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