ECON 208 FINAL-McGill
Efficiency - CORRECT ANSWER--The order produced by all these selfish decisions is
efficient
-all the good/services people want and have the means to purchase are produced with
the least possible amount of our scarce resources
Characteristics of the "Market" economy - CORRECT ANSWER-1. Self-interest
2. Incentives: People in the economy respond to incentives
3. Market price and Quantity: determined by buyers and sellers, though not directly or
officially
4. Institutions: These activities are all governed by a set of institutions, including: private
property, freedom of contract, rule of law
Scarcity - CORRECT ANSWER--resources are scarce (limited, not infinite)
-wants are unlimited (infinite)
-the mismatch of want and resources is the fundamental problem of economics
-economics is the study of how we use scarce resources to satisfy unlimited wants
Resources - CORRECT ANSWER--what we use to produce the goods and services
that people want
-AKA factors of production
3 kinds of resources - CORRECT ANSWER-1. Labour: mental and physical human
resources (people)
2. Land: all natural endowments (arable land, oil, minerals, trees, fresh water, etc)
3. Capital: all manufactured aids to production (machines, computers, etc)
-all resources/FOP produce either goods or services
Two results of scarcity - CORRECT ANSWER--choice
-opportunity cost
Choice - CORRECT ANSWER--consumers and producers must choose to allocate
scarce resources (consumers -> money, producers -> resources) toward one thing and
not another (consumers -> buying goods and services, producers -> creating goods and
services)
-because choice means giving something up for something else, what you give up is the
cost
Opportunity cost - CORRECT ANSWER--specifically what you give up/forego in
choosing to consume (for consumers) or produce (for producers) one thing over another
(what am I losing out on by buying a shirt instead of a book for school)
-AKA the next best thing that you could be doing
,Self-Organizing - CORRECT ANSWER--The economy, when left alone without
intervention, is naturally self-organizing
-spontaneous economic order and self interest is behaviour that is enough to produce a
structured and organized economy
Spontaneous Economic order - CORRECT ANSWER-The billions of minor decisions
and transactions made by people every day come together to produce what people
need on a much larger scale
Self Interest - CORRECT ANSWER--In economics we assume all people are motivated
solely by self-interest and all decisions they make are in order to maximize their
personal gain
-economists call this rationality and all people are assumed to be rational
Production Possibilities Curve (PPC) - CORRECT ANSWER--we have a certain amount
of resources that can be used to produce 2 different things, lets call them product A and
product B
-since the amount of resources we have is limited, how much of A and B we can
produce with them is limited too
-we can use our resources to produce only product A's, only product B's, or a
combination of product A's and B's
-There is a tradeoff whenever we choose to produce a certain amount of one product:
the more we produce of one product, the less we can produce of the other
-on the PPC one of A and B is represented on the vertical axis, the other on the
horizontal axis
-The PPC shows all the different combinations of A and B that we can produce when all
of our resources are being used
-when on the curve, we are using all our resources, showing that we are being efficient
-any point inside the curve represents a combination of A and B that we can produce
without using all of our resources (inefficient)
-any point outside the curve represents a combination of A and B that we are not
capable of producing with the amount of resources we have (unattainable, impossible)
Characteristics of PPC - CORRECT ANSWER--negative slope (downwards)
-concave in shape (bows out from the origin): continuosly increasing
-not linear: the opportunity cost is not constant
-increasing opportunity cost
-inverse relationship between A and B
Moving along the PPC curve vs. a shift in the PPC curve - CORRECT ANSWER--When
we move along the PPC from one point to another, we are choosing to produce a
different combination of A and B: more of one, less of the other
-At each point along the curve we are using all of our resources: no more, no less
,-conversely, a shift in the PPC means that the amount of resources we have (the
amount of machines, the amount of workers) has changed, or the efficiency of those
resources (the level of technology) has changed, therefore leading to a change of how
much we can now produce
Two kinds of PPC shifts - CORRECT ANSWER-1. The entire curve shifts either inward
or outward
2. only one dimension of the curve shifts inward or outward
Entire PPC curve shifts outwards - CORRECT ANSWER--increased amount of
resources allows us to produce more of A and more of B
-producing more of each than before
-technology has improved (resources are used more efficiently), worker population has
increased (amount of resources we have - workers - has increased)
Entire PPC curve shifts inwards - CORRECT ANSWER--decreased amount of
resources forces us to produce less of A and less of B
One dimension of the PPC curve shifts outwards - CORRECT ANSWER--the additional
resources we have acquired are only useful in producing one of our two goods or we
improved our technology for producing A
-ex: our new resources are only capable of producing A
--> 10 A's and 0 B's to 12 A's and 0 B's
One dimension of the PPC curve shifts inwards - CORRECT ANSWER--the resources
we lost were only useful in producing one of our two goods
-Ex: our lost resources were only capable of producing B
--> 10 A's and 10 B's to 10 A's and 8 B's
Circular flow of income and expenditure - CORRECT ANSWER--goods and services go
from firms to individuals (consumers)
-payments for these goods and services go from individuals (consumers) to firms
-these changes occur in the goods markets
-factor services (ex: labour) go from individuals to firms
-payments for these factor services go from firms to individuals
-these changes occur in the factor market
specialization of labour - CORRECT ANSWER--the allocation of different jobs to
different people
-beneficial because different people are good at different things
-this results in greater efficiency and productivity
division of labour - CORRECT ANSWER--specialization within the production process
of a particular product
, -ex: one worker specializes in the assembly of a chair and another specializes in cutting
of the material for the chair
-production process is broken down into several different tasks, each undertaken by a
different worker/group of workers
Barter - CORRECT ANSWER--instead of using money to purchase a good, goods are
traded for one another
-this requires a double coincidence of wants: you need to have what i want, and i need
to have what you want
-Money eliminates this requirement, thus facilitating exchange between individuals
irrespective of whether they posses a good that the other wants
Traditional economy - CORRECT ANSWER--behaviour and decisions are based mainly
on tradition, customs, and habits
Command Economy - CORRECT ANSWER--Decisions are made by a central planning
authority
-main feature is centralization of decision making
-command economy and centrally planned economy are synonyms
Free-Market economy - CORRECT ANSWER--Most decisions are made by private
households and firms (individuals)
-main feature is decentralization of decision making
-Free-market economy, market economy, and price-system economy, are all synonyms
Mixed economy - CORRECT ANSWER--a combination of traditional, command, and
free-market economies
-some decisions are made by firms and households; others are made by government
-in practice, all economies are mixed economies
Positive Statement - CORRECT ANSWER--stating something as FACT
-Whether the statement is true, false, or unverifiable does not change whether or not it
is a positive statement
-A positive statement is a statement saying "something is this way" or "this thing
happens" or "when this happens, that happens", etc
-ex: rain usually leads to more car accidents, an increase in GDP causes interest rates
to fall
Normative statements - CORRECT ANSWER--stating something as an OPINION
-whether the opinion is intelligent, stupid, makes a lot of sense, or makes no sense at
all, does not change whether or not it is a normative statement
-a normative statement is a statement saying "something should be this way" or "ought
to be this way" or "it would be better to do this than that"
-ex: because rain leads to more car accidents, people ought to avoid driving on rainy
days, the government should try to increase GDP so that interest rates can fall
Efficiency - CORRECT ANSWER--The order produced by all these selfish decisions is
efficient
-all the good/services people want and have the means to purchase are produced with
the least possible amount of our scarce resources
Characteristics of the "Market" economy - CORRECT ANSWER-1. Self-interest
2. Incentives: People in the economy respond to incentives
3. Market price and Quantity: determined by buyers and sellers, though not directly or
officially
4. Institutions: These activities are all governed by a set of institutions, including: private
property, freedom of contract, rule of law
Scarcity - CORRECT ANSWER--resources are scarce (limited, not infinite)
-wants are unlimited (infinite)
-the mismatch of want and resources is the fundamental problem of economics
-economics is the study of how we use scarce resources to satisfy unlimited wants
Resources - CORRECT ANSWER--what we use to produce the goods and services
that people want
-AKA factors of production
3 kinds of resources - CORRECT ANSWER-1. Labour: mental and physical human
resources (people)
2. Land: all natural endowments (arable land, oil, minerals, trees, fresh water, etc)
3. Capital: all manufactured aids to production (machines, computers, etc)
-all resources/FOP produce either goods or services
Two results of scarcity - CORRECT ANSWER--choice
-opportunity cost
Choice - CORRECT ANSWER--consumers and producers must choose to allocate
scarce resources (consumers -> money, producers -> resources) toward one thing and
not another (consumers -> buying goods and services, producers -> creating goods and
services)
-because choice means giving something up for something else, what you give up is the
cost
Opportunity cost - CORRECT ANSWER--specifically what you give up/forego in
choosing to consume (for consumers) or produce (for producers) one thing over another
(what am I losing out on by buying a shirt instead of a book for school)
-AKA the next best thing that you could be doing
,Self-Organizing - CORRECT ANSWER--The economy, when left alone without
intervention, is naturally self-organizing
-spontaneous economic order and self interest is behaviour that is enough to produce a
structured and organized economy
Spontaneous Economic order - CORRECT ANSWER-The billions of minor decisions
and transactions made by people every day come together to produce what people
need on a much larger scale
Self Interest - CORRECT ANSWER--In economics we assume all people are motivated
solely by self-interest and all decisions they make are in order to maximize their
personal gain
-economists call this rationality and all people are assumed to be rational
Production Possibilities Curve (PPC) - CORRECT ANSWER--we have a certain amount
of resources that can be used to produce 2 different things, lets call them product A and
product B
-since the amount of resources we have is limited, how much of A and B we can
produce with them is limited too
-we can use our resources to produce only product A's, only product B's, or a
combination of product A's and B's
-There is a tradeoff whenever we choose to produce a certain amount of one product:
the more we produce of one product, the less we can produce of the other
-on the PPC one of A and B is represented on the vertical axis, the other on the
horizontal axis
-The PPC shows all the different combinations of A and B that we can produce when all
of our resources are being used
-when on the curve, we are using all our resources, showing that we are being efficient
-any point inside the curve represents a combination of A and B that we can produce
without using all of our resources (inefficient)
-any point outside the curve represents a combination of A and B that we are not
capable of producing with the amount of resources we have (unattainable, impossible)
Characteristics of PPC - CORRECT ANSWER--negative slope (downwards)
-concave in shape (bows out from the origin): continuosly increasing
-not linear: the opportunity cost is not constant
-increasing opportunity cost
-inverse relationship between A and B
Moving along the PPC curve vs. a shift in the PPC curve - CORRECT ANSWER--When
we move along the PPC from one point to another, we are choosing to produce a
different combination of A and B: more of one, less of the other
-At each point along the curve we are using all of our resources: no more, no less
,-conversely, a shift in the PPC means that the amount of resources we have (the
amount of machines, the amount of workers) has changed, or the efficiency of those
resources (the level of technology) has changed, therefore leading to a change of how
much we can now produce
Two kinds of PPC shifts - CORRECT ANSWER-1. The entire curve shifts either inward
or outward
2. only one dimension of the curve shifts inward or outward
Entire PPC curve shifts outwards - CORRECT ANSWER--increased amount of
resources allows us to produce more of A and more of B
-producing more of each than before
-technology has improved (resources are used more efficiently), worker population has
increased (amount of resources we have - workers - has increased)
Entire PPC curve shifts inwards - CORRECT ANSWER--decreased amount of
resources forces us to produce less of A and less of B
One dimension of the PPC curve shifts outwards - CORRECT ANSWER--the additional
resources we have acquired are only useful in producing one of our two goods or we
improved our technology for producing A
-ex: our new resources are only capable of producing A
--> 10 A's and 0 B's to 12 A's and 0 B's
One dimension of the PPC curve shifts inwards - CORRECT ANSWER--the resources
we lost were only useful in producing one of our two goods
-Ex: our lost resources were only capable of producing B
--> 10 A's and 10 B's to 10 A's and 8 B's
Circular flow of income and expenditure - CORRECT ANSWER--goods and services go
from firms to individuals (consumers)
-payments for these goods and services go from individuals (consumers) to firms
-these changes occur in the goods markets
-factor services (ex: labour) go from individuals to firms
-payments for these factor services go from firms to individuals
-these changes occur in the factor market
specialization of labour - CORRECT ANSWER--the allocation of different jobs to
different people
-beneficial because different people are good at different things
-this results in greater efficiency and productivity
division of labour - CORRECT ANSWER--specialization within the production process
of a particular product
, -ex: one worker specializes in the assembly of a chair and another specializes in cutting
of the material for the chair
-production process is broken down into several different tasks, each undertaken by a
different worker/group of workers
Barter - CORRECT ANSWER--instead of using money to purchase a good, goods are
traded for one another
-this requires a double coincidence of wants: you need to have what i want, and i need
to have what you want
-Money eliminates this requirement, thus facilitating exchange between individuals
irrespective of whether they posses a good that the other wants
Traditional economy - CORRECT ANSWER--behaviour and decisions are based mainly
on tradition, customs, and habits
Command Economy - CORRECT ANSWER--Decisions are made by a central planning
authority
-main feature is centralization of decision making
-command economy and centrally planned economy are synonyms
Free-Market economy - CORRECT ANSWER--Most decisions are made by private
households and firms (individuals)
-main feature is decentralization of decision making
-Free-market economy, market economy, and price-system economy, are all synonyms
Mixed economy - CORRECT ANSWER--a combination of traditional, command, and
free-market economies
-some decisions are made by firms and households; others are made by government
-in practice, all economies are mixed economies
Positive Statement - CORRECT ANSWER--stating something as FACT
-Whether the statement is true, false, or unverifiable does not change whether or not it
is a positive statement
-A positive statement is a statement saying "something is this way" or "this thing
happens" or "when this happens, that happens", etc
-ex: rain usually leads to more car accidents, an increase in GDP causes interest rates
to fall
Normative statements - CORRECT ANSWER--stating something as an OPINION
-whether the opinion is intelligent, stupid, makes a lot of sense, or makes no sense at
all, does not change whether or not it is a normative statement
-a normative statement is a statement saying "something should be this way" or "ought
to be this way" or "it would be better to do this than that"
-ex: because rain leads to more car accidents, people ought to avoid driving on rainy
days, the government should try to increase GDP so that interest rates can fall
