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62 Cards in this Set
- Front
- Back
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Production possibilities frontier (ppf)
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curve is a set of all combinations of goods/services that it is possible to produce in an economy given its resources/technology. The curve illustrates the reality of scarcity, inefficient combos, increasing opportunity costs. Opportunity costs increase because some resources better suited for consumption goods and others for investment goods.
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Circular flow model
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illustrates the economic relationships among all players in the economy: households, firms, the factors market, the goods and services market, government, and foreign trade. it is diagram illustrating the flow of spending/income in economy.
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Gross Domestic product (GDP)
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market vaule of all final goods and services produced within a country in a given period of time, regardless of the nationalities or permanent residencies of the producers.
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Gross national product (GNP)
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market value of all final goods and services produced by a country's permanent residents in a given period of time.
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Differences between Nominal GDP and Real GDP
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Nominal measures output in terms of actual dollar value, while Real GDP measure output in terms of physical goods and services.
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GDP Deflator
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is a measure of the average price level relative to the base year.
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What is Adam Smith's idea of "self-interest" and the "invisible hand" in the marketplace?
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Note: his first major work concentrates on ethics and CHARITY, yet charity alone won't put dinner on the table. Someone earning money by his own labor benefits himself. Unknowingly, he also benefits society, because to earn income on his labor in a competitive market, he must produce something others value. In Adam Smith’s lasting imagery, ―By directing that industry in such a manner as its produce may be of greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
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What is the “invisible hand” spoken of by Adam Smith?
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Milton Friedman, a Nobel Prize winner in economics, calls the “invisible hand” the idea of “the possibility of cooperation without coercion” in economic decision making. It is the idea that when consumers and producers are allowed to make their own economic choices, they will freely interact together in the marketplace. Automatically (or ‘invisibly’) each one’s self-interest will guide them to supply, produce, and consume what will eventually and usually be beneficial to all in a free, dynamic, and cooperative marketplace.
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What is the role of government in the economy according to John Maynard Keynes?
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Keynes (pronounced ‘Cains’) wrote several books on monetary policy in 1920s–30s. Chiefly his “General Theory of Employment, Interest and Money” in 1936 explains that government should use monetary and fiscal policies to ‘make up the difference’ if the economy has high unemployment, inflation and/or decreasing economic growth. For example in fiscal policies, he believed that government should deficit spend. This is how government would decrease unemployment and increase economic growth. Keynes’ monetary theory addressed government’s role in controlling inflation.
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deficit spend
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deficit spend (or borrow money by selling Treasury bonds), then spend the borrowed money in the economy, thus stimulating aggregate demand in the marketplace. This government spending would create new jobs and incomes so more people would then spend and further stimulate the economy bringing economic growth.
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John Maynard Keynes Vs. Adam Smith
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Smith: Founder of free market economics. Economics based on natural law and free market. Believed government should build infrastructure and grant copyrights. Favored retaliatory tariffs. Believed competition was key to well rounded economy and regulation "extinguish[ed] emulation". Opposed mercantilism because free markets provided surplus goods at better prices. Keynes: Keynesian Economics. Helped construct International Monetary Fund and fixed exchange rates. Opposed reparations on Germans post WWI. Keynes' General Theory revolutionized modern economics. Keynes supported free markets, but also government deficit spending in order to stop unemployment/create employed spending--fiscal policy created employment, free market took over after.
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Laissez-faire
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a doctrine advocating a minimum role for government in the economy, such as providing for defense against external enemies, a system of law to protect individuals and their property, and production of such goods and services which for some reason are needed, but would not be produced by private firms.
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What is the basic question in economics?
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How should individuals/society choose to use scare resources that nature/previous generations have provided? It boils down to ways of thinking, understanding society, global affairs. Therefore, it is what is produced, who gets it, why, the result, and room for improvement? The results are societal choices.
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What are the "opportunity costs" of making any economic decision or transaction?
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When we decide upon a transaction, we inevitably forgo, or trade-off, an alternative opportunity. i.e.- going to the movies sacrifices other options for that time/money or skipping income earned at work to take a vacation.
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What are the different kinds of economic markets?
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efficient market-- a market in which profit opportunities (risk-free ventures) are eliminated almost instantaneously. In an efficient market, if it sounds too good to be true, it probably is because people are always looking for good deals, but there are some exceptions.
Labor market-- jobs, incomes. |
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scarcity
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means limited. Opportunity costs occur because of scarcity. Hence 24 hours in a day creates time scarcity.
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Marginalism
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the process of analyzing the additional or incremental costs or benefits arising from a choice/decision. marginal cost- the incremental cost of producing one more unit of a good or service. (I.E. sunk cost is 5 ,000 investment to run an airplane, it doesn't add to the cost to sell discounted tickets on a half-empty plane. even though the tickets aren't full price they're still profitable without adding costs, therefore, it is marginal).
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specialization
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Specialization and trade increase the productivity of a nations's resources and allow for larger total output than otherwise
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trade
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economic decision making
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command, mixed, market economies
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absolute and comparative advantage
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describing and analyzing human behavior in economic decision making
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What are current examples of command and mixed economies?
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A current example of a command economy is North Korea. This socialist republic government, under the direction of their leader Kim Jong-il and the Central People’s Committee (CPC), sets broad economic goals and directs all aspects of their economy: supply, demand, production, and consumption. A current example of a mixed economy is the United States. Though we have a strong free-market philosophy in our country, we actually have a mixed economy. Our government has a central bank, the Federal Reserve. Our government tries to control inflation and unemployment as well as stimulate economic growth using fiscal and monetary policies. We have government regulation of all business (producers); therefore our economy is mixed with both laissez-fair and central planning characteristics.
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subprime loans
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during the housing boom, mortgage credit was expanded to borrowers who in earlier years would have not qualified due to bad credit, low income, substantial debt. The mortgage loans to them were subprime.
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microeconomics
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functioning of individual industries and the behavior of individual economic decision-making units: firms and households. Firms: what to produce? Households: what to buy? Deals with household income.
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macroeconomics
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economy as a whole. examines the factors that determine national output, or national product. Deals with national income
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comparative economic system
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(field of economics) examines the ways alternative economic systems function. Figures advantages/disadvantages of different systems.
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econometrics
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(field of economics) applies statistical techniques and data to economic problems in an effort to test hypotheses and theories.
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economic development
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(field of economics) focuses on problems of low-income countries. Includes population growth, basic needs, international trade.
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economic history
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field of economics-- traces the development of the modern economy. (such as Industrial Revolution)
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Economics of race and gender
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field of economics-- examines role of race/gender in economic history, economic life, policy making.
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environmental economics
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field of economics-- studies the potential failure of the market system to account fully for impacts of production and consumption on the environment and on natural resource depletion.
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Finance
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field of economics-- examines the ways in which households/firms pay for/finance their purchases. Involves study of capital markets, futures, capital budgeting, asset valuation.
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History of economic thought
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field of economics-- grounded in philosophy, studies the development of economic ideas/theories over time. Includes Adam Smith, Thomas Malthus, Karl Marx, John Maynard Keynes.
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Industrial organization
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field of economics-- looks carefully at the structure/performance of industries/firms within economy. Business competition.
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International economics
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field of economics--Studies trade flows among countries and inernational financial institutions.
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Labor economics
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field of economics-- Deals with wages, employment, unemployment. What jobs, how worked, time worked. Unions/management.
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law and economics
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field of economics-- analyzes the economic function of legal rules/institutions. How does law change behavior of individuals and businesses. LIability laws, crime, etc.
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Public economics
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field of economics-- examines role of government in economy.
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Urban/regional economics
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field of economics-- studies spatial arrangement of economic activity. Why businesses set up where they do, etc.
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fiscal policy
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changes in government spending and tax collections designed to achieve a full-employment and non-inflationary domestic output; also called discretionary fiscal policy.
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Diamond-Water Paradox
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water is in great supply relative to demand and thus has low price per gallon. Diamonds are rare/costly to mine, cut, polish. Their supply is small to the demand. The marginal utility (satisfaction of one more item) of last unit of water consumed was very low. But because diamonds are so rare/expensive, satisfaction remains high. The total willingness to pay for water is high because people consume a lot more of it, and would die without it. However the total marginal willingness to pay
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Equilibrium price
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determined by willingness to buy and sell one additional unit.
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monetary policy
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central bank's changing of the money supply to influence interest rates and assist the economy in achieving full-employment, noninflationary level of total output.
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law of supply
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is the positive relationship between price and quantity supplied, holding everything else constant. Other factors that affect supply include prices of inputs, technological change, prices of substitutes in production, expected future prices, and the number of firms in the market. In response to a change in any one of these factors, there will be a change in supply or a shift in the supply curve.
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law of demand
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The law of demand is the negative relationship between price and quantity demanded, holding everything else constant. Other factors that affect demand include prices of related goods (substitutes and complements), income, tastes, population and demographics, and expected future prices. Responses to changes in any of these shift a product’s demand curve and are referred to as changes (increases or decreases) in demand.
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demand, supply, equilibrium
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An increase in demand increases equilibrium price and increases the equilibrium quantity. A decrease in demand decreases equilibrium price and decreases the equilibrium quantity. An increase in supply decreases equilibrium price and increases the equilibrium quantity. A decrease in supply increases equilibrium price and decreases the equilibrium quantity.
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government actions that affect equilibrium
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Price Ceilings-- Price ceilings are regulations designed to protect low income individuals from not being able to afford important resources. If the ceiling is set below the equilibrium level, however, then there is a deadweight loss created. Other problems come in the form of black markets, search time, and fees, which are added but not directly associated with the sale - for example a high charge for fittings could be added to a maxed out rental cost.
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stagnation
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Economic stagnation or economic immobilism, often called simply stagnation or immobilism, is a prolonged period of slow economic growth (traditionally measured in terms of the GDP growth), usually accompanied by high unemployment. Under some definitions, "slow" means significantly slower than potential growth as estimated by experts in macroeconomics. Under other definitions, growth less than 2-3% per year is a sign of stagnation.[citation needed]
The term bears negative connotations, but slow economic growth is not always the fault of economic policymakers. For example, potential growth may be slowed down by catastrophic or demographic reasons. |
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inflation
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an economic condition wherein the price of the goods and services increase steadily measured against standard level of purchasing power, whereas the supply of the goods and services decline along with the devaluation of money. However, it is agreed that inflation occurs due to an unexpected rise in the supply of money which causes devaluation or a decrease in the supply of goods and services.
Again, the inflation rate decreases with the increase in the production of goods and with the decrease in the supply of money in the market. symptoms: supply of goods decreases there is a natural rate of unemployment, and so in the long term inflation does not impact upon unemployment at all in the long term (in the short term, employment will fall as price increases, leading to a period of time when unemployment rises |
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Signs of Recession
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unemployment. drop in housing market (everyone wants a house, so when they aren't selling, something isn't right), little to no hiring, High gas prices mean less driving, and less driving means less spending. decline in total output, income, employment, trade lasting 6 months or longer*
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consumer price index
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(cpi) measures changes in the price level of consumer goods and services purchased by households. The CPI in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
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peak
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business activity has reached a temporary maximum, economy is in full employment and level of real output is at or very close to its capacity. Price levels are likely to raise.
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trough
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recession or depression phase in which output and employment bottom out at their lowest levels. Can be short lived or quite long
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recovery
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output and employment increase toward full employment. as recovery progresses, price level may begin to rise before there is full employment and full capacity production.
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current account
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the section in a nation's international balance of payments which records its exports and imports of goods and services, its net investment income, and its net transfers.
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capital account
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the section of a nation's international balance of payment statements in which the foreign purchases of assets in the united states (producing money capital inflows) and US purchases of assets abroad (producing money capital outflows of that nation) are recorded.
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elastic supply
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product or resource supply whose price elasticity is greater than 1; means the resulting change in quantity supplied is greater than the percentage change in price.
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elastic demand
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product or resource demand whose price elasticity is greater than one; means the resulting change in quantity demanded is greater than the percentage change in price.
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What are three determinants of demand elasticity?
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How elastic (think of a rubber band stretching) or responsive is any good to market demand? It depends on three things. First, what is the availability of substitutes? If there are acceptable, cheaper substitute goods this will increase the elasticity of the good—make that good’s demand more responsive to the substitute’s prices. Second, what is the importance of the item in individual budgets? If a good is a small part of our overall budget, we may not notice or care about price increases and keep our demand of that good at the same level. Conversely, if big-ticket items in our budget really increase in price, we will demand less of them. Third, what is the time frame? In the short run, our demand for a good may be inelastic; but in the long run (or over time) we may change our overall demand for any good. So elasticity can change over time. Goods and services that are inelastic in the short run can become highly elastic over time. See the different definitions of elasticity in the textbook on page 90.
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What are four sources of market failure?
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Market failure means there are no perfectly efficient markets. There are four ways perfectly efficient markets can fail. Have you seen any of these examples? First, monopolies and oligopolies happen. One or many firms produce goods and services where there are no close substitutes. These firms control price, production and entry into the marketplace. Think of oil prices. Society loses the benefits of more products and lower prices. Second, there are no public goods (or social goods). No private household or firm can be expected to provide national defense for an entire country. National defense would be a public good—a good that is needed collectively in society. Third, externalities happen. There are external costs and benefits to society that happen outside of the initial exchange, price, and profit of goods and services. Does any firm really bear all of the costs of its pollution when it sells goods or services? No, most pollution costs are externalities—costs borne by others in the marketplace. Our marketplace does not always force consideration of all the costs and benefits of economic decisions. Fourth, imperfect information is a reality. Does every consumer understand all product characteristics, prices, substitute goods, etc., when consuming or investing in something? Do you? Usually not, so imperfect information is another weakness in markets.
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