Adam Smith
Define Capitalism
The economic system where the FOPs and industry are owned by individuals and firms for the purpose of profit maximization
Ex) System theorized by Adam Smith and coined by Karl Marx
What are Marx's 4 criticisms of capitalism?
Exploitation, Alienation, Cyclical Crises, & Rising Inequality
This area of economics studies the decision-making of households, firms, and governments.
Microeconomics
Define marginal utility
Term for the satisfaction a consumer receives from consuming an additional unit of a good or service. It is measured in utils.
Ex) When I eat 1 slice of pizza, my total utility is 16 utils. When I eat 2, it is 24 utils. So my marginal utility of my second slice is 8 utils
Define rationality
All consumers have perfect information to maximize their utility
All consumers have consistent preferences and taste
All consumer preference and taste is transitive
This is used to help measure the patterns of consumption in an economy
Where did the value of products come from, according to Adam Smith?
The scarcity of the resources and the labor used to produce
Where did the value of products come from, according to Karl Marx?
The scarcity of the resources and the labor used in production
Where did the value of products come from, according to Jean Baptiste Say?
The scarcity of the resources and consumer preferences
Where did the value of products come from, according to Carl Menger?
The scarcity of the resources and consumer preferences
Where do households buy goods and services?
Product market
Adam Smith used this metaphor to describe how self-interested market activity can contribute to wider social benefits.
The Invisible Hand
Define Alienation
The concept that the laborer is separated from the products they produce and therefore meaning, from the production process and the decisions thereof (control), and from connection from others as they compete as cogs in the machine
What is a Veblen good?
A good whose quantity demanded rises as price rises, contrary to the law of demand. Ex) Hermes Birken Bag
If marginal utility per dollar for two goods is equal, what is true about the consumer’s equilibrium?
the consumer is maximizing total utility
Why does the PPC bow out?
Because the resources used in the production of the two goods are allocated at different proportions, so as we decide to produce more of one good, we must give up more and more of the other good at an increasing opportunity cost rate.
This French term describes an approach favoring minimal government interference in markets.
Laissez-faire
The term for the pool of unemployed workers whose availability to work weakens workers' bargaining power.
Which law links production with the creation of income and purchasing power?
Say's Law of Markets
Differentiate demand from quantity demand from individual demand from market demand
Demand is the relationship between quantity demanded at all price points.
Quantity demanded is the amount demanded at a singular point
Individual demand is how much a singular consumer wants of a product at a specific price point
Market demand is the summation of all individual demands
Differentiate conflict theory with functionalism
Both believe economic agents are rational and make decisions based on their own interests, but they differ in that in conflict theory, the inequality this causes will inevitably lead to conflict while the functionalist believes that the necessary changes can come about through peaceful, beaurocratic processes
A policy is judged by whether its benefits are fairly distributed and whether it preserves resources for future generations. These are the two key concepts being considered.
Equity & Sustainability
Explain how, according to Marx theory, the pursuit of profit maximization leads to overproduction and cyclical crises.
Lower costs by lowering wages and reducing worker purchasing power, weakening demand, which signals more production to stimulate the economy (Say´s Law), which weakens value of unsold goods, leading to revenues decreasing and causing further production cuts and unemployment.
A consumer spends $10 on tea (giving 100 utils) and $20 on coffee (giving 150 utils). Which has the higher marginal utility per dollar?
tea (10 utils per dollar vs. 7.5 for coffee)
If the price of music lessons falls from $60 to $20 and marginal utility stays at 600 utils, what happens to MU per dollar?
an increase from 10 to 30 utils per dollar
Explain why the quantity demanded of a product decreases as the price increases
1) Substitution Effect: When a good becomes cheaper, the consumer substitutes (buys more of) the now less expensive good
2) Income Effect: When a price drop increases purchasing power, enabling people to buy more of the good.
3) Decreasing MU: As you use or consume more of something, you will get less satisfaction from each additional unit of that thing