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115 Cards in this Set
- Front
- Back
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Scarcity is ____
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inescapable
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Risk is _____
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unavoidable
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All persons must make ____
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choices.
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People generally act in their own _____ when choices are made
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self-interest
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There is often more than one way to _____ things
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produce
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Voluntary exchange is mutually _____
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advantageous
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It is _____, not _____, which has causes
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wealth / poverty
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Public policies usually have ____________: some good and some bad.
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primary and secondary effects
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In the long run, _______ tend to prevail.
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economic laws
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What is meant by Scarcity?
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Supply is fixed or Limited
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What is meant by Opportunity cost?
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Best foregone alternative
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What is the formula for economics? |
Unlimited wants / limited recourses |
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What is the Cobb-Douglas Production Function?
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Q= f(K,L) q-quantity K-Capital L-Labor (Output is a function of inputs)
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Capital Intensive Production?
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Technology driven production (Oil industry)
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Labor Intensive Production?
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People producing items manually (Orange Juice Industry)
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Wealth of Nations (Author and Year Published?)
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Adam Smith 1776
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Two most noble professions and why
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Plumber (We will always need them) & Manager of McDonalds (We won’t go to war with someone we’re doing business with)
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Example of Scarcity:
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Oil
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Example of Risk:
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Driving to school / death trap
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Example of choices:
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Opportunity cost
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Example of Self-Interest:
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I chose to shower this morning as opposed to saving water
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Example of various ways of production:
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Furniture Manufacturer / Carpenter
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Example of Wealth having causes, not poverty:
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The Great Depression - Wealthy getting wealthier, causing a rise in employment, then suddenly creating a deficit / rapid inflation
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Example of Public Policies having multiple effects:
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Raising minimum wage
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Example of Economic Laws prevailing:
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They benefit almost everyone, they’re not biased, Prevailing wage laws
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Definition of Economics:
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Social science which attempts to explain how individuals, firms and nations allocate scarce resources among competing interests
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Normative Economics
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Value Judgments (what should be… statements)
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Positive Economics
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Fact (“What is” statements)
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Difference between Micro/ Macro
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Micro- Small picture Macro- Big picture
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Levels of Micro?
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Individual, Entrepreneur, Firm, Industry
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Sectors of Macro?
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Business, Household and Foreign
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What is meant by Allocation? |
Allocative Efficiency - the right particular mix of goods and services highly valued to society, the BEST point on the production possibility frontier curve (or PPF curve) Point E on PPF shown |
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What is meant by productive efficiency? |
The production of any particular good in the least costly way (along production possibility frontier curve) Points A-I on PPF Shown |
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Four Factors of Production?
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Land, Labor, Capital, Entrepreneurship
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What are payments to four factors of production?
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Land – Rent / Labor – Wages / Capital – Interest / Entrepreneurship – Profit
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What is the largest part of national income? Smallest? |
Largest – wages / Smallest – Rent |
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What are three questions all economic systems must answer?
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What? How? For Whom?
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Four types of Economic systems
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Command & Control (Communistic) / Capitalist (Free market) / Compromise (mixed) / Customary (Traditional)
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How are the three questions answered in the economic systems? (What how and for whom) |
Communistic – Government Capitalist – Price Compromise – Govt & Price Customary – Tradition |
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What are six economic warnings?
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1. Post Hoc Ergo Propter Hoc
2. Fallacy of Composition 3. Correlation does not equal causation 4. Violation of cetirus paribus 5. Inclusion of irrelevant variables 6. Exclusion of relevant variables |
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What is meant by “guns and butter”?
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Butter is consumer goods / Guns is military (Good example of Opportunity cost!)
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What is meant by post hoc ergo propter hoc?
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After this therefore because of this (Example of time series data.) “Because I washed my car, it’s going to rain tomorrow”
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Dif. Between Correlation and Causation?
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Correlation: Two items go together and will go together. Causation, just because they’re moving together doesn’t mean they’re actually together
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What is meant by “Shaving with Ockham’s razor”?
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Use as few variables as you can
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What is the fallacy of composition?
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The assumption that one thing that works for one, works for all.
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What is meant by time-series data?
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Comparing things across a series of time.
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What is meant by Cross-Sectional data?
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Looking at things at one specific point in time.
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What does the slope of a PPF represent?
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Opportunity Cost
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What does the shape of a PPF represent?
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(Bowed shape) Law of increasing opportunity cost.
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What does PPF stand for?
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Production Possibilities Frontiers
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What is meant by the law of increasing opportunity cost? Why does this happen?
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Things don’t cross over evenly. There isn’t an exact proportion of precisely even distribution
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What does it mean to be operating Inside the PPF?
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Inefficiency
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What does it mean to be operating outside the PPF?
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Unattainable given current resources
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What does it mean to be operating on the PPF?
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Productive efficiency or The right methods of production
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How does allocative efficiency and productive efficiency relate to a PPF?
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It means it’s the right mix of goods
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How do consumer goods and capital goods differ?
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Consumer goods are things we use, capital goods are things that produce other things
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Over time, what happens if a nation devotes more of its production to capital goods?
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More consumer goods are produced after time
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Over time, what happens if a nation devotes more of its production to consumer goods?
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Amount of capital goods will decrease, creating deficit in consumer goods
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What is the opposite of an economic “good”?
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An Economic Bad. Literally. Like that’s the answer.
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What is meant by a “bad”?
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Anything negative to do with the economy.
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What is the definition of Demand? All 8 parts!
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1. The various quantities 2. Of a good or service 3. Which a consumer 4. Is both willing and able 5. To purchase (or consume) 6. At various prices 7. Per unit of time 8. Cetirus Paribus (with other conditions remaining the same)
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What is the definition of Supply? All 8 Parts!
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1. The various quantities 2. Of a good or service 3. Which a producer / seller 4. Is both willing and able 5. To produce or sell 6. At various prices 7. Per unit of time 8. Cetirus paribus (with other conditions remaining the same)
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Write out the demand function -
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Qd = f(P | (Non-Price Parameters)
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Write out the supply function -
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Qs = f(P | (Non-Price Parameters)
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What are the Non-Price Parameters of demand?
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Expectations of buyers, # of buyers, Tastes/Preferences, advertising
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What are the Non-Price Parameters of supply?
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Expectations of sellers, # of sellers, Price of inputs, technology, taxes and subsidies, weather
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How does a “movement along a curve” differ from a shift?
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Movement is caused by a change in the price of a good, where a shift is changed by a Non-Price Parameter
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What is meant by shortage?
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Not enough quantity to satisfy the demand (Price will rise)
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What is meant by a surplus
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An excess of supply, too much for the demand (Price will drop)
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What happens in a market graph if a price is below equilibrium?
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Shortage!
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What happens in a market graph if a price is at equilibrium?
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Supply and Demand are in balance
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What happens in a market graph if a price is above equilibrium?
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Surplus!
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What are the three steps of “comparative statics”?
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1. Identify the initial equilibrium price & quantity
2. Identify the shift 3. Identify the NEW Equilibrium price & quantity |
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What is meant by a price floor?
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A case in which the government states: “You have to charge at least ___”
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When is a price floor effective? And what is it’s effect?
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Effective price floors are set above equilibrium and must result in a surplus
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Example of an effective price floor?
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Minimum wage
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What is meant by a price ceiling?
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A case in which the government states: “You can charge no more than ____”
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When is a price ceiling effective and what is its effect?
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Effective price ceilings must be set below equilibrium and result in a shortage.
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Example of an effective price ceiling?
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Rent control
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What are three main variables of macroeconomics?
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Outputs, Price and Employment
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What are the two measures of Outputs in Macroeconomics?
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GDP and GNP
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What are the three measures of inputs in macroeconomics?
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PPI, CPI and GDP Deflator
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What is the measure of employment in macroeconomics?
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Unemployment!
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What is meant by Fair’s Model?
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Uses output and price to predict presidential elections
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What is meant by Okun’s Law?
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% of the change in output = 3%-2% change of unemployment
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What is meant by the Phillip’s Curve?
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Uses Price and Employment stating that inflation and unemployment correlate
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What is the Full Employment act of 1946?
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Everyone should be employed, Output goes up, employment goes up, and the price remains stable. This is actually not possible due to the fact we do not live in a vacuum
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How does GDP differ from GNP?
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GNP – Total dollar value of all final goods/services produced by the US anywhere in the world in a given calendar year GDP – Total dollar value of all final goods/services produced by anyone within US borders in a given calendar year.
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How does nominal GDP differ from real GDP? Show with two-good formulas!
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(PA(Current)*QA(Current)) + (PO(Current)*QO(Current)) = Nominal GDP
(PA(Base year)*QA(Current)) + (PO(Base Year)*QO(Current)) = Real GDP Real GDP deals with real things while Nominal GDP is JUST dollars. The difference shows inflation |
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How does CPI differ from the GDP deflator?
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CPI is a fixed market basket, same goods every year. And includes only consumer goods/services GDP Deflator deals with a changing market basket and deals with all goods and services produced within US borders
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What does CPI stand for?
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Consumer Price Index
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How are CPI and the GDP Deflator similar?
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They both measure the correlation between Price and Quantity |
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What three formulas can be used to demonstrate the algebraic relationships among the GDP Deflator, Nominal GDP and Real GDP?
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1. GDP Deflator = Nominal GDP / Real GDP
2. Nominal GDP = Real GDP x GDP Deflator 3. Real GDP = Nominal GDP / GDP Deflator |
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Give an example of an item contained in GDP but excluded from GNP
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Shell Gas Station in LA
OR! Nintendo Factory in US |
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Give an example of an item contained in GNP but excluded from GDP
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Ford in France
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What is the difference between magnitude and rate of change?
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Magnitude is how we adjust for inflation while the rate of change is how we measure inflation.
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What is meant by unintended consequences? |
Raising minimum wage resulting in higher unemployment. |
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What is meant by "Aggregate"? Which branch of economics uses this term? |
The sum / total / whole. Used primarily in Macroeconomics. |
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What is meant by a circular flow diagram? |
The showing of Macroeconomics. Input markets providing $ to household sectors in exchange for supplying inputs (Labor in this case.) |
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What can be learned from a Circular flow diagram? |
That one's outputs can be directly correlated to another's inputs. |
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Be able to draw the graph for a PPF. |
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Using the demand function, demonstrate what happens when price changes & what happens when a non-price parameter changes. |
Price changes - movement along demand curve (change in quantity demand) Non-Price Parameter changes - shift in demand, change in demand |
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Using the supply function, demonstrate what happens when price changes and what happens when a non-price parameter changes |
Price changes- movement along supply curve (change in quantity supplied) Non-Price Parameter changes- shift in supply, change in supply |
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List which direction each of the non-price parameters of demand shifts the demand curve |
complimentary goods have inverse relationships substitute goods have positive relationships consumer income normal good ^ Y ^ inferior good v Y ^ consumer expectations- mixed bag, trendy to the right number of consumers (not in notes but book) changes in consumer taste- health benefits - demand curve to right |
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List which direction each of the non-price parameters of supply shifts the supply curve |
change in technology- if better technology discovered, prod price falls, suppliers will shift supply right change in the price of resources- price of production fell dues to cheaper resources- supply would shift right, increase in price of resource would reduce the supply changes in the prices of other goods- complimentary inverse (italian bread price goes down pizza supply goes up) producer expectations- do they expect the value to go up number of products in market- more producers- more supply vice versa |
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In terms of the equilibrium price and equilibrium quantity, what happens when supply and demand shift in the same direction? .... opposite directions? |
Case 1 D--> S--> | Equilibrium Price (P*) is indeterminate and depends on magnitude of non-price parameters, Equilibrium Quantity (Q*) goes up Case 2 D<-- S<-- | P* - Indeterminate / Q* goes down Case 3 D--> S<-- | P* - Goes up / Q* indeterminate Case 4 D<-- S--> | P* Goes down / Q* indeterminate |
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How can the inflation rate be calculated using CPI? |
(Cowboy Yodeling song. *You know you know it!*) CPInew - CPIold allllll over CPIold (CPInew - CPIold) / CPIold |
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What is CPI in the base year? |
100 |
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What is known when Nominal GDP increases over time? |
Nothing except that the price is going up, you have to know what Real GDP is doing to know if Nominal GDP is following a pattern of inflation/deflation/disinflation or hyperinflation. |
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What is known when Real GDP increases over time? |
Quantity is increasing |
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What is the formula to calculate CPI? |
A-Apples // O-Oranges // C-Current // B-Base [(PA(C)*QA(B)) + (PO(C)*PO(B))] /divided by/ [(PA(B)*QA(B))+(PO(B)*QO(B))] all x100 |
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Which year price/quantities are used for Nominal GDP? |
Uses all current Prices and Quantities (PA(C)*QA(C)) + (PO(C)*QO(C)) = Nominal |
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Which year price/quantities are used for Real GDP? |
Uses Base Prices and Current Quantities (PA(B)*QA(C)) + (PO(B)*QO(C)) = Real |
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How do you adjust for inflation? Example: CPI'68 - 30 CPI'15 - 160 Price of a Coke in 1968 was $0.25 |
(CPInew / CPIold) * Old Price (CPI'15 / CPI'68) * Price'68 (160/30) * 0.25 = $1.33 |
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Dividing by 91. FOR FUN |
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