Economics Quiz Chapters 1, 2, 7, & 8

nominal gross domestic product

GDP measures in terms of the price level at the time of measurement

active but limited government

Governments have their own set of shortcomings that can cause substantial misallocations of resources

how will the system promote progress?

advertising technological advance (new and improved methods and better products and processes) creative destruction capital accumulation

the demise of command systems

command systems fail to produce adequate amounts of goods and services - soviet union,. north korea, pre reform china

command system

communism or socialism government ownership and resources decisions made by central planning board North Korea, Myanmar, Cuba

marginal analysis

comparing benefits and costs

microeconomics

concerned with decision making by individual customers, workers, households, and business firms - observing behavior -measuring the price of products - measure revenue and income of households - measure expenditures of a specific firm, government entity or family

second hand sales

contribute nothing to current production and are therefore excluded from GDP

marginal cost

difference in cost when additional service or goods are sold

competition

diffuses economic power 2 rivals trying to secure the business of the third party enables economy to adjust to consumer tastes key regulatory force in the market system

generalizations

economic principles are generalizations - tendencies of typical or average consumers, workers, or businesses firms

virtues of the market system

efficiency, incentives, freedom

macroeconomics

examines the performance and behavior of the economy as a whole - focuses on economic growth - business cycle, interest rates, inflation, and the behavior of major economic aggregates: government, household, and business sectors

government purchases

expenditures by government for goods and services that government consumes in providing public services as well as expenditures for publicly owned capital that has a long lifetime (jets)

gross private domestic investment (g)

expenditures that increase the nation's stock of capital, which is the collection of physical objects and intangible ideas that help to produce goods and services

how the system deals with risk

facing risk of loss, change in tastes, natural disasters - employees and suppliers have security (paid no matter what)

market and prices

key component of the market system - supply and demand - coordinating system - people who ignore signals are penalized -

4 economic resources

land, labor, capital, and entrepreneurial ability that are used to produce goods and services

Laissez Faire

let it be no government control people interact in markets to buy and sell government needed to protect private property from theft, and provide a legal environment for contract enforcement

capital

man made physical objects (factories, roads) and intangible ideas (the recipe for cement) that do not directly satisfy human wants but help to produce the goods and services that do satisfy human wants

use of money

medium of exchange barter: exchanging one good for another

market system

mix of the two private markets are dominant force private ownership of resources self-interested behavior

self interest

motivating force achieve its own goal maximize profit and minimize loss maximize utility direction and consistency

coordinating problem

must correctly set output targets for all goods and services

nominal GDP versus real GDP

nominal: gdp not adjusted for inflation real: gdp adjusted for inflation

intermediate goods and services

products that are purchased for resale or further processing or manufacturing

final goods and services

products that have been purchased for final use (rather than for resale or further processing or manufacturing)

economizing problem

the choices necessitated because society's economic wants for goods and services are unlimited but the resources available to satisfy these wants are limited (scarce)

Gross output (GO)

the dollar value of the economic activity taking place at every stage of production and distribution (by contrast, GDP only accounts for the value of final output)

personal income

the earned and unearned income available to resource suppliers and others before the payment of personal taxes

income approach

the earnings/allocations approach, the income derived or created from producing final goods and services

person consumption expenditures (c)

the expenditures of households for both durable and nondurable consumer goods

freedom of enterprise

the freedom of firms to obtain economic resources, to use those resources to produce products of the firms' own choosing, and to sell their products in markets of their choice

freedom of choice

the freedom of owners of property resources to employ or dispose of them as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in the manner that they prefer

creative destruction

the hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies

expenditures approach

the output approach the sum of all the money spent buying final goods and services

marginal benefit

the price someone is willing to pay for that difference

private property

the right of private persons and firms to obtain own, control, employ, dispose of, and bequeath land, capital, and other property - encourage investment, innovation, maintenance of property, and economic growth - mutually agreeable transactions - encourages cooperation

economics

the social science with how individuals, institutions, and society make optimal choices under conditions of scarcity

national income accounting

the techniques used to measure the overall production of a country's economy as well as other related variables

value added

the value of a product sold by a firm less the value of the products (materials) purchased and used by the firm to produce that product

base year

the year with which other years are compared when an index is constructed; for example, the base year for a price index

core of economics

there is no free lunch, someone bears a cost

incentive problem

Misjudged output lead to shortages and surpluses of those products

net domestic product

(NPD) gross domestic product less the part of the year's output that is needed to replace the capital goods worn out in producing the output (additions to the capital stocks)

how will the goods and services be produced?

- combinations and ways that maximize output an minimize cost

how will the system accommodate change?

- communicate changes in preferences - expand output - entice new competitors

what will be produced?

- consumer sovereignty (produce where you'll make profit) - dollar votes

who will get the output?

- distributed to consumers who can pay and are willing to pay

examples of gross private investment

- final purchases of plant, machinery, and equipment by business enterprises -residential construction expenditures on the research and development (R&D) of new productive technologies - money spent on the creation of new works of art, music, writing, film, and software -changes in inventory

assumptions of production possibilities model

- full employment - fixed resources -fixed technology - two goods (consumer and capital)

clockwise circle

- money income (wages, rents, interests, profits) - consumption expenditures - revenues - costs

characteristics of the market system

- private property - freedom of enterprise - freedom of choice - self interest - competition - market and prices

counterclockwise circle

- resources - goods and services - goods and services - land, labor, capital, entrepreneurial abilities

features of the economic perspective

- scarcity - opportunity costs - utility

2 components of international trade

- specialization - increased production possibilities

4 factors of production

- take initiative - make strategic business decisions - innovate - take risks

entrepreneurs

- take initiative in combining resources, driving force behind production - make strategic business decisions that set the course of an enterprise - innovate; commercialize new products, new production techniques, or new forms of organization - bear risk, devote time, effort, ability, money to commercialize

utility

- the pleasure, happiness, or satisfaction obtained from consuming a good or service - take into account time, energy, and money - rational self interest - we want to increase utility

economic growth is the result of...

-increases in supplies of resources -improvements in resource quality -technological advances

examples of financial transactions

-public transfer payments -private transfer payments - stock market transactions

5 fundamental questions of the market system

1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will get the goods and services? 4. How will the system accommodate change? 5. How will the system promote progress?

Scientific method (class acronym)

ATCOB - accepting or rejecting or modifying any hypothesis - testing and explanation and comparing - continue testing against the facts - observe the outcomes of the results - based on those observations, make a decision

BEA

Bureau of Economic Analysis - assess the economy's long run growth trajectory adjust economic policies to safeguard and improve the economy's health

2 types of non production transactions (excluded from GDP)

Financial transactions and second hand sales

gross domestic output

GDP the total market value of all final goods and services produced annually (or quarterly) within the boundaries of a nation (welfare not included in GDP)

the invisible hand

The tendency of competition to cause individuals and firms to unintentionally but effectively promote the interests of society even when each individual firm only attempts to pursue its own interests - invisible force driving economics

aggregate

a collection of specific economic units treated as if they were one unit

durable goods

a consumer good with an expected life of 3 or more years

nondurable goods

a consumer good with an expected life of less than 3 years

taxes on production and imports

a national income accounting category that includes such taxes as sales, excise, business property taxes, and tariffs that firms treat as costs of producing a product and pass on (in whole or in part) to buyers by charging a higher price

economic principles

a statement about economic behavior or the economy that enables the prediction of the probable effects of certain actions

economic perspective

a viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions

service

an (intangible) act or use for which a consumer, firm, or government is willing to pay

consumption of fixed capital

an estimate of the amount of capital worn out or used up in producing the gross domestic product (depreciation)

price index

an index number that shows how the weighted-average price of a "market basket: of goods changes over time relative to its price in a specific base year

land

any and all natural resources that are used to produce goods and services

labor

any mental or physical exertion. on the part of a human being that is used in the production of a good or service

law of increasing opportunity cost

as more of a particular good is produced, its marginal opportunity costs increases

unlimited wants

from necessities to luxuries we want a lot of things in life - wants can change or multiply - services and goods can satisfy our wants

net private domestic investment

gross private domestic investment less consumption of fixed capital; the addition to the nation's stock of capital during a year

circular flow model

households businesses sole proprietorship partnership cooperation product and resource market real flow and the money flow

normative economics

incorporates value judgements about what the economy should be like or what policy actions should be recommended - "what ought to be"

factors of production

inputs, things that produce goods and services - land - labor - capital -entrepreneurial ability

scarcity

restricts options and demands choices

consumer goods

satisfy wants directly

capital goods

satisfy wants indirectly, by aiding the production of consumer goods

economic systems

set of institutionalized arrangements coordinating mechanism

entrepreneurial ability

special human resource that differs from labor

technology and capital goods

specialization, division of labor geographic specialization - tools, machinery, large scale factories, facilities - most direct forms of production are usually the least efficient - rely on capital goods - more efficient production means more output

investment

spending that pays for the production and accumulation of capital goods

opportunity costs

the amount of other products that must be forgone or sacrificed to produce a unit of a product - sacrificing the next bets thing

positive economics

the analysis of facts or date to establish scientific generalizations about economic behavior - cause and effect - "what is" - scientific statements

other things equal assumption

the assumption that factors other than those being considered do not change

4 checkpoints on the circle

top: resource market: households sell, businesses buy right: households: sell resources, buy products bottom: product market: businesses sell, households buy left: businesses: buy resources, sell products

national income

total income earned by resource suppliers for their contributions to gross domestic product plus taxes on production and imports

economic growth

total larger output

aggregate output

total output; primary measure of an economy's performance

limited income

we have a finite amount of income - wages, interest, rent, profit, government programs, or family members

multiple counting

wrongly including the value of intermediate gods in the GDP; counting the same good or service more than once - make sure that you are adding together the sales values of final products only - calculate GDP by summing together values added