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72 Cards in this Set

  • Front
  • Back
individual choice
Individual choice is the decision by an individual of what to do
resources
Resources (anything that can be used to produce something else) includes capital, land, labor and entrepreneurship
opportunity cost
All costs are opportunity costs: what one must give up in order to get it
marginal decisions
Decisions about whether to do a bit more or a bit less of an activity are marginal decisions
marginal analysis
The study of such decisions is known as marginal analysis
incentive
An incentive is anything that offers rewards to people who change their behavior
People usually exploit opportunities to make themselves better off.
trade
In a market economy, individuals engage in trade: they provide goods and services to others and receive goods and services in return
gains from trade
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
specialization
This increase in output is due to specialization: each person specializes in the task that he or she is good at performing
Equilibrium
Equilibrium is an economic situation in which no individual would be better off doing something different
efficient
an economy is efficient if it takes all opportunities to make some people better off without making other people worse off.
equity
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
welfare (rationale)
When markets don’t achieve efficiency, government intervention can improve society’s welfare
production possibility frontier
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
efficiency on the ppf
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)
comparative advantage
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
absolute advantage
An individual has an absolute advantage in an activity if he or she can do it better than other people.
circular-flow diagram
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.
household
A household is a person or a group of people that share their income
firm
A firm is an organization that produces goods and services for sale
markets for goods and services
Firms sell goods and services that they produce to households in markets for goods and services
factors of production (factor markets)
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)
positive economics
Positive economics is the branch of economic analysis that describes the way the economy actually works
normative economics
Normative economics makes prescriptions about the way the economy should work
competitive market
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
supply and demand model
The supply and demand model is a model of how a competitive market works
demand schedule
A demand schedule shows how much of a good or service consumers will want to buy at different prices
demand curve
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
quantity demanded
The quantity demanded is the actual amount consumers are willing to buy at some specific price
law of demand
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
shift of the demand curve
A shift of the demand curve is a change in the quantity demanded at any given price denoted by a new demand curve
movement along the demand curve
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
substitutes
Two goods are substitutes if a fall in the price of one of the goods makes consumers less willing to buy the other good
complements
Two goods are complements if a fall in the price of one good makes people more willing to buy the other good
normal good
A good is a normal good when a rise in income increases its demand.
inferior good
A good is an inferior good when a rise in income decreases its good
Causes for shifts in the demand curve
1. Change in the price of related goods, 2. changes in income, 3. changes in taste, 4. changes in expectations
quantity supplied
The quantity supplied is the actual amount of a good or service people are willing to sell at some specific price
supply schedule
A supply schedule shows how much of a good or service would be supplied at different prices
supply curve
A supply curve shows graphically how much of a good or service people are willing to sell at any given price
shift of the supply curve
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
movement along the supply curve
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
Causes for shifts in the supply curve
1. Changes in input prices, 2. Changes in technology, 3. Changes in expectations
input
An input is a good that is used to produce another good
surplus
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.
shortage
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
price controls
Price controls are legal restrictions on how high or low a market price may go.
price ceiling
A price ceiling is a maximum price sellers are allowed to charge for a good
price floor
A price floor is a minimum price buyers are required to pay for a good
examples of price ceilings
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
inefficiences of price ceilings
1. Inefficient allocation to consumers, 2. Wasted resources (shortages), 3. Inefficiently low quality, 4. Black markets
inefficient economy/market
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
inefficient allocation to consumers
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
wasted resources (shortages)
people spend money and expend effort in order to deal with the shortages caused by the price ceiling
inefficiently low quality
sellers offer low-quality goods at a low price even though buyers would prefer a higher quality at a higher price
black market
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
minimum wage
a legal floor on the wage rate, which is the market price of labor
inefficiencies caused by price floors
1. Inefficient allocation of sales among sellers, 2. Wasted resources (surpluses), 3. Inefficiently high quality, 4. Black markets
inefficient allocation of sales among sellers
those who would be willing to sell the good at the lowest price are not always those who actually manage to sell it
wasted resources (surpluses)
the government (typically) spends money and expends effort in order to deal with the surpluses caused by the price ceiling
inefficiently high quality
sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price
quantity control (quota)
an upper limit on the quantity of some good that can be bought or sold
quota limit
The quota limit is the total amount of the good that can be legally transacted.
demand price
The demand price of a given quantity is the price at which consumers will demand that quantity.
supply price
The supply price of a given quantity is the price at which producers will supply that quantity
wedge
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
quota rent
Quota rent is the earnings that accrue from a license-holder from ownership of the right to sell the good
costs of quantity controls
1. Inefficiency due to missed opportunities, 2. Incentives to engage illegal activity
excise tax
An excise tax is a tax on sales of a good or service
Why are taxes like quotas?
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
incidence
The incidence of a tax is a measure of who really pays it.
deadweight loss (excess burden)
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.