econ1
Terms
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- A good is scarce when:
- the amount of a good is less than the amount that people want when the good's price equals zero
- Adam Smith's "Invisible Hand"
- A person who looks to maximize and benefit himself will automatically help all of society and therefore the role of the government in the economy should be minimized; 3rd party effect derived from individual acting in his self-interest
- Controlled market
- Price levels are set by the government (so they control the whole economy)
- Deficit
- Imports are greater than exports, meaning that you are losing money bcause you're selling less than you're recieving.
- Factors that cause movement along the demand curve:
- price (connected to quantity demanded) (price does NOT shift the curve!!)
- Factors that cause movement along the supply curve:
- price
- Factors that shift the demand curve:
- Seasonal/climate changes, preferences (trends), quality (luxury goods), income, substitution
- Factors that shift the supply curve:
- Production costs, technological changes, government regulation, psychology of owner, weather conditions.
- If a point is to the left or right of the PPC graph, why are they not production possibilties?
- Left: inefficient production. it's possible but it's not smart. Right: can't produce at that point because there are not enough resources.
- In order to shift/move a PPC curve, ______ must change
- land, labor, or capital
- Law of diminishing marginal returns
- When more units of a variable resource (labor) are added to a fixed resource (capital), the marginal output associated with the variable resource will eventually decline
- Market Failure
- When government has intervened in the market to provide products or a service. When there is no equilibrium point (consumers and sellers can't agree on a price). Occurs when there's a 3rd party effect
- Market's four meanings:
- physical place where products are bought and sold, all the buyers and sellers of a product/service, the demand for a product/service, the process by which a buyer and seller arrive at a mutually acceptable price and quantity
- Microeconomics
- Focuses on consumer behavior
- Minimum wage is an example of _____.
- price floor
- Negative externalities include:
- social cost & private cost or benefit
- One definition for Market
- The interaction of buyers and sellers for a mututally beneficial transaction
- Postive Externalities include:
- Social benefit & private cost or benefit
- Price Ceiling
- When the government believes people are paying too nuch. Prices can't rise above that line. Below equilibrium point. There is more demanded than supplied, meaning there is a shortage.
- Price Floor
- When government believes sellers are recieving too low a price for a product. Above equilibrium. Prevents a price from falling below that line. Supplied is greater than demand, meaning there is a surplus of goods.
- Production Possibilities Curve (PPC)
- Graph of the production choices facing an economy; measures the maximum output we can make between two products. Important to know so we know how many resources we need
- Pros and cons of subsidies:
- Pros: buyers pay less, sellers have extra revenue. Cons: coming out of taxpayers money, keep inefficient producers in business, and barrier to fair trade in world economy.
- Rent Control is an example of _____.
- Price ceiling
- Specialization
- When each person on an assembly line has their own task to perform. Stops after a certain worker. Assumes that it has the resources to do so.
- Subsidy
- A grant of money made to a particular industry by the government. Brings more products into the market. Paid for by taxes. Government intervenes for socal or environmental reasons.
- The law of diminshing marginal value (Law of diminishing marginal utility/utility theory)
- Consumers get less satisfaction from each additional unit of a good consumed.
- The Law of Downward Sloping Demand
- Price and quantity demanded have an inverse relationship, hence the negative slope. (price up, quantity demanded down)
- The science of economics
- Resources used to produce goods and services are scarce. Choices are made because of scarcity. If there wasn't scarcity, we could get anything we wanted since there'd be no value.
- Third Party Effect (externalities)
- Indirect effect on an individual, society, or company due to a transaction. Has to do with government intervention into the free market
- Trade Surplus
- Exports are greater than importants, meaning you are gaining money because you're selling more than you're recieving
- Unmet public goods
- The free market cannot define the equilibrium price and quantity; can't meet the demand of a product, so government steps in. Ex: fire department, military defense, building of sidewalks
- What are the two possible outcomes of price ceilings?
- A black market could be started (someone buys item and sells it for higher price cus it's high in demand cus of shortage). Quality of the product might go down cus the sellers have to reduce their costs.
- What can a business do in order to produce at the right point on a PPC graph?
- Must have PPC shift to go through that point. It will shift from technological improvements (or population changes), meaning capital has increased. (we didn't take any resources from land or labor!)
- What does a straight line on a PPC graph assume?
- That the law of diminishing returns doesn't apply. If it is straight, it means that there is a proportional increase. Total outputs are increasing, meaning the law of d.m.r cannot be applied!
- What is the inevitable outcome of a price ceiling?
- It will lead to a subsidy by government because more goods need to be produced because of the shortage
- Why are both ceilings and floors inefficient?
- They are not at equilibrium point!
- Why does the government intervene?
- For mutual protection of the people & quality control
- _____ benefit from economies of scale
- big businesses