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81 Cards in this Set
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limited resources |
labor, capital, land, and entrepreneurial ability |
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indicates how much of a good consumers are willing and able to buy at each possible price during a given time period, other things constant |
Demand |
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the quantity demanded varies inversely with price, other things constant |
Law of Demand |
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Describe Substitution Effect |
a price of a good falls, its relative price makes consumers more willing to buy
a price of a good increases, its relative price makes consumers more willing to buy
changes in relative prices causes the subsitution effect |
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Income Effect (two types) |
Money - number of dollars received in a period of time
Real - measured in terms of goods and services it can buy
price decrease, real income increase price increase, real income decrease |
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What could cause a shift in the Demand curve? |
*Money income of consumers *prices of related goods *consumer expectations *number and composition of consumers in the market *consumer tastes |
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Name and define two types of goods. |
Normal goods - the demand increases when income increases and decreases when income decreases
Inferior goods - the demand decreases when income increases and increases when income decreases |
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if an increase in the price of one good shifts the demand for the other good to the right and if a decrease in the price of one shifts the demand for the other to the left, the two goods are... |
Substitutes |
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if an increase in the price of one good shifts the demand for the other to the left and if a decrease in the price of one shifts the demand for the other to the right, the two goods are... |
Complements |
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Consumer Expectations: |
if individuals expect income to increase in the future, current demand increases and vice versa
if individuals expect prices to increase in the future, current demand increases and vice versa |
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indicates how much of a good producers are willing and able to offer for sale |
Supply |
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states that the quantity supplied is usually directly related to its price, other things constant |
Law of Supply |
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What is supply vs. quantity supplied? |
supply refers to relation between price and quantity, supply curve
quantity supplied refers to a particular amount offered for sale at a particular price, a point on the supply curve |
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What can cause a shift in the Supply Curve? |
*state of technology *prices of relevant resources *prices of alternative goods *producer expectations *number of producers in the market |
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goods that use some of the same resources employed to produce the good under consideration |
Alternative Goods |
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Producer Expectations: |
When a good can be easily stored, expecting future prices to be higher may reduce current supply
any change expected to affect future profitability could shift the supply curve |
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When plans of both buyers and sellers exactly match and market forces exert no pressure to change price or quantity, the market is said to have reached... |
Equilibrium |
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Price floors and ceilings distort markets, creating... |
a surplus and a shortage |
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examines how people use scarce resources to satisfy unlimited wants |
Economics |
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When goods are scarce, how do we determine who gets them? |
* prices * seniority/status * lottery/random draw |
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Four general categories of scarce resources: |
* Labor * Capital * Land * Entrepreneurial Ability |
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broad category of human effort (physical and mental) |
Labor |
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Human creations used to produce goods and services
physical: factories, machines, etc.
human: knowledge and skill to enhance labor productivity |
Capital |
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What types of resources are categorized under Land? |
natural resources: land, bodies of water, trees, oil reserves, etc. |
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What types of resources are categorized under Entrepreneurial Ability? |
* Special kind of human skill
* Talent required to dream up a new product or find a better way to produce an existing one; innovation |
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Payments for Resources |
Wages --> payment for use of labor
Interest --> payment for the use of capital
Rent --> payment for use of land
Profit --> reward for entrepreneur's innovation |
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Employing land, labor, capital, and entrepreneurial ability in various combinations produces a variety of... |
Goods (tangible) and Services (intangible) |
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List and describe four types of decision-makers in the economy: |
* Households - demand goods and services, and supply labor, capital, land, and entre. ability
*Firms, governments, and rest of the world - demand the resources, supply goods and services (rest of the world is foreign households, firms, and governments) |
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Households supply _________ and demand ________.
Firms supply _________ and demand ___________. |
resources; goods and services
goods and services; resources |
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__________ market determines wages, interest, rent, and profits which flow as income to households.
__________ market determines prices for goods and services which flow as revenue to firms. |
Resource; Product |
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What determines the choices people make? |
1. self interest 2. time and info 3. marginal analysis
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Marginal Analysis: |
estimating how a small change in the way things are now will impact us, and then we decide whether to make that change or not |
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Studies the performance of the economy as a whole;
Examines the factors that influence individual economic choices |
Macroeconomics; Microeconomics |
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* simplifies economic reality * used to make predictions about the real world * focuses on the important elements of the problem under study *simple models are often the best |
Economic theory or model |
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Explain normative vs. positive. |
Positive economic statement - "what is" * assertion about economic reality * supported or rejected by facts
Normative economic statement - "what should be" * opinions * cannot be shown to be true or false by facts |
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List three possible sources of mistakes in reasoning leading to faulty conclusions: |
1. Fallacy that Association is Causation 2. Fallacy of Composition 3. Mistake of Ignoring Secondary Effects |
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Define Fallacy that Association is Causation. |
Event A caused Event B simply because the two are associated in time |
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Define Fallacy of Composition. |
Erroneous belief that what is true for the individual or the part, is also true for the group or whole |
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Define Primary and Secondary Effects. |
Primary effects are felt relatively quickly and easily observed.
Secondary effects tend to develop more slowly and are frequently not obvious |
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__________ demands goods and services thereby helping determine what gets produced and supply the resources |
Household |
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Describe the Household: Then and Now. |
Then: agricultural, largely self-sufficient, produced what they consumed and vice versa
Now: more women ( with children) in workforce, two-earner households, decrease in home production, and increase in goods and services demanded from the market, improved farm productivity, growth of urban factories |
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The satisfaction from consumption of limited resources: |
Households Maximize Utility |
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Households as Resource Suppliers: |
* use limited resources to produce goods and services in the home * households with few resources can receive transfer payments from the government * sell these resources in the resource market to earn income |
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Households as Demanders of Goods and Services: |
Households spend over 80% of their income on consumption of goods: * durable goods - 3+ years * nondurable goods * services |
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List and describe the evolution of the Firm: |
* Cottage Industry System - put out raw material to rural households that turned it into finished goods * Entrepreneurs - organize all the stages of production under one roof * Industrial Revolution - Development of large-scale factory production |
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Why does Household Production still exist? |
* the opportunity cost of performing some tasks is below the market price * no skills or specialized resources needed * household production avoids taxes * household production reduces transaction costs * technological advances increases household productivity |
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List the 3 different types of firms: |
1. Sole Proprietorship 2. Partnership 3. Corporation |
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Single-owner firm bearing unlimited liability; most common form of U.S. business organization: |
Sole Proprietorship |
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Multiple-owner firms with each owner bearing unlimited liability: |
Partnership |
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Legal entity owned by stockholders, exists separate from owners: |
Corportation |
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List some roles of the Government: |
* establishing and enforcing the rules of the game * promoting competition * regulating natural monopolies * providing public goods * dealing with externalities * more equal distribution of income * full employment, price stability, and economic growth |
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Sources of Government Revenue: |
Individual income tax and payroll tax |
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List and describe the 2 Tax Principles: |
* Ability-to-pay principle based on premise that those with a greater ability to pay should pay more tax
* Benefits-received tax principle based on premise that those who receive more benefits from the government program funded by a tax should pay more tax |
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Defined as who actually bears the burden of a tax |
Tax Incidence |
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Percentage of income paid in taxes decreases as income increases |
Regressive Taxation |
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Percentage of each additional dollar of income that goes to taxes |
Marginal Tax Rate |
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Why does international trade occur? |
Because the opportunity cost of producing specific goods differs among countries |
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Merchandise Trade Balance: |
the value of exported goods minus the value of imported goods |
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Balance of payments: |
record of all economic transactions between a country's residents and the residents of the rest of the world |
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the price of one currency in terms of another |
Exchange Rate |
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List and describe trade restrictions: |
Tariffs: taxes on imports
Quotas: legal limits on the quantity of a particular good that can be imported |
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the value of the best alternative that is forgone; focuses on the alternatives associated with making choices; subjective |
Opportunity Cost |
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A cost that has already been incurred; cannot be recovered regardless of further actions; irrelevant in making choices |
Sunk Cost |
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Law of Comparative Advantage |
States that the individual with the lower opportunity cost of producing a particular output should specialize in producing that output |
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Being able to produce a product using fewer resources than other resources require |
Absolute Advantage |
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Examples of comparative advantage between nations: |
* Climate * Workforce skills * Natural resources * Capital stock |
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What does specialization and comparative advantage imply? |
* most people consume little of what they produce and produce little of what they consume
* they exchange what they produce for money which is exchanged for what they consume |
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Focus is on how much an economy can produce with a given set of resources and technology; identifies the various possible combinations of two types of goods that can be produced using all available resources |
Production Possibilities Frontier |
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List factors that can Shift the PPF: |
* changes in resource availability * increases in the capital stock * technological change |
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PPF represents the combinations of output that are possible, given the economy's resources and technology |
Efficiency |
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Given the stock of resources and technology, the economy can produce only so much |
Scarcity |
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rightward shift or rotation of PPF |
Economic Growth |
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The PPF does not tell us what we SHOULD produce: |
It lists all the possible combinations of production but we ultimately have to CHOOSE |
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a set of mechanisms and institutions that resolve the what, how, and for whom questions |
Economic System |
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Criteria used to distinguish among economic systems (3): |
* who owns the resources * what decision-making process is used to allocate resources and products * what type of incentives guide the economic decision makers |
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* private ownership of all resources * coordination of economic activity based on price signals generated in free, unrestricted markets * owners have property rights, free to supply resources to highest bidder * voluntary buying and selling * Laissez-faire: let people do as they choose without government intervention |
Pure Capitalism |
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transmit information about relative scarcity of goods and services; provide individual incentives; distribute income among resource supplies |
Markets |
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Flaws in Capitalism: |
* no central authority to protect and enforce * people with no resources could starve * some producers may try to monopolize * production or consumption could lead to pollution * public goods, such as national defense, will not be provided |
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* resources are directed and production is coordinated not by markets but by the "command," or central plan of government * public or communal ownership of property * central plans spell out answers to three questions |
Pure Command System |
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Flaws of Command System |
* running an economy is complicated, resources may be used inefficiently * nobody owns resources, less incentive * central plans may be biased to central planners * since government is responsible for production, resources are more limited * less personal freedom in making economic choices |
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Describe a Mixed Economy |
* role of government increasing in market, role of markets increasing in command economies * government directly accounts for 1/3 of all economic activity * government regulates the private sector * some economies based on custom or religion |
