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