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Sunday, April 07, 2013
Study Guide for 1st Mid Term 207
The following study guide is to help you prepare for your 1st midterm in Economics 207. It will
consist of about 40 concepts to match with their definitions, about 40 true false questions and 10
multiple choice questions. All of the questions were drawn from the first 4 chapters of Heilbroner,
the first 5 chapters and chapter 22 from the newest Gregory and Stuart book which is found on line
as well as a series of class notes which are published along with the two principal study guides.
I listed below the names of most of the concepts which you will have to match and your
careful review of your class notes and the two sets of lecture notes and the readings will help you do
well on the true false questions.
Concepts to match with a list of definitions or examples.
_____ Organizations in the Middle Ages with restrictions on competition among various producers of goods,
restricting the entry into the profession and allowable business practices.
_____ A macro-economic concepts from the Solow growth model which indirectly evaluates the gap between
potential output of an economy and actual output from measured available factors of production.
Can be used as a measure of the effectiveness of a country’ economic instituions.
1. latifundia
2 itinerant traders
3 guilds
4 manors
5 the tradition of sons following the father
6 capital output ratios
7 per capita GDP output
8 total factor productivity
9 marginal physical product
10 total physical product
You may have to look up some of these concepts in the textbooks if it is not given on the
second page of Terms and Concepts.
1. Infrastructure
2. Guilds
3. Total factor productivity
4. Per capita GDP
5. Socio-economic indicators
a. GDP Per capita
b. Growth of GDP per capita
c. Static efficiency
d. Dynamic efficiency
e. Income distribution
i. GINI coefficient – describes the inequality of money income distribution
f. Macroeconomic stability
g. Leisure
h. Economic and financial security
i. Physical security (safety, crime)
j. Life expectancy and other health indicators
k. Freedom
Sunday, April 07, 2013
Study Guide for 1st Mid Term 207
l. Opportunity
6. Extensive growth
7. Intensive growth
8. Dynamic efficiency
9. Static efficiency
10. From Gregory and Stuart 2014
a. State capitalism
b. Multinationals
c. economic institutions
d. public choice
e. an organizations
f. instituions, rules of the game and enforcement mechanism
g. principal agent problem
h. opportunistic behavior
1. moral hazard
2. adverse selection
i. Three fold classification
i. Capitalism
ii. Market socialism
iii. Planned socialism
j. Perceptional measures of measuring non-quantifiable factors affecting economic
performance (Corruption, legal system)
k. Economic outcomes (O) = f(ES, ENV, POL) and initial conditions and social norms
l. Economic systems (ES)
m. Environmental factors (ENV
n. Policies pursues by economic system (POL)
o. Weights used to combine the relative importance of success indicators
11. Efficiency in the use of scarce private-type resources (with rival uses) in the economy
a. The example of self-sufficient peasant using marginal analysis (see notes on March 5 th)
b. Marginal cost equals marginal benefits
c. Marginal physical product of labor
d. Marginal utility of consumption
e. Pareto conditions of efficiency in perfect competition
f. The use of marginal cost benefit analysis in the government use of resources to produce
public goods (highway safety) equal dollar spent to “save a life” in driving).
g. The relevant variable for benefits and costs are the relative benefits of two choices and the
relative costs of production (relative opportunity costs and benefits)
12. Functions of the price system
a. Providing decentralized information
b. Determining the allocation of private goods given the income distribution
c. Problem of incorporating marginal social costs and benefits with private marginal
costs and benefits
13. Information problem
a. Perfect centralization – planned economy – impossible of perfect information
Sunday, April 07, 2013
Study Guide for 1st Mid Term 207
b. Informationally decentralized – market economy for private-type goods
c. Moral hazard
d. Adverse selection
e. Principal agent problem
14. The economic decision making problems
a. Deciding what and when to produce goods and services
b. Allocation of scare resources between private type goods and public type goods
c. How and by whom should goods and services be produced
d. For whom goods and services should be produced (income distribution)
e. Who is to make these decisions
f. Decentralization of decision-making power in a mixed market economy even for
government decision (federal, state, local, school district)
15. The problem of incentive mechanisms
a. Determination of an incentive mechanism to get the participants in an economy to use
their labor and other resources efficiently according to the needs of the decision
b. Closely tied to the information problem and the principal agent problem
16. Transaction costs
a. Definition of transaction costs
b. Causes of transaction costs and their effects on economic systems
17. The law of diminishing marginal returns – long run tendency towards subsistence agriculture
when land per capita is scarce (Malthusian model)
18. Cobb-Douglas production functions, growth models and total factor productivity
19. Public type goods and resources –
a. non-rivalry in consumption or use
b. examples: technology and intellectual products, television broadcasts, lighthouses
c. congestible public goods: roads, airspace, bridges, concerts,
20. Private type goods and resources –
a. rivalry in consumption or use
b. Labor, capital, land and natural resources hour private-type resources
c. Clothing, foods, housing, schools (could also be a congestible public good).
21. Social external costs and benefits: should be incorporated in to prices
22. Causes of market failure (usually requires some type of government or not-for-profit
a. External costs and benefits
b. Common property over fishing, fisheries, air)
c. The market’s inability to produce and distribute public type goods
d. Shortsightedness of the market in long term decision making
e. Tendency towards monopoly in industries with increasing returns to scale
f. Tendencies for producer to form anti-competitive alliances
g. Asymmetric information leading to principal agent problems and moral hazard.
23. Societal values about business in a traditional economy
24. Societal values about business in a market economy
25. Mixed market economy: its prerequisites and shortcomings
Sunday, April 07, 2013
Study Guide for 1st Mid Term 207
26. Hierarchical command economy,
a. nature of information, decision making and motivation structure
b. Problems inherent in centralized decision making and control at the national level
27. Dysfunctional conditions affecting the performance of any economic system
28. Read the following on page 3 on my notes Terms and Concepts for Economics 207
a. Marxist theory of change
b. Hayek
c. Schumpeter
d. Van-Mises
e. Kornai
f. Olson and Murrell’ Critique of Socialism (which also applies to lobby-rich capitalism)
g. Marxist primitive accumulation
29. Globalization
a. Increased competition
b. Decreasing trade barriers
c. Improved communication and transportation
d. Increased mobility of factors of production
30. Deregulation
31. Public versus private ownership
32. Relative roles of government in the share of output and income redistribution
a. Government expenditure and taxes have risen
b. Government production of actual goods and services is much less
c. Bulk of Government expenditure is on social expenditures
d. Types of taxes
i. Income taxes
1. A regressive tax
2. A progressive tax
3. A proportional tax
4. Progressive tax redistributes income to make income distribution more
5. A labor tax to finance social services
6. A tax on labor: e.g. social security taxes
7. A tax on business services
a. A sales tax
b. Value added tax
ii. Relatively low levels of taxation as a percentage of GDP for the US
33. Change in socialist economies
a. Socialist reform models
i. The collapse of communism in late 1980’s and early 1990’s
ii. The emergence of transition economies
iii. The challenge of privatization
34. Transition from planned economies to mixed market economies
35. Mercantilism
Chapter 22
Sunday, April 07, 2013
Study Guide for 1st Mid Term 207
36. Economic systems models and performance
a. Anglo Saxon model
b. Planned socialists
c. European model
d. Asian model
e. The Chinese model of market socialist
37. Other economic systems
a. Latin America model with its free market reforms and confronting corruption
b. African economies based on commodities, high levels of population growth,
dysfunctional politics and widespread corruption
c. Islamic model
i. Prohibition of interest
ii. Zakat system
iii. Islamic moral norms in business
iv. Sharia law as a potential barrier to economic growth
38. Performance of economic systems depends on institutional quality (page 609-613)
Economic systems and economic performance - Do systems matter?
a. National experiments with economic growth
b. South Korean vs. North Korean
c. East Germany vs. West Germany
d. Cuba vs. the rest of Latin America
39. Efficiency, inventions, and institutions in economic systems
a. Scientific and technological advances in economic systems
i. Intellectual property rights
1. Nobel Prize winners
40. Distribution of income and the goals of the welfare state
41. Effort and leisure in different economic systems
Sunday, April 07, 2013
Study Guide for 1st Mid Term 207
Conditions for industrialization in England
The study of the process of industrialization in England is useful in the study of comparative economic systems
because it illustrates some of the conditions that were necessary for England from the constraints of guilds,
manorial, and dysfunctional believe systems to develop into a vibrant market economy with a high level of
savings transforming itself from an agricultural society into an industrial society.
42. England was a relatively rich country with output per capita above the subsistence level
a. Importance of per capita output above subsistence level as a source of savings
43. The existence of a fairly good system of common law as well as legislative law that protected
the property rights of at least the middle and upper classes if not everyone as well as the
absence of extensive violence in the countryside
44. Immense resources of coal and iron
45. Transforming from a feudal into a commercial society by 1750
46. Enclosure by the English landlords
a. The forced expulsion of the serf from his land around a manor to create large plots of
land on which to either graze sheep or to farm more efficiently
b. Created an industrial proletariat
c. The shift of labor from agriculture to industry requires the absence of social barriers to
labor mobility
d. The use of an underemployed or unemployed proletariat to staff the new factories
47. Emergence of a large upper-middle stratum of bourgeois creating a mass consumer market
48. The existence of a healthy maritime trade for the export of their manufactured goods and
import of their inputs
49. An unique enthusiasm for science and engineering throughout English society
a. The passing of laws to create a national patent system to protect new technologies
b. The universal inquisitiveness about technology of the upper classes of England
c. Simultaneous emergence of new technology to power factories and greatly increase
the productivity of labor in producing cloth and metal
i. Watt - steam engine
ii. Arkwright - spinning Jenny
iii. Wilkinson – iron maker
50. The rising social status of industrialists
51. Hands-on approach of English industrialists
52. Entrepreneurship of the English
53.The rapid accumulation of physical capital in industry
54. The importance of capital goods in raising the productivity of labor in the initial stages of
55. Emergence of the limited stock company to raise capital in the early 1844s.
56. The financing of the production of new technology
a. By existing well to do landlords and manufacturers
b. By the reinvestment of profits into more factories by the industrial capitalists result in
a high rate of savings. Note the relatively small role, if any, of a financial system of
financial intermediaries
Sunday, April 07, 2013
Study Guide for 1st Mid Term 207
c. Incorporating mechanized sources of power such as steam engines, windmills, and
water mills, e.g. power driven mechanical equipment which greatly enhanced the
productivity of industrial labor
d. Competitive wages to attract the industrial proletariat were below the value of the per
worker output in these industries creating the opportunity for profit and savings by
the industrialists
e. The industrial revolution was essentially a capital building process which enhanced the
productivity of labor
f. During The Revolution the growing profits served as a primary source of savings
Contrast this with the institutions of antiquity and the middle ages.
57. Socially approved methods of wealth accumulation in antiquity and early middle ages were as
a reward for military service, political services or being a poet, but definitely not for being a
58. Capital building in antiquity required forced savings (slaves and taxation) where the cities
were parasites on agriculture
59. The low productivity of agriculture in antiquity which still relied on animal and human power
60. The low social status of traders, money lenders, and manufacturers relative to landlords,
politicians and the military
61. Expectation that son follow father in profession
The results of the industrial revolution
62. Industrial manufacturing became the dominant form of production over agriculture and trade
a. Under employment – the under use or misallocation of labor in the productive process
allowed the shift of labor from agriculture to factories without a significant decline in
agricultural output
b. The rise of the factory town with its accompanying “slums”, its bad externalities, and
poor working conditions gave rise to legislation and commission to improve
c. Heilbroner’s observation about early capitalism and social justice
i. Doubtful if the industrial poverty represented a deterioration of life for the
masses in general compared to agriculture
ii. Early industrial capitalism gave rise to new ideas of social justice and rights
(political liberalism) which started a system of reforms in industry that was not
possible in agriculture
iii. The most important effect of the industrial revolution is its long term beneficial
impact on the well-being of the individual after an initial period of hardships
for some classes of the population, e.g. the guild masters
63. English industrialism with market competition was often accompanied by falling prices of
manufactured goods especially in the early 18 hundreds.
Adam Smith’s economic theory of the market system during this period
64. The role Adam Smith, the emergence of modern economics with a society of “perfect liberty”
by which he means a society of freely contracting agents.
a. Two attributes to such a society
Sunday, April 07, 2013
Study Guide for 1st Mid Term 207
i. A tendency to grow from an increase in labor productivity from
1. An ever division of labor
2. Capitalist investment in capital equipment as a means to higher profits
ii. The market mechanism which prevents sellers from exploiting buyers, how the
changing demand for goods would change the production of goods to match
demand creating a self-regulating market
65. Adam Smith relied on the mechanism of competition in the market place to provide an
orderly solution to problems of production and distribution to many participants in the
economy all acting in their own self interest
66. Importance of market prices in providing (solving) the information problem and the
distribution (allocation) of private-type goods.
67. The mechanism of competition raises prices and attracts resources and cuts quantity
demanded when prices of a product rise and when there are shortages and causes prices to
fall and reduces factors of production when there are surpluses in the market all without the
use of centralized information system. That is it is a self-regulating system with “a hard
budget constraint”
68. Didn’t address the problems of market failure, externalities, or public goods.
Forces Changing Feudalism
The itinerant merchant
The process of urbanization
The crusades
The rise commerce supporting national states which created markets
The age of exploration and the gold it brought into Europe
The emergence of new religious ideas more sympathetic to business than Catholicism
The monetization of dues in the manorial system
The separation of economic life from social life
The rise of the economic aspect of life
a. Peasant serf is no long bound to the land but became free mobile labor
b. The guild master is freed from guild rules to become an independent entrepreneur
c. The lord of the land became a landlord who maximized his income through the
complex enclosures
d. The emergence of the wage laborer where the worker is paid for his time but the
ownership of the entire product is invested in the hands of the employer capitalist
e. The profit motive or utility maximizing motive not as an acquisitive drive but a
pervasive necessity for all people in a monetized society