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Macroeconomics Exam 1 Study Material
Terms in this set (60)
How would you define Economics?
A social science dealing with the allocation of scarce resources to meet unlimited wants.
What is a Social Science?
A soft science, "Social" meaning it deals with people
What does Allocation mean?
To assign, this sounds like an "organized" term
Scarce Resources is the same as..?
Factors of Production, remember scarce means "limited"
What is Production?
Things we use to produce goods and services
Fill in the blank: If there is Scarce Resources, there is....
Scarce goods produced
What are the four Factors of Production?
Land, Labor, Capital, Entrepreneurial Ability
Define Land and Labor
Land includes ALL natural resources. Ex: Minerals, water, air etc.
Labor includes all human effort which is mental and physical. NOT OWNER.
Define Capital and Entrepreneurial Ability
Capital includes tools, equipment, and machinery used in the production process. This could also mean things that are used over and over again.
Entrepreneurial Ability includes the person(s) that start, own, or organize a business.
Factors of Production are used to..?
Produce "stuff" (Goods and Services.)
What is the Economic Problem?
Scarce Resources for unlimited wants. Us as humans have an insatiable desire for goods and services that are wants not needs.
What is another definition of Economics?
The science of constrained choice.
When you make a choice...
Something must be given up
What is Opportunity Cost?
The most important thing you give up when a choice is made. (Next best alternative, second choice)
What is a model?
Simplification of Reality
What does Ceteris Paribus mean and where does it come from?
Latin term meaning "All other things remaining constant" or "Everything else remaining constant"
What are the three assumptions in the production possibilities model?
1. Two-good Economy: only able to produce two goods
2. All resources are efficiently utilized: no idle or unemployed resources
3. Technology and resources are fixed
What is another name for Factors of Production?
What is the opportunity cost in the Bread/Auto example? (See Production Possibilities Table)
The opportunity cost will increase from "A" to "F"
Opportunity Cost will always be in terms of the good..
You're giving up. (Less of)
What is the Law of Increasing Cost?
As the production of a good increases, the opportunity cost in terms of the other good given up will increase
Why does the PPC bow out or concave to the origin?
The explanation behind the Law of Increasing Cost
Where is the best place to operate in our Bread/Auto Example?
Because we lack information to be able to say exactly, all are adequate because they are on the curve.
What are the 3 questions all economic systems must answer?
1) What? - What goods and services will be produced?
Answer: Whatever people are willing and able to buy
2) How? - How will the goods and services be produced?
Answer: They will be produced by those businesses that can do so efficiently, and be able to make a profit
3) Who? - Who gets the goods and services
Answer: Whoever is wiling and able to buy it, effective demand, must have the ability and money to.
What is a Dollar Vote?
When you buy something, you are essentially casting your dollar vote for that item to produced, most votes are produced.
What does Consumer Sovereignty mean?
"Consumer is King" (in charge)
What kind of economic system do we have?
What is a Market?
Mechanism or place that brings together buyers and sellers
What does a market system do?
Allocates scarce resources through the interaction of buyers and sellers
What is a mixed market system?
a little help from the government
What are the three economic systems?
Market (USA), Command or Planned (Communist China, Cuba), Tradition and Custom
What is a Tradition and Custom Economic System?
When you pass away, all of your stuff goes to family members
What is Socialism and why type of Economic System does it include?
Socialism involves heavy hand government. Resources are owned and directed by government. Basically, economic power is in the government's hands. You would see Socialism in a Command or Planned Economy.
What are the key elements of a market economy? (Capitalist Ideology)
1) System of Free Markets & Prices- Interaction of buyers and sellers
2) Role of private property and property rights- powerful incentives (privately owned resources, 4 factors of production)
3) Limited Role of Government- provide legal and social framework, enforce property rights
4) Role of self interest as a motivating factor- Laissez Faire
5) Competition- Lots of firms producing a similar product
What does Lassiez Faire mean?
"Let Business Be"
What does Adam Smith say about the Wealth of Nations?
"The wealth of nations is their resources and productivity"
What does the Guiding or Invisible Hand stand for?
This hand allocates resources. It stands for Self interest
Who said this quote: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self interest"
What does Adam Smith's quote mean?
Since we cater to our own taste and preferences through self interest, businesses do the same thing.
Who are the two main participants in the circular flow model?
Households(Consumers) and Businesses(All types)
Together Households and Businesses make up...
The private sector
What is a government at all levels?
What are the type of Factor Payments?
Land-Rent, Labor-Wages, Capital-Interest, Entrepreneur-Normal Profit
What is Normal Profit?
Minimum amount it takes to keep the entrepreneur in business for him/herself
Normal Profit will always reflect...
...Your next best alternative/oppertunity.
How is pure economic profit found?
Total Revenue - Total Cost
How do you find Total Revenue?
Price x Quantity
What is the difference between price and cost?
Price- What you're paying
Cost- Cost of production
What is Total cost?
All of the costs of production including normal profits
What kind of profit is being earned when Total revenue - Total cost= 0?
What are the two types of flows in our Circular Flow Model?
Money Flow (two inside flows)
Real Flow (two outside flows)
What are the two types of markets in our Circular Flow Model?
Resource Market (Top Half)
Product Market (Lower Half)
What is the difference between Micro and Macroeconomics?
Macro- study of all economics by looking at the entire economy, economic aggregates (Big Picture), total output, inflation, and price level.
Micro- uses economics to look at individuals units- one price, firm, or industry output
How is a price determined in the product market?
A price is determined in the product market through the interaction of the supply decisions of competing businesses and the demand decisions of competing households
How is a price determined in the resource market?
A price is determined in the resource market through the interaction of the supply decisions of competing households and the demand decisions of competing businesses
What is the demand schedule?
A schedule that shows the quantities of a good consumers are willing and able to purchase at various prices out of a set of all possible prices, over a specified period of time
What is the Law of Demand?
There will always be an inverse (indirect) or negative relationship between price and quantity demanded
What is the difference between a change in quantity demanded and a change in demand?
Change in quantity demanded- move ALONG a demand curve as the price changes, ceteris paribus
Change (Shift) in demand- movement of the entire curve
What are the two possible directions a demand curve can shift?
Rightward- which is an INCREASE in demand
Leftward- which is a DECREASE in demand
What causes a shift in the demand curve?
It is caused by a change in one or more of the Non-Price determinants of demand
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