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Macro Midterm

Macro Chapters 1-4

QuestionAnswer
What is scarcity? Why is it the central economic problem? Wants are unlimited, but resources are limited Scarcity means choices and choices mean costs
What are the factors of production? land (natural resources) labor capital entrepreneurship
Positive statements Fact statements about “what is” Might be right or wrong Testable
Fallacies correlation vs. causation post hoc, ergo propter hoc fallacy of composition ignoring secondary effects
Fallacy of composition “what is true for one part is true for the whole” WRONG
Secondary effects Policies have unintended consequences EXAMPLE: 1.NYC rent control 2.intended to keep rents down 3.leads to shortage and run-down apts.
NOT financial Capital stocks, bonds, bank loans
What is Physical Capital resource goods used to make other good factories machines infrastructure
Normative Statements Opinion What ought to be Not testable
Individuals are rational if they Maximize expected benefits Minimize expected costs Use available info to calculate benefits and costs
Correlation A measurement of the relationship between two variables.
Causation - A relationship between that describes and analysis cause and effect. -Correlation does not prove causation
post hoc, ergo propter hoc “if A happened right before B, then A must have caused B.” WRONG
Reasons why post hoc, ergo propter hoc can be wrong Coincidence? A third unrelated causal factor?
What is opportunity cost? The opportunity lost Is subjective
What is a sunk cost? Opportunity's/things given up that you can never have back
What is specialization How do we get the most out of our resources? We specialize in what we do best, and trade that for what we need
What is comparative advantage? Producing a good at a lower opportunity cost
What does the production possibilities frontier show? Shows maximum possible output combos of 2 goods, given current resources
How to interpret points on, inside or outside the PPF Points on or inside the PPF are possible Points INSIDE the PPF are inefficient (Left over resources) Points ON the PPF are efficient (Uses all resources)
Why is the PPF concave? (negative and increasing slope) To represent increasing opportunity cost with increased output of a good
What is the law of increasing opportunity costs? Producing more will cost more
Why are opportunity costs increasing? You need to produce less of something to produce more of something else
How does economic growth affect the PPF? It will shift the PPF upward/outward
What three questions relating to scarcity must every society answer? 1. What to produce? 2. How to produce the stuff in #1? 3. For whom to produce?
Scarcity In a pure command system? Former U.S.S.R., N. Korea Reduced incentives for efficiency Coordination failures
Scarcity In a mixed economy? Enforces property rights Regulates markets Taxes to provide goods & services
Scarcity In pure capitalism? When buyers and sellers interact to answer these questions Markets unrestricted Private property
What is the division of labor Different people specialize in different things People become very good at their task Efficiency gains
How do we make tthe most out of scarce resources Efficiency & specialization
if we get more resources OR if technology improves the PFF will shift Shift Out
What type of economy is the U.S. Mixed Economy
Households Consume goods and services Maximize utility
Household Role as supplier of resources Supply resources
Household Role as consumer of goods and services Childcare Meals House care
Firms Production of goods and services Consume Resources
Firms sole proprietorship Most firms are sole proprietorship Owned and run by one natural person
Firm Corporations Limited Liability
Limited liability? Corporation/company is sued, not people
What type are most firms? Sole proprietorship
What type of firms accounts for most sales? Corporations
Why household production? No special skills needed No taxes Reduce transactions costs Productivity increases due to technology
Role of government Enforce of rules of the game Deal with market failures
What/Why is market failure When markets, if left alone, do not give the best outcome
Public Good Can Cause Market Failure Nonrivalry and Nonexludability Provided By government Ex. Missile Defense
Why do public goods pose a problem? Solution? Can cause market failure Solution: Gov’t levies taxes to fund production of public good Society is better off
Nonexclusive Goods Cannot exclude those who do not pay from getting benefits
Nonrival Goods My consuming good does not prevent you from consuming it
What is Market Power? Problem? Solution? Problem: Firms w/ market power restrict output, increasing prices. No incentive to improve quality Solution: Antitrust laws regulate BEHAVIOR not just size
Natural Monopolies Efficient to have only one producer Ex. Electricity Distribution
What are the largest categories of expenditures at the federal level? Education Prisons
The largest source of government revenue Income Taxes Property Tax
Progressive Taxation Tax RATE rises as income rises Income taxes in the US are progressive
Regressive Taxation Lower incomes taxed at a HIGHER rate EX. A poll tax where every household must pay $500 per year
World trade tariff Tax on imports
World trade quota Limits on quantity of imports
Why restrict trade? Result? With out it some groups at the expense of many
Economic Decision Makers Households Firms Government World
External Benefit Positive Externality Education Childhood nutrition Exterior home improvement
External cost Negative Externality
Private Good If I eat candy, You cannot
Proportional Tax All incomes pay the same rate (Same Percentage)
A model of buyer behavior Buyers & Sellers Use model to: to predict the impact of changes to explain changes that occur
Law of demand Price of good increases, quantity demanded falls.
Factors affecting demand o Income o Prices o Buyers Expectations o # of buyers o Perfrerences
Law of supply If price of good rises, Quantity Supplied rises
Factors affecting Supply • Cost of input • Prices of related seller expectations • #Sellers • Producctivity • Factors Effecting Supply
Change in quantity supplied Change in quantity supplied -- occurs when prices change -- movement along existing supply curve
Change in Quantity demanded Demand line shifts
How do shifts in the demand curve and/or supply curve affect equilibrium price and quantity? Price at which Qs = Qd
Price Ceiling gov’t regulation sets maximum price
Normal Goods An increase in income will increase demand Ex. Eating out
Inferior Goods An increase in income will decrease the demand for things like Ramen noodles
Change in demand occurs when other factors change shift to a new demand curve NOT caused by change in price of the good Shifts Demand line
Change in quantity demanded occurs when prices change movement along existing demand curve Moves point on graph
Created by: rpm02044
 

 



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