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45 Cards in this Set
- Front
- Back
Law of Demand
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Assuming all things are equal, as price increases for a given product, quantity demanded decreases for said product and vice-versa. Inverse Relationship.
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What changes the demand curve?
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A change in own-price.
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5 Determinants of Demand? (Causes a Shift, With Arrows)
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Change in consumer income.
Change in consumer preference Change in Price of related goods Change in expected price Change in population (# of consumers) |
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What do consumers want to do?
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Maximize their utility
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Define Demand.
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Demand is a schedule or curve that shows the amount of a product that consumers are willing and able to purchase at various prices over a specific time.
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What to producers want to do?
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Maximize their profit.
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Define Supply.
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Supply is a schedule or curve that shows various amounts of a product that producers are willing and able to make available for sale at different prices during a given time period.
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What causes a movement in the supply curve?
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A change in own-price.
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Six Determinates of Supply
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Change in price of resources
Change in taxes and subsidies Change in technology Change in price of related goods Change in population (# of sellers) Change in producer expectations |
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Law of Supply
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The Law of Supply states assuming all things are equal, as price increases for a particular product or service the quantity supplied will also increase. Direct relationship.
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What is the price consumers are willing to pay for a product?
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Equilibrium. Where Quantity Supplied (Qs) = Quantity Demanded (Qd)
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Price Ceiling
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Maximum legal price that a producer can charge for a good or service. Causes a shortage.
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Price Floor
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Minimum legal price that the gov't will allow a producer to charge for a good or service. Creates a surplus.
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Be Sure to Label All Curves.
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S, D, etc. Put the points and the light lines.
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Four categories of resources:
(Factors of Production) |
1. Land
2. Labor 3. Capital 4. Entrepreneurial Ability (Scarce Resources) |
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What is the Assumption of the Production Possibilities Curve?
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1. Full Employment
2. Fixed Resources 3. Fixed Technology 4. Two Goods |
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What is a Production Possibilities Table?
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Lists the different combinations of two products that can be produced with a specific set of resources, assuming full employment.
(Pizza and Robots) It declines to create more and more. Robots: 10, 9, 7, 4, 0 Pizza: 0, 1, 2, 3, 4 |
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What does perfect competition include?
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Perfect Information; Complete Transparency.
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Economic System
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Particular set of institutional arrangements and coordinating mechanism. To respond to the econ. problem.
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What does the economic system have to determine?
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WHAT goods are produced, HOW they are produced, WHO gets them, and how to accommodate change technological progress.
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Freedom of Enterprise
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Ensure the entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and services; and to sell them.
(One of the 2 components of a Market System) |
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Freedom of Choice
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Enable owners to employ or dispose of their property and money as they see fit.
(One of the 2 components of a Market System) |
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Self-Interest
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The motivating force of various economic units as they express their free choice.
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What does the Market System depend on?
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Competition. (Freedom of choice expressed in pursuit of monetary return.)
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What does competition require?
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: Two or more buyers and two or more sellers acting independently in a particular product or resource market.
: Freedom of sellers and buyers to enter or leave markets on the basis of their economic self-interest. |
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Specialization
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The use of resources of an individual, firm, region or nation to produce one or a few goods and services rather than the entire range of goods and services.
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Five Fundamental Questions all Market Systems must answer
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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 accomodate change. 5. How will the system promote progress. |
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Household Income (3 Sections)
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Personal Taxes.
2. Personal Saving. 3. Personal consumption expenditures. |
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Consumption consists of two types of goods:
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Durable goods - Last 3 or more years;
Nondurable Goods - Last less than 3 years. |
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Business are divided into 3 categories:
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Plants;
Firms; Industry |
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Plants
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Production, Redistribution of goods and services.
(Factory, Farm, Mine, Store, Warehouse) |
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Firms
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(For Profit, operates one or more plants) Uses resources to produce goods and services.
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Industry
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(Group of firms) Produce the same or similar products.
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Business owned and operated by one person.
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Sole Proprietorship.
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Redistribution of Income consists of: (3)
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Transfer Payments - Welfare & Food Stamps
Market Intervention - Price support, price ceiling, price floor. Taxation - Personal Income Tax |
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Principle Agent Problem
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The principals are the stockholders who own the corporation
and who hire executives as their agents to run the business on their behalf. But the interests of these managers (the agents) and the wishes of the owners (the principals) do not always coincide. The owners typically want maximum company profit and stock price. However, the agent may want the power, prestige, and pay that often accompany control over a large enterprise, independent of its profitability and stock price. So a conflict of interest may develop. Agents may spend excessively, and the executives will fail to maximize profit and the stock price for the owners. |
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Human specialization—called
the division of labor—contributes to a society’s output in several ways: |
1. Makes use of differences in ability.
2. Fosters learning by doing. 3. Specialization saves Time |
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Corporation
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A legal creation that can acquire
resources, own assets, produce and sell products, incur debts, extend credit, sue and be sued, and perform the functions of any other type of enterprise |
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Externalities
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Positive and negative.
An externality occurs when 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. |
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Negative Externalities
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Production or consumption
costs inflicted on a third party without compensation are called negative externalities. Environmental pollution is an example. Oil spilled into a lake: fishermen, swimmers are impacted and not compensated. |
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Positive Externalities
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Uncompensated
spillovers accruing to third parties or the community at large. Education benefits individual consumers: Better-educated people generally achieve higher incomes than less-welleducated people. But education also provides benefits to society, in the form of a more versatile and more productive labor force, on the one hand, and smaller outlays for crime prevention, law enforcement, and welfare programs, on the other. |
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How to correct positive externalities:
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How might
government deal with the underrallocation of resources resulting from positive externalities? The answer is either to subsidize consumers (to increase demand), to subsidize producers (to increase supply), or, in the extreme, to have government produce the product: |
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How to correct negative externalities:
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LEGISLATION against polluting, for example.
SPECIFIC TAXES: Government might levy a s pecific tax—that is, a tax confined to a particular product— on each unit of the polluting firm’s output. |
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When dealing with determinants in the question, what label should you change?
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Use QUANTITY; not quantity demanded when dealing with any of the determinants.
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What are the four scarce resources?
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Land, Labor, Capital, Entrepreneurial Ability.
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