Econ201- Exam 1 Vocab

Adam Smith

father of modern economics -created term called invisible hand

Karl Marcs

father of socialism

Production efficiency

occurs when goods are produced at the lowest possible cost

allocative efficiency

occurs when individuals who desire a product the most get those goods and services

Invisible hand

phenomenon that markets promote efficiency through the incentives faced by individuals and firms

six determinants of supply:

(1) production technology, (2) costs of resources, (3) prices of related commodities, (4) expectations, (5) the number of sellers (producers) in the market, and (6) taxes and subsidies.

five key determinants of demand:

(1) tastes and preferences; (2) income; (3) prices of related goods; (4) the number of buyers; and (5) expectations regarding future prices, income, and product availability When one of these determinants changes, the entire demand curve changes.

Rational Behavior Requires Thinking on the Margin

-A business uses marginal analysis to determine how much of its products it is willing to supply to the market. -Individuals use marginal analysis to determine how many hours to exercise or study. -Governments use marginal analysis to determine how much pollution should be permitted.

Economic Growth, Low Unemployment, and Low Inflation Are Economic Goals That Do Not Always Coincide

-The goal of economic growth is fostered by policies set by government, including fiscal policy and monetary policy -When either unemployment or inflation is too high, economic growth can be inhibited. Government policy is therefore used to correct one problem at the potential expense of exacerbating the other.

People Respond to Incentives, Both Good and Bad

-The natural tendency for society to respond to incentives leads individuals and firms to work hard and generate ideas that increase productivity, a measure of a society's capacity to produce that determines our standard of living

Economics Is Concerned With Making Choices With Limited Resources

-Therefore, one must think of economics in a broad sense of determining how best to manage all of society's resources (not just money) in order to maximize well-being. This involves tradeoffs and opportunity costs

Institutions and Human Creativity Help Explain the Wealth of Nations

-Two important factors influencing the wealth of nations are good institutions and human creativity

Institutions include...

-a legal system to enforce contracts and laws and to protect the rights of citizens and the ideas they create -a legislative process to develop laws and policies that provide incentives to individuals and firms to work hard -a government free of corruption -a strong monetary system.

Specialization Leads to Gains for All Involved

-tradeoffs (especially with one's time) can lead to better outcomes if one is able to specialize in activities in which she or he is more proficient.

When Making Decisions, One Must Take Into Account Tradeoffs and Opportunity Costs

-we all face time limitations -The fact that we have many wants but limited resources (scarcity) means that we must make tradeoffs in nearly everything we do.

8 key principles

1. Economics Is Concerned With Making Choices With Limited Resources 2. When Making Decisions, One Must Take Into Account Tradeoffs and Opportunity Costs 3. Specialization Leads to Gains for All Involved 4. People Respond to Incentives, Both Good and Bad 5. Rational Behavior Requires Thinking on the Margin 6. Markets Are Generally Efficient; When They Aren't, Government Can Sometimes Correct the Failure 7. Economic Growth, Low Unemployment, and Low Inflation Are Economic Goals That Do Not Always Coincide 8. Institutions and Human Creativity Help Explain the Wealth of Nations

inferior good

A good for which an increase in income results in declining demand.

demand curve

A graphical illustration of the law of demand, which shows the relationship between the price of a good and the quantity demanded.

supply curve

A graphical illustration of the law of supply, which shows the relationship between the price of a good and the quantity supplied.

price system

A name given to the market economy because prices provide considerable information to both buyers and sellers.

positive question

A question that can be answered using available information or facts.

normative question

A question whose answer is based on societal beliefs on what should or should not take place.

demand schedule

A table that shows the quantity of a good a consumer purchases at each price

Short-run economic growth is illustrated on a PPF diagram by movement from inside the PPF toward the PPF. A situation where this would be an appropriate depiction is in an economy: A. recovering from a recession. B. with increasing unemployment. C. going into a recession. D. that is stagnant.

A. recovering from a recession.

willingness-to-pay

An individual's valuation of a good or service, equal to the most an individual is willing and able to pay.

A(n) _____ can cause the PPF to expand. A. natural disaster destroying factories and infrastructure B. improvement in production technology C. workforce that is shrinking due to an accelerating death rate D. decrease in the rate of inflation

B. improvement in production technology

A combination of goods represented by a point on the PPF is considered efficient because the economy is: A. employing as many workers as possible. B. producing goods using the fewest inputs possible. C. not using all of its available inputs. D. producing the goods that consumers want to buy.

B. producing goods using the fewest inputs possible

Markets Are Generally Efficient; When They Aren't, Government Can Sometimes Correct the Failure

But when markets do fail, they tend to do so in predictable ways. Where consumers have no choice but to buy from one firm (such as a local water company), the market will fail to provide the best solution, and government regulation is often used to protect consumers

entrepreneurs

Entrepreneurs combine land, labor, and capital to produce goods and services. They absorb the risk of being in business, including the risk of bankruptcy and other liabilities associated with doing business. Entrepreneurs receive profits for their effort.

Production Efficiency

Goods and services are produced at their lowest resource (opportunity) cost.

substitute goods

Goods consumers will substitute for one another. When the price of one good rises, the demand for the other good increases, and vice versa.

complementary goods

Goods that are typically consumed together. When the price of a complementary good rises, the demand for the other good declines, and vice versa.

law of demand

Holding all other relevant factors constant, as price increases, quantity demanded falls, and as price decreases, quantity demanded rises.

law of supply

Holding all other relevant factors constant, as price increases, quantity supplied rises and as price declines, quantity supplied falls.

efficiency

How well resources are used and allocated. Do people get the goods and services they want at the lowest possible resource cost? This is the chief focus of efficiency.

Human Creativity

Ideas change civilizations. Ideas are the basis for creating new products and finding new ways to improve existing goods and services. Human creativity starts with a strong educational system, and builds with proper incentives that allow innovation and creativity to flourish into marketable outcomes to improve the lives of all.

human capital in labor

Improvement to labor capabilities from training, education, and apprenticeship programs all adds to labor's productivity and ultimately to a higher standard of living

capital

Includes manufactured products such as tractors, welding equipment, and computers that are used to produce other goods and services. The payment for capital is interest.

land

Includes natural resources such as mineral deposits, oil, natural gas, water, and land in the usual sense of the word. The payment for land used as a rent

labor

Includes the mental and physical talents of individuals who produce products and services. The payment to labor is wages.

market

Institutions that bring buyers and sellers together, so they can interact and transact with each other.

determinants of demand

Nonprice factors that affect demand, including tastes and preferences, income, prices of related goods, number of buyers, and expectations.

determinants of supply

Nonprice factors that affect supply, including production technology, costs of resources, prices of related commodities, expectations, number of sellers, and taxes and subsidies.

change in demand

Occurs when one or more of the determinants of demand changes, shown as a shift in the entire demand curve.

change in supply

Occurs when one or more of the determinants of supply change, shown as a shift in the entire supply curve.

surplus

Occurs when the price is above market equilibrium, and quantity supplied exceeds quantity demanded.

shortage

Occurs when the price is below market equilibrium, and quantity demanded exceeds quantity supplied.

change in quantity demanded

Occurs when the price of the product changes, shown as a movement along an existing demand curve.

change in quantity supplied

Occurs when the price of the product changes, shown as a movement along an existing supply curve.

absolute advantage

One country can produce more of a good than another country.

comparative advantage

One country has a lower opportunity cost of producing a good than another country.

scarcity

Our unlimited wants clash with limited resources, leading to scarcity. -Everyone (rich and poor) faces scarcity because, at a minimum, our time on earth is limited. -Economics focuses on the allocation of scarce resources to satisfy unlimited wants as fully as possible.

______________ is the process of converting factors of production (resources)—land, labor, capital, and entrepreneurial ability—into goods and services.

Production

resources

Productive resources include land (land and natural resources), labor (mental and physical talents of people), capital (manufactured products used to produce other products), and entrepreneurial ability (the combining of the other factors to produce products and assume the risk of the business).

production possibilities frontier (PPF)

Shows the combinations of two goods that are possible for a society to produce at full employment. Points on or inside the PPF are attainable, and those outside of the frontier are unattainable.

↑ Production technology= What kind of shift in supply

Supply shifts right.

incentives

The factors that motivate individuals and firms to make decisions in their best interest.

equity

The fairness of various issues and policies.

demand

The maximum amount of a product that buyers are willing and able to purchase over some time period at various prices, holding all other relevant factors constant (the ceteris paribus condition).

supply

The maximum amount of a product that sellers are willing and able to provide for sale over some time period at various prices, holding all other relevant factors constant (the ceteris paribus condition).

Allocative Efficiency

The mix of goods and services produced is just what the society desires.

equilibrium quantity

The output that results when quantity demanded is just equal to quantity supplied.

equilibrium price

The price at which the quantity demanded is just equal to quantity supplied.

horizontal summation

The process of adding the number of units of the product purchased or supplied at each price to determine market demand or supply.

production

The process of converting resources (factors of production)—land, labor, capital, and entrepreneurial ability—into goods and services.

macroeconomics

The study of the broader issues in the economy such as inflation, unemployment, and national output of goods and services. ex: Inflation, unemployment, recessions, international trade and international finance

microeconomics

The study of the decision making by individuals, businesses, and industries. ex: labor laws, environmental policy, and health care policy

opportunity cost

The value of the next best alternative; what you give up to do something or purchase something.

what if the PPF can be shifted to the right?

This shift would give economies new maximum frontiers

The three basic economic questions that each society must answer are:

What goods and services are to be produced? How are these goods and services to be produced? Who will receive these goods and services?

product prices

are the principal mechanism for communicating information in the system.

ceteris paribus

assumption used in economics (and other disciplines as well), that other relevant factors or variables are held constant. "Holding all other things equal"

points on the PPF are considered____________ by our economy

attainable

Economic growth, low unemployment, and low inflation are economic goals that do not always _____

coincide

A _________ PPF shows how opportunity costs rise due to diminishing returns.

concave

Alfred Marshall

considered the father of the modern theory of supply and demand—that price and output are determined by both supply and demand

Who will get the resulting products?

depends on how the economy is organized

What goods and services should it produce?

depends on the goods and services a society wants. In a communist state, the government decides what a society wants, but in a capitalist economy, consumers signal what products they want by way of their demands for specific commodities.

stylized

economists boil down facts to their basic relevant elements and use assumptions to develop a stylized (simple) model to analyze the issue

The production possibilities model holds resources and technology constant to derive the PPF. These assumptions suggest that economic growth has what two basic determinants:

expanding resources and improving technologies.

normal good

good for which an increase in income results in rising demand.

How are these goods and services to be produced?

how land, labor, and capital should be combined to produce the desired products

Everything to the _________ of the PPF is also attainable, but is an inefficient use of resources—the economy can always do better

left

Market equilibrium often is achieved by

letting market participants make decisions freely.

Together, supply and demand determine __________ ___________, which occurs when the quantity supplied exactly equals quantity demanded.

market equilibrium;

The equilibrium price is also called the

market-clearing price

PPFs map out the ______________ that an economy can produce

maximum

___________ contain a wealth of information for both buyers and sellers.

prices

What is the principal mechanism for communicating information in the system?

product prices

Gains from trade result when a country specializes in the _____________ of goods in which it has a _____________ advantage, and trades these goods with another country. Trade is a positive-sum game. Both countries can benefit even if one country has an absolute advantage in both goods.

production; comparative

The government's primary roles are

protecting property rights, enforcing contracts between private parties, providing public goods such as national defense, and establishing and ensuring the appropriate operating environment for competitive markets

Distribution

refers to the way an economy allocates to consumers the goods and services it produces.

Everything to the __________ of the PPF curve is considered unattainable

right

↑ Cost of resources= What kind of shift in supply

supply shifts left

↑ Price expectations=What kind of shift in supply

supply shifts left

↑ Price of related commoditiesWhat kind of shift in supply

supply shifts left

↑ Taxes=What kind of shift in supply

supply shifts left

↑ Number of sellers=What kind of shift in supply

supply shifts right

↑ Subsidies= What kind of shift in supply

supply shifts right

planned economies (socialist and communist) are

systems in which most of the productive resources are owned by the state and most economic decisions are made by central governments

economics

the study of how individuals, firms, and society make decisions to allocate limited resources to many competing wants.

Rational behavior

thinking on the margin