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64 Cards in this Set

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Economics
The study of the allocation of scarce resources to satisfy competing ends
What are our scarce resources that we have to allocate?
Labor, capital, entrepreneurship, time, and natural resources.
Labor
scarce resource, people who can produce goods and services.
Natural Resources
scarce resource, such as land, air, water, minerals, and oil
Capital
scarce resource, tools equipment, tools. These are scarce because we can use it to do this or we can use it to do that.
Entrepreneurship
Scarce resource. someone willing to take a risk and combine other things to come up with a new idea.
Time
Scarce resource, we only have 24 hours in a day we can only do so much we have to make a choice.
Resources---
For something to be considered a resource it must be capable of doing more than one thing. If not there would be no choice because they can only do one thing. Resources are limited there are unlimited wants so we have to make a choice.
4 basic questions every economy must answer.
1. What should be produced?
2. how much do we produce?
3. How do we produce it?
4. How to allocate it? Who gets it?
Capitalism
Private ownership
Command economy
Public ownership.
Market based economy
Profits signal where resources should go. WE make our choices to allocate on our profits. The resources go where the profits are because the ownership is private and we get to keep what we make.
micro Vs. Macro
before the great depression there wasn't a choice. The models quit working however, during the great depression and the split occurred. There was a surplus of workers during the great depression the market should have fixed it by lowering wages so more companies want employees and more people don't want to work. If people aren't buying the government has to buy it.
Micro
Will work well the market will always balance.
In macroeconomics we look at
total or aggregate output or GDP. Total levels of unemployment, inflation rate (CPI), fiscal policy--taken by president setting tax and spending policies, monetary policy--undertaken by the Fed. reserve bank. They set interest rates and control the supply of money imports and exports.
In Microeconomics we look at
individual parts of the economy. Individual household behavior (demand), individual firm behavior (supply), individual markets (such as the gas price or the supply of snow boots), policies aimed at particualr markets (what happens when the government raises the cigarette tax?)
Normative Economics
People's opinions. Subjective. Value judgements.
Positive Economics
Objective. Can be proven true or false.
Economics is what kind of a science?
Social Science
Social Science
Social science means we are looking at what people do and since humans are wacky we have different results than we sometimes anticipate.
What is economics known as?
The dismal science because economists rain on your parade.
opportunity cost
What we give up by not making the alternative choice. It costs you the next best option.
Marginal
Extra or additional
How do people make decisions?
By weighing the marginal benefit vs. the marginal cost. If the benefit outweighs the cost the person makes the choice.
What do economists believe people do in relation to their decisions?
They assume that people make decisions that are rational or are in their self interest.
how do we get different decisions?
Everyone is acting on their own information set and own constraints so we see diff. behaviors and make diff choices.
Negative incentive
These increase the cost or decrease the benefit. Aka increasing fines or increasing jail time.
Positive incentive
increase benefit or lower cost. If we want to increase safety we can lower the speed limit or increase safety requirements in cars.
The law of unintended consequences
People feel safer and they drive even faster. This leads to more deaths. You get the opposite result than what you expected.
Fallacy of composition
It is not necessarily true that what is true for one is true for an entire group. Exp. If you are at a show and someone tall sits in front of you you can stand up. If everyone stands up you are no better off.
Correlation
2 variables appear to be either directly or inversely related.
Simplifying assumption
We assume other things being equal or constant. Ceteris paribus. We pick out two variables and hold other things equal.
What is the latin word for other things equal
ceteris paribus
Dependent variable
variable of interest
Independent variable
Variable that changes first and causes the change in the other dependent variable.
in economics where does it go? X or Y axis?
X axis-dependent, Y axis-independent
slope euqation
slope=rise/run
change in P/Change in Q
Equation of a line
y=mx+b
In the equation of a line b=
the y intercept.
Scientific method steps
1. observation of the real world
2. hypothesis
3. hypothesis test
4. accept, reject, or nullify
5. develop an economic principle
Budget Line
Explores if we have a limited resource, money, what we can purchase if we allocate it to resource A or resource B. Always has a 1 to 1 ratio and should be a straight line.
Production Possibilities Curve
Works like a budget line except it is more general.
PPC Assumptions
1. 2 goods are produced. They can be either consumer goods or capital goods.
2. Our resources are fixed.
3. Technology is fixed/constant.
4. Full employment of resources.
Consumer Good PPC
Food, clothing, medical supplies, Goods the satisfy our wants directly when we use or consume them.
Capital Good PPC
Plant, equipment, tools, These satisfy our wants indirectly by increasing productivity and helping to produce more in the future.
The PPC illustrates:
Everything we talk about in economics. It illustrates scarcity because anything outside of the PPC is unattainable due to scarce resources. If we are at a point inside the curve we can move outward without giving anything up because we are not opperating efficiently. If we are on the PPC curve we do have an opportunity cost to move along it because we are operating at full employment and we can either make more of one thing or more of the other.
Law of Increasing Opportunity Cost
As you produce more of one good the opp cost of producing it increases.
Why is the Law of Increasing Opportunity Cost true?
It is true because of specialization. In the budget line, which has a 1 to 1 ratio, money is equally adapted to purchasing either one. However, when we get into producing wheat or guns, when we want to produce wheat we start with 3 fields that are on prime location for growing. However, as we want to produce more wheat we have to start planting on worse land so we need more land to produce a small increase in wheat production. So there is less land available to produce Guns now.
What happens if you change the PPC assumptions?
1. Change in the quantity of resources. THis could be caused by a change in immigration laws which allows the labor force to increase. When we have an increase in resources we can produce more stuff so the PPC shifts out. When we have a decrease in resources, such as a natural disaster, the PPC shifts inward because capital is destroyed and people flee the area.
2. Change in quality of resources.
this can be caused by an increase in technology that would cause the PPC to shift outward or if the people are better educated they can perform tasks more efficiently and the PPC shifts outward.
What happens if there is a change in quantity of resources in the PPC
If they increase the PPC shifts outward and production increases.
If they decrease the PPC shifts inward and production decreases.
What happens to the PPC when the quality of resources change
If the quality increases such as technology gets better or workers are more educated the PPC shifts outward and production increases.
If the quality decreases and a computer crash occurs then the curve shifts inward and we can produce less stuff.
What happens if we have a technological breakthrough that allows us to produce one item cheaper?
Well since we can produce one item cheaper, the PPC stays the same for the other item and shifts outward on the end of the item that is now able to be produced cheaper. This also allows us to increase production of the other item because we have more resources to allocate to its production.
How can a politician who says I will increase healthcare without giving up anything else be telling the truth?
If we are currently operating inefficiently he can shift us to be on the PPC. Or if there is an advance in technology.
Which point on the PPC should the US choose? What's wrong with this question?
Normative statement. Economics cannot tell us what we SHOULD do just what will happen based on the decision we decide to make.
Which of the following is NOT an opp cost you incur if you see a Royals baseball game? A) the parking fee, if you drive to the park, B) the exorbitant price you paid for a hot dog, C) the time spent in the after game traffic jam, D) the ticket given to you by a friend who couldn't go to the game.
D
Which of the following is most likely an example of a macroecon topic? A) an increase in the price of pizza, B) a decrease in the unemployment rate, C) The entry of new firms into the software industry, D) a decrease in the production of DVDs by a consumer electronics company
B
Which of the following is LEAST likely to shift the production possibilities curve outward? A) the discovery of new natural resources, B) a change in preferences away from one good and toward the other good, C) a reduction is people's preferences for leisure i.e. people wanna work more, D) an invention that reduces the amount of natural resources necessary for producing a good.
B
Which of the following is a normative statement? A) the main goal of the govt. should be to achieve an annual growth rate for the economy of 7%, B) due to advances in health care, people live longer and, therefore, social security expenses have increased, C) unemployment increased last year, even though the govt, sector followed an expansionary economic policy, D) a 5% decrease in ppl's income will lead to a 3% decrease in ppl's consumption of pizza.
A
In making choices people find that: A) resources are scarce and that they cannot do everything or have everythiong they want, B) the real cost of a choice is what you give up to make that choice, C) people make choices that will make them better off, D) all of the above.
D
A point inside the PPC represents: A) a growing economy, B) a fully employed economy, C) a situation of unemployed or inefficient use of resources, D) All of the above
C
In a market based economy like the US, the question of "how to produce" is determined by: A) the least cost method of production, B) the distribution of income, C) consumer demand, D) none of the above
A
A company believing that offering airline frequent flyer miles with the purchase of their product will lead to increased sales is following which key economic idea? A) people think at the margin, B) people respond to incentives, C) information is important, D) markets are efficient.
B
When Ross decides whether or not he should eat another dessert, an economist would say that he : A) considers how much additional exercise he will need to avoid gaining weight from eating the dessert, B) considers whether he can do so without anyone else noticing, C) compares the benefits and costs of eathing another dessert, D) only considers the price of the dessert
C
Which of the following statemtns is true? A) People usually make choices without regard to the additional benefits and costs of those choices, B) the incentives or rewards for certain types of behavior, rarely influence people's decisions at the margin, C) If people were less wasteful we could eliminate problems due to scarcity of resources, D) people consider the opp costs of their choices.
D