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Micro/Macro Econ. 1
First round of Micro/Macro Econ
| Question | Answer |
|---|---|
| What is economics? | The study of choices people make to attain their goals given their scarce resources |
| What is scarcity? | A situation in which unlimited wants exceed the limited resources available to fulfill those wants |
| What are economic models? | Economists study choices using these, simplified versions of reality used to analyze real world economic situations |
| What is a market? | A group of buyers & sellers of a good or service & the institution or arrangement by which they come together to trade |
| What are the market assumptions? | People are rational, people respond to incentives, & optimal decisions are made at the margin |
| What is an incentive? | It's a financial/non-financial reward or penalty for taking a particular course of action |
| What is marginal analysis? | Analysis that involves comparing marginal benefits & costs |
| What is "the optimal decision"? | Is to continue any activity up to the point where marginal benefit equals marginal cost, MB=MC |
| What is a trade off? | The idea that, because of scarcity, producing more of one good or service means producing less of another good or service |
| What is an opportunity cost? | Any activity is the highest valued alternative that must be given up to engage in that activity |
| What are the key economic questions? | What goods & services will be produced, how will the goods & services be produced, & who will receive the goods & services produced? |
| What are the different types of economies? | Centrally planned, Market, & Mixed |
| What is a centrally planned economy? | An economy in which the government decides how economic resources will be allocated |
| What is a market economy? | An economy in which the decisions of households & firms interacting in markets allocate economic resources |
| What is a mixed economy? | An economy in which most economic decisions result from the interaction of buyers & sellers in markets but in which the government plays a significant role in the allocation of resources |
| What is allocative efficiency? | a state of the economy in which production is in accordance with consumer preferences. Comes about because of competition |
| what is productive efficiency? | a situation in which a good or service is produced at the lowest possible cost. Arises due to voluntary exchange |
| What is voluntary exchange? | a situation that occurs in markets when both the buyer & the seller of a product are made better off by the transaction |
| what is equity? | the fair distribution of economic benefits |
| what are the steps to building an economic model? | Decide on the assumptions to use, formulate a testable hypothesis, use economic data to test the hypothesis, revise the model if it fails to explain the economic data well, & retain the revised model to help answer similar economic questions in the future |
| what behavioral assumptions do economic models make? | consumers will buy goods & services to maximize their well being & firms act to maximize their profits |
| what are economic variables? | something measurable that can have different values, such as the number of people employed in manufacturing |
| what is positive analysis? | analysis concerned with what is |
| what is normative analysis? | analysis concerned with what ought to be |
| what is microeconomics? | is the study of how households & firms make choices, how they interact in markets, & how the government attempts to influence their choices |
| what is macroeconomics? | is the study of the economy as a whole; including topics such as inflation, unemployment, & economic growth |
| what is a firm? | is an organization that produces a good or service |
| what are factors of production? | firms use this to produce goods & services. Examples are labor, capital, & natural resources (including land, entrepreneurial ability, & minerals) |
| what is capital? | referring to the physical version, which includes manufactured goods that are used to produce other goods & services |
| what does scarcity require? | trade offs |
| what is the production possibilities frontier (PPF)? | is a graphical model showing the trade offs & opportunity costs |
| what does the production possibilities frontier (PPF) assume? | that only two goods are produced, resources are fixed, technology is constant, & full employment & efficiency |
| what is economic growth? | the ability of the economy to increase the production of goods & services |
| what is trade? | the act of buying & selling |
| what is absolute advantage? | the ability of an individual, firm, or country to produce more of a good or service than competitors, using the same amount of resources |
| what is comparative advantage? | the ability of an individual, firm, or country to product a good or service at a lower opportunity cost than competitors |
| what is the basis for trade? | comparative advantage |
| what are households? | consists of individuals who provide factors of production: labor, capital, natural resources, & other inputs used to make goods & services |
| What are the 4 factors of production? | labor, capital, & natural resources |
| what is labor? | all types of work |
| what are natural resources? | land, water, oil, iron ore, & other raw materials that are used in producing goods |
| what is an entrepreneur | someone who operates a business |
| what is entrepreneurial ability? | the ability to bring together the other factors of production to successfully produce & sell goods & services |
| what is the circular flow diagram? | a model that illustrates how participants in markets are linked |
| what do households provide in the circular flow diagram? | they provide factors of production to firms, & pay money to firms for goods & services |
| what do firms provide in the circular flow diagram? | they provide goods & services & pay money to households for factors of production |
| what is a free market? | a market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed |
| what is required in a market system? | protection of private property |
| what are property rights? | the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it |
| what are socially democratic parties? | are parties that favor a large role for government in the economy, sometimes including government ownership or control of some large industries |
| what is a demand schedule? | a table that shows the relationship between the price of a product & the quantity of the product demanded |
| what is a demand curve? | a curve that shows the relationship between the price of a product & the quantity of the product demanded |
| what is the ceteris paribus ("all these equal") condition? | the requirement that when analyzing the relationship between two variables--such as price & quantity demanded--other variables must be held constant |
| what is quantity demanded? | the amount of a good or service that a consumer is willing & able to purchase at a given price |
| what explains the law of demand? | When the price of a good falls, two effects take place: Consumers substitute toward the good whose price has fallen & consumers have more purchasing power, which is like an increase in income |
| what is the substitution effect? | the change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power |
| what is the income effect? | the change in the quantity demanded of a good that results from the effect of a change in the good's price on a consumers' purchasing power, holding all other factors constant. |
| where does an increase in demand move? | the curve shifts to the LEFT |
| where does a decrease in demand move? | the curve shifts to the RIGHT |
| what are variables that shift market demand? | Income, prices of related goods, tastes, populations & demographics, expected future prices, & natural disasters & pandemics |
| what are normal goods? | goods for which the demand INCREASES as income RISES & DECREASES as income FALLS |
| what are inferior goods? | goods for which the demand INCREASES as income FALLS & DECREASES as income RISES |
| what are substitutes? | goods & services that can be used for the same purpose |
| what are complements? | goods & services that are used together |
| who is the father of modern economics? | Adam Smith, who wrote "Wealth of Nations" |
| what does marginal mean? | means one more or one less |
| what are the implications of marginal thinking? | up to a point, compared to what, & present starting point |
| what is the law of demand? | there is an inverse relationship between price & quantity demanded |
| what is the law of diminishing utility? | each additional unit of a homogenous stock of goods is worth less than previous unit |
| what is technological change? | a firm may experience positive or negative change in its ability to produce a given level of output with a given quantity of inputs |
| what are substitutes in production? | where firms produce & sell alternative products |
| what are complements in production? | two products are necessarily produced together |
| what is a change in quantity supplied? | a change in the price of the product being examined causes a movement along the supply curve |
| what is a change in supply? | any other change affecting the supply curve to shift |
| what is market equilibrium? | is a situation in which quantity demanded equals quantity supplied |
| Demand Curve & Supply curve are unchanged | Quantity unchanged, Price unchanged |
| Demand curve shifts to the right & Supply curve unchanged | Quantity increases, Price Increases |
| Demand curve shifts to the left, Supply curve unchanged | Quantity decreases, Price decreases |
| Demand curve unchanged & supply curve shifts to the right | Quantity increases, Price decreases |
| Demand curve shifts to the right, Supply curve shifts to the right | Quantity increases, Price increases, decreases, or is unchanged |
| Demand curve shifts to the left, Supply curve shifts to the right | Quantity increases, decreases, or is unchanged, Price decreases |
| Demand curve unchanged, Supply curve shifts to the left | Quantity decreases, Price increases |
| Demand curve shifts to the right, Supply curve shifts to the left | Quantity decreases, Price increases, decreases, or is unchanged |
| what is a business cycle? | alternating periods of economic expansion & economic recession |
| what is expansion? | the period of a business cycle during which the total production & total employment are INCREASING |
| what is recession? | the period of a business cycle during which total production & total employment are DECREASING |
| what is economic growth? | the ability of an economy to produce increasing quantities of goods & services |
| what is inflation rate? | the percentage increase in the price level from one year to the next |
| what is gross domestic product (GDP)? | the market value of all final goods & services produced in a country during a period of time typically one year |
| what are imports? | households buy goods & services from firms in other countries |
| what are exports? | firms sell goods & services to households in other countries |
| What are the 4 major categories of expenditures the Bureau of Economic Analysis (BEA) measure? | Personal consumption expenditures ( or consumption (c)), gross private domestic investment (or investment (I)), government consumption & gross investment ( or government purchases (G)), & net exports of goods & services (or net exports (NX)) |
| what is consumption | the spending by households on goods & services, not including spending on new houses (which are counted instead in investment) |
| what are services? | such as medical care, education, & haircuts |
| what are nondurable goods? | such as goods & clothing |
| what are durable goods? | such as automobiles & furniture |
| what is an investment? | is spending by firms on new factories, office buildings, machinery, & additions to inventories, plus spending by households & firms on new houses |
| what categories do the Bureau of Economic Analysis (BEA) measure when it comes to investments? | business fixed investment, residential investment, & changes in business inventories |
| what are business fixed investments? | such as new factories, office buildings, machinery, & research & development |
| what are residential investments? | i.e. new single-family & multi-unit houses |
| changes in business inventories | i.e. goods that have been produced but not yet sold |
| what are government purchases? | spending by federal, state, & local governments on goods & services |
| what is household production? | such as childcare, cleaning, & cooking is not typically paid for with money |
| what is the underground economy? | buying & selling of goods & services that is concealed from the government to avoid taxes or regulations, or because the goods & services are illegal |
| what is the GDP per capita (i.e. GDP divided by population)? | is often used to represent differences in standards of living from country to country |
| what is nominal GDP? | the value of final goods & services evaluated at current-year prices |
| what is real GDP? | the value of final goods & services evaluated at base-year prices |
| what is the GDP deflator? | a measure of the price level, calculated by dividing nominal GDP by real GDP & multiplying by 100 |
| what is the Gross National Product (GNP)? | Production performed by citizens of a nation, including oversees production |
| what is national income? | GDP minus the consumption of fixed capital, i.e. GDP minus depreciation |
| what is personal income? | income received by households; includes transfer payments but excludes firms' retained earnings |
| what is disposable personal income? | personal income minus personal tax payments; this measures the amount that households are able to spend or save |
| what is the law of supply? | there is a positive relationship between the price of a good & the quantity supplied |
| what are the determinants of supply? | change in technology, changes in input prices, taxes & subsidies, expectations, entry or exit of producers, & seller's willingness to produce. |
| what is consumer surplus? | the difference between the price that is consumer is prepared to pay & the actual price paid in the market |
| what is the consumer surplus formula? | 1/2 x Triangle Base x Triangle Height |
| what is the labor force? | the sum of employed & unemployed workers in the economy |
| what is the unemployment rate? | the percentage of the labor force that is unemployed |
| what is employed? | in government statistics, someone who currently has a job or who is temporarily away from his or her job |
| what is unemployed? | in government statistics, someone who is not currently at work but who is available for work & who has actively looked for work during the previous month |
| what are discouraged workers? | people who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them |
| what is the formula for unemployment rate? | unemployed/labor force x 100 |
| what is labor-force participation rate? | the percentage of the working-age population in the labor force |
| what is the formula for labor-force participation rate? | (labor force/working - age population) x 100 |
| what is employment-population ratio? | the percentage of the working-age population that is employed |
| what is the formula for employment-population ratio? | (employed/working - age population) x 100 |
| what are the types of unemployment? | frictional, structural, & cyclical |
| what is frictional unemployment? | short-term unemployment that arises from the process of matching workers with jobs |
| what is structural unemployment? | unemployment that arises from a persistent mismatch between the skills or attributes of workers & the requirements of jobs |
| what is cyclical unemployment? | unemployment caused by a business cycle recession |
| what is full employment? | this means there will always be SOME unemployment in the economy |
| what is the natural rate of unemployment? | the normal rate of unemployment, consisting of frictional unemployment & structural unemployment |
| what are labor unions? | are organizations of workers that bargain with employers for higher wages & better working conditions |
| what is efficiency wage? | an above-market wage that a firm pays to increase workers' productivity |
| what is price level? | a measure of the average prices of goods & services in the economy |
| what is the consumers price index (CPI)? | is a measure of the average of the prices a typical urban family of 4 pays for the goods & services they purchase |
| what is the formula for consumers price index (CPI)? | (expenditures in the current year/expenditures in the base year) x 100 |
| what are the potential problems with the consumer price index (CPI)? | substitution bias, increase in quality bias, new product bias, & outlet bias |
| what is substitution bias? | consumers may change their purchasing habits away from goods that have increased in price |
| what is an increase in quality bias? | difficult to separate improvement in quality from increase in price, say in cars or computers |
| what is new product bias? | the basket of goods used to change only every 10 years. (now it updates every 2 years.) there is a delay to including new goods like cell phones |
| what is outlet bias? | CPI used to only survey prices at traditional retail outlets. now, it tries to minimize this bias by surveying people about where they ACTUALLY buy products |
| what is the producer price index (PPI)? | is the average of the prices received by producers of goods & services at all stages of the production process |
| what are nominal variables? | values like wages in current-year dollars |
| what is deflation? | a decline in the price level |
| what are menu costs? | the cost to firms of changing prices |
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