Econ midterm 1 chapt 1-4
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when society gets the most from its scarce resources
- when prosperity is distributed uniformly among society’s members
- Govt may alter market outcome to promote equity
allocates resources throughthe decentralized decisions of many house holds and firms as they interact in markets.
when the market fails to allocatesociety’s resources efficiently
a single buyer or seller has substantial influence on market price (e.g. monopoly)
The most important determinant of living standards
the amount of goods and services produced from each hour of a worker’s time(goods/hour)
increases in the general level of prices
The 4 principles of decision making are:
- -People face tradeoffs.
- -The cost of any action is measured in termsof foregone opportunities.
- -Rational people make decisions by comparing marginal costs and marginal benefits.
- -People respond to incentives.
The 3 principles of interactions among people are:
- -Trade can be mutually beneficial.
- -Markets are usually a good way of coordinating trade.
- - Govt can potentially improve market outcomes if there is a market failure or if the market outcome is inequitable.
- a visual model of the economy, shows how dollars flow throughmarkets among households and firms
Factors of production:
- the resources the economy uses to produce goods & services including
- - labour
- - land
- - capital (buildings & machines used inproduction)Copyright
The Circular-Flow Diagram : Households
- - Own the factors of production,sell/rent them to firms for income
- - Buy and consume goods & services
The Circular-Flow Diagram: Firms:
- - Buy/hire factors of production,use them to produce goodsand services
- - Sell goods & services
Production Possibilities Frontier (PPF)
- a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the availabletechnology
the study of how households and firms make decisions and how they interactin markets.
the study of economy-wide phenomena, including inflation, unemployment,and economic growth.
attempt to describe the world as it is.(dont have to be correct)
attempt to prescribe how the world should be.
Why Economists Disagree
- different values
- different judgements
Propositions about Which Most Economists Agree
- A ceiling on rents reduces the quantity andquality of housing available. (93%)
- Tariffs and import quotas usually reduce generaleconomic welfare. (93%)
- A large federal budget deficit has an adverseeffect on the economy (83%)
- Flexible and floating exchange rates offer aneffective international monetary arrangement.(90%)continued…Copyright © 2011 Nelson Education Limited 34Propositions about Which MostEconomists Agree (and % agreeing)
- Cash payments increase the welfare of recipients toa greater degree than do transfers-in-kind of equalcash value. (84%) A minimum wage increases unemployment amongyoung and unskilled workers. (79%)
- Effluent taxes and marketable pollution permitsrepresent a better approach to pollution controlthan imposition of pollution ceilings. (78%)
the ability to produce a good using fewer inputs than another producer
- -the ability to produce a good at a lower opportunity cost than another producer
- -Absolute advantage is not necessary for comparative advantage
one with many buyersand sellers, each has a negligible effect on price
perfectly competitive market
- - All goods exactly the same
- - Buyers & sellers so numerous that no one can affect market price – each is a “price taker”
Law of demand (or Law of diminishing marginal benefit)
- -the quantity demanded of a good falls when the price of the good rises, other things equal
- -creates a downwards slope
- -positively related to income.
- -Increase in income causes increase in quantity demanded at each price, shifts D curve to the right
- -negatively related to income.
- -An increase in income shifts D curves for inferior goods to the left.
Two goods are substitutes if an increase in the price of one causes an increase in demand for the other
Two goods are complements ifan increase in the price of onecauses a fall in demand for the other
5 Demand Curve Shifters
- # of buyers
- Income (Normal and Inferior goods)
- Prices of other goods (substitutes compliments)
- (price causes movement along D curve not shift)
Law of supply:
- -the claim that the quantity supplied of a good rises when the price of the good rises, other things equal
- -creates an upwards slope
4 Supply Curve Shifters
- Input Prices
- # of Sellers
- (Price causes a movement along the S curve not shift)
if the market price is above equilibrium a surplus of goods is the result which causes the price to fall.
If the market price is below equilibrium,a shortage results, causing the price to rise
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