| 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 |
