A normative economic statement such as “The minimum wage should be abolished”
involves values (religion, ethics, political philosophy) in addition to data
A circular-flow diagram is a model that
a.
helps to explain how participants in the economy interact with one another.
b.
helps to explain how the economy is organized.
d.
Both (a) and (b) are correct.
A positive economic statement such as “Pollution taxes decrease the quantity of pollution generated by firms”
would require values and data in order to be evaluated.
Refer to Figure 2-2. If the owners of land, labor, and capital are represented by Box B of this circular-flow diagram, then
firms are represented by Box A.
Efficient production is represented by which point(s)?
K, N
Inefficient production is represented by which point(s)?
D
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Economic models
are simplifications of reality, and in this respect economic models are no different from other scientific models.
Economists make assumptions in order to
focus their thinking on the essence of the problem at hand
A model can be accurately described as a
simplification of reality.
A macroeconomist — as opposed to a micro economist — might study
the effect of an increasing inflation rate on national living standards
Economic Policy advisors:
try to improve the world
Economic Scientists:
try to explain the world
Assumptions are used to:
simplify the complex
world,
make it easier to understand.
Model:
a highly simplified
representation of
a more complicated reality.
The Production
Possibilities Frontier (PPF) is
a graph that shows the combinations of:
2 goods the economy can possibly produce given the available resources and the available technology
The Circular-Flow Diagram, a visual model of the economy, shows how:
dollars flow through markets among households and firms
Two types of “actors” in a circular flow diagram:
households
firms
Two markets in a circular flow diagram:
-the market for goods
& services
-the market for “factors of production”
Points above the PPF are:
not possible
Points on the PPF are:
possible
efficient: all resources are fully utilized
Points under the PPF are:
possible but not efficient: some resources underutilized
The slope of the PPF tells you the
opportunity cost of one good in terms of the other.
Economic growth shifts the PPF line -
outward.
What equals the
“rise over the run,” the amount the line rises when you move to the
right by one unit on a PPF graph?
The slope of a line
If opp. cost remains constant,
PPF is a straight line.
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PPF illustrates the
concepts of _____, ______ ____ ,
_______ and inefficiency,
unemployment, and _______ growth.
tradeoff ,opportunity cost, efficiency, economic
A bow-shaped PPF illustrates the concept of increasing
opportunity cost.
PPF illustrates the
concepts of
tradeoff and opportunity cost,
efficiency and inefficiency,
unemployment, and
economic growth.
If the PPF is bow-shaped, opp. cost of a good rises as more of…
the good is produced,
PPF is bow-shaped when different workers have different
skills, opportunity
costs of producing one good in terms of the other, or mix of resources with
varying opportunity costs. (E.g., different types of land suited for
different uses).
define macro economics focus
employment rates, inflation, economic growth (as a large organization - county, state, world)
economic scientists make _____ , that can be refuted and analyzed.
positive statements
define micro economics focus
how households and firms(companies) interact and make decisions
policy advisors base their advice on _____ , that are based on the fairy tale view
normative statements
during an oil shortage, an economic policy maker would figure out how n=best to respond, while an economic scientist would______
see it as a chance to gather interesting data
land, labor, and capital
Factors of production
markets for goods and services
firms sells / households buy (milk, eggs)
markets for factors of production
households sell / firm buys (labor)
two reason economists may give conflicting advice
1. may disagree about
theories importance of parameters/economic variables
2. have different personal values
3. perception vs reality ()
Delta symbol signifies…
change in a variable
negatively related
two variables are negatively related if they move in the opposite direction
positively related
the variables move in the same direction
slope formula
rise/run
causality
The relationship between a cause and its effect
reverse causality
A situation where the researcher believes that A causes B when actually B causes A
scarcity
Not having enough resources to satisfy every need.
economics
study of how people and societies use limited resources to satisfy unlimited wants; the management of scarcity and choice
guns n butter
term to describe how society allocates resources for different uses. (defense, goods, aid, etc. )
People face…
trade offs (work vs leisure)
the cost of something is what you…
give up to get it (lost wages + tuition = degree )
rational people think along…
margins (don’t believe its all or nothing)
rational people
people who systematically and purposefully do the best they can to achieve their objectives
marginal changes
Small, incremental adjustments to one’s plan of action.
efficiency
society getting the most it can from its scarce resources
equality
the property of distributing economic prosperity uniformly among the members of society
efficiency versus equality is an example of a
tradeoff
opportunity cost
the highest valued alternative that must be given up in order to engage in an activity
People respond to…
rewards and punishment (good deal vs a fee)
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incentive
Something that induces a person to act
trade can make things
more competitive (lower costs and higher wages for in demand jobs)
markets are the most efficient way to
organize trade
market economy
An economy in which the decisions of households and firms interacting in markets allocate economic resources.
Government can improve
market outcomes (protect property rights or )
property rights
the ability of an individual to own and exercise control over scarce resources
market failure
a situation in which a market left on its own fails to allocate resources efficiently
externality
the impact of one person’s actions on the well-being of a bystander
market power
the ability of a single or group of actors to substantially alter the market price of a good or service
productivity
quantity of goods and services produced from each unit of labor input
a country’s living standards are linked to…
their ability to produce
inflation
A rise in the general level of prices in an economy.
business cycle
Fluctuations in economic activity, such as employment and production
society faces a short term trade off between
inflation and unemployment (more $ printed means more spending, increasing demand and need for employees)
invisible hand
Adam Smith’s economic theory (free market) that the greatest benefit to a society is brought by individuals acting freely in a competitive market place in the pursuit of their own self interest
prices rise when…
too much $ is in circulation
Economics deals primarily with the concept of
scarcity
The overriding reason why households and societies face many decisions is that
resources are scarce
A society allocates its scarce resources to various jobs. These scarce resources include
land, people, and machines -among countless others
The principle that “people face tradeoffs” applies to
individuals, families, and societies, every person and/group on the planet
Efficiency means that
society is getting the maximum benefits from its scarce resources.
trade and specilization
…
Productivity is the…
amount of goods and services produced from each unit of labor input.
Inflation is defined as
an increase in the overall level of prices in the economy.
What is the most important factor that explains differences in living standards among countries?
…
Which of the following is the primary cause of inflation?
an increase in the quantity of money
The short-run tradeoff between inflation and unemployment implies that, in the short run,
a decrease in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate.
The adage, “There is no such thing as a free lunch,” means
everything has a value and cost
Billie Jean wants to buy either a new amplifier for her guitar or a new mp3 player to listen to music while working out. Both the amplifier and the mp3 player cost $120, so she can only buy one. This illustrates the basic concept that
people face trade-offs.
Guns and butter are used to represent the classic societal tradeoff between spending on
…
The terms equality and efficiency are similar in that they both refer to benefits to society. However they are different in that
equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits from scarce resources.
Which of the following words and phrases best captures the notion of equality?
sameness
Which of the following is an economic principle concerning how people interact?
all of the above
Dee can earn more in the hour it would take her to work on her lawn than she must pay her landscaper. This scenario is an example of which principle of economics?
…
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The “invisible hand” directs economic activity through
prices
Resources are
scarce for households and scarce for economies.
scarcity
Not having enough resources to satisfy every need.
economics
study of how people and societies use limited resources to satisfy unlimited wants; the management of scarcity and choice
guns n butter
term to describe how society allocates resources for different uses. (defense, goods, aid, etc. )
People face…
trade offs (work vs leisure)
the cost of something is what you…
give up to get it (lost wages + tuition = degree )
rational people think along…
margins (don’t believe its all or nothing)
rational people
people who systematically and purposefully do the best they can to achieve their objectives
marginal changes
Small, incremental adjustments to one’s plan of action.
efficiency
society getting the most it can from its scarce resources
equality
the property of distributing economic prosperity uniformly among the members of society
efficiency versus equality is an example of a
tradeoff
opportunity cost
the highest valued alternative that must be given up in order to engage in an activity
People respond to…
rewards and punishment (good deal vs a fee)
incentive
Something that induces a person to act
trade can make things
more competitive (lower costs and higher wages for in demand jobs)
markets are the most efficient way to
organize trade
market economy
An economy in which the decisions of households and firms interacting in markets allocate economic resources.
Government can improve
market outcomes (protect property rights or )
property rights
the ability of an individual to own and exercise control over scarce resources
market failure
a situation in which a market left on its own fails to allocate resources efficiently
externality
the impact of one person’s actions on the well-being of a bystander
market power
the ability of a single or group of actors to substantially alter the market price of a good or service
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productivity
quantity of goods and services produced from each unit of labor input
a country’s living standards are linked to…
their ability to produce
inflation
A rise in the general level of prices in an economy.
business cycle
Fluctuations in economic activity, such as employment and production
society faces a short term trade off between
inflation and unemployment (more $ printed means more spending, increasing demand and need for employees)
invisible hand
Adam Smith’s economic theory (free market) that the greatest benefit to a society is brought by individuals acting freely in a competitive market place in the pursuit of their own self interest
prices rise when…
too much $ is in circulation
Economics deals primarily with the concept of
scarcity
The overriding reason why households and societies face many decisions is that
resources are scarce
A society allocates its scarce resources to various jobs. These scarce resources include
land, people, and machines -among countless others
The principle that “people face tradeoffs” applies to
individuals, families, and societies, every person and/group on the planet
Efficiency means that
society is getting the maximum benefits from its scarce resources.
trade and specilization
…
Productivity is the…
amount of goods and services produced from each unit of labor input.
Inflation is defined as
an increase in the overall level of prices in the economy.
What is the most important factor that explains differences in living standards among countries?
…
Which of the following is the primary cause of inflation?
an increase in the quantity of money
The short-run tradeoff between inflation and unemployment implies that, in the short run,
a decrease in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate.
The adage, “There is no such thing as a free lunch,” means
everything has a value and cost
Billie Jean wants to buy either a new amplifier for her guitar or a new mp3 player to listen to music while working out. Both the amplifier and the mp3 player cost $120, so she can only buy one. This illustrates the basic concept that
people face trade-offs.
Guns and butter are used to represent the classic societal tradeoff between spending on
…
The terms equality and efficiency are similar in that they both refer to benefits to society. However they are different in that
equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits from scarce resources.
Which of the following words and phrases best captures the notion of equality?
sameness
Which of the following is an economic principle concerning how people interact?
all of the above
Dee can earn more in the hour it would take her to work on her lawn than she must pay her landscaper. This scenario is an example of which principle of economics?
…
The “invisible hand” directs economic activity through
prices
Resources are
scarce for households and scarce for economies.
Economy
Comes from greek word oikonomos, which means “one who manages a household”
_______ and economies have much in common.
Households
Once society has allocated people to various jobs, it must also allocate the _________ and ________ they produce.
goods, services
The management of society’s resources is important because resources are _________.
Scarce
Scarcity
Society has limited resources and therefore cannot produce all the goods and services people wish to have.
Economics
The study of how society manages its scarce resources.
What do Economists study?
How people make decisions, how much they work, what they buy, how much they save, and how they invest their savings. They also study how people interact with one another. They also study analyze trends that affect the economy as a whole, including the growth in average income, the fraction of the population that cannot find work, and the rate at which prices are rising.
What is an Economy?
Simply a group of people dealing with one another as they go about their lives.
The behavior of the _______ reflects the behavior of the __________ of the economy.
Economy, people
Principle 1: People Face Trade Offs
To get what we like, we usually have to give up something we also like. Example-a student could spend all their time studying for one subject or divide her time and study for two.
“Guns and Butter”
The classic trade off-the more a society spends on national defense to protect, the less it can spend on consumer goods (butter) to raise the standard of living.
Efficiency
Society is getting the maximum benefits from its scarce resources.
Equality
Benefits are distributed uniformly among society’s members.
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__________ refers to the size of the economic pie
Efficiency
__________ refers to how the economic pie is divided into individual slices
Equality
When the government tries to cut the economic pie into more equal slices, the pie gets ________
smaller.
People are likely to make good decisions only if they understand the ________ that are available to them
options
Principle 2: The Cost of Something is What You Give Up To Get It
Making decisions requires comparing the costs and benefits of alternative courses of action
Opportunity Cost
What you give up to get something. When making any decisions, decision makers should be aware of the opportunity osts that accompany each possible action.
Principle 3: Rational People Think at the Margin
Rational people systematically and purposefully do the best they can to achieve their objectives, given the available opportunities.
Marginal Change
A small incremental adjustment to an existing plan of action.
Rational people often make decisions by comparing marginal _______ and marginal ________.
Benefits, costs
A rational decision maker takes an action if and only if the marginal ______ of the action exceeds the marginal _______ cost.
benefit, cost
Principle 4: People Respond to Incentives
Because rational people make decisions by comparing costs and benefits, they respond to incentives
Incentive
Something that induces a person to act.
_______ are crucial to analyzing how markets work.
Incentives
A higher price in a market provides an ______ for buyers to consume _____ and an incentive for sellers to produce ______.
incentive, less, more
Inflation
Increases in the general level of prices
Productivity
The amount of goods and services produced per unit of labor
Market Power
The ability of a single person or small group to influence market prices
Externalities
the impact of one person’s actions on the well-being of a bystander. Example is pollution
Market Failure
When the market fails to allocate society’s resources efficiently
Market
A group of buyers and sellers. They do not need to be in a single location
To achieve greater ______, we could redistribute income from wealthy to poor, but this reduces _______ to work.
equality, incentive
Business Cycle
The irregular and largely unpredictable fluctuation in economic activity measured by the production of goods
All Decisions Face Tradeoffs. True or False?
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True
Society Faces the important tradeoff between….?
Efficiency and equality
Principle 5: Trade can make everyone better off
Countries can benefit from trade and specialization
Principle 6: Markets are usually a good way to organize economic activity
In a market economy, the decisions of a central planner are replaced by the decisions of millions of firms and households.
Principle 7: Governments can sometimes improve market outcomes
Market economies need institutions to enforce property rights so individuals can own and control scarce resources.
What is the Government’s most important role?
To enforce property rights.
What are the causes of Market failure?
Externalities and market power
Principle 8: A country’s standard of living depends on its ability to produce goods and services
Almost all variation in living standards is attributable to differences in countries’ productivity, or, the amount of goods and services produced by each unit of labor input
What is the most important determinant of living?
Productivity
What does productivity depend on?
Equipment, skills, and technology available to workers
Principle 9: Prices rise when government prints too much money
When the government creates large quantities of the nation’s money, the value of the money falls.
Principle 10: Society faces a short-run tradeoff between inflation and unemployment
Over a period of a year or two, many economic policies push inflation and unemployment in opposite directions.
Who said that households and firms interacting in markets act as if they are guided by an “invisible hand” that leads them to desirable market outcomes.
Adam Smith
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______ are the instrument with which the invisible hand directs economic activity.
Prices
The growth in the quantity of money is the ultimate source of _______.
Inflation
Society faces a short-run trade-off between ______ and _______.
Inflation, unemployment
Market Economy
An economy that relies mainly on market forces to allocate goods and resources and to set prices
The “invisible hand” refers to….
the ability of free markets to reach desirable outcomes, despite the self-interest of market participants.
Governments may intervene in a market economy in order to….
Protect property rights, correct a market failure due to externalities, and achieve a more equal distribution of income.
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