ECON 110: Kearl Exam #1

Define: Human Capital

Human skills, abilities and education used in production

Equation: Marginal Cost

∆Total Cost / ∆Quantity

Equation: Marginal Revenue

∆Total Revenue / ∆Quantity

What key services does the financial system provide to the savers and lenders?

1. Collects and communicates information about borrowers to savers 2. Allows savers to spread their money among many financial investments 3. Provides an easy method of exchanging a financial security for money

What are the types of arrangements that lower transaction costs?

1. Contracts 2. Firms 3. Money 4. Intermediaries

What are some difficulties associated with bureaucratic firms?

1. It is extremely difficult to monitor the production of individuals where output cannot be directly observed 2. The interests of the individuals and the owner's are likely at odds 3. Effectively management requires good information about the firm which is increasingly costly to obtain as the firm grows

If the money supply is growing at a rate of 6% per​ year, real GDP​ is growing at a rate of 4% per​ year, and velocity is growing at 2% per year instead of remaining​ constant, what will the inflation rate​ be?

4%

What five points can be learned from the invisible hand and economic activity?

1. Parties are individually better off trading 2. Gains from economic activity are real 3. The gains are made possible because parties have different preferences 4. Exchange is not a "winner" and "loser" interaction 5. Reallocation creates "Increased Individual well-being" even though no more product is produced

What are the types of firms found in the United States?

1. Sole proprietorship 2. Partnership 3. Corporation

What are the three economic questions that every society must answer?

1. What goods will be produced 2. How will the goods be produced 3. Who will receive the good

What three questions ought to be asked when policies are impacting relative price?

1. Who wins when relative prices change? 2. Who loses? 3. How does the political system respond to these gains and losses?

If the money supply is growing at a rate of 6% per​ year, real GDP​ is growing at a rate of 4% per​ year, and velocity is​ constant, what will the inflation rate​ be?

2%

Define: Free Market

A market where the government does not control the production of goods and services

Define: Coordination

A person/group/social construct that uses coercion, allegiance or incentives to direct choice and action

Define: Rational Analysis

A type of economic analysis that is concerned with the way things ought to be

Define: Leisure

Activities that are not productive

Define: Work

Activities that are productive

Define: APPF

Aggregate Production Possibilities Frontier; The total production possibilities for the combined actors in a given economy

Define: Logical Model

An abstract way of representing the essence of seemingly complex situations by focusing on the most important elements.

Economist use models to what?

Answer questions and analyze issues

Can you consume outside your PPF? Are there exceptions to this?

As long as you remain alone you cannot consume or produce beyond your PPF. If you expand to trade with others your consumption can increase beyond your PPF but not your production.

Equation: Average Fixed Costs

Average Fixed Costs / Quantity

Define: Physical Capital

Buildings, tools, machines used in production

What does specialization and trade do to your PPF?

By specializing and exchanging you can consume more than you could by yourself

What are two systems that help avoid opportunistic behavior?

Contracts and reputation

Define: Competition

Created by scarcity, it is the conflict arising from scarce resources desired among multiple parties.

Is an elasticity score greater than 1 elastic or inelastic?

Elastic

Define: Productive Efficiency

Every good or service is produced at the lowest possible cost

Define: Allocative Efficiency

Every good or service is produced up to the point where the marginal benefit is equal to the marginal cost

What are the two main categories of participants in markets?

Firms and households

Equation: Total Cost

Fixed Cost + Variable Cost

Which participants are of greatest importance in determining what goods and services are produced?

Households

Is an elasticity score less than 1 elastic or inelastic?

Inelastic

Economic inefficiency is show with all points where?

Inside the production possibilities frontier

What is the production of new capital called?

Investment

Equity means that good are distributed in a way that what?

Is fair

What is the cost of sitting on a beach for 1 hour?

It costs however much you could have produced during that time

What does ownership give the owner?

It give the individual the right, enforceable at law, to exclude others from using a resource without his or her permission

What does the "Invisible Hand" provide?

It guides firms to provide consumers what they want without the government

Exchange ratio is another term for what?

It is a another term for Relative Price

How is specialization determined?

It is determined by comparative advantage

What is an economy's APPF determined by?

It is determined by it's available resources and technology. This includes natural resources, capital, labor and human capital

Define: Circular-Flow Diagram

It shows how households and firms are linked through product and factor markets

How does the quantity theory provide an explanation about the cause of ​ inflation?

It shows that if the money supply grows at a faster rate than real​ GDP, then there will be inflation.

What is the basis for trade?

It's basis is comparative advantage

What is the quantity theory of money?

M * V = P * Y

Is the effect of higher income taxes on the total amount of consumer spending more of a micro or macroeconomics issue?

Macroeconomics

Efficiency means that good are distributed in a way that what?

Maximizes benefits to society

A primary difference between macroeconomics and microeconomics is what?

Micro is concerned with individual markets while macro is concerned with an economy as a whole

Is the effect of higher cigarette taxes on the quantity sold more of a micro or macroeconomics issue?

Microeconomics

Is the reason for low rates of profit in the airline industry more of a micro or macroeconomics issue?

Microeconomics

Does changing how much you work change the opportunity cost ratio between two goods that can be produced?

No. Changing your work-leisure balance changes your PPF but does not change the relationship between goods.

Equation: Total Revenue

P * Q

What do resource constraints produce?

Scarcity

Define: Intermediary

Someone who specialized in facilitating trade

Economic data is used to do what?

Test economic models

Define: Self Interest

The "dominant" motive in individuals to purse options, make decisions and respond to circumstances by examining how the said options impact themselves, not how they impact others.

Considering that money is used as a unit of account suggests that GDP (Gross Domestic Product) would be another term for what?

The Aggregate Output

What is a PPF stand for?

The Production Possibilities Frontier

Define: Comparative Advantage

The ability for one economic actor to create a good or service at a lower economic cost than another actor

Define: Shirking

The behavior resulting from the incentive to work less intensively

Economics is the study of what?

The choices people make to attain their goals, given their scarce resources

Define: Vertically Integrated

The combination in one company of two or more stages of production normally operated by separate companies

Define: Relative Cost

The cost of one good or commodity in terms of another. In situation 1 product "A" may have a higher relative cost that situation 2 due to a change in Product "B's" change in absolute cost even with no change to Product A's absolute cost.

Define: Aggregate Savings

The difference between what an economy and produce and what the economy is actually consuming

When an economy is producing as much as possible given its' resources it is considered what?

The economy is considered to be "Efficiently" using its' resources

Should an individual trade if said individual has an absolute advantage?

The individual should trade if the other individual has a comparative advantage

Define: Increasing Marginal Opportunity Cost

The production of a good requires larger and larger decreases in the production of another

Define: Coincident Wants

The situation in which both parties in a bartering situation hold what the other prefers or wants

Define: Opportunistic Behavior

The tendency for individuals to take advantage of opportunities to save costs or improve profits even at the expense of another, holding the recipient hostage in a situation

Define: Inputs

The tools/resources used in production activities. Inputs may be hours of manually acquiring coconuts or it may be hours of acquiring coconuts with a special tool. The quality and level of your inputs impacts the amount you can produce.

Define: Opportunity Cost

The value of the 2nd best option

Why are commodities valuable to us?

They are valuable because of what we expect to be able to do with them now and in the future

Economists assume people are rational in what sense?

They assume individuals use all available information as they take actions intended to achieve their goals

Why do entrepreneurs play a key role in the market system?

They bring together factors of production

What purpose do price indexes hold?

They help us understand the purchasing power of monies considering their state of changing value

How does restriction on use impact the market value of a resource?

They lower the market value of the resource

Define: Entrepreneur

They operate business that produce goods and services

It's essential for firms to have access to adequate sources of funds otherwise what?

They will not be able to invest in capital, adopt new technologies and expand

Define: Economies of Scale

This situation exists when a firm can double its' outputs without having to double all of its' inputs

Define: Supervisors / Managers

Those who are not directly engaged in the production of an output but rather facilitate production by others

Define: Capital

Tools used to leverage production

Equation: Profit

Total Revenue - Total Cost - Opportunity Cost OR Total Revenue - Total Economic Cost (same thing)

Define: Technology

Training, tools, and the way skills and tools are combined to produce output.

Define: Distribution of Individual Income

When relative prices change within an economy, the total consumption opportunity for an individual also change in relation to his relative costs

When do governments allow hyperinflation to occur?

When they want to spend more than the collect in taxes, central banks increase the money supply at a rate higher than the GDP growth.

From what problem does shirking arise?

With the individual inputs being less than the aggregate output it is difficult to associate a lower aggregate output with a specific individuals lack in input

In small, A/B product economies with specialization, how much should you trade?

You should specialize in your leveraged product and then trade for whatever amount of the other you want