Econ 261 – Flashcard
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Define economics.
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the study of how society manages its scarce resources
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Explain how economists use the scientific method to formulate economic principles
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they use theory and observation
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Explain the importance of ceteris paribus in formulating economic principles.
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Aka "other things equal" the assumption that factors other than those being considered do not change. They assume that all variables except those under immediate consideration are held constant for a particular analysis. (what if)
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macroeconomics
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Macro is the study of economy-wide phenomena including inflation, unemployment, and economic growth. (economy as a whole)
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positive statement
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claims that attempt to describe the world as it is. (testable)
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normative statement
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claims that attempt to prescribe how the world should be (some opinion) (could've, would've, should've)
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Explain the role of self-interest and "invisible hand" in promoting economic efficiency.
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"Invisible hand" promotes public interest through a market system where the primary motivation is self-interest. By attempting to maximize profits, firms will also be producing the goods and services most wanted by society.
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markets for goods and services
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firms sell and households buy
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factors of production
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firms buy and households sell
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absolute advantage
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the ability to produce a good using fewer inputs than another producer
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comparative advantage
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the ability to produce a good at a lower opportunity costs than another producer -reflects opportunity cost -unless two people have the same opportunity cost, one person will have a comparative advantage in one good, and the other person will have comparative advantage in the other good ----the gains from specialization and tare are based on comparative advantage ---------when each person specializes in producing the good for which he or she has a comparative advantage, total production in the economy rises.
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price of trade
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for both parries to gain from trade, the price at which they trade must lie between the two opportunity costs
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demand represents...
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consumers
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microeconomics
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Micro is the study of how households and firms make decisions and how they interact in markets. (individual)
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supply represents...
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producers
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price and quantity demanded are ____ related
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inversely
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price and quantity supplied are ____ related
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directly
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determinants of demand Hint: When it comes to women, I demand a TEN)
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income tastes expectations number of buyers
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income
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an increase in income means an increase in demand (normal good) if demand for a good rises while income falls (inferior good)
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tastes
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demand based off own tastes
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expectations
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your expectations about the future may affect your demand for a good or service today
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number of buyers
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more buyers lead to an increase in demand
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determinants of supply Hint: Supply = TNIE
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technology number of sellers input prices expectation for future prices
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technology
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improvements help production costs and increase profits, so it stimulates higher supply
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number of sellers
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more sellers in the market increase market supply
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input prices
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higher production cost will lower profitless supply
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expectation for future prices
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if producers expect higher prices in the future, they will hold on to inventories and offer producers to buyers in the future to capture higher price
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equilibrium price
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the price that balances quantity supplied and quantity demanded.
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equilibrium quantity
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the quantity supplied and the quantity demanded at the equilibrium price.
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price ceiling
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a legal maximum on the price at which a good can be sold (above eqm)
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price floor
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a legal minimum on the price at which a good can be sold (below eqm) Ex: minimum wage
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binding- price ceiling
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price ceiling set below the equilibrium price
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not binding- price ceiling
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price ceiling set above the equilibrium price
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binding- price floor
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price floor set above the equilibrium price
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not binding- price floor
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price floor set below the equilibrium price
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frictional unemployment
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unemployment that results because it takes time for workers to find jobs to best suit their talents and skills -arises from the process of a job search
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cyclical unemployment
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the deviation of unemployment from its natural rate
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structural unemployment
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the number of jobs available in some labor markets is insufficient to provide jobs to everyone who wants one -explains longer spells of unemployment happens when wages are set above the level that brings supply and demand into equilibrium ---minimum-wage laws ---unions ---efficiency wages -arises from an above-equilibrium wage
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scarcity
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the limited nature of society's resources
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trade-off efficiency
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the property of society getting the most it can from its scarce resources
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trade-off equality
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the property of distributing economic prosperity uniformly among the members of society
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opportunity cost
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whatever must be given up to obtain some item
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rational
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-people who systematically and purposefully do the best they can to achieve their objective -marginal change
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marginal change
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a small incremental adjustment to a plan of action
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incentives
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something that induces a person to act
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market economy
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-an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services -difficult to understand because people act in their own self interest --promotes general economic well-being
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market failure
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a situation in which a market left on its own fails to allocated resources efficiently
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externality
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the impact of one person's actions on the well-being of a bystander
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market power
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-the ability of a single economic actor to have a substantial influence on market prices -invisible hand does not always allocate recourses equally
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productivity
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the quantity of goods and services produced from each unit of labor input most important determinant of living standards depends on the equipment, skills and technology available to workers
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inflation
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increase in the general level of prices in the long run, inflation is almost always caused by excessive growth in the quantity of money, which causes the value of money to fall
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scientific method
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the dispassionate development and testing of theories about how the world works. -in the form of: ---devising theories, collecting data, and then analyzing the data in attempt to verify or refute the theories.
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models
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a highly simplified representation of a more complicates reality economists use models to study economic issues
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components of circular-flow diagram
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firms, households, markets for goods and services, markets for factors of production
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Inner loop
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-represents the flow or inputs and outputs ---households sell the use of their labor, land, and capital to the firms in the markets for the factors of production -----the firms then use these factors to produce goods and services, which in turn are sold to household in the markets for goods and services.
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outer loop
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-represents the corresponding flow of dollars ---households spend money to buy goods and services from the firms -----the firms use some of the revenue from these sales to pay for the factors of production, such as wages -------remaining- profit of the firm owners
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Production Possibilities Frontier (PPF)
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a graph that shows all the combinations of two goods the economy can possibly produce given the available factor of production and the available production technology. points on the PPF: efficient- all resources fully utilized points under the PPF: not efficient- some resources are underutilized points above the PPF: not possible
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market
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a group of buyers and sellers of a particular good or service
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quantity demanded
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the amount of a good that buyers are willing and able to purchase
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law of demand
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the claim that, other things being equal, the quantity demanded of a good falls when the price of a good rises
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demand schedule
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a table that shows the relationship between the price of a good and the quantity demanded
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quantity supplied
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the amount of a good that sellers are willing and able to sell
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law of supply
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the claim that, other things being equal, the quantity supplied of a good rises when the price of a good rises.
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decrease in supply
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the price of a substitute in production rises
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decrease in supply
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the price of a complement in production falls
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decrease in supply
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a resource price or other input price rises
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decrease in supply
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the price of a good is expected to rise
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decrease in supply
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the number of sellers decreases
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decrease in supply
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productivity decreases
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increase in supply
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the price of a substitute in production falls
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increase in supply
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the price of a complement in production rises
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increase in supply
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a resource price or other input price falls
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increase in supply
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the price of the good is expected to fall
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increase in supply
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the number of sellers increases
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increase in supply
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productivity increases
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decrease in demand
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the price of a substitute falls or the price of a complement rises
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decrease in demand
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the price of a good is expected to fall
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decrease in demand
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income decreases
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decrease in demand
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expected future income or credit decreases
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decrease in demand
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the number of buyers decreases
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increase in demand
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the price of a substitute rises or the price of a complement falls
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increase in demand
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the price of a good is expected to rise
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increase in demand
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income increases
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increase in demand
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expected future income or credit increases
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increase in demand
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the number of buyers increases
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surplus
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a situation in which quantity supplies is greater than quantity demanded -happens in the case of a Price Floor -causes a fall in price, which increases the quantity demanded and decreases the quantity supplied ----movement along
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shortage
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a situation in which quantity demanded is greater than quantity supplied. -happens in the case of a Price Ceiling
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employed
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1) includes those who worked as paid employees, worked in their own business, or worked as unpaid worked in a family member's business 2) both full-time and part-time workers are counted. 3) includes those who were not working but who had jobs from which they were temporarily absent because of vacation, illness, or bad weather.
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unemployed
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1) includes those who were not employed, available for work, and had tried to find employment during the pervious for weeks. 2) includes those waiting to be recalled to a job from which they had been laid off
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not in the labor force
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1) includes those who fit neither in the first two categories 2) such as full-time students, homemakers, and retirees
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labor force
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the total number of workers, including both the employed and the unemployed Labor Force= number of employed + number of unemployed
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unemployment rate
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the percentage of the labor force that is unemployed Unemployment Rate= number of unemployed / labor force x 100.
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labor-force participation rate
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the percentage of the adult population that is in the labor force Labor-force participation rate= labor force / adult population x 100.
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natural rate of unemployment rate
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the normal rate of unemployment around which the the unemployment rate fluctuates
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discouraged worker
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individuals who would like to work but have given up looking up for a job. -do NOT show up in unemployment statistics, even though they are truly workers without jobs.
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union
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a worker association that bargains with employers over wages, benefits, and working conditions
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collective bargaining
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the process by which unions and firms agree on the terms of employment
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strike
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the organized withdrawal of labor from a firm by a union
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negatives of unions
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when unions raise the wages, they reduce the quantity of labor demanded, cause some workers to be unemployed, and reduce the wages in the rest of the economy. inefficient- high union wages reduce employment in unionized firms below the efficient, competitive level. inequitable- some workers benefit at the expense of other workers.
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positives of unions
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a necessary antidote to the market power of firms that hire workers. a firm can use market power in the case of a 'company town' and pay lower wages and offer worse working conditions than would prevail if it had to compete with other firms for the same workers. important for firms to respond efficiently to worker's concerns
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efficiency wages
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above-equilibrium wages paid by firms to increase worker productivity. -according to this theory, firms operate more efficiently if wages are above equilibrium level ---may be profitable for firms to keep wages high even in the presence of surplus labor.
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types of efficiency wages
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workers health, turnover, quality, effort
