ECON 102 Exam 1 Latest Update 100% Pass

ECON 102 Exam 1 Latest Update 100% Pass Economic Analysis People making decisions economic wat of thinking Choices: Costs and Benefits Performing a certain economic action will increase our well-being if the benefits are greater than the costs (choices are the result of scarcity) Self Interest The pursuit of one's own goals (does not always mean increasing one's wealth; could also include prestige, friendship, love, and feeling good) Rationality Assumption The assumption that people do not intentionally make decisions that leave them worse off Incentive A reward or punishment for engaging in an activity (positive - money, candy, extra credit, company awards, negative - tax, spanking, jail, overdraft fees, fines) Scarcity Occurs when there is not enough of our "wants" at a price of zero (is not a shortage and is not the same thing as poverty) Definition of Economics The study of how people allocate their limited (scarce) resources to satisfy their unlimited wants (the study of how people make choices) Resources Things used to produce goods and services to satisfy people's wants (inputs) Wants What people would buy if their incomes were unlimited Microeconomics The study of decision making undertaken by individuals (or households) and by firms (i.e. Worker - Work overtime?, Family - Have a baby?, Firm - Advertise? How much?) Macroeconomics The study of the behavior of the economy as a whole (i.e unemployment rate, rate of growth in the money supply (inflation), government's budget deficit) Economics as a Science Economics is an empirical (data, numbers, predictions) science, and uses models Ceteris Paribus All other things equal Models Simplified representations of the real world used as the basis for predictions or explanations Data Real-world data is used to evaluate the usefulness of a model Positive Economics Purely descriptive statements or scientific predictions; "If A, then B," a statement of what is, was, or will be (can be tested true/false) Normative Economics Analysis involving value judgements or opinions; relates to whether things are god or bad; a statement of what ought to be Market Economy Demand and supply determine prices: i. Prices and quantities set in relatively free markets ii. Institutions (laws) protect private property and enforce contracts iii. Very decentralized iv. Profit incentives lead to higher productivity (i.e United States) Command Economy Central Government makes all output, pricing, and allocation decisions: i. Lots of information is required, tough to maintain ii. Black markets can develop iii. No profit incentives lead to low productivity (i.e. Soviet Russia) Direct Relationship When two variables move in the same direction (positive slope) Inverse Relationship When two variables move in the opposite direction (negative slope) Production Any activity that results in the conversion of resources (input) into products (output) that can be used in consumption Resources or Factors of Production (Inputs) Inputs that are used to produce things that people want (land, labor (L), physical capital (K), human capital (i.e. education), entrepreneurship) Opportunity Cost The highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want Production Possibilities Curve A graph that represents all possible maximum combinations of total output that can be produced (individual PPC is linear due to opportunity costs and society PPC is bowed out due to heterogeneous inputs) Economic Growth An outward shift of the PPC caused by increase in technology, capital investment, more natural resources, more/better labor, less institutional constraints (taxes or laws) Consumer Goods Goods produced for personal satisfaction Capital Goods Goods used to produce other goods Specialization Organization of economic activity among different individuals and regions (leads to greater productivity) Division of Labor Rational individuals choose their comparative advantage and specialize (combined with trade, this allows us to consume beyond our own production capabilities) (i.e assembly line) Absolute Advantage When you can produce more output with the same input Comparative Advantage The ability to produce a good or service at a lower opportunity cost (relative) Markets Arrangements that individuals have for exchanging with one another (represents interaction of buyers and sellers) Quantity Demanded The amount of a good or service that consumers wish to purchase at a certain income, price, and time period Demand Schedule A table showing price and quantity demanded relationship of a good, ceteris paribus (only examining price vs. quantity demanded, everything else held constant) Demand Curve The graphical relationship of the demand schedule (price is on the vertical axis and quantity is on the horizontal axis) First Law of Demand When the price of a good rises, we have a lower quantity demanded and vice versa (demand curve has a negative slope) Market Demand The demand of all consumers in the marketplace for a particular good or service (the horizontal sum of individual demand at each price) Change in Quantity Demanded When we move along a demand curve, from one point to another caused by the change in the price of the good (movement along a demand curve) Change in Demand A shift in demand caused by a change in non-price factors or a change in the price of other goods Determinants of Demand (Demand Shifters) i. Income: there is a direct relationship between income and demand for normal goods and an inverse relationship for inferior goods ii. Prices of other goods: there is a direct relationship between the price of a substitute and the demand for a given good and an inverse relationship between the price of a complement and a given good iii. Population iv. Future expectations: expected future prices are directly related to demand today v. Tastes and Preferences: any "other" demand change (i.e seasonal changes, new information, advertising, etc.) Quantity Supplied The amount of a good or service that producers are willing to produce given a certain price and time period Supply Schedule A table showing price and quantity supplied relationship of a good, ceteris paribus (only examining price vs. quantity supplied, everything else held constant) Supply Curve The graphical relationship of the supply schedule (price is on the vertical axis and quantity is on the horizontal axis) Change in Quantity Supplied When we move along a supply curve, from one point to another caused by the change in the price of a (final) good (movement along a supply curve) Change in Supply A shift in supply caused by a change in non-price factors affecting production Determinants of Supply (Supply Shifters) i. Input Prices: there is an inverse relationship between input prices and supply ii. Technological Progress: shift to right iii. Per-unit Government Taxes or Subsidies: a tax will shift the supply curve to the left while a subsidy will shift it to the right iv. Number of Suppliers: direct relationship Equilibrium The price that "clears the market" (Qd=Qs; on graph, the intersection of the supply and demand curves) Surplus The situation when quantity supplied is greater than quantity demanded (Qs>Qd; exist at any price above the market clearing price) Shortage The situation when quantity demanded is greater than quantity supplied (Qd>Qs; exist at any price below the market clearing price) Stable Equilibrium If we are not at equilibrium, we're moving towards it and if we're at it, we will stay there (unless some external factor pushes us away) Function of Prices Provide information about relative scarcity and act as a signal to individuals and firms Function of Markets Emphasize voluntary exchange, determine the terms of exchange, and facilitate change Voluntary Exchange Trading, buying, selling Terms of Exchange Conditions under which trade takes place (often the price we pay for goods) Rationing Methods i. Prices ii. Rationing by Queues (waiting in line) (i.e. Black Friday) iii. Rationing by Random Assignment and/or coupons (i.e. competitions) Price Ceiling A legal maximum price; a price ceiling is binding if the ceiling is below the equilibrium price; typically meant to help. Binding price ceilings may cause shortages and black markets (i.e. price gauging after natural disasters, drugs, human organs, payoffs, bribes to landlords under rent control). Price Floor A government-set minimum price preventing firms from exploiting workers and ensuring people a "living wage" (i.e. alcohol, tobacco, minimum wage, farm commodities) Quantity Restrictions Governments can impose quantity restrictions on things like drugs and taxi cabs in NYC with methods like laws and licenses Market Failure A situation in which the unrestrained market economy leads to too few or too many resources going to a specific economic activity (prevents efficiency, harms individual freedom, is addressed by public policy (government)) Private Costs/Benefits Costs/Benefits borne solely by the individuals who incur them (also called internal costs/benefits) Social Costs/Benefits Full costs/benefits borne by society when a resource is used (internal + external costs/benefits) Externality A situation in which a private cost/benefit diverges from a social cost/benefit. A situation in which the costs/benefits of an action are not fully borne/gained by the two parties engaged in a scarce-resource-using activity. (positive - created by vaccinations and education, negative - created by pollution and smoking) Third Parties People not directly involved in the activity Correcting externalities An externality arises when a private cost/benefit diverges from a social cost/benefit. The remedy is to change the signal for decision making (make people do less/more of an activity by increasing/decreasing the costs, decreasing/increasing benefits, or making requirements) Functions of Government in a Market Economy i. Providing a Legal System: enforce contracts, define and protect property rights, establish laws ii. Promoting Competition: enacting antitrust legislation to restrict the formation of monopolies and regulate certain anticompetitive business practices iii. Providing Public Goods iv. Ensuring economy-wide stability: full employment, price stability, economic growth) Public Goods Goods to which the principle of rival consumption (individuals are rivals in consuming private goods) does not apply Free Rider Arrises when some individuals take advantage of the fact that others will take on the burden of paying for public goods Exclusion Principle An individual may or may not be prevented from consuming a good