Intro to Economics Test Questions – Flashcards
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Scarcity - for all societies; Because we can't get everything we want, we have to make choices.
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Basic Economic Problem
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The limited resources available for production relative to the demand for goods and services; Human wants will always exceed the capacity of our available resource
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Scarcity
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the study of choices people make in an effort to satisfy their wants and needs.
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Economics
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something for which there are many substitutes
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Wants
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Things for which there are no substitutes
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Needs
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(Individuals) Economists examine processes by which goods and services are produced, distributed, and consumed
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Microeconomics
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(Big Picture) Economists examine the effects of government policy on economic growth and stability.
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Macroeconomics
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Generally speaking, people prefer [n+1] units of a good to [n] units of the same good.
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PIG Principle
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1. What to produce? (Resource Allocation) 2. How to produce? (Production) 3. Who gets what we produce? (Distribution) - Answers influenced by our values & beliefs, socialization process, agents of socialization, social institutions, encultration, etc.
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Three Basic Economic Questions
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1. People Economize - Choices must bee made; Nothing is free due to opportunity costs 2. All Choices have Opportunity Costs - The next best thing that is given up 3. People Choose for Good Reasons - people only act according to their own self-interest 4. People Respond to Incentives in Predictable Ways - changing an incentive, changes behavior 5. Economic Systems Influence Choices & Incentives - individual choices are influenced by the rules & customs of a country 6. Voluntary Trade Creates Wealth - We give up something we value to gain something we value more 7. The consequences of our choices occur in the future
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Basic Economic Principles that Influence our Thinking
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What you are willing and able to give up to get what you really want
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Trade-Off
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The costs associated with the next best alternative that was not chosen
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Opportunity Cost
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are represented by currency; Not always present, but easier to give a value to Price is a measure of the value associated with our economic wants as they relate to the availability of scarce productive resource; Money represents the time, enegery, and talent tthat is given up to produce something
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Explicit Costs
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represent the time, energy, and effort associated with the lost opportunity; Always present, but harder to give a value to
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Implicit Costs
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PACED 1. Identify the Problem - What decision are you trying to make? 2. List the Alternatives - What choices or options are available? 3. Establish the Criteria (based on values & beliefs) - Cost and benefit Analysis - What do I want to achieve? What are my goals? What gives me more of what I want? 4. Evaluate the Alternatives (according to criteria, rank your alternatives) - What do you gain and give up with each alternative? 5. Decide on a course of action or solution example: Who should get the kidney?
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Economic Decision Making Model
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an identified means [process] for distributing scarce resources example: chocolate bar
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Allocating Mechanism
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the "ingredients" needed for production Land, Labor, Capital, Human Capital, Entrepreneurship
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Factors of Production
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natural resource, raw materials, found "as is" in nature; unchanged by human hands; example: water, air, trees, etc.
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Land
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human resources, man power, (the mental and physical) effort people devote to a task for which they are paid, unspecialized; example: waitress, cook, clerk, day laborer, etc.
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Labor
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resources changed, built, or modified by human hands; examples: 2x4, warehouse, computer
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Capital
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specialized ideas, skills, patents, degrees, know-how, & talents; specialization makes "switching" resource more inefficient (ex: mechanic replaced with chef); examples: systems analyst, actuary, etc.
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Human Capital
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Unique to mixed/market systems, risk takers, visionaries examples: Bill Gates, Mark Zuckerburg, etc.
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Entrepreneurship Ability
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1. Recognize a social problem 2. Use entrepreneurial principles to organize, create, and mange a venture to achieve social change 3. Focus on creation of social capital to further social and environmental goals 4. Key tool - leverage the power of internet and social media for change 5. Act as the change agent for soceity
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Social Enterpreneurship
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money earned for selling the factors of producton; wages
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Income
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money paid by households to get more of what they want (finished goods & services)
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Consumption Expenditures
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money earned by a business; profit
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Revenues
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incurred by businesses; payments made to obtain the factors of production
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Costs
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made up of individuals or families; consumers
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Households
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purpose for existence is to make a profit either selling the factors of production or creating a product that consumers want; producers
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Businesses
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land, labor, capital, and entrepreneurship
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Productive Resources
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an exchange of the factors of production
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Factor Market
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an exchange of finished goods and services
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Product Market
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Money (wages, expenditures, revenue, costs) flows clockwise while resources & goods & services flow counterclockwise. Taxes go into the government while public goods and services flow out.
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Circular Flow Model
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measurable; 1. Economic Growth 2. Allocative Efficiency 3. Price Stability 4. Full Employment
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Economic Goals (List)
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1. Economic Equity 2. Economic Freedom 3. Economic Security
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Socio-Economic Goals (list)
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goal is to grow the economy; this is accomplished by finding new markets of increasing innovation and efficiency; creates jobs and reduces poverty while improving GDP.
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Economic Growth
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maximize output by careful use of resources; produce what is most desirable to society; Marginal Benefit=Marginal Cost
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Allocative Efficiency
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maximize output from given amount of resources; produce the lowest cost; point on PPF curve
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Productive Efficiency
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prevent rapid increase and decreases in overall price levels; measure of inflation; measured by CPI (consumer price index); assumes slow, steady increase in prices over time
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Price Stability
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the higher the cost, the higher the value
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The higher the scarcity . . .
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is attained when anyone that wants a job is able to have one (complete utilization of a nation's labor force); 93%-97% of all labor resource utilized at once
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Full Employment
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provide for a fair distribution of available resources; basic ingredient of command system (ex: welfare, social security, tax system, etc.)
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Economic Equity
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allows the individual to make decisions on production, spending, and employment (answers to the three basic economic questions)
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Economic Freedom
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protects consumers and producers from economic risks; our safety net; plays into consumer confidence & impacts spending; examples: insurance, savings, gov. programs, etc.
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Economic Security
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goal is to eliminate waste and maximize benefits from our scarce resources; leads to economic growth and full employment
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Efficency (overall)
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Developed to answer 3 basic economic questions; will match political system: Command System Socialist System Traditional system Mixed System Market System
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Economic Systems (list)
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- collective order is more important than individual preferences - Government owns/controls productive resources and therefore answers the three basic economic questions - power is concentrated in the hands of a few; political and economic systems are directly connected - individuals are conditioned to accept the decisions of the sate; only a few know why decisions were made
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Command System
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- government provides numerous services to citizens in order to improve the quality of life - government controls essential industries/services (ex: transportation, education, healthcare) - many examples of private ownership focus is on "we" vs. "me"; social responsibility is paramount to improving the quality of life for all, not just some - high taxes, but high standard of living
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Socialist System
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- economic decisions generally repeat those made by previous generations - rely upon habit, custom, or ritual to answer the three economic questions
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Traditional Systems
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- limited role of government - government acts in response to voter demands; protect consumers or industry - government provides only those services that are too cumbersome to be managed by private interest [public goods & services]
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Mixed Systems
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- supremacy of the individual over the collective good - productive resources are owned/controlled by private interests who answer the three basic economic questions [freedom] - resources are allocated based on the potential for profit according to consumer preferences (willingness and ability to pay)
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Market Systems
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1. Perfect Competition 2. Oligopoly 3. Monopoly
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Types of Market Structures (list)
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- Multiple firms producing the same products - easy entrance and exit of the market - competition drives price down' efficiency and quality go up - firm is a price taker and has no price setting power; better for consumer - very very limited barriers to entry - brand loyalty, control of vital inputs, economies of scale
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Perfect Competition
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- few dominant producers -substantial barriers to entry into the market - price leadership; small group usually follows
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Oligopoly
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- on firm in market - producing the only product of its kind available - significant barriers to entry: No new producers allowed - complete control of price; usually as price goes up, quality goes down - regulated via anti-trust laws - natural monopolies: utilities
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Monopoly
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1. Lack of Economic Power; buyers and sellers can not individually influence price 2. Free Mobility - move in and out of any market 3. Perfect Information - each participant has all information related to quality, price, substitutes, etc. 4. Well-Defined Property Rights a) Universality - productive resources are privately owned' property rights are well-defined b)Exclusivity - all benefits/costs related to the use of productive resources go to the owner of said resource c)Transferability - all property rights can be exchanged d) Enforceability - property rights are protected fro theft by the government
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Essential Characteristics of a Perfectly Competitive Market
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a means of urging people to do more of a good thing or less of a bad thing
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Incentives
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-helps us to compare the opportunity costs of various alternatives of production - shows us the trade-offs - shows us possible combinations for production in which we would be efficient; assumes productive resources are scarce - clarifies situations in which we are under-utilizing our resources - illustrates the frontier - one moment in time - indicates growth and expansion - assumes technology is fixed
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What does PPF provide?
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graph of all possible combinations of two outputs given a fixed amount of resources; points on graph =productive efficiency; points inside graph=not efficient; points outside of graph=unattainable currently; need economic growth (increased technology)
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Production Possibilities Frontier Curve
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- show the shape of PPF - bowed outward - economic resources are not completely adaptable to alternative uses - the more something is produced, the greater costs associated with lost opportunites
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Law of Increasing Opportunity Costs
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PPF would be a straight line; factors of productions are good substitutes for each other
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Constant Opportunity Cost
