econ 200 exam 1

investment *****

is the process of using resources to create or buy new capital

Economics

is the study of how individuals and societies allocate their limited resources to satisfy their nearly unlimited wants

building an economic model

1. what we include in the model 2. the assumptions we make when choosing what to include in the model 3. the outside conditions that can effect the models performance

Microeconomics

is the study of the individual units that make up the economy such as households and businesses

Trade *****

is the voluntary exchange of goods and services between two or more parties

monopoly *****

exists when a single company supplies the entire market for a particular good or service

positive incentives *****

encourage an action by offering rewards or payment ex. end of year bonuses to motivate employees

competitive market *****

is one in which there are so many buyers and sellers that each only has a small impact on the market price and output. ex. pike place market, Seattle

inferior good

is purchased out of necessity rather than choice ex. ramen rather than sushi

quantity supplied *****

is the amount of a good or service that producers are willing and able to sell at the current price

Opportunity costs *****

is the highest valued alternative that must be scarified to get something else

resource market

the household acts as the seller and the firm is the buyer

Scarcity *****

the limited nature of societys resources (diamonds, water, sun)

specialization *****

the limiting of one's work to a particular area

Positive vs normative 1. winters in Arkansas are too cold

the phrase "too cold" is an opinion. Normative statement

Macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth (overall aspects and workings of an economy)

market demand *****

the sum of all the individual quantities demanded by each buyer in the market at each price

purchasing power

the value of your income expressed in terms of how much you can afford

Surplus *****

- Qs > Qd - occurs at any price above equilibrium - price will fall over time toward equilibrium

what are the benefits of specialization and trade? 2

Parties that are better at producing goods and services than all their potential trading partners (and thus hold an absolute advantage) still benefit from trade. Trade allows them to specialize and trade what they produce for other goods and services that they are relatively less skilled at making

ceteris paribus *****

"other things being equal" the concept under which economists examine a change in one variable while holding everything else constant

shifts in demand 2

- caused by changes in non price factors - entire demand curve will shift to the left or right - ex. change in income, in tastes, in the price of related goods, number of buyers

shifts in supply 2

- caused by non price factors - entire supply curve will shift to the left or the right - ex. changes in input costs, technology, taxes/ subsidies, expectations & number of sellers

Factors that shift demand to the left (demand decrease) *****

- income falls or rises - price of substitute goods falls - price of complementary goods rises - the good falls out of style - the number of buyers in the market falls - excise or sales tax increase

factors that shift demand to the right (increase demand) *****

- income rises or falls - price of substitute good rises - the price of complementary good falls - the good is currently in style - the number of buyers in a market increases = excise or sales tax decrease

factors that shift the supply to the right (increase supply) *****

- the cost of an input falls - business taxes decrease or subsidies increase - the price of a product is expected to fall in the future - business deploys more efficient technology

factors that shift supply to the left (decrease supply) *****

- the cost of an input rises - business taxes increase or subsidies decrease - the number of sellers decreases - the price of the product is anticipated to rise in the future

Shortage *****

-Qd > Qs - occurs at any price below equilibrium - Price will rise over time toward equilibrium

Indirect incentives *****

A secondary change in behavior brought on by the original incentive

what is the trade-off between having more now and having more later?

All societies face a crucial trade-off between consumption in the short run and economic growth in the long run. Investments in capital goods today help to spur economic growth in the future. However, because capital goods are not consumed in the short run, society must be willing to sacrifice how well it lives today in order to have more later.

3. Harvard is the top educational institution in the country

Based on different assumptions, not possible to identify a definitive "top" school. Normative statement

markets *****

Bring buyers and sellers together to exchange goods and services

Which one of the following will decrease the supply of chocolate ice cream? a. A medical report finding that consuming chocolate prevents cancer b. A decrease in the price of chocolate ice cream c. An increase in the price of chocolate, an ingredient used to make chocolate ice cream d. An increase in the price of whipped cream, a complementary good

Choice C, chocolate is a necessary ingredient in the production process. Whenever the price of an input rises, profits are squeezed. The result is a decrease in supply at the existing price

Which one of the following will increase the demand for ice cream? a. A decrease in the price of the butterfat used to make ice cream b. A decrease in the price of ice cream c. An increase in the price of the milk used to make ice cream d. An increase in the price of frozen yogurt, a substitute for ice cream

Choice d is correct because the increase in the price of frozen yogurt will cause consumers to substitute away from frozen yogurt and toward ice cream.

4. suppose that Colombia is good at growing coffee but not very good at making computer software and that Canada is good at making computer software but not very good at growing coffee. If Colombia decided to only grow coffee and Canada only to make computer software, would both countries be better or worse off? explain. can you think of a similar example from your life?

If Colombia decided to specialize in the production of coffee, it could trade coffee to Canada in exchange for computer software. This process illustrates gains from specialization and trade. Both countries have a comparative advantage in producing one particular good. Colombia has ideal coffee-growing conditions, and Canada has a workforce that is more adept at writing software. Since both countries specialize in what they do best, they are able to produce more value than they could produce by trying to make both products on their own

double coincidence of wants *****

In which each party in an exchange transaction has what the other party desires

5 foundations of economics #1 incentives

Incentives are important because they help explain how rational decisions are made

How do economists study the economy?

The scientific method 1. researchers observe a phenomenon 2. Next based on these observations researchers develop a hypothesis 3. then they construct a method to test the hypothesis 4. finally they design experiments to test how well the model works. After collecting data from the experiments, they can verify, revise, or refute the hypothesis

analyzing changes in market equilibrium

To determine the effects of any event: 1. decide whether event shifts demand, supply or both 2. decide in which direction: left or right 3. use supply and demand diagram to work out impact on equilibrium price and quantity

#5 trade creates value

Trade creates value because participants in markets are able to specialize in the production of goods and services that they have a comparative advantage in making

substitutes *****

Two goods that are used in place of each other.

normal good

a good consumers buy more of as income rises, holding other things constant ex. meal at a restaurant

how do economists study the economy ? 2

a good model should be simple, flexible, and useful for making accurate predictions. A model is both realistic and harder to understand when it involves many variables. to keep models simple, economists often use the concept of ceteris paribus or "all else equal" maintaining a positive (as opposed to normative ) framework is crucial for economic analysis because it allows decision makers to observe the facts objectively

supply curve *****

a graph of the relationship between the prices in the supply schedule and the quantity supplied at those prices

Production possibilities frontier (PPF) *****

a model that illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently

subsidy

a payment made by the government to encourage the consumption or production of a good or service

invisible hand

a phrase coined by Adam Smith to refer to the unobservable market forces that guide resources to their highest valued use

Variable

a quantity that can take on more than one value

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

supply schedule

a table that shows the relationship between the price of a good and the quantity supplied

#8 we have talked about how trade creates value. use the information in each example below to compute the total value created in each exchange: a. Patrick bought an orange pen from Jill for $2. Patrick would have been willing to pay $2.50 for the pen, and jill would have been willing to sell the pen for $1.25 b. Hillary found a car in craigslist for which she would have been willing to pay up to $10,000. The car owner Jason, needed to sell the car right away and would have accepted $6,0,00. The price they agreed was on was $7,500

a. Patrick is better off by $0.50 because he was willing to pay $2.50 but paid just $2.00. Jill is better off my $0.75 because she would have accepted $1.25but Patrick payed het $2.00. so the total value created is the additional value to Patrick ($0.50) plus the additional value to Jill ($0.75) which sums to $1.25 b. The value added up for Jason is $1,500 which is the difference between the minimum price he would have accepted ($6,000) and the price he received ($7,500). The value added for Hillary is $2,500m which is the difference between the maximum price she would have payed ($10,000) and the price she actually payed ($7,500) in total, $1,500 + $2,500 = $4,000 in new value was created through the exchange

what role do incentives play in each of the following situations ? are there any unintended consequences? a. you learn you can resell a ticket to a movie for twice what you paid b. state government announces a "sales tax holiday" for back to school shopping during one week each in august

a. because your tickets are worth more than you paid for them ,you have a direct positive incentive to resell them b. the "sales tax holiday" is a direct positive incentive to buy more clothes during the back to school period. An unintended consequences of this policy is that fewer purchases are likely to be made both before and after the tax holiday

Consumer goods *****

any good that is produced for present consumption. They help satisfy out needs or wants now ex. food, entertainment, clothing

inputs

are resources used in the production process - inputs may include: workers, equipment, buildings, and capital goods

complements *****

are two goods that are bought and used together

what are the benefits of specialization and trade? 3

as long and the terms of trade fall between the opportunity costs of both trading partners, the trade benefits both sides

Positive statement *****

can be tested and validated "what is" ex. the unemployment rate is 7% (can be tested by gathering data

normative statement *****

cannot be tested or validated "what ought to be" ex. an unemployed worker should receive financial assistance to help make ends meet

Slope

change in y over change in x

competitive market? Fresh produce stand at a farmers market

competitive market - must charge the same price as other vendors, competes for the same customers

competitive market? gas stations at a busy interstate exit

competitive market- must charge the same price, competes for the same customers

causality

condition existing when one variable influences another

how do economists study the economy ? 1

design hypotheses (proposed explanations ) and then test them by collecting real data. The economists laboratory is the world around us

Negative incentives *****

discourage action by providing undesirable consequences or punishments

time series graph

displays information about a single variable across time ex. inflation over a certain period of time

#3 opportunity costs *****

each time we make a choice, we experience an opportunity cost, or a lost chance to do something else

Direct incentives *****

easy to recognize ex. gut my grass and ill pay you $30

exogenous factors *****

factors beyond our control - outside the model

incentives *****

factors that motivate yo to act or exert effort

endogenous factors *****

factors that we know about and can control

capital goods *****

help in the production of other valuable goods and services in the fture. ex. roads, factories, trucks and computers

law of demand **

holding all else constant when the price of a product falls, the quantity demanded of the product will rise (and vise versa)

full monty experiment (law of supply)

holding all else constant, increases in the price of a good causes an increase in the quantity supplied (and vise verse)

Product market

households are the buyers and firms are the sellers

economic thinking *****

involves a purposeful evaluation of the available opportunities to make the best decision possible

Barter *****

involves individuals trading a good they already have or providing a service in exchange for something they want

Market power *****

is a firm's ability to influence the price of a good or service by exercising control over its demand, supply, or both

demand curve *****

is a graph of the relationship between the prices in the demand schedule and the quantity demanded at those prices - only a change in price can cause a movement along a demand curve

imperfect market *****

is a market in which either the buyer or the seller can influence the market price ex. empire state building view tickets ($$$)

what is the production possibilities frontier? *****

is a model that illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently. an outcome is considered efficient when resources are fully utilized and potential output is maximized. economists use the PPF to illustrate trade offs and to explain opportunity costs and the role of additional resources and technology in creating economic growth

law of increasing opportunity cost

law stating that the opportunity cost of producing a good rises as a society produces more of it

#4 marginal thinking *****

marginal thinking requires a decision maker to weigh the extra benefits against the extra costs

shifts in demand 1

movement along a demand curve - caused by a change in the price of the good - inverse relationship between price & QD

shifts in supply 1

movement along a supply curve - caused by a change in the price of the good - direct relationship between price and QS

reverse causation

occurs when causation is incorrectly assigned among associated events

market

place where buyers and sellers meet (doesn't have to be a physical place)

2. the current exchange rate is 0.7 British pound per US dollar

positive statement. you can verify this fact

Comparative advantage

refers to the situation in which an individual business, or country can produce at a lower opportunity cost than a competitor can

market economy

resources are allocated among households and firms with little or no government interference

Circular flow

shows how resources and final goods and services floe through the economy

what are the benefits of specialization and trade? 1

society is better off if individuals and firms specialize and trade on the basis of the principle of comparative advantage

absolute advantage *****

the ability to produce more of a given product using a given amount of resources

quantity demanded ******

the amount of a good or service that buyers are willing and able to purchase at the current price

Would you wait in line 3 weeks to be the first customer at Best buy on black Friday? 2 women from California did just that taking turns holding their positions in line around the clock for over 500 hours. They waited in order to get a doorbuster deal on a new 5o inch tv for $199 (retail $399) discuss why they might be willing to wait in line 3 weeks in terms of incentives? do you think choices make sense? answer this question by considering the marginal benefit that they receive versus the marginal cost they must pay

the women have a direct positive incentive to wait in line. They will save $200 when they buy theTV. there are many trade offs they face: missed sleep, time they could have spent with family and the time they could be working instead of waiting in line. - its hard to see the women's choice as rational when examining it using marginal analysis. They will save $200, but they will spend hundreds of hours in line. There is a high opportunity cost here and the hourly rate that they are using to value their time worth 40 cents an hour. in short, they don't seem to be aware of the opportunity cost of their time

#2 trade offs *****

trade offs exists when a decision maker has to choose a course of action

short run *****

we make decisions that reflect our immediate or short term wants

long run ****

we make decisions that reflect our wants, needs and limitations over a much longer time horizon

market equilibrium

where quantity demanded equals quantity supplied - can be shown graphically or algebraically: Where Qd = Qs