Econ test 1
What is opportunity cost?
"the marginal value of the best possible alternative that is given up in the decision to use a resource"
What are the Five Powers of Economics Thinking?
1) resource costs more than you think 2) all decisions made by consumers are rational 3) all decisions are made at the margin 4) answer to most economic questions found in statement: it depends 5) all people/businesses are maximizers
What is the economizing problem?
1) societies wants are unlimited 2) economic resources are limited/scarce
Production Possibilities Curve
A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good.
Productive Efficiency
A situation in which a good or service is produced at the lowest possible cost.
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants
Allocative Efficiency
A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
Mixed Economies
A variation of Free-Market Economies (Capitalism) and Centrally Planned Economies (Communism)
What was Adam Smith's theory on how economies should be organized? What does an "invisible hand" have to do with economics?
Adam Smith- free markets and private ownership will provide jobs, profits, & increasing standard of living. "Pure capitalism" - no gov. reg. invisible hand- people need for goods will be enough to keep econ going
Centrally Planned Economies (Communism)
All the factors of production are controlled by the government and the questions of whom, what, and how are answered by government as well
Free-Market Economies (Capitalism)
All the factors of production are controlled by the private-sector and the questions of whom, what, and how are answered by private sector as well
Command Economy
An economic system in which the government controls a country's economy.
Traditional Economy
An economy in which production is based on customs and traditions and economic roles are typically passed down from one generation to the next.
Capital Goods
Buildings, machines, technology, and tools needed to produce goods and services.
What are the factors of production (C.E.L.L.)?
Capital, Entrepreneurial, Land, Labor
Opportunity Cost
Cost of the next best alternative use of money, time, or resources when one choice is made rather than another
What is the study of economics primarily concerned with?
Economics is primarily concerned with how society sets about meeting people's demands for things they want to consume
Friedrich Hayek supported what specific theory in an economic system?
Hayek- centralized bank (gov. control) that tries to expand the money supply results in unfavorable market fluctuations free enterprise- free market for growth & little gov. intervention for stability and full employment
How did John Keynes believe the market should be organized?
Keynes thought gov. should use taxation and spending to stabilize gov. Mixed econ- somewhat free gov. mixed econ- somewhat free market & gov. intervention for stability and full employment
Factors of Production
Land, Labor, Capital, Entrepreneurship
Economic Resources
Land, labor, capital, and entrepreneurial ability that are used in the production of goods and services. They are "economic" resources because they are scarce (limited in supply and desired). Also known as "factors of production".
What is the difference between macro- and micro- economics?
Macro- (large scale) national & global economies Micro- (small scale) individual decisions & markets
Trade-offs
Making decisions requires trading off one item against another. In economics, the term trade-off is often expressed as an opportunity cost, which is the most preferred possible alternative.
What are the differences between a mixed, command, and market (capitalist) economy?
Market: capitalisms unregulated prices & decentralized decisions (no gov. reg.) Command: (communism) total gov. reg. Mixed: (free enterprise) gov. reg. & private business
Understand how the PPF demonstrates the economizing problem.
PPF illustrates 4 possibilities of production 1) all attainable and unattainable combinations of production 2) full employment and unemployment of resources 3) tradeoffs & free lunches 4) can help with illustrating comparative advantage and absolute advantage
Positive economics vs. Normative economics
Positive economics is objective and fact based, while normative economics is subjective and value based.
Identify the difference between a normative and positive statement.
Positive: what is Negative: what ought to be
Consumer Goods
Products such as washing machines, cars, and refrigerators, which the general public buys
The circular flow model (the Flow of Goods and Services) contains what four variables?
Revenue, spending, costs, income
Comparative Advantage
The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers.
Utility
The ability of any good or service to satisfy consumer wants
Ceteris paribus
a Latin phrase that means "all other things held constant"
Resource Market
a market in which households sell and firms buy resources or the services of resources
Laissez-faire Capitalism
an economic system in which the means of production and distribution are privately owned and operated for profit with minimal or no government interference
What is marginal analysis and why is it important?
an examination of the additional benefits of an activity compared to the additional costs of that activity
Marginal Analysis
analysis that involves comparing marginal benefits and marginal costs
What is the difference between comparative and absolute advantage?
comparative advantage: country w/ comp. adv. is one that can produce a good with lowest opportunity cost absolute advantage: country has absolute adv. if it can produce more of a good than another country
What does the term utility mean?
defined as any good or service that gives pleasure or satisfaction
c. ...identify what a point INSIDE the PPF demonstrates,
free lunch, attainable
What is the benefit of "specialization" in the production process?
gain greater degrees of productive efficiency
Economic Growth
growth of output usually measured by the percentage change in real GDP or real GDP per capita
Constant Opportunity Cost
having to give up the same amount of one good to get additional units of another
How do economists define "land", "capital", and "entrepreneurship"?
land: all natural resources capital: manufactured aids to production entrepreneurship: driving force behind production, decision maker, risk taker
What is meant by the word scarcity?
limited
Full Production
occurs when an economy is producing at its maximum capacity or experiencing full employment
What is the difference between productive and allocative efficiency?
productive: producing goods & services for the lowest cost allocative: more concerned with distribution and allocation of resources in society
Zero Opportunity Cost
straight PPC
Absolute Advantage
the ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group.
Investment
the act of redirecting resources from being consumed today so that they may create benefits in the future; the use of assets to earn income or profit
Full Employment
the level of employment reached when there is no cyclical unemployment
Product Market
the market in which households purchase the goods and services that firms produce
Increasing Opportunity Cost
the opportunity cost of producing additional units of a good rises as society produces more of that good
Macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
b. ...identify what a point OUTSIDE the PPF demonstrates,
trade-off, unattainable