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Econ Ch 1-7
December Exam
| Question | Answer |
|---|---|
| Marginal Benefit | The extra benefit of consuming one more unit of a good/service; the change in total benefit when one more unit is consumed. |
| Marginal Cost: | The extra cost of producing one more unit of output. Equal to the change in total cost divided by the change in output. |
| Ceteris Paribus | Everything else equal |
| Economic Policy Goals | Growth, full employment, economic freedom, stable inflation, economic security |
| Positive Economics | Focused on facts |
| Normative Economics | Incorporates value judgements and desires |
| Fallacy of Composition | A statement valid for the individual is not necessarily valid for the whole. |
| Post Hoc Fallacy | Because A precedes B does not necessarily hold that A is the cause of B |
| Economic Resources/Factors of Production | Land, labor, capital, entrepreneurial ability |
| Full Employment | Use of all available resources to produce goods and services |
| Full Production | Employment of all available resources to achieve maximum production |
| Productive Efficiency | Least costly manner |
| Allocative Efficiency | Most wanted production |
| PPC | Production possibilities curve; a point on the curve represents a point of efficiency as all resources/inputs are utilized; a point inside the curve is inefficient - unemployment; a point outside the curve cannot be reached given the assumptions |
| Opportunity Cost | Whatever is given up to produce more of another good |
| Increasing Marginal Opportunity Cost | Resources are not easily adaptable to produce different goods (i.e. time is required for training) |
| PPC Assumption | Full employment and productive efficiency, fixed resources (quantity and quality), fixed technology, only 2 goods are produced |
| Optimal Allocation/Allocative Efficiency | MC=MB |
| PPC Shift Causes | More resources (i.e. higher population, more skilled workers, higher capital stock, new resource discoveries); increase in technology |
| Market System | Private ownership of resources; markets and prices determine economic activity; self-interest; decision making is dispersed; innovation; reward |
| Command System | Central planning; gov't ownership of resources; production goals determined by the gov't |
| Capitalism | Based on self-interest; private property, market system; distribution is according to ability, effort, inheritance; private ownership is key - profit motive (rewards and payments); freedom within certain limits; price system and scarcity drives the system |
| Socialism | Based on individual good will; gov't makes people look out for each other; soviet style socialism - gov't ownership, central planning, price controls |
| Feudalism | feudal lord made all economic decisions for serf; serf worked according to tradition; people fled to cities; markets emerged in cities, breaking tradition; medium of exchange developed - money; land became a tradeable good and feudalism died |
| Mercantilism | wealthy traders were granted the right to engage in economic activities by the monarchy; economic decisions made by agents of the crown; guilds emerged (trade unions); market was allowed to operate under the control of the monarchy through merchants; |
| Adam Smith | wrote Wealth of Nations - "invisible hand theory"; emergence of laissez-faire policy (economic coordination through invisible hand) |
| Industrial Revolution | 1750 - late 1800s economic growth spurred on by machinery, factories,...; capitalism emerged (i.e. stock markets, banks, insurance); abuses (i.e. child labor, few workers rights, 18h workdays), Karl Marx emerged |
| Karl Marx | published Das Kapital; argued capitalism would not last - workers would revolt and socialism would emerge; tension between economic classes of bourgeois and proletariat; no revolution, but gov't regulated capitalism; 1930s-1940s union power dominated |
| Welfare Capitalism | Gov't seriously influences key economic questions; markets constrained by gov't; modern economies resemble this system |
| Reason for Socialism's Collapse | No incentives for workers, inefficient system, poor quality and unavailable consumer goods, exploitation |
| The Market System | Individual and societal goals come into conflict; private property; freedom of enterprise and choice; self-interest; competition; markets and prices; technology and capital goods; specialization; use of money |
| Freedom of Enterprise | Freedom to obtain and use resources to produce any product to sell in any market |
| Freedom of Choice | Freedom to produce, work, or spend freely |
| Competition | Independently acting sellers and buyers operating in a particular product/resource market; freedom of sellers and buyers to enter/leave markets; competition limits potential abuse of economic power |
| Roundabout Production | Construction and use of capital to aid in the production of consumer goods |
| Specialization | Division of labour (human specialization); takes advantage of differences in ability; fosters learning by doing; saves time; geographic specialization |
| Primary Decision Makers | Households and firms |
| Consumer Sovereignty | Determination by consumers of the types/quantities of goods and services that will be produced |
| Derived Demand | demand for a resource that depends on the demand for the products it can be used to produce |
| Creative Destruction | Creation of new products/production methods simultaneously destroys the market positions of firms using existing technology; monopoly power cannot survive |
| Capital Accumulation | Selling shares, raising capital to maintain competitive edge |
| How does the market system promote progress? How is the standard of living increased over time? | Technological advance and capital accumulation |
| Market System Virtues | Efficiency, incentives, freedom |
| Dollar Votes | the voting power of consumers |
| Fundamental Questions | What will be produced? How will the goods/services be produce? Who will get the output? How will the system accommodate change? How will the system promote progress? |
| Spillovers/Externalities | Costs/benefits of a good "spillover" to someone other than the immediate buyer or seller |
| Spillover Cost | i.e. pollution; gov't can address overallocation of resources through taxes, legislation |
| Spillover Benefit | i.e. immunization, education; gov't can address underallocation of resources by subsidizing consumers or producers and gov't provision of the product |
| Public Goods and Services | Private goods produced through competitive markets and are divisible; subject to the exclusion principle. Public goods are indivisible and not excludable. |
| Free-rider Problem | People receive benefits without contributing to the cost (public goods) |
| Quasi Public Goods | Could be offered privately, but are not due to the fear of an underallocation |
| Diminishing Marginal Utility | Consumers will buy more if the price is progressively reduced |
| Income Effect | Lower prices lead to greater purchasing power |
| Substitution Effect | People will substitute the less expensive good for a relatively more expensive one |
| Causes for Demand Curve Shift | Consumer tastes and preferences; number of consumers; consumer incomes; prices of related goods; consumer expectations |
| Law of Demand | As the price of a product falls, the quantity demanded increases |
| Law of Supply | As the price of a product falls, the quantity offered for sale decreases |
| Causes for Supply Curve Shift | Factor prices; technology; taxes and subsidies; prices of other goods; producer expectations; number of sellers |
| Surplus | Price for a good is too high; the quantity supplied is higher than the quantity demanded |
| Shortage | Price for a good is too low; the quantity demanded is higher than the quantity supplied |
| Rationing Function of Prices | Combination of freely made individual decisions sets the market clearing price |
| Price Ceilings | Maximum legal price a seller may charge for a product/service; i.e. rent controls; typically leads to shortages, requires rationing system, leads to development of black markets |
| Price Floors | Minimum price fixed by the gov't; i.e. wheat, milk...; typically leads to a surplus of goods produced |
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stellarxo
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