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107 Cards in this Set

  • Front
  • Back
Scarcity
not enough to go around- everyone faces this. Unlimited wants. we cannot ever be completely satisfied
how do we decide who gets what
1) raise the price
2)communism
3)lottery system
4) monarchy
consequences of everyone facing scarcity
sacrifice one thing for another. we have to make choices the fact that we have choice means we make sacrifice.
notion of sacrifice
oportunity cost
oportunity cost
the amount of one thing we sacrifice in order to produce a unit for another. when you choose to grow corn you cannot grow potatos
Difference between scarcity and poverty
not everyone faces poverty where everyone faces scarcity
poverty
living below basic level of need. constately giving up things to get another. no given need
resources/factors of production
-natural resources: land
-labor: physical and mentel
-capitol: Manufactured aides used in production. ex. machines to farm.
-entreprenuerial skills: have an idea and market it. they work for themselves. he is an innovater and a risk bearer and makes strategic buisness decisions
How we are paid for each
land-rent
labor-wages
capitol-interest
entrepeurs-profit
Interest
we borrow to pay and when we pay it back we pay interest
wants
unlimited: they can be fulfilled in a short period of time but generally we cannot satisfy them
do our wants change?
yes as we grow older we want cars instead of toys
does our change diminish or greaten
no. we dont want big screen tvs any less or more than we wanted baby food when we were little
The production possibilities curve
the maximum output of two products: based on the assumptions of full employment and productive effiency, fixed resources, fixed technology and that the economy is only producing two goods1
full employment
the economy is useing all of its available resources
productive efficency
production at the lowest cost
fixed resources
availible supplies needed for production are fixed in quanitity and quaility. they can however be reallocated for different uses
fixed resources
the assumption that change of the state of technology does nto change during analysis
the law of increasing opportunity costs
the more you produce the more you must give up. At first the resources are easy to convert but then they become increasingly hard to convert. the more that is produce the greater the oportunity cost.
what must the economy do in order to operate on the opportunities curve
it must ultize full employment and productive effiency.
Curve is the same as
Frontier
Utility
various goods and services that provide pleasure or satisfaction
necessities
food, shelter, clothing
luxuries
perfumes, yachts, race cars
The objective of all economic activity
fulfill wants
Economics
the social science that examines efficiency.. the best use of scarce resources
Full production
all emplyed resources must be used so that they provide the maximum possible satisfaction of our economic wants. full production implies two kinds of efficiency: productive and allocative
productive efficiency
the production of any particular mix of goods and services in the least costly way.
allocative efficiency
the least-cost production of that particular mix of goods and services most wanted by society. It requires that an economy produce the right mix of goods and services with each item being produced at the lowest-possible unit cost.
Underemployed
not realizing full production
production possibilities table
lists the different combinations of two products that can be produced with a specific set of resources (and with full employment and productive efficiency)
Generalization
at any point in time, an econoimy achieving full employment and productive efficiency must sacrifice some of one good to obtain more of another good. Scarce resources prohibit such an economy from having more of both goods.
Inside of the production possibilities curve
inefficiency and there fore is not desirable.
outside of the production possibilities curve
this is unattainable with the current supplies of recources and technology because it represents a greater output than the out put at any point on the curve.
economic growth
the ability to produce a larger total output. This growth is the result of (1) increases in supplies of recourses (2) improvements in recource quality (3) technological advances
Goods for the future
they increase the quanitity and quality of property resources, enlarge the stock of technoligical information and improve the quality of human resources ex. capitol goods, research and education, and preventive medicine
Production possibilities analysis
implies that an individual nation is limited ot the combinations of poutput indicated by the production possibilities curve
international specialization
directing domestic resources to output that a nation is highly efficent at production.
Economic system
societies attempt to deal with scarsity
4 questions need to be answer in an economic system
1) what will be produced 2) how will you produce it. 3) who gets it? 4) how will we accomadate change
Command exconomy
(former soviet union, china, NK. Cuba)
-gov owns resources
-gov decides what will be produced. Central planning company decides what and how to produce
-gove decides how it gets produced (also central planning company)
-CPC decides who gets it
problem: change didnt govern over well -hard to accomadate change
Traditional economy
(feudalism)
-cast system
-resources are communally owned or by a feudal lord
-produced based on what you do on things in the past -never got out of box
-Agrarian- based on agriculture
-you did things the way you always did them.
Market system
-individuals own resources
-react to the economic market (market dictates what to produce... if you dont keep up you lose- market is brutle)
-Freedom of enterprise- anybody can start any buiness and get out of it- easy entrace and exit
-self inter motivates US (individuals).. work for what we want
-competition
-prices dictate who gets what and how much
-"dollar votes": buyers determine which products succeed and which fail
-extensive use of capital goods (can make production process less expensive)
-specialization
-use of money (hasnt always been around)
-limited government
Monopolies
are allowed if they setup legally
limited government
gov doesnt own means of production
Market
an institution or mechanism that brings together buyers ("demanders") and sellers ("supplies") of particular goods, services or resources. All situations that link potential buyers with potential sellers are markets. Some are local and other are national or internations.
In a simple economy
there are two operators . the firm(buisness) and the households.
Circular Flow Model
sugguest a complex interrelated web of decision makig and economic activity involving buinesses and households. Buisnesses buy resoures which the households sell in exchange for costs. Households buy products in exchange for money (income for firms)
Resource market
the place where resources or services of resource suppliers and bought and hold. households sell resources and buinesses buy them. the buinesses pay bosts which translates inco wages, rent, interest, and profit income to the households (land labor capitol)
Product market
the place where goods and services produced by buinesses are bought and sold. In this market. the buinesses combine the resources they have obtained to produce and sell goods and services. households use the income they recieved from the sale of recoureces to buy goods and services.
non simpole market
we have taxes (leckage in market). also government spending needs to be considered. however it does balence out because it interacts with both products and buinesses and households. also need to consider imports and exports
why do nations need trade?
-resources are unevenly distributed
-its more efficient (cheeper) to get resources from other places than it is to try to get them at home (also eaiser)
-for political reasons-its easier to project power if we ahve a sound trade with them
who bennifits from trade?
-both sides by difintion must bennifit from trade
-no such thing as a bad trade in economics
-democrats dont go to war with eachother
-socially=allies
-intellectually-culltural and technoligical bennifits
how do nations vary in their production techniques?
Us- capitol intensive production.. factories
however not everyone has advanced technology
-labor intensive production...cheaper because factory workers are expensive in US (minimun wage)
-land intensive production: agriculture economies (midwest us, Brazil)
Which is the wrong ease
neither. its just that resources are distributed unevenly.
Comparitive advantage
total output will be greatest when each good is produced by the nation that has the lowest domestic opportunity cost for that good
2 types of comparative advantage problems
output problem and input problem
output problem
gives us the amount of stuff produced in a given period of time or amount of space (certain output for given imput) ex. tons per acre, bustles per hr. gallons permin (see workbook)... O=output=other over firt to find the least opportunity cost
imput problem
it takes a certain amount of input to make a given product. ex. how many acres to get a ton
demand
a schedule or graph which shows how much of a product consumers are willing and able to buy at various prices.
Law of Demand
there is an inverse relatioship between prices and quanity demand
why would demand change
-# of buyers in the market
-price decrease: consumers can afford it..income effect
-substitution effect: people give up more expensive for less expensive
-diminishing marginal ultilty: the first consumed has greater satisfaction then later: will only buy more if price goes down
What causes demand to move along the curve
change in price
what causes the curve to shift?
-tastes: fashion change
-income change
-# of buyers change
-prices of related products: substitutes and complements;when the demand for complementory good good falls then the product demand will fall
-expectations: 1)future increase in price means they want more now 2)decrease means more later
complements
things that go together ex. cars and gas, hotdogs and hotdog buns
Supply
(suppliers are caring about sellers)
-the amount of good a company is willing or able to supply
law of supply
as prices go up the quantity of services and goods supplied goes up. Prices and Quantity are directly related.
what causes change in supply?
1) taxes and subsides
2)technology- we can do more with less
3)number of sellers
4)prices of related products: the one with the highest price will cause switch which will lower supply of the oringinal
4)resource prices: if resource prices now supply will shift to the left
6)expectations: they want to make the most they can. will get out of a market if it is expected to decrease in money
taxes
gov puts cost on production in addition to gen cost
subsidies
payment from gov that helps offset the cost of productions
equalibrium
supply and demand meet. everytime there is a trade there is an equailbrium
price cieling
maximum legal price a seller may charge
price floor
minimum price fixed by the government (constant state of surplus) and market cannot get back to equailibrium
See workbook
see workbook
THings to rememeber about comparitive advantage
-always compare data in collum (up and down)
-always pick lowest fraction
-no need to do it if there is an absolute advantage
inferior goods
goods whose demand varies inversely with money income
superior goods or normal goods
products whose demand baries directly with money income
marginal cost
the added cost of producing one more unit of output
shortage
excecss demand
surplus
excess supply
rationing function of prices
the ability of competitive forces of supply and demand to establish a price at which selling and buying decisions are consistent
complex cases of changees in equalibrium
when both supply and demand change
Rent controls
goal is to protect low-income families from escalting rents caused by percieved housing shortages and to make housing more affordableto the poor. prob is it makes it less attractive for renters to put houses on the rentle market
how to cope with surplus
-gov can restrict supply or increase demand.
-or they can purchase the surplus output (subsidizeing farmers) and store or otherwise dispose of it
GDP
a total market value of all goods and services produced in a given year
revenue tariff
applied to a product that is not being produced domestically
protective tarrif
designed to shield domestic producers from foreign competition. although protective tariffs are usually not high enough to stop the importation of foreign goods, they put foreign producers at a competitive disadvantage in selling in domestic markets
import quota
specifices the maximum amount of a commodity that may be imported in any period.
nontariff barrrier (NTB)
a licensing requirement that specifires unreasonable standards pertaining to product quality and safety or unnecessary bureaucratic red tape that is used to restrict imports
voluntary export restriction (VER)
trade barrier by which foregn firms "voluntaritly" limit the amount of their exports to a particular country. they avoid more stringent trade barriers
impact of tariffs
-domestic prices go up
-domestic quality goes down
-increased production because with the higer income they can afford it
-decline in imports
Military argument for protective tarrifs
it states that protective tarrifs are needed to preserve industries that produce national defense materials. also, that political/military objectives take precedence over economic goals. This is open to abuse becuase any industry can claim they aide national security and thus deserves protection from imports
Increased Domestic employment agreement
arguing for a tariff to save US jobs. if imports are reduced then more money will be spent on domestic output making employment rise. Problems: imports might get rid of some jobs but create others. also if all nations cut back on imports than the countries would not make any money on exports. there is also the possibility that the countries affected by the tarrifs will retaliate causing a trade-barrier war. in the long run, an excess of exports caused by the tarriff would make it impossible to raise employment
the diversification for stability argument
used by highly specialized economies who are dependent on the international market for income. tariff and quota protection are argued as a necessity to enable industrial diversification. this way, these countries wont be so dependent on exports. the problem is the economic cost of diversification may be great
Infant industry argument
states that protectice tariffs are needed to allow the establishment of domestic industries. the expception is that the companties will never be able to make adjustments needed for larger scale/great efficiency production. the problems with this arguement is that it is difficult to deem which industries are infants capable of reaching economic growth, thus desriving protection. once the infants reach maturity it is also to monitor it. (thus continuing with protective tarrifs) last, most conomists feel there are other ways of subsidzing than the use of tariffs.
protection against dumping argument
is that tarrifs are needed to protect domestic firms from dumping foreign products. many vcountrying prohibit dumping. although dumping does occur, the us gains from lower priced products. if antidumping laws are abused. tey might incrase the price of imports and retrict competition. anything cheaper can be called dumping (prob)
cheap foreign labor arguemtn
says that domestic firms and workers should be protected from competition of countries where wages are low. it is argued that if protection isnt provied, cheap imports will hurt the us markets, wages of workers and the price of goods. however, not everyone would gain from this plan, any gains are based on comparative advantage
Protective tarrif
protect domestic producers from forign competition
artificial barriers
(tariffs and import quotas) are used to regulate improts
protective tariffs reduce both the imports and the exports of the nation that levies tariffs
this is because if the countries who are making/exporting the goods to (for example) the us cannot get paid for their goods, they are less likely to be able to afoord us exports. also jobs are lost when limiting imports and some countries could rebel
the extensive application of protective tariffs destroys the ability of the international market system to allocate resources effiently
this is because protection raises prices. also the allocation of resources is ineiffient because there is more resources going to the product that has a tarrif on it and less to another product which would make more money. allocation of resources is to use resources in the way that would produce the most bennifits (income)
unemployment in some industries can often be reduced through tariff protection, but by the same token infficiency typically increases
this is because when imports raise the price then there is a greater demand for US goods; thus demanding for more laborers. This shift in domestic employment ususally means less workers in export industries and more in domestic industries. this shift implies a less efficient use of resources in export companies or ineffient in the domestic country because resources are inifinially allocated.
foreign firms that dumps their products onto the us market are in effect providing bargains to the countries citizens.
they may do this to drive away doesmtic competitors, thus obtaining a monopoly./ although it could potentially damage inner economy it rarely happens thus not justifing a permanent tariff. alsoUS consumers gain in the short run
In the view of the rapitidy with which technology advance is dispersed around the world, free trade will inevidtablly yeild balence-of -payements problems for industrially advanced nations.
what this means is that if countries make products that have the lowest opportunity cost (allocative efficiency says that productsshould be made at the loest marginal cost with the highest marginal production) and then buy from the countries products wthat for the "home" country has a high opportunity cost then not only will the home economy bennifit (wont have to lose money on producing the product themselves) but it will keep the money in the international flowing. this increases competioin and deters monopolies. it could also deter poissible tariff wars. forces us to reconstruct our economy
free trade can imporve compositiion and efficiency of domestic output.
competition from differnt car factories forced detroit to make a compact car, and foreign imports on bottled water forced american firms to offter that product. because there is a comptition from forign merchanges/companies, domestic contries are forced to improve the quailty of their product and to create something new. it forces the doesmtic country to fully employ its resources
in the long run. foreign trade is neutral with respect to the total enpolyment.
if each country is able to produce, epxort and ear the money from those exports than int he end all countries will bennifit because if coutnry A is doing it then so is country B,C, and D. as the recipient of these exports, countries get goods at a lower cost then what it would be to make it themselbes and it forces companies to stay honest about their production (low prices and high quailty). might lose job in some countries but gain more in another. standard of living coes up (capitalists argue this)
see homework # 3
see homework # 3