Economics (Exam 1) – Flashcards
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Who was the founder of economics?
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Adam Smith
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What does the idea of the "invisible hand" mean?
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in pursuing your own self-interest, you may benefit others
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Opportunity Costs
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Opportunity costs don't always deal with money, often they deal with the loss of things or time Ex: going to college full time: you are gaining an education, but you are losing money by paying for school, but also losing time to work to make more money because you are in school; the PenDot example
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Economics
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concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of human material wants
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Efficiency
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lowest cost
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Resources (3)
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Land, Labor, and Capital
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Land
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Most important natural resource
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Goods Market
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These are items that the household buys Ex: food, clothes, computers, haircuts, etc.
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Labor Market
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The Labor Market flows from the households; this is the other side of the Goods Market where the household is buying the product. The Labor Market is how the Goods Market is able to survive
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Financial (Capital) Market
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This is when the household is investing money, either by directly buying shares of a stock or indirectly through a savings account at the bank. The households are paid for their investments through interest or dividends. This makes the household the Supplier and the firms the Demanders
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What was the name of Adam Smith's famous book and what year was it written? What was the book about?
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He wrote "The Wealth of Nations" in 1776. The book was about the value in exchange vs. the value in use. He uses the example of diamonds and water
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Exchange Value
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Tied to how scarce the product is and how many people want it
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The Quantity of Good is on which axis of the graph?
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horizontal axis (x)
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The Price of the good is on which axis of the graph?
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vertical axis (y)
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Substitution Effect
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As the price of goods start to go up, people substitute that good for something similar, but cheaper Ex: orange juice; if the price of orange juice rises too high, people will substitute it for apple juice or vitamin C pills
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Which direction does the demand curve slope and why?
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It slopes downward because as the price gets lower and lower (vertically) , the demand gets higher and higher (horizontally)
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Income Effect
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As the prices of goods rise, but your income stays the same, the consumer will have less buying power
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Quantity Demanded
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refers to a specific amount of a good that is desired at each given price. Quantity Demanded is a point on a graph
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Demand
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refers to the relationship between Price and Quantity Demanded. Demand is a curve on the graph.
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What makes Demand rise and fall?
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The income of a community rises, a population boom, popularity of an item, substitutions for goods
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Supply
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refers to the relationship between the Quantity of a good Supplied and the Price of a good; how much is Produced at every price. Supply is a curve on the graph
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Quantity Supplied
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refers to the specific amount produced at a given price. Quantity Supplied is a point on the graph
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What makes Supply rise and fall?
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new technology, affects from the weather, change in Input Prices
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Equilibrium
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this occurs when the Quantity Supplied is at the same point on the graph as Quantity Demanded. Also said to be the point at which Price and Quantity are efficient in the specific economic sense that nothing is being wasted
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Shift in the Curve means what?
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there was a change in demand or supply, must be a curve change so it can't be just a change in Quantity Demanded or Quantity Supplied
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Price Ceiling
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the maximum price for a produce, this occurs when politicians enact a law to keep the price of a good low Ex: Rent-Control Laws
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Shortage
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Quantity Demanded will rise, but Quantity Supplied will fall Ex: the Ford Fusion; some many people wanted the car that they sold out before they could make enough to replace those inventories
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Price Floor
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the minimum price for a product; this occurs when those who supply the good are a politically powerful force and can get the government to set this price Ex: farmers that grow certain crops
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Surplus
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Quantity Supplied exceeds the Quantity Demanded; this is when inventories start to stack up Ex: Blackberries
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Elasticity
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refers to the relationship between taxes and the Quantity Demanded; how Quantities respond to changes in Price
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Elasticity of Demand
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defined as the percentage change in Quantity Demanded divided by the percentage change in Price
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Elasticity of Supply
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defined as the percentage change in Quantity Supplied divided by the percentage change in Price
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Inelastic Demand
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the percentage change in Quantity Demanded is smaller than the percentage change in Price; goods with Inelastic Demand have an Elasticity of less than 1 Ex: when there isn't a less expensive substitute; insulin for Diabetic patients or cigarettes for older addicted smokers
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Elastic Demand
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the percentage change in Quantity Demanded is greater than the percentage change in Price; good with Elastic Demand have an Elasticity of greater than 1 Ex: being able to substitute to a less expensive good; orange juice or teen smokers
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Unitary Elasticity of Demand
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when the percentage change in the Quantity of a good Demanded is exactly equal to the percentage rise in its Price; good with Unitary Elasticity of Demand have an Elasticity equal to 1
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Inelastic Supply
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a given percentage change in Price will bring a smaller percentage change in the Quantity Supplied; good with Inelastic Supply have a Elasticity of less than 1 Ex: Pablo Picasso paintings (no matter how high the prices go, we won't be getting anymore of them)
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Elastic Supply
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a given percentage change in price will bring a larger percentage change in the Quantity Supplied; good with Elastic Supply have an Elasticity of greater than 1 Ex: this occurs in firms where it is very easy to ramp up production very quickly when they are running below capacity
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Unitary Elasticity of Supply
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a given percentage change in Price would cause an equal percentage change in the Quantity Supplied; goods with Unitary Elasticity of Supply have an Elasticity equal to 1
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Why is Elasticity calculated by using percentage changes in Price and Quantity?
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this is a great advantage when the U.S. is making trades with countries all over the world that use different units or different currencies
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Does raising prices bring in more revenue when the Demand is Elastic or Inelastic?
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Inelastic
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Supply and Demand are often ___1___ in the short run and ___2___ in the long run. (fill in the blank with either Elastic or Inelastic)
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Blank one: Inelastic Blank two: Elastic
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Elasticity increases the cost of production for Producers (or) Consumers?
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Producers Ex: if the Price of coffee goes up, a coffee shop can't afford to sell the coffee at the same low Price, but now they are losing customers because their Prices went up and their customers can make less expensive substitutions
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Inelasticity increases the cost of production for Producers (or) Consumers?
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Consumers Ex: when the tax on cigarettes went up, the consumers had to pay more in order to get their smokes, but because it is an addiction for most people they are willing to pay for cigarettes at almost any Price because there is no less expensive substitutions
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3 Basic Questions of Economics
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What should be produced? How should it be produced? Who should receive what is produced?
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What?
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Capitalist Society: the Producers and Consumers decide what should be produced? Ex: House, Cars, etc Communist Society: the Government makes all the decisions
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How?
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Producers are the only factor in this question
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Who?
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Political Science, this question can't be answered in terms of Economic Efficiency
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Who created the Second Order Effect and what is it?
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Frederic Bastiat is associated with this effect and he was describing that a good Economists is able to see both the SEEN and UNSEEN effects
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CBO
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states for: Congressional Budget Office neutral in terms of political influence, teases out unforeseen consequences, does economic analysis
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Positive Economics
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Always answers the What? and How? questions; the CBO always answers in a positive economic way
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Normative Economics
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Always answers the Who? question, very close to Political Science
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Two types of Cost
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Private and Public
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Private Costs
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these are the costs of the producer: land/resources, labor, and capital
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Public Costs
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these are born by a 3rd party process of making something (the public); costs not involved with land, labor, or capital Ex: air pollution control, fixing of pot holes
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Social Costs
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Private Costs + Public Costs = Total Cost Overall
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Wants are ___1___, while resources are ___2___
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blank one: unlimited bland two: scarce
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Margin
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incremental changes
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Marginal Benefit VS. Marginal Cost
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M.B.: benefit from pursuing an incremental increase in activity M.C.: cost of pursuing an incremental increase in activity Ex (for both): Saudi's is trying to raise their prices so the U.S. can't compete anymore and goes out of business; which test should I study for more, Econ or Ochem?
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Macroeconomics VS. Microeconomics
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Macro: deals with the entire economy as a whole (Janet Yellen and Jake Lew: secretary of the treasury) Ex: growth of unemployment Micro: deals with specific products or sectors of the economy, examines markets and organized system of exchange Ex: Oil production, Labor Markets
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Market
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organized system of exchange
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Ceteris Paribus
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means: other things equal; dealing with only things that are relevant
