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the limited nature of society's resources

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scarcity

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the study of how society manages its scarce resources

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economics

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-how people decide what to buy, how much to work, save, and spend -how firms decide how much to produce, how many workers to hire -how society decides how to divide its resources b/w national defense, consumer goods, protecting the environment, and other needs

answer

examples of economics

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tradeoffs

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all decisions involve...

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-going to a party the night before your midterm leaves less time for studying

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examples of tradeoffs

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efficiency vs. equality

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society faces an important tradeoff:

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when society gets the most from its scarce resources

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efficiency

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when prosperity is distributed uniformly among society's members

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equality

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to achieve greater equality, could redistribute income from wealthy to poor. but this reduces incentive to work and produce

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efficiency vs. equality tradeoff

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no. - researchers discovered that when growth is looked at over the long term, the trade-off b/w efficiency and equality may not exist -equality appears to be an important part of promoting and sustaining growth

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are social justice and social product inevitably at war with one another?

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improve efficiency

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countries may find that improving equality may also...

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what you give up to get it

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the cost of something is...

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the opportunity cost of any item is whatever must be given up to obtain it -it is the relevant cost for decision making

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opportunity cost

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-going to college for a year is not just the tuition, books, and fees, but also the forgone wages -seeing a movie is not just the price of the ticket, but the value of the time you spend in the theater

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examples of opportunity cost

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at the margin

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rational people think...

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systematically and purposefully do the best they can to achieve their objectives

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rational people:

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rational people make decisions by evaluating costs and benefits of marginal changes, incremental adjustments to an existing plan

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marginal changes

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when a student considers whether to go to college for an additional year, he compares the fees and foregone wages to the extra income he could earn with the extra year of education

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example of rational people think at the margin

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incentives

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people respond to...

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something that induces a person to act (the prospect of a reward or punishment)

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incentive

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-when gas prices rise, consumers buy more hybrid cars and fewer gas-guzzling SUV's -when cigarette taxes increase, teen smoking falls

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examples of rational people respond to incentives

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better off -rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods

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trade can make everyone..

question

-get a better price for goods they produce, -buy other goods more cheaply from abroad than could be produced at home

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ways that countries benefit from trade and specialization

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organize economic activity

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markets are usually a good way to...

question

a group of buyers and sellers (need not be in a single location)

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market:

question

-what goods to produce -how to produce them -how much of each to produce -who gets them

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"organize economic activity" means determining:

question

allocates resources through the decentralized decisions of many households and firms as they interact in markets

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market economy

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each of these households and firms acts as if "led by an invisible hand" to promote general economic well-being

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famous insight by Adam Smith in 'The Wealth of Nations' (1776)

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-the interaction of buyers and sellers determines prices -each price reflects the good's value to buyers and the cost of producing the good -prices guide self-interested households and firms to make decisions that, in many cases, maximize society's economic well-being

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the invisible hand works through the price system:

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market outcomes

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governments can sometimes improve...

question

enforce property rights (with police, courts)

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important role for government:

question

there is a large risk of their property being stolen

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people are less inclined to work, produce, invest, or purchase if

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when the market fails to allocate society's resources efficiently

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market failure

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externalities and market power

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2 causes of market failure

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when the production or consumption of a good affects bystanders (ex: pollution)

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externalities

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a single buyer or seller has substantial influence on market price (ex: monopoly)

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market power

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efficiency

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public policy may promote

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equity

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government may alter market outcome to promote

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tax or welfare policies can change how the economic "pie" is divided

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if the market's distribution of economic well-being is not desirable,

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goods and services

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a country's standard of living depends on its ability to produce...

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-average income in rich countries is more than ten times average income in poor countries -the US standard of living today is about 8 times larger than 100 years ago

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huge variation in living standards across countries over time:

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productivity

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the most important determinant of living standards:

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the amount of goods and services produced per unit of labor

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productivity

question

the equipment, skills, and technology available to workers

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productivity depends on

question

prints too much money

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prices rise when the government..

question

increases in the general level of prices

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inflation

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greater

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the faster to government creates money, the ______ the inflation rate

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inflation and unemployment

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society faces a short-run tradeoff between...

question

scientists and policy advisors

answer

economists play two roles:

question

-tries to explain the world -employs the scientific method, the dispassionate development and testing of theories about how the world works

answer

the economist as a scientist:

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models

answer

assumptions lead to

question

simplify the complex world and make it easier to understand

answer

assumptions

question

to study international trade, assume there are only two countries and two goods -unrealistic, but simple to learn and gives useful insights about the real world

answer

example of an assumption

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a highly simplified representation of a more complicated reality

answer

model

question

economic issues

answer

economists use models to study

question

-a road map -a model of human anatomy from biology class -a model airplane -a model teeth at the dentist's office

answer

examples of models

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a visual model of the economy, shows how dollars and goods and services flow through markets among households and firms

answer

circular-flow diagram

question

households and firms

answer

two types of "actors" in the circular flow diagram

question

-the market for goods and services -the market for "factors of production"

answer

two markets in the circular flow diagram

question

the resources he economy uses to produce goods and services, including: -labor -land -capital (buildings and machines used in production)

answer

factors of production

question

-buy/hire factors of production, use them to produce goods and services -sell goods and services

answer

firms

question

-own the factors of production, sell/rent them to firms for income -buy and consume goods and services

answer

households

question

see notes

answer

image of the circular flow diagram

question

a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology

answer

production possibilities frontier (PPF)

question

-two goods: computers and wheat -one resource: labor (measured in hours) -economy has 50,000 labor hours per month available for production (see notes for charts)

answer

example of the PPF

question

-possible -efficient: all resources are fully utilized

answer

points ON the PPF

question

-possible -not efficient: some resources underutilized (workers unemployed, factories idle)

answer

points UNDER the PPF

question

not possible

answer

points ABOVE the PPF

question

-moving along a PPF involves shifting resources (ex: labor) from the production of one good to the other -tradeoff: getting more of one good requires sacrificing some of the other

answer

the PPF and opportunity cost

question

the opportunity cost of one good in terms of the other

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the slope of the PPF tells you

question

the slope of a line equals the "rise over the run," the amount the line rises when you move to the right by one unit

answer

the PPF and opportunity cost (slope)

question

with additional resources or an improvement in technology, the economy can produce more computers, more wheat, or any combination in between (see notes for graph)

answer

economic growth and the PPF

question

could be straight or bow-shaped

answer

shape of the PPF

question

opportunity cost

answer

shape of the PPF depends on what happens to the _____ as economy shifts resources from one industry to another

question

is a straight line

answer

if opportunity cost remains constant, the PPF

question

is bow-shaped

answer

if opportunity cost of a good rises as more of the good is produce, the PPF

question

(see notes for picture) -PPF is bow-shaped because when different workers have different skills, there are different opportunity costs of producing one good in terms of the other -also bow-shaped when there is some other resource, or mix of resources with varying opportunity costs (ex: different types of land suited for different uses)

answer

why the PPF might be bow-shaped

question

resources and technology

answer

the PPF shows all combinations of two goods that an economy can possibly produce, given its

question

tradeoff and opportunity cost, efficiency and inefficiency, unemployment, and economic growth

answer

the PPF illustrates the concepts of

question

increasing opportunity cost

answer

a bow-shaped PPF illustrates the concept of

question

the study of how households and firms make decisions and how they interact in markets

answer

microeconomics

question

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

answer

macroeconomics

question

-attempt to describe the world as it is -statements that economists make as scientists

answer

positive statements

question

-attempt to prescribe how the world should be -statements that economists make as policy advisors

answer

normative statements

question

positive statement

answer

statement that can be confirmed or refuted

question

normative statement

answer

statement that cannot be confirmed or refuted

question

-economists give conflicting policy advice -they sometimes disagree about the validity of alternative positive theories about the world -they may have different values and therefore different normative views about policies

answer

why economists disagree

question

-a ceiling on rents reduces the quantity and quality of housing available (93%) -tariffs and import quotas usually reduce general economic welfare (93%)

answer

propositions about which most economists agree

question

-we rely on people from around the world to provide us goods and services -comes from "trade can make everyone better off"

answer

interdependence

question

-two countries: US and Japan -two goods: computers and wheat -one resource: labor, measured in hours -we will look at how much of both goods each country produces and consumes (if the country chooses to be self-sufficient/if it trades with the other country) (see notes for graphs)

answer

interdependence example

question

goods produced domestically and sold abroad

answer

exports

question

goods produced abroad and sold domestically

answer

imports

question

see notes

answer

production under trade

question

see notes

answer

consumption under trade

question

absolute advantage

answer

where do gains from trade come from?

question

the ability to produce a good using fewer inputs than another producer -measures the cost of a good in terms of the inputs required to produce it

answer

absolute advantage

question

absolute advantage in the production of wheat

answer

producing a ton of wheat uses 10 labor hours in the US vs 25 in Japan, therefore the US has an...

question

absolute advantage in the production of computers

answer

producing one computer requires 125 labor hours in Japan, but only 100 in the US, therefore the US has an..

question

two countries can gain from trade when each specializes in the good it produces at lowest cost

answer

if the US has an absolute advantage in both computers and wheat, why does Japan specialize in computers? and why do BOTH countries gain from trade?

question

-the inputs required to produce it -opportunity cost: what you give up in order to get something else (opp cost of a computer is the amount of wheat that could be produced using the labor needed to produce one computer)

answer

two measures of a cost of a good

question

the ability to produce a good at a lower opportunity cost than another producer

answer

comparative advantage

question

to answer this, must determine the opportunity cost of a computer in each country

answer

which country has the comparative advantage in computers?

question

10 tons of wheat

answer

in the US, producing one computer requires 100 labor hours, which instead could produce 10 tons of wheat. this means the opportunity cost of a computer in the US is:

question

5 tons of wheat

answer

in Japan, producing one computer requires 125 labor hours, which instead could produce 5 tons of wheat. this means that the opportunity cost of a computer in Japan is:

question

Japan has a comparative advantage in computers

answer

since the opportunity cost of a computer is 10 tons of wheat in the US and 5 tons of wheat in Japan...

question

comparative advantage (differences in opportunity costs)

answer

gains from trade arise from

question

total production in all countries is higher, the world's "economic pie" is bigger, and all countries can gain from trade

answer

when each country specializes in the good(s) in which it has a comparative advantage,

question

Brazil has an absolute advantage in coffee

answer

producing a pound of coffee requires only one labor hour in Brazil, but two in Argentina. so,

question

argentina has a comparative advantage in wine

answer

Argentina's opp cost of wine is 2 pounds of coffee (because the 4 labor hours required to produce a bottle of wine could instead produce 2 pounds of coffee), and Brazil's opp cost of wine is 5 pounds of coffee (because the 5 labor hours required to produce wine could instead produce 1 pound of coffee). so,

Microeconomics Mid Term 1

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