Final Study Guide: Econ 203
106 Cards in this Set
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Scarcity
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the condition of peoples’ wants being greater than available resources
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economics
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the study of how people manage resources.
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Microeconomics
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Study of individuals and firms
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Macroeconomics
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Study of the economy on a regional, national, or international scale
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economic costs
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include both the direct cost and indirect costs
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opportunity costs
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the value of what you have to give up in order to get something
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opportunity cost
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represents the trades offs between costs and benefits
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incentive
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something that causes a change in the tradeoffs that people face.
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incentive
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changes the trade offs that people far when making decision
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positive incentive
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Makes people more likely to do something by lowering their opportunity cost
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negative incentive
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–Makes people less likely to do something by raising their opportunity cost.
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efficiency
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use of resources in the most productive way possible to produce the goods and services that have the greatest total economic value to society (
produce the things that people want at the lowest possible costs.)
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positive analysis
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the way things are
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normative analysis
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the way things should be
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economic models
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show how people, firms, and governments make decisions about managing resources, and how their decisions interact.
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–Makes clear assumptions.
–Describes the real world accurately.
–Predicts cause and effect.
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what makes models useful?
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correlation
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A consistently-observed relationship between two events
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causation
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A relationship between two events in which one brings about the other
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Correlation without causation
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Two events may be extremely correlated, making it appear that a causal relationship exists.
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omitted variables
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Two events may be extremely correlated due to a third event causing the two
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reverse causation
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Sometimes it is unclear whether Event A causes Event B or if Event B causes Event A
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production possibility frontier curve
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the line or curve that shows all possible combinations of two outputs that can be produced using all available resources.
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absolute advantage
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the ability to produce more of a good or service than others can with a given amount of resources.
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comparative advantage
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a good if it can produce it at a lower opportunity cost than other countries.
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quantity demanded
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the amount of a particular good or service that buyers are willing and able to purchase at a given price
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demand schedule
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displays the quantities demanded at various prices
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demand curve
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illustrates the relationship between the quantity demanded and the price of the good, holding all of the other non-price determinants constant.
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law of demand
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•the lower the price, the higher the quantity demanded, all other things equal.
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preferences, number of buyers, incomes, expectations, price of related goods
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5 most important non-price determinants of demand
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quantity supplied
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•the amount of a particular good or service that producers are willing and able to offer for sale at a given price.
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supply schedule
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displays the quantities supplied at various prices
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law of supply
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•the higher the price, the higher the quantity supplied, all other things equal.
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technology, number off producers. price of inputs, expectations, price of related goods
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non-price determinants of supply
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equilibrium
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where the supply curve intersects the demand curve.
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surplus
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If the price is too high, excess supply occurs
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shortage
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If the price is too low, excess demand occurs
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standardized good, no transaction costs, full information, participants are price takers
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four characteristics of perfectly competitive markets
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Gross Domestic Product
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•the sum of the market values of all final goods and services produced in a country within a given period of time. (measured with a country)
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gross domestic product
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the sum of the market values of all final goods and services produced within a country in a given period of time
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Gross National Product
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measures output produced by permanent residents (nationals) of the country.
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gross national product
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the sum of the market values of all final goods and services produced and capital owned by the permanent residents of a country for a given period of time
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market value
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–Used so there are common units to add up goods and services.
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final goods and services
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Only count expenditures on goods and services sold to the consumer
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the expenditure approach
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C + I + G +NX
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the income approach
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•the income earned by everyone (households and firms) in a country.
= Wages + Interest + Rental income + Profits
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the value added approach
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calculates the value that each transaction adds to the economy.
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consumption
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spending on goods and services by private individuals and households
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investment
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spending on productive inputs, such as factories, machines, and inventory
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inventory
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stock of goods that a company produces now but does not sell immediately
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government purchases
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spending on goods and services by all levels of government
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real GDP
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GDP calculation in which goods and services are valued at constant prices
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nominal GDP
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GDP calculation in which goods and services are valued at current prices
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GDP deflator
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a measure of the overall change in prices in an economy, using the ration between real and nominal GDP
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GDP deflator
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ngdp/rgdp X 100
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GDP deflator
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measure of the overall change in prices in an economy using the ratio between real and nominal GDP
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Green GDP
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an alternative measure of GDP that subtracts the environmental costs of production from the positive outputs normally counted in GDP
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In cities that have more police, crime rates are higher
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reverse causation
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many retired people live in states where everyone uses air conditioning during the summer
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omitted variable
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more people come down with the flu during the winter olympics than during the summer olympics
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correlation without causation or omitted variable
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for the last five years, Punxsutawney Phil has seen his shadows on Groundhog Day, and spring comes late
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correlation without causation
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time spent studying and test scores
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positive correlation
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vaccination and illness
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negative correlation
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soft drink preference and music preference
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uncorrelated correlation
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income and education
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positive correlation
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people behave rationally
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assumption
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if the price of a good falls, people will consume more of that good
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prediction of cause & effect
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mass starvation will occur as population outgrows the food supply
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prediction of cause & effect
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a good economic model includes
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predicts that A causes B
Make approximately accurate assumption
predicts things that are usually true
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people who pay their bills on time are less likely than other to get into debt
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positive statement
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hard work is a virtue
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normative statement
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everyone should pay his/her bills on time
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normative statement
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china has a bigger population than any other country
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positive statement
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china's one child policy helped to spur the country rapid economic growth
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positive statement
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lower taxes are good for the country
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normative statement
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constraints
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affect decision making because you have to think about time, activities, and expenses
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why a product isn't efficient
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innovation
market failure
interventions
goals other than profit
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sunk cost
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cost that has been incurred and is not recoverable
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non-price determinants of demand
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income
prices of related goos
population
tastes
expectations of future prices
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non-price determinant of supply
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technology
price of related goods
numbers of firms in the market
expectations of future prices
shift vs movement
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a point above the ppt line
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is inefficient and unattainable
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a point below the ppt line
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is inefficient and attainable
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a point on the ppf line
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is efficient and attainable
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calculating opportunity cost
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slope of line
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If the price of a substitutes increases
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demand increases
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If the price of Complement increases
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demand decreases
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movement demand
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change price of good (change in quantity demanded)
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shift demand
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a non price determinant changes (change in demand)
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Advertising causes individuals to prefer cellphones over home phones
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shift to the right
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cellphones go on sale
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movement downward
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cellphone calling plans become more expensive
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compliment - shift to left
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competitive market
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A market in which no buyer or seller has market power.
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If a decrease in the price of laptops causes the demand for cell phones to increase, are laptops and cell phones substitutes or complements?
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complements
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If rising incomes cause the demand for beer to decrease, is beer a normal or inferior good?
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inferior good
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Perfectly competitive markets
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full info
no transaction costs
price takers
standardized good
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GDP formula
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GDP=C+I+G+NX
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Nominal GDP formula
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NGDP=Qyr1 X Pyr1
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Real GDP formula
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Real GDP =\Sigma (Price from Base year)*(Quantity from current year)
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inflation formula
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(deflator current year - deflator previous year/ deflator previous year )X 100%
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gdp per capita
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gdp/population
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gdp growth rate formula
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(GDPt-GDPt-1/GDPt-1) x 100
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price index
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a measure of how much a market basket has changed relative to cost in a base time period or location
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consumer price index (CPI)
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a measure that tracks changes in the cost of a basket of goods and services purchased by a typical U.S. household
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CPI vs. GDP
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prices of goods/services bought by customers vs all goods/services produced domestically
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substitution bias
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basket of goods remains fixed even in consumers substitute for similar goods
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producer price index (PPI)
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measures the prices of g/s purchased by firms
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purchasing power parity (PPP)
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theory that purchasing power between countries should be the same with common currency
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Final Study Guide: Econ 203