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What is scarcity?
Why is it the central economic problem?
Why is it the central economic problem?
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What are the factors of production?
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Macro Midterm
Macro Chapters 1-4
| Question | Answer |
|---|---|
| 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 |
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