191 Cards in this Set
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three core choices of every nation
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1. WHAT to produce with limited resources
2. HOW to produce the goods and services we select
3. FOR WHOM goods and services are produced—that is, who should get them
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economy
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an abstraction referring to the grand sum of all our production and consumption activities
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____ of our economy is consumption
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2/3 (good thing!)
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scarcity
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lack of enough resources to satisfy all desired uses of those resources
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we face _____
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tradeoffs
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factors of production
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resource inputs used to produce goods and services, such as land, labor, capital, and entrepreneurship
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what are the factors of production
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land
labor
capital
entrepreneurship
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land
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all natural resources
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labor
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the skills and abilities to produce goods and services (quantity and quality of human resources), sometimes called human capital
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capital
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final goods produced for use in the production of other goods such as equipment and structures
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types of capital
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physical
human
financial
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physical capital
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any good or service (investment) that extends ones human capital
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human capital
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mental and physical skills, abilities and talents
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financial capital
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funds used to increase both physical and human capital
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entrepreneurship
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the assembling of resources to produce new or improved products and technologies
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payments for factors:
land
labor
physical capital
entrepreneurship
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Land—rent
Labor—wages
Physical capital—interest
Entrepreneurship—profit
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what is the most evident economic limit
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the amount of resources available for producing goods and services
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economics
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the study of how best to allocate scarce resources among competing uses
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opportunity cost
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the most desired goods or services that are forgone to obtain something else
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sunk cost
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the past, it is already gone, you can’t get it back
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As slope _____ in absolute value, one product is getting cheaper, and one is getting more expensive
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increases
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substitution curve
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straight line, exchange of one item for another have equal results
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imperfect substitutes in a production yield _____
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increasing opportunity cost; substitution curve is a bowed outward line
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technically efficient
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means you are making a product with the least amount of resources
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production possibilites
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the alternative combinations of final goods and services that could be produced in a give time period with all available resources and technology
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full employment
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means you’re at the lowest level of unemployment without inflation pressure
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the law of increasing opportunity cost
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the difficulties entailed in transferring labor skills, capital, and entrepreneurship. We must give up ever-increasing quantities of other goods and services in order to get more of a particular good.
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efficiency
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maximum output of a good from the resources used in production
All points along the PPF curve are efficient
All points inside PPF are inefficient
Unemployment is inefficient
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economic growth
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an increase in output (real GDP); an expansion of production possibilities
All output combinations that lie outside the PPF are unattainable in the short run
With more resources or better technology our production possibilities increase
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adam smith
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invisible hand/market mechanism
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market mechanism
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the use of market prices and sales to signal desired outputs (or resource allocators)
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laissez faire
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the doctrine of “leave it alone,” of nonintervention by government in the market mechanism, don’t start something
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what is the essential feature of the market mechanism
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price signal
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laissez passer
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don't stop something
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karl marx
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argued that the government not only had to intervene but had to own all the means of production in order to avoid savage inequalities
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john maynard keynes
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argued that the government should play an active but not all-inclusive role in managing the economy (liberals favor)
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mixed economy
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an economy that uses both market signals and government directives to allocate goods and resources
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market failure
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an imperfection in the market mechanism that prevents optimal outcomes
Specifically, the invisible hand has failed to achieve the best possible outcomes
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public good
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anyone can use it and no one is in the way
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common good
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anyone can use it and someone is in your way
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government failure
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government intervention that fails to improve economic outcomes; the challenge for any society is to minimize economic failures by selecting the appropriate balance of market signals and government directives
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normative analysis
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what should be one
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positive analysis
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how the world is
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normative analysis
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how the world should be
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macroeconomics
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the study of aggregate economic behavior, of the economy as a whole (total business investment)
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microeconomics
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the study of individual behavior in the economy, of the components of the larger economy (individual business investment)
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ceteris paribus
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the assumption of nothing else changing
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how much of the world's output does the U.S. produce
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20%
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GDP means nothing unless proceeded with
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real or nominal
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gross domestic product (GDP)
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the total market value of all final goods and services produced within a nation’s borders in a given time period
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Per capital (REAL) GDP
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the dollar value of GDP divided by total population; average GDP
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economic growth
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an increase in output (real GDP); an expansion of production possibilities
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what percent of U.S. output is services
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80%
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factors of production
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resource inputs used to produce goods and services, such as land, labor, capital, entrepreneurship
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human capital
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the knowledge and skills possessed by the workforce
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capital intensive
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production processes that use a high ratio of capital to labor inputs
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productivity
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output per unit of input—for example, output per labor-hour
The high productivity of the U.S. economy results from using highly educated workers in capital-intensive production processes
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production possibilites
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the alternative combinations of final goods and services that could be produced in a given period with all available resources and technology
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roles of the government
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providing legal framework
protecting environment
protecting consumers
protecting labor
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externalities
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costs (or benefits) of a market activity borne by a third party
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monopoly
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a firm that produces the entire market supply of a particular good or service
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income quintile
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one-fifth of the population, rank-ordered by income
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The top 20 percent quintile of U.S. households get ___ of all U.S. income
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half
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poorer countries have (more/less) inequality
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more
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primary economy
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goods and services are created by the person who enjoys them
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secondary economy
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goods are created by one person for another person (trade)
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tertiary economy
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services are done by one person for another person
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poverty line is based on ____, not _____
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income, in kind transfers
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luddite
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doesn't like technology
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nominal wage
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dollars you've earned
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real income
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nominal income divided by the price level (purchasing power)
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capital deepening
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increasing the capital to labor ratio by giving each worker more tools
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capital widening
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measured by the rate of change in capital stock per labor hour
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measured by the rate of change in capital stock per labor hour
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living standards, not per capita GDP
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differences in size of real GDP across countries are best explained by
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human capital
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if human capital increases, _______ production processes increase
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capital intensive, NOT labor intensive
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all market participants enter the marketplace to
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pursue specific goals
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which basic goals explain most market activity (3)
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utility maximization, profit maximization, welfare maximization
Consumers goal is to maximize the utility (satisfaction) the get from available incomes
Businesses try to maximize profits
The government’s goal is to use available resources to serve public needs
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we are driven to buy and sell goods by two simple facts:
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We are incapable of producing everything we want to consumer
Even if we could produce all our own goods and services, it would make more sense to specialize and trade our goods for other desired goods
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our economic interaction with others are necessitated by two constraints:
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Our absolute inability to produce all the things we need or desire
The limited amount of time, energy, and resources we have for producing those things we could make for ourselves
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factor market
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any place where factors of production are bought and sold
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product market
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any place where finished goods and services are bought and sold
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supply
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the ability and willingness to sell and produce specific quantities of a good at alternative prices in a given time period, ceteris paribus
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demand
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the ability and willingness to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus
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demand schedule
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a table showing the quantities of a good a consume tis willing and able to buy at alternative prices in a given time period, ceteris paribus
Demand is an expression of consumer buying intentions, willingness to buy, not a statement of actual purchases
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demand curve
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a curve describing the quantities of a good a consumer is willing and able to buy at alternative prices in a given time period, ceteris paribus
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law of demand
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the quantity of a good demanded in a given time period increases as its price falls, ceteris paribus
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determinants of demand
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Tastes (desire for this and other goods)
Income
Other goods (their availability and price)
Expectations (for income, prices, tastes)
Number of buyers
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substitute goods
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goods that substitute for each other; when the price of good x rises, the demand for good y increases
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complimentary goods
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goods frequently consumed in combination; when the price of good x rises, the demand for good y falls
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shift in demand
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a change in the quantity demanded at any and every given price
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movements along a curve
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change in QUANTITY
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shifts of curve
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change in demand or supply (NOT QUANTITY)
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market demand
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the total quantities of a good or service people are willing and able to buy at alternative prices in a given time period; the sum of individual demands
Market demand curves only show how much consumers are willing and able to buy, not how much they do buy
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market supply
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the total quantities of a good that sellers are willing and able to sell at alternative prices in a given time period
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law of supply
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the quantity of a good supplied in a given time period increases as its price increases, ceteris paribus
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equilibrium price
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the price at which the quantity of a good demanded in a given time period equals the quantity supplied
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price floor
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lower limit set for a price of a good
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market surplus
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the amount by which the quantity supplied exceeds the quantity demanded at a given price; excess supply
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market shortage
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the amount by which the quantity demanded exceeds the quantity supplied at a given price; excess demanded
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trade is based on
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comparative advantage
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comparative advantage is based on
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lower opportunity cost
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quid pro quo
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this for that
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optimal mix of output
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the most desirable combination of output attainable with existing resources, technology, and social values
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market mechanism
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the use of market prices and sales to signal desired outputs (or resource allocations)
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price signals in the marketplace are suppose to
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move factors of production from one industry to another in response to consumer demands
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market failure
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an imperfection in the market mechanism that prevents optimal outcomes
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market failure implies
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that the forces of supply and demand haven’t led us to the best point on the production possibilities curve
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micro failure
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made the wrong stuff
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macro failure
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inside the curve
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Market failure establishes
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a basis for government intervention
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four specific sources of market failure
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lack of public good
presence of externalities
inappropriate market power
Inequity
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public good
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a good or service who's consumption by one person does not exclude consumption by others
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private good
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a good or service who's consumption by one person excludes consumption by others
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the market mechanism only works if...
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the good is purchased for your personal consumption
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consumption of a public good by one person ______ preclude consumption of the same good by another person
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doesn't
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free rider
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an individual who reaps direct benefits from someone else’s purchase (consumption) of a public good
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if public good were marketed like private goods
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everyone would wait for someone else to pay
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externalities
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costs (or benefits) of a market activity borne by a third party; the difference between the social and private costs (benefits) of a market activity
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whenever externalities are present . . .
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market prices aren’t a valid measure of a good’s value to society
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a market will _______ goods that field external benefits and _______ those that generate external costs
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underproduce, overproduce
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the market fails by:
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Overproducing goods that have external costs
Underproducing goods that have external benefits
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market power
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the ability to alter the market price of a good or a service
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monopoly
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a firm that produces the entire market supply of a particular good or service
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antitrust
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government intervention to alter market structure or prevent abuse of market power
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natural monopoly
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an industry in which one firm can achieve economies of scale over the entire range of market supply
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transfer payments
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payments to individuals for which no current goods or services are exchanged, like Social Security, welfare, and unemployment benefits
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merit good
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a good or service society deems everyone is entitled to some minimal quantity of
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macro instability
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The micro failures of the marketplace imply that we’re at the wrong point on the production possibilities curve or inequitably distributing the output produced
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unemployment
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the inability of labor force participants to find jobs
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inflation
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an increase in the average level of prices of goods and services
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The potential micro and macro failures of the marketplace
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prove specific justifications for government intervention
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which type of government spends the most
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local and state
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progressive tax
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a tax system in which tax rates rise as incomes rise
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progressive tax is known as an
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automatic stabilizer
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proportional tax
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a tax that levies the same rate on every dollar of income
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regressive tax
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a tax system in which tax rates fall as income rises
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what is an example of social security tax
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regressive tax
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what is the second major source of federal revenue
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social security
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state and local government have what type of tax and rely heavily on
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regressive, sales taxes
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government failure
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government intervention that fails to improve economic outcomes
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the issue of government failure encompasses two distinct questions
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Efficiency: are we getting as much service as we could from the resources we allocate to government
Opportunity cost: are we giving up too many private sector goods in order to get those services
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public choice
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theory of public sector behavior emphasizing rational self-interest of decision makers and voters; A central tenet of public choice theory is that bureaucrats are just as selfish
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proportional tax is also called
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flat rate
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marginal is
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how much the next unit costs (ONE more item)
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types of goods
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private
club
common
public
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private good
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rival in consumption, excludable
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club good
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not a rival in consumption, excludable
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common good
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rival in consumption, not excludable
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public good
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not a rival in consumption, not excludable
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excludable
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means a person can be prevented from using it
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rival in consumption
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means one person’s use of the good diminishes other people’s use of it
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what is the highest revenue generator for federal government
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income tax
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double taxation affects
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corporations
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nominal means
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both variables change
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real means
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constant, one variable changes
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national income accounting
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the measurement of aggregate economic activity, particularly national income and its components
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gross domestic product
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the total market value of all final goods and services produced within a nation’s borders in a given time period
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The use of prices to value market output allows us to
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summarize output activity and to compare the output of one period with that of another
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GNP
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refers to the output produced by American-owned factors of production regardless of where they’re located; GDP only counts output produced in America’s borders
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GDP per capita
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total GDP divided by total population; average GDP
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GDP measures exclude
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most goods and services that are produced but not sold in the market
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Because good are made in many steps, we only count
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value added to GDP
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value added
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the increase in the market value of a product that takes place at each stage of the production process
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intermediate goods
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goods or services purchased for use as input in the production of final goods or in services
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nominal GDP
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the value of final output produced in a given period, measured in the prices of that period (current prices)
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real GDP
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the value of final output produced in a given period, adjusted for changing prices
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base year
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the year used for comparative analysis; the basis for indexing price changes
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real GDP in year t =
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Nominal GDP in year t / price index
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inflation
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an increase in the average level of prices of goods and services
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production possibilities
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the alternative combinations of final goods and services that could be produced in a given time period with all available resources and technology
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depreciation
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the consumption of capital in the production process; the wearing out of plant and equipment
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Net domestic product
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GDP less depreciation
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investment
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expenditures on production of new plants, equipment, and structures in a given time period, plus changes in business inventories
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gross investment
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total investment expenditure in a given time period; the stock of capital—the total collection of plants and equipment—won’t grow unless gross investment exceeds depreciation
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net investment
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gross investment less depreciation
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investment goods are the
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plants, machinery, and equipment we produce
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investment spending claims about ____ of our total output
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1/6
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net exports
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the value of exports minus the value of imports
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The value of GDP can be computed by
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adding up the expenditures of market participants
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The total value of market incomes must equal
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the total value of final output, or GDP
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NDP =
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GDP - depreciation
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national income
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total income earned by current factors of production: GDP less depreciation, plus net foreign factor income
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indirect business taxes
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must be deducted from nation income
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personal income
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income received by households before payment of personal taxes
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disposable income
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after-tax income of households; personal income less personal taxes
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saving
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that part of disposable income not spent on current consumption; disposable income less consumption
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all disposable income is either
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consumed or saved
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the dollar value of output will always equal
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the dollar value of income
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GDP ends up distributed in the following ways
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To households (disposable income)
To business (retained earnings and depreciation allowances)
To government (taxes)
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the flow of income that starts with GDP ultimately returns to the market in the form of
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new consumption, investment, and government purchases
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EC 111: Exam 3