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110 Cards in this Set

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What is the economic perspective?
the economic way of thinking
What is economics?
the social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity
What are opportunity costs?
giving up the opportunity of getting the next best thing
What is utility?
the pleasure, happiness or satisfaction obtained from consuming a good or service
What is marginal analysis?
comparisons of marginal benefits & marginal costs, usually for decision making
What is the scientific method?
1. Observation of real-world behavior
2. Formulation of a possible explanation (hypothesis)
3. testing the hypothesis
4. acceptance or rejection of hypothesis
5. continued testing of hypothesis
What is the economic principle?
a statement about economic behavior or the economy that enables prediction of the probable effects of certain actions
What are the economic principles?
1. Generalizations
2. Other-Things-Equal Assumption
3. Graphical Expression
What is macroeconomics?
either the economy as a whole or its basic subdivisions or aggregates, such as the government, household, and business sectors
What is an aggregate?
a collection of specific economic units treated as if they were one unit
What is microeconomics?
the part of economics concerned with individual units such as a person, a household, a firm or an industry
What are positive economics?
focusing on facts and cause-and-effect relationships
What are normative economics?
incorporating value judgments about what the economy should be like or what particular policy actions should be reccommended
What is the economizing problem?
the need to make choices because economic wants exceed economic means
What is a budget line?
it is a visualization of the budget constraint
What are economic resources?
natural, human, and manufactured resources that go into the production of goods and services
What are the economic resource categories?
1. Land
2. Labor
3. Capital
What is land?
all natural resources used in the production process, such as arable land, forests, mineral and oil deposits, and water resources
What is labor?
the physical and mental talents of individuals used in producing goods and services
What is capital?
all manufactured aids used in producing consumer goods and services
What is an investment?
the purchase of capital
What functions do the entrepreneur serve?
1. takes the initiative in combining the resources of land, labor and capital to produce a good or service
2. makes the strategic business decisions that set the course of an enterprise
3. an innovator
4. risk bearer
What are the assumptions of the Production Possibilities Model?
1. Full employment
2. Fixed resources
3. Fixed technology
4. Only two goods
What is the production possibilities curve?
a graphical display of the different combinations of goods and services that society can produce in a fully employed economy, assuming a fixed availability of supplies of resources and constant technology
What is the law of increasing opportunity costs?
as the production of a particular good increases, the opportunity cost of producing an additional unit rises
What is economic growth?
larger total output
What results in economic growth?
1. increases in supplies of resources
2. improvements in resource quality
3. technological advances
What is an economic system?
a particular set of institutional arrangements and a coordinating mechanism
How do economic systems differ?
1. who owns the factors of production
2. the method used to motivate coordinate, and direct economic activity
What is a command system?
socialism or communism
What is the market system?
capitalism
What is private property?
the private ownership of capital and the freedom to negotiate binding legal contracts
What is freedom of enterprise?
ensuring that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and services and to sell them in their chosen markets
What is freedom of choice?
the ability for owners to employ or dispose of their property and money as they see fit
What is self-interest?
the motivating force of the various economic units as they express their free choices
What is competition?
freedom of choice exercised in pursuit of a monetary return
What is a market?
an institution or mechanism that brings buyers into contact
What does the market system encourage?
extensive use and rapid development of complex capital goods: tools, machinery, large-scale factories, and facilities for storage, communication, transportation, and marketing
What is specialization?
the use of resources of an individual, firm, region, or nation to produce one or a few goods or services rather than the entire range of goods and services
What are the parts of division of labor?
1. Specialization makes use of differences in ability
2. fosters learning by doing
3. saves time
What is bartering?
swapping goods for goods
What are the five fundamental questions of the market system?
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will get the goods and services?
4. How will the system accommodate change?
5. How will the system promote progress?
What is consumer sovereignty?
consumers can choose to spend their income on whatever they want
What are "dollar votes"?
registering your voice in the market by buying
What does the most efficient production technique depend on?
1. The available technology
2. The prices of the needed resources
What is creative destruction?
the creation of new products and production methods completely destroys the market positions of firms that are wedded to existing products and older ways of doing business
What is the "invisible hand"?
a highly competitive market system will simultaneously promote the pubic or social interest
What are the three virtues of the market system?
1. Efficiency
2. Incentives
3. Freedom
What is the coordination problem?
central planners cannot coordinate millions of individual decisions by consumers, resource suppliers, and businesses
What is the incentive problem?
the government has to provide incentives to all workers in the country
What is the resource market?
the place where resources or the services of resource suppliers are bought and sold
What is the product market?
the place where goods and services produced by businesses are bought and sold
What is demand?
a schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time
What is the law of demand?
as price falls, the quantity of demand rises, and as price rises, the quantity demanded falls
What is diminishing marketing utility?
as more and more of a product is consumed, the utility decreases
What is the income effect?
a lower price increases the purchasing power of a buyer's money income
What is the substitution effect?
at a lower price buyers have the incentive to substitute what is now a less expensive product for similar, more expensive products
What are the determinants of demand?
1. consumer's tastes
2. the number of buyers in the market
3. consumers' incomes
4. the prices of related goods
5. consumer expectations
What are normal goods or superior goods?
products whose demand varies directly with money income
What are inferior goods?
goods whose demand varies inversely with money income
What is a substitute good?
one that can be used in place of another good
What is a complementary good?
one that is used together with another good
What can cause an increase in demand?
1. a favorable change in consumer tastes
2. an increase in the number of buyers
3. rising incomes if the product is a normal good
4. falling incomes if the product is an inferior good
5. an increase in the price of a substitute good
6. a decrease in the price of a complementary good
7. a new consumer expectation
What is a change in demand?
a shift of the demand curve to the right (increase) or to the left (decrease)
What is a change in the quantity demanded?
a movement from one point to another point along the demand curve
What is supply?
a schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period
What is the law of supply?
as price rises, the quantity supplied rises, as price falls, the quantity supply falls
What are the determinants of supply?
1. Resource prices
2. Technology
3. Taxes and subsidies
4. Prices of other goods
5. Producer expectations
6. the number of sellers in the market
What is a change in supply?
a shift in the supply curve
What is a change in the quantity of supplied?
a movement from one point to another on a fixed supply curve
What is the equilibrium quantity?
the quantity demanded and the quantity supplied match
What is a surplus?
an excess of supply
What is a shortage?
an excess in demand
What is productive efficiency?
production is achieved in the least costly way
What is allocative efficiency?
the particular mix of goods and services most highly valued by society
What is a price ceiling?
the maximum legal price a seller may charge for a product or service
What is the black market?
a market where products are illegally bought and sold above legal prices
What is a price floor?
a minimum price fixed by the government
What is the functional distribution of income?
shows how the nation's earned income is apportioned among wages, rents, interest, and profits
What is the personal distribution of income?
shows how the nation's money income is divided among individual households
What makes up the expenditures of a household?
1. personal taxes
2. personal saving
3. personal consumption expenditures
What are durable goods?
products that have expected lives of three years or more
What are nondurable goods?
products that have lives of less than three years
What are services?
the work done for consumers by lawyers, barbers, doctors, lodging personnel, etc.
What is stock?
a representation of a share in the ownership of coporation
What is a bond?
lending money to a corporation
What is limited liability?
personal assets are not at stake if the corporation defaults on its debts
What is the principal-agent problem?
the stockholders are the principals who own the corporation and the executives are the agents that run the business on their behalf
What is a monopoly?
one company controls an industry
What are the ways that society chooses to redistribute a part of total income through policies and programs?
1. Transfer payments
2. Market intervention
3. Taxation
What are transfer payments?
compensation to the unemployed through welfare, food stamps, etc.
What is a market intervention?
the government modifies the prices that by providing interventions
What causes market failure?
1. produces the "wrong" amounts of certain goods and services
2. fails to allocate any resources whatsoever to the production of certain goods and services whose output
What is externality?
some of the costs or the benefits of a good are passed on to or "spill over to" someone other than the immediate buyer or seller
What are negative externalities?
production or consumption costs inflicted on a third party
What are things the government does to fix negative externalities?
1. legislation
2. specific taxes
What are positive externalities?
uncompensated spillovers spillovers accruing to third parties or the community at large
What are things the government does to correct positive externalities?
1. subsidize consumers
2. subsidize suppliers
3. provide goods via government
What are public goods?
everyone can simultaneously obtain the benefit of a public good (national defense, etc.)
What is the free-rider problem?
people can receive benefits from a public good without contributing to its costs
What are quasi-public goods?
goods that could be produced to exclude consumers
What problems do government address to promote stability?
1. unemployment
2. inflation
What are government purchases?
purchasing products to directly absorb resources
What are the top four areas of federal spending?
1. pensions and income security
2. national defense
3. health
4. interest on the public debt
What is the personal income tax?
a tax levied on taxable incomes (the incomes of households and unincorporated businesses after certain exemptions)
What is a marginal tax rate?
the rate at which the tax is paid on each additional unit of taxable income
What is the average tax rate?
the total tax paid divided by total taxable income
What are payroll taxes?
taxes based on wages and salaries
What is the corporate income tax?
levied on a corporation's profits
What are sales and excise taxes?
sales tax falls on a wide range of products, excises are levied individually on a small, select list of commodities