Test: Basic Economic Concepts The Production Possibilities Curve – Flashcards
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Economic
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-science of scarcity -"study of choice"
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Scarcity
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-unlimited wants, but limited resources -unable to have everything we desire, so must make choices on how we will use our resources
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Macroeconomics
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study of large economy as a whole or economic aggregates (ex: economic growth, government spending, inflation, unemployment, international trade, etc.)
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Microeconomics
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study of individual small economic units
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Theoretical Economics
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scientists use economics to make generalizations and abstractions to make theories
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Policy Economics
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theoretical economic theories are then applied to fix problems or meet economic goods
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Positive Statements
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-base on facts -avoids value judgement (what is)
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Normative Statements
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includes value judgement (what ought to be)
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5 Key Economic Assumptions
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1) scarcity- society has unlimited wants and limited resources 2) Trade-offs- the cost of the choices made due to scarcity 3) self-interest- everyone's goal is to make choices that maximize their satisfaction 4) "marginal costs and benefits"- compared costs and benefits of each choice so everyone can make decisions 5) certeris peridus- the models and graphs that can explain and analyze real life situations
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Trade-offs
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(aka opportunity cost) all alternatives we give up when we make a choice
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Opportunity Cost
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most desirable alternative given up when you make a choice
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4 Factors of Production
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1) Land- all natural resources that are used to produce goods and services 2) Labor- people devoted to tasks which that person is paid 3) Capital- (Physical) human made resources that are used to create other goods/services; (human) any skills or knowledge gained by a worker through education and experiences 4) Entrepreneurship- ambitious leaders that combine other factors of production to create goods/services
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Entrepreneurs... so they can gain profit.
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1) take the initiative 2) innovate 3) act as the Risk Bearers
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3 Economic Questions (answers determine type of eco. system)
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1) What goods/services should be produced? 2) How should they be produced? 3) Who consumes these goods/services?
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Centrally Planned Economy
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the government: 1) owns the resources 2) answers the 3 economic questions ex: Cuba, North Korea, Soviet Union
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Free Market System (Capitalism)
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1) laissez-faire- let it be- little government involved 2) individuals own resources and answer the 3 economic questions 3) opportunity to make profit gives people incentive to produce quality items efficiently 4) wide variety of goods available to consumers
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Mixed Economy
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System with free markets but also some government intervention (almost all countries including the USA have this economy)
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The Production Possibilities Curve (PPC)
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-a model that shows alternative ways that an economy can use its scarce resources -demonstrates scarcity, trade-offs, opportunity cost, and efficiency
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PPC Assumptions
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1) only 2 goods can be produced 2) full employment of resources 3) fixed resources 4) fixed technology
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PPC Graphs
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-shows a combination of efficient resources
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Point Below Curve on PPC
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inefficient (unemployment)
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Point Above Curve on PPC
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impossible
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Point On PPC Curve
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efficient use of resources
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Constant Opportunity Cost
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-resources are easily adaptable for producing either good -results in straight line PPC (not common)
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Law of Increasing Opportunity Cost
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-as you produce more of any good, the opportunity cost (forgone production of another good) will increase -because resources are not easily adaptable to producing both goods -results in a bowed out (concave) PPC
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Productive Efficiency
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-products produced in least costly way -any point on the PPC
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Allocative Efficiency
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-products being produced are the ones most desired by the masses -optimal point on PPC
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3 Changes/Shifts of PPC
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1) change in resources quantity/quality 2) change in technology 3) change in trade
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A change in demand...
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does NOT shift PPC
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Comparative Advantage -; Specialization and Trade
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everyone specializes in the production of goods and services and trades it to others
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David Ricardo
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English economist responsible for promoting comparative advantage as the basis of trade
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Absolute Advantage V Comparative Advantage
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-Absolute= faster, more efficient -Comparative= lower opportunity cost
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Specialization
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producing according to comparative advantage
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Per Unit Opportunity Cost Review
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per unit opportunity cost= opportunity cost/ units gained
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Absolute Advantage
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the producer that can produce the most output or requires the least amount of inputs (resources)
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Comparative Advantage
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producer with lowest opportunity cost
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Comparative Advantage- Input Method
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provides data on the amount of resources needed to produce one unit of output
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Comparative Advantage- Output Method
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-gives data on the amount of output that can be produced with a given amount of an input -how many units of an item the producers can create with a given amount of resources
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Price
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the amount of money paid for an economic good/service
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Quantity
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the amount of an item
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Demand
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a consumers willingness and ability to buy an item at a given price
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Demand- Willingness
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buyer must want the item
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Demand- Ability
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buyers must have the financial resourses to afford the item
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Demand refers to...
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a behavior, instead of a numerical amount
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The Law of Demand
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-the price of a good/service is inversely related with the quantity demanded -the price of an item determines the quantity demanded -the lower the price the higher the quantity demanded -the higher the price the lower the quantity demanded
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3 Reasons Why the Law of Demand Exists
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1) income effect 2) substitution effect 3) diminishing marginal utility (only way to buy more is if the price is lower)
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Price changes...not...
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...the quantity demanded...the demand.
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Changes in Demand
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-increase in demand= more quantity demanded at all prices (demand curve shifts -;) -decrease in demand= less quantity demanded at all prices (demand curve shifts ;-)
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Changes in Demand: TRIPE
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-Tastes and Preferences- preferences and tastes are affected by advertising, trends, health considerations, etc. - Related Goods- complements (goods/services used in conjunction) and substitutes (goods/services used in lieu of other goods/services) -Income of Consumers- when consumers income increase: demand for normal goods/services increases and demand for inferior goods/services decreases; when consumers income decreases: demand for normal goods/services decreases (income and demand are directly related) -Population- more popular=more demand; less popular=less demand -Expectations of Future Price Changes- if consumers expect price to rise in the future, then demand increases now; if consumers expect prices to fall in the future, then demand decreases now
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Supply
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-producers willingness and ability to sell a good/service -not an amount but a behavior
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The Law of Supply
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-the price of a good/service is directly related to the quantity supplied -the price of an item determines the quantity supplied -the lower the price the lower the quantity supplied -the higher the price the higher the quantity supplied
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The Reason For The Law of Supply
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The law of increasing marginal cost- it's more costly to produce 2 than 1- results in the need to collect a higher price if I am going to produce more.
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Change in Supply
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-increase in supply- more quantity supplied at all prices (supply curve shifts ->) -decrease in supply- less quantity supplied at all prices (supply curve shifts <-)
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Price does NOT...
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change supply.
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Change in Supply NICEJAG
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-Natural/Man Made Phenomenon (natural disasters, weather, wars, riots, strikes, anything not covered under your homeowners policy) -Input Costs- prices of new materials or other factors of production; changes in technology; changes in productivity (efficiency gain/loss) -Competition- number of producers in the market, ex: fewer producers=fewer supply and vise versa (competitive market supplies more than monopolistic market) -Expected Prices- if producers expect prices to rise in the future, then they supply less now, so that they can sell their goods/services at the future higher price; if producers expect prices to fall in the future, then the supply more now while prices are still relatively higher -Probability of Goods in Joint-Supply- if the supply of beef increases, then the supply of leather increase -Probability of Alternative Goods in Supply- remember productive resources are scarce, therefore decisions about what to produce must be made= sacrifice -Government Action- business taxes, regulation, subsidies
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Equilibrium
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-when supply=demand in the market -creates single price and quantity for a good/service
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Changes in Supply and Demand Graph
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-increase in demand- D+.: Price + & Quantity + -decrease in demand- D-.: Price- & Quantity- -increase in supply- S+.: Price- & Quantity+ -decrease in supply- S-.: Price+ & Quantity-
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Simultaneous Change in Supply & Demand (with multiple shifts, shift supply first)
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-increase in supply&demand- S+&D+.: Price? & Quantity+ -decrease in supply&demand- S-&D-.: Price?& Quantity-
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Opposing Simultaneous Change in Supply & Demand
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-decrease in supply with increase in demand- S-&D+.: Price+ & Quantity? -increase in supply with decrease in demand- S+&D-.: Price- & Quantity?
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Disequilibrium
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-supply and demand are not equal
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Surplus
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when price = higher than equilibrium price (Qs>Qd)
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Shortage
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when price = lower than equilibrium price (Qs<Qd)
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Causes of Disequilibrium
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-Price Floor- a minimum price for a good/service or resources determined outside of market -Price Ceiling- a maximum price for a good/service or resource determined outside of market
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Markets work best when...
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supply and demand determine the price of goods/services or resources
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Surpluses and shortages occur when...
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forces other than supply and demand determine the price of goods/services or resources
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Economic Costs
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-both costs are opportunity costs -explicit costs -implicit costs
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Explicit Costs
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expenditures for something
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Implicit Costs
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the opportunity costs of using your own resources rater than selling them to someone else
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The Slope of a PPC
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shows the opportunity cost of producing another unit of one good in terms of the amount of the other goods that must be given up
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Shifts in the market demand and supply curves...
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result in new values of the equilibrium price and quantity
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3 Important Goals for the Macroeconomy
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1) full employment 2) price stability 3) economic growth
