interested in accepting additional passengers for a discounted price? Explain. |
Yes. Because the cost is very little compared to not filling the seats and losing more money.
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the benefit from an additional unit
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marginal benefit
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the cost of an additional unit
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marginal cost
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the analysis of the benefit vs. the cost of an additional unit
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marginal benefit vs. cost analysis
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What are the implications of rationality?
c) People understand that there are TRADE-OFFS and opportunity costs when making choice. For instance: (i) We have to decide between doing things in the present or in the future. For instance, if you get a $1,000 gift today, you could spend the money today, but you could save and spend it later. What is the potential benefit of saving it for later? |
You can earn interest by investing
Waiting for future product Expecting price to go down |
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expenditure in or the usage of goods/services that do not contribute to increase future production or income
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consumption
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expenditure in goods/services that might contribute to increase future production or income
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investment
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What are the implications of rationality?
c) People understand that there are TRADE-OFFS and opportunity costs when making choice. For instance: (ii) In most cases, to increase future consumption, society needs to reduce present consumption. Why. |
If you consume, you can't invest. So reduce present consumption, so you can consume more in the future.
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production at the lowest possible cost per unit
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productive efficiency
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production is allocated according to consumer preferences
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allocative efficiency
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fair distribution of economic benefits
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equity
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What are the implications of rationality?
c) People understand that there are TRADE-OFFS and opportunity costs when making choice. For instance: iii) Governments face trade-offs between EFFICIENCY (more production, allocated according to consumer preferences) and EQUITY (more equalitarian income distribution and opportunities). This means that in order to distribute income in a more equitable fashion, efficiency is compromised. Why? |
In order to distribute income, you must take money from rich
The cost of producing products would be very high because no one would want to work |
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The study of particular pieces of the economy
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microeconomics
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The study of the economy as a whole
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macroeconomics
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Micro or Macro?
How does the interest rate affect the consumption of goods in the U.S.? |
Macro
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Micro or Macro?
How many cars will GM make next year? |
Micro
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Micro or Macro?
How does globalization affect unemployment of American workers? |
Macro
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Micro or Macro?
What would happen with the U.S. production of apples if tariffs on imported apples are reduced? |
Micro
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Micro or Macro?
What is the effect of an increase in oil prices on inflation? |
Macro
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Percent Change
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Final Value - Initial Value / Initial Value
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Compute the percentage change in the price of gasoline when it went up from $1.60 in 2004 to about $2.20 in 2005.
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2.20-1.60/1.60 = 0.60/1.60 = .375 = 37.5%
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Compute the percentage change in the population of Grand Rapids, MI. In 2000, the population was approximately 198,000, while in 2007 the estimated population was approximately 194,000.
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194,000-198,000/198,000 = -.02 = -2%
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Area of a rectangle
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base x height
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Area of a triangle
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base x height / 2
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Slope
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Rise / Run
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A situation in which unlimited wants exceed the limited resources available to fulfill those wants
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scarcity
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A simplified version of reality used to analyze real-world economic situations
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economic model
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A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
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market
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An economy in which the government decides how economic resources will be allocated
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centrally planned economy
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An economy in which the decisions of households and firms interacting in markets allocate economic resources
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market economy
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An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources
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mixed economy
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Analysis concerned with what is
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positive analysis
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Analysis concerned with what ought to be
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normative analysis
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Someone who operates a business, bringing together the factors of production - labor, capital, and natural resources - to produce goods and services
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entrepreneur
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the practical application of an invention
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innovation
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The processes a firm uses to turn inputs into outputs of goods and services
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technology
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Total revenue minus total cost
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profit
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Labor, capital, natural resources, and other inputs used to produce goods and services
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factors of production
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The accumulated training and skills that workers possess
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human capital
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an organization that produces a good or service
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firm
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tangible merchandise
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goods
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activities done for others
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services
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total amount received for selling a good or service
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revenue
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consists of all persons occupying a home
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household
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manufactured goods that are used to produce other goods and services
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capital
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Arlene quits her $125,000-a-year job to take care of her ailing parents. What is the opportunity cost of her decisions?
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at least $125,000
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The decisions about what goods and services will be produced made in a market economy is made by
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consumers and firms choosing which goods and services to buy or produce
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Voluntary exchange between buyers and sellers generates ____________________ in a market economy
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allocative efficiency
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Which of the following correctly describes the relationship between economic efficiency and economic equity?
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There is often a trade-off between the two
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What does the NAACP mean when they say they want the federal stimulus package to be distributed equitably?
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They want a fair distribution of the economic benefits associated with the stimulus package
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A grocery store sells a bag of potatoes at a fixed price of $2.30. Which of the following is a term used by economists to describe the money received from the sale of an additional bag of potatoes?
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marginal revenue
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What is another economic term for the incremental cost of producing the last 3,000 cell phones?
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marginal cost
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