Econ 110 - Microeconomics, Ch. 1 - 4

Front 1

individual choice

Back 1

Individual choice is the decision by an individual of what to do

Front 2

resources

Back 2

Resources (anything that can be used to produce something else) includes capital, land, labor and entrepreneurship

Front 3

opportunity cost

Back 3

All costs are opportunity costs: what one must give up in order to get it

Front 4

marginal decisions

Back 4

Decisions about whether to do a bit more or a bit less of an activity are marginal decisions

Front 5

marginal analysis

Back 5

The study of such decisions is known as marginal analysis

Front 6

incentive

Back 6

An incentive is anything that offers rewards to people who change their behavior
People usually exploit opportunities to make themselves better off.

Front 7

trade

Back 7

In a market economy, individuals engage in trade: they provide goods and services to others and receive goods and services in return

Front 8

gains from trade

Back 8

There are gains from trade: by dividing tasks and trading, two people can get more of what they want than they could if they tried to be self-sufficient

Front 9

specialization

Back 9

This increase in output is due to specialization: each person specializes in the task that he or she is good at performing

Front 10

Equilibrium

Back 10

Equilibrium is an economic situation in which no individual would be better off doing something different

Front 11

efficient

Back 11

an economy is efficient if it takes all opportunities to make some people better off without making other people worse off.

Front 12

equity

Back 12

Equity means that everyone gets his or her fair share. Since people can disagree about what’s “fair,” equity isn’t as well-defined a concept as efficiency

Front 13

welfare (rationale)

Back 13

When markets don’t achieve efficiency, government intervention can improve society’s welfare

Front 14

production possibility frontier

Back 14

The production possibility frontier illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given quantity produced of another

Front 15

efficiency on the ppf

Back 15

a key element of efficiency is that there are no missed opportunities in production—there is no way to produce more of one good without producing less of another (which occurs when one is on the line of the ppf)

Front 16

comparative advantage

Back 16

An individual has a comparative advantage in producing a good or service if the opportunity cost of producing the good is lower for that individual that for other people

Front 17

absolute advantage

Back 17

An individual has an absolute advantage in an activity if he or she can do it better than other people.

Front 18

circular-flow diagram

Back 18

a model that represents the transactions in an economy by flows around a circle. The simplest circular-flow diagram models an economy that contains only households and firms.

Front 19

household

Back 19

A household is a person or a group of people that share their income

Front 20

firm

Back 20

A firm is an organization that produces goods and services for sale

Front 21

markets for goods and services

Back 21

Firms sell goods and services that they produce to households in markets for goods and services

Front 22

factors of production (factor markets)

Back 22

Firms buy the resources they need to produce—factors of production—in factor markets. A factor of production is not used up in the production process (machinery)

Front 23

positive economics

Back 23

Positive economics is the branch of economic analysis that describes the way the economy actually works

Front 24

normative economics

Back 24

Normative economics makes prescriptions about the way the economy should work

Front 25

competitive market

Back 25

A competitive market is a market in which there are many buyers and sellers of the same good or service. No individual’s actions have a noticeable effect on the price at which the good or service is sold

Front 26

supply and demand model

Back 26

The supply and demand model is a model of how a competitive market works

Front 27

demand schedule

Back 27

A demand schedule shows how much of a good or service consumers will want to buy at different prices

Front 28

demand curve

Back 28

A demand curve is a graphical representation of the demand schedule; it shows how much of a good or service consumers want to buy at any given price

Front 29

quantity demanded

Back 29

The quantity demanded is the actual amount consumers are willing to buy at some specific price

Front 30

law of demand

Back 30

The law of demand says that a higher price for a good, other things equal, leads people to demand a smaller quantity of the good

Front 31

shift of the demand curve

Back 31

A shift of the demand curve is a change in the quantity demanded at any given price denoted by a new demand curve

Front 32

movement along the demand curve

Back 32

A movement along the demand curve is a change in the quantity demanded of a good that is the result of a change in that good’s price

Front 33

substitutes

Back 33

Two goods are substitutes if a fall in the price of one of the goods makes consumers less willing to buy the other good

Front 34

complements

Back 34

Two goods are complements if a fall in the price of one good makes people more willing to buy the other good

Front 35

normal good

Back 35

A good is a normal good when a rise in income increases its demand.

Front 36

inferior good

Back 36

A good is an inferior good when a rise in income decreases its good

Front 37

Causes for shifts in the demand curve

Back 37

1. Change in the price of related goods, 2. changes in income, 3. changes in taste, 4. changes in expectations

Front 38

quantity supplied

Back 38

The quantity supplied is the actual amount of a good or service people are willing to sell at some specific price

Front 39

supply schedule

Back 39

A supply schedule shows how much of a good or service would be supplied at different prices

Front 40

supply curve

Back 40

A supply curve shows graphically how much of a good or service people are willing to sell at any given price

Front 41

shift of the supply curve

Back 41

A shift of the supply curve is a change in the quantity supplied of a good or service at any given price; denoted by a new supply curve

Front 42

movement along the supply curve

Back 42

A movement along the supply curve is a change in the quantity supplied of a good that is the result of a change in that good’s price

Front 43

Causes for shifts in the supply curve

Back 43

1. Changes in input prices, 2. Changes in technology, 3. Changes in expectations

Front 44

input

Back 44

An input is a good that is used to produce another good

Front 45

surplus

Back 45

There is a surplus of a good when the quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above its equilibrium level.

Front 46

shortage

Back 46

There is a shortage of a good when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level

Front 47

price controls

Back 47

Price controls are legal restrictions on how high or low a market price may go.

Front 48

price ceiling

Back 48

A price ceiling is a maximum price sellers are allowed to charge for a good

Front 49

price floor

Back 49

A price floor is a minimum price buyers are required to pay for a good

Front 50

examples of price ceilings

Back 50

WWII: high demand for raw materials/rent control
1973 oil embargo by Arab oil-exporters
2001, shortage of electricity resulted in regulation of CA electricity

Front 51

inefficiences of price ceilings

Back 51

1. Inefficient allocation to consumers, 2. Wasted resources (shortages), 3. Inefficiently low quality, 4. Black markets

Front 52

inefficient economy/market

Back 52

A market or an economy is inefficient if there are missed opportunities: some people could be made better off without making other people worse off

Front 53

inefficient allocation to consumers

Back 53

people who want the good badly/are willing to pay a high price don’t get it, while those don't care as much/pay lower do get it

Front 54

wasted resources (shortages)

Back 54

people spend money and expend effort in order to deal with the shortages caused by the price ceiling

Front 55

inefficiently low quality

Back 55

sellers offer low-quality goods at a low price even though buyers would prefer a higher quality at a higher price

Front 56

black market

Back 56

a market in which goods or services are bought and sold illegally—either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling

Front 57

minimum wage

Back 57

a legal floor on the wage rate, which is the market price of labor

Front 58

inefficiencies caused by price floors

Back 58

1. Inefficient allocation of sales among sellers, 2. Wasted resources (surpluses), 3. Inefficiently high quality, 4. Black markets

Front 59

inefficient allocation of sales among sellers

Back 59

those who would be willing to sell the good at the lowest price are not always those who actually manage to sell it

Front 60

wasted resources (surpluses)

Back 60

the government (typically) spends money and expends effort in order to deal with the surpluses caused by the price ceiling

Front 61

inefficiently high quality

Back 61

sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price

Front 62

quantity control (quota)

Back 62

an upper limit on the quantity of some good that can be bought or sold

Front 63

quota limit

Back 63

The quota limit is the total amount of the good that can be legally transacted.

Front 64

demand price

Back 64

The demand price of a given quantity is the price at which consumers will demand that quantity.

Front 65

supply price

Back 65

The supply price of a given quantity is the price at which producers will supply that quantity

Front 66

wedge

Back 66

A quantity control (or quota) drives a wedge between the demand price and the supply price of a good; that is, the price paid by buyers ends up being higher than that received by sellers

Front 67

quota rent

Back 67

Quota rent is the earnings that accrue from a license-holder from ownership of the right to sell the good

Front 68

costs of quantity controls

Back 68

1. Inefficiency due to missed opportunities, 2. Incentives to engage illegal activity

Front 69

excise tax

Back 69

An excise tax is a tax on sales of a good or service

Front 70

Why are taxes like quotas?

Back 70

Taxes cause redirection of money, thus shifting either the supply or demand curve to the left. The post-tax price is higher than the pre-tax price (generally) to cover the cost of the tax

Front 71

incidence

Back 71

The incidence of a tax is a measure of who really pays it.

Front 72

deadweight loss (excess burden)

Back 72

The excess burden, or deadweight loss, from a tax is the extra cost in the form of inefficiency that results because the tax discourages mutually beneficial transactions.