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Economics

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the study of how humans make decisions in the face of scarcity

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Scarcity

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humans wants for goods, services and resources exceed what is available

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What is the most scarce resource

answer

Time

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Division of Labor

answer

means the good or service is produced by dividing the number of tasks that are performed by different workers

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Who is Adam Smith and what did he write

answer

Economist "Wealth of Nations"

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Specialization

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workers focus on the parts of the production where they have an advantage

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Pros of specialization

answer

specialized workers make products better and quicker; specialization requires trade

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Microeconomics

answer

actions of individual agents within the economy, like households, workers, and businesses

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Macroeconomics

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Looks at economy as a whole (unemployed people, inflation, government deficits, levels of exports and imports)

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Goals of Macroeconomics:

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growth in the standard of living, low unemployment, low inflation

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Monetary Policy:

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policies that affect bank lending, interest rates, financial capital markets

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Fiscal policy:

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Government spending and taxes - determined by legislative body

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John Maynard Keynes

answer

Famous economist that teaches you how to think

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Theory:

answer

simplified representation of how two or more variables interact with each other, also called model

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Circular Flow Diagram

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good model to start with in economics

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two groups in economy:

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households and firms, goods and services market

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Traditional Economy:

answer

oldest; stick to traditional ways, occupations stay with the family - mostly farmers - what you produce is what you consume

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Command Economy:

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economic effort is devoted to goals passed down from a ruler or a ruling class; ex: ancient Egypt

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Market Economy:

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decentralized structure; based on private enterprise; businesses supply goods and services based on demands

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Globalization

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expanding cultural, political, and economic connections between people around the world - this has encouraged greater trade

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Positive Statement:

answer

reporting data as it is

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Normative Statement:

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reporting data as it should be

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Dismal Science:

answer

economics is never fulfilling; happiness is associated with wealth

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Hypothesis vs. Theory

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Hypothesis: testable proposition Theory: proven hypothesis These are used for prediction

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Fallacy of Composition:

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"what's good for me is good for everyone else"

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In economics, a firm that faces no competitors is referred to as what?

answer

a monopoly

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IF a paper mill shuts down its operations for three months so that it produces nothing, its ________ will be reduced to zero.

answer

Variable Costs

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If a solar panel manufacturer wants to look at its totally costs of production in the short run, which of the following would provide a useful starting point?

answer

Divide total costs into two categories: fixed costs that can't be changed in the short run and variable costs that can be

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_________ arises where many firms are competing in a market to sell similar but differentiated products

answer

Monopolistic competition

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Productive Efficiency

answer

it is impossible to produce more of one good without decreasing the quantity that is produced of another

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Allocative Efficiency

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the particular mi of goods a society produces represents the combination that society most desires

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What makes economic efficiency

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a mixture of productive efficiency and allocative efficiency

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What are the determinants of Aggregate Demand:

answer

changes in consumer spending, changes in investment spending, changes in government spending, changes in net export spending CIG NE (Consumer, Investment, government, net export)

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Determinants of Demand:

answer

Change in buyer tastes, change in number of buyers, change in income, change in price of related goods, change in expectations (TBIPE) or TIBEP (taste, income, buyers, price [of related goods], expectations)

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Determinants are also classified as what?

answer

"Shifters"

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Determinants of Supply:

answer

Change in resource prices, change in technology, changes in taxes and subsidies, change in prices of other goods, change in expectations, change in number of suppliers

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Determinants of Aggregate Supply:

answer

Changes in input prices, changes in productivity, change in legal-institutional environment

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GDP: (components of aggregate sale)

answer

Input prices, productivity, laws and institutions)

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demand Curve:

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shows the relationship between price and quantity demanded on a graph

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Is demand the same as quantity demanded?

answer

quantity demanded is only a certain point on the demand curve, demand is the relationship between a range of prices and the quantities demanded at those prices

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Supply

answer

the amount of some good or service a producer is willing to supply at that price

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Law of Supply

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a higher price leads to a higher quantity supplied and lower price leads to a lower quantity supplied

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Law of Demand:

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all other variables that affect demand are held constant; a fall in price will increase the quantity demanded, and vice versa

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Equilibrium:

answer

where supply and demand intersect; this will determine the price and quantity that will be bought and sold in a market

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equilibrium price:

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the only price where the plans of consumers and the plans of producers agree; the amount of the product consumers want to buy is equal to the amount producers want to sell

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Excess supply:

answer

Surplus; any above-equilibrium price, where the quantity supplied exceeds the quantity demanded

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Excess demand:

answer

shortage; a t the given price and the quantity demanded now exceeds the quantity supplied

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Ceteris Paribus

answer

"other things being equal"; any given demand or supply curve is based on the ceteris paribus assumption that all else is held equal; supply demand curve is relationship between two and only two variables when all other variables are kept constant

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When is ceteris paribus applied?

answer

the new look at how changes in price affect demand or supply; applied more generally

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Is a shift to the right increase or decrease for demand?

answer

increase

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Normal Good:

answer

a product whose demand rises when income rises

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Inferior Good:

answer

a product whose demand falls when income rises; so when income increases the demand curve shifts to the left

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Substitute:

answer

a good or service that can be used in place of another good or service

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Complement:

answer

the goods are often used together, because consumption of one good tends to enhance consumption of the other

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Increase in income shifts demand curve where?

answer

To the right (increase)

question

Decrease in supply means a shift to what direction?

answer

left

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Price Controls

answer

Laws that government enacts to regulate prices

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Price ceiling

answer

keeps a price from rising above a certain level

question

price floor

answer

keeps a price from falling below a certain level

question

Price Ceiling example:

answer

Rent Control

question

Best example of price floor:

answer

minimum wage; based on the normative view that someone working full time ought to be able to afford basic standard of living

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Do price ceilings and floors change demand or supply?

answer

no; they simply set a price that limits what can be legally changed in the market

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Consumer surplus:

answer

the amount that individuals would have been willing to pay, minus the amount they actually paid

question

Consumer surplus on a graph:

answer

above supply line, below demand line, above equilibrium price

question

Producer surplus on graph:

answer

above supply line, below demand line, below equilibrium price

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Producer surplus:

answer

the amount that a seller is paid fora good minus the seller's actual cost

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Social surplus:

answer

the sum of consumer surplus and producer surplus (also called economic surplus or total surplus)

question

Inefficiency of price floors and ceilings:

answer

the imposition of a price floor or ceiling will prevent a market from adjusting to its equilibrium price and quantity which creates inefficient outcomes

question

Deadweight Loss:

answer

the loss in social surplus that occurs when the economy produces at an inefficient quantity

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Say's Law

answer

supply creates its own demand; Say: famous french economist of early 19th century

question

Neoclassical Economists:

answer

modern economists who generally subscribe to the say's law view on the importance of supply for determining the size of the macroeconomy

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Keynes' Law:

answer

Demand creates its own supply

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GPL

answer

General Public License

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AS

answer

Aggregate Supply; the total quantity of output firms will produce and sell; aggregate supply curve shows the total quantity of output that firms will produce at each price level

question

Aggregate Supply Curve Diagram

answer

Real GDP on horizontal, price level on vertical; slopes upwards

question

Potential GDP

answer

the quantity that an economy can produce by fully employing its existing levels of labor, physical capital and technology, in the context of its existing market and legal institutions

question

What is potential GDP sometimes called?

answer

Full employment GDP

question

AD

answer

aggregate demand; refers to the amount of total pending on domestic goods and services in an economy. it includes all four components of demand, consumption, investment, government spending, and net exports

question

Aggregate Demand Curve:

answer

shows the total spending on domestic goods and services at each price level

question

Aggregate Demand on a graph:

answer

slopes down, showing the as the price level rises, the amount of total spending on domestic goods and services declines

question

What does the intersection of the aggregate supply and aggregate demand curves show?

answer

the equilibrium level of real GDP and the equilibrium price level in the economy

question

Higher prices for key inputs shifts AS to the :

answer

Left

question

Productivity growth shifts AS to the :

answer

Right

question

Increases in the price of inputs like wages and energy products will cause:

answer

SRAS curve to shift to the left

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Stagflation:

answer

pattern of a shift to the left in SRAS leading to a stagnant economy with high unemployment and inflation

question

The aggregate supply curve can also shift due to:

answer

shocks to input goods or labor

question

Formula for aggregate Demand:

answer

AD= C + I + G + X - M (m is the total value of imported goods)

question

Value of assets change, there is a change in _____

answer

aggregate demand

question

Interest rate effect

answer

as prices for outputs rise, the same purchases will take more money or credit to accomplish

question

Foreign Price Effect

answer

points out that if prices rise in the united states while remaining fixed in other countries, then goods in the US will be relatively more expensive compared to goods in the rest of the world

question

wealth effect

answer

as the price level increases, the buying power of savings that people have stored up in bank accounts and other assets will diminish, eaten away t some extent by inflation

question

Natural tendency of free competitive market

answer

economy moves towards full employment of all its resources; natural

question

Keynesian Zone

answer

the portion of the SRAS curve on the far left which is relatively flat

question

neoclassical zone:

answer

near vertical portion of the SRAS curve on the right hand side

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