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124 Cards in this Set

  • Front
  • Back
study of how individuals ans societies choose to use scarce resources that nature and previous generations have provided
opportunity cost
the best alternative we forgo or give up when we make a choice or decision
the process of analyzing the additional or incremental costs or benefits aring from a choice or decision
sunk cost
costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred
efficient market
a market in which profit opportunities are eliminated almost instantaneously
why study economics:

informs us about....
tells use about
personal, business decisions

historical evolution
global affairs

udnerstand society
global affairs
be an informed voter
economics addresses the 3 basic questions of any society
what gets produced
how it gets produced
why it gets produced
industrail revolution
period in england during the lat, early 18th, 19th centuries in which manufacturing technologies and imrpvoed transportation gave rise to the modern factory system and a massive movement of the population from the countryside to the cities
the branch of economics that examines the functioning of individual industries and the behavior of individual decision making units: business firms and households
branch of econ that examines the economic behavior of aggregates- income, employment, output and so on- on a national scale
fields of economics
public finance
monetary economics
positive economics
seesks to understand behavior and operation of systems without making judgements. it describes what exists and how it works

(key word: is)
normative economics
analyzes outcome of economic behavior, and evaluated as good or bad. (key word: should)
descriptive economics
compilation of data that desctibe phenomena and acts
economic theory
a statement or set or related statements about cause and effect, actio and reaction
a formal statement of a theory, usually a mathematical statement of a presumes relationship between 2 or more variables
a measure that can change from time to time or from observation to observation
ockham's razor
the principle that irrelevent detail should be cut away
ceteris paribus
a device used to analyze the relationship between two variables while the values of other variables are held unchanged
post hoc, ergo propter hoc
a common error made in thinking about causation: if event a happens before event b, it is not neccesarily true that A caused B
correlation and causation
correlation does not always mean caustation

means __ efficieny in econ
an efficent economy is one that produces what people what at the least possible cost

economic growth
an increase in the total output of an economy
criteria for judging economic outcomes
condition in which national output is growing steadily with low inflation and full employment of resources
thigns that are themselves produced and that are then use in the production of other goods and services
factors of production

3 main factors of production
inputs into the process of production. aka resources

process that transforms scarce resources into useful goods and services
inputs or resources
anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants
usable products
command economy

free market economy
decision about what is produced is made by a central government

allows individuals and businesses pursue their self interests with minimal government involvement
production possibilities frontier (PPF)
a graph showing all potential combinations of goods and services that can be produced inf a coutnry utilizes its resources efficiently
theory of comparitive advantage
ricardos theory that specialization and free trade will beneift all trading parties, even those that may be absolutley more efficient producers
absolute advantage
a producer has an absolute advantage over another in the production of a good or service if it can produce that product using fewer resources
comparitive advantage
production of a good or service if it can produce at a lower opportunity cost
the basic economic problem
limited resources available to fufill infinite human wants
consumer goods
goods produced for present consumption
the process of using resources to produce new capital
does capital have to be tangible?

comp programs
what occurs during economic dornturns or recessions
industrial plants run less than their total capacity
3 factor of production
land- resources, etc
labor- skills, abilites
capital- things use to make other things
inefficency of production results from...
mismanagement of the economy

mismanagement of the firm
efficient mix of output
in addition to operating on the ppf, companies must be operating on the right point on the ppf
marginal rate of transformation
the slope of the ppf.
economic growth
an increase in the total output of an economy. it occurs when society acquires new resources or when it learned to produce more using existing resources
the discovery and application of new more efficent production techniques
institution through which buyers and sellers interact and engage in exchange
consumer sovereignty
consumers dictate what will be produced by choosing what to purchase and what not to
free enterprise
freedom to start businesses
income vs wealth
amount a household earns each year

amount that households have accumulated out of past income through saving or inheritance
what we give up to produce more of another good
law of comparitive advantage

suggests that each country will benefit by specialzing in productiong of what is can at the lowest opportunity costs

david ricardo
division of labor
specialize in trade to be efficient
organization that transforms resources into products.
a person who organizes manages and assumes risks of a firm, taking no ideas ans turning it into a business
price theory
price dictates economic decisions
product or output markets
markets in which goods and services are exchanged
the consuming units in an economy
input or factor markets
market in which the resources used to produce products are exchanged
labor market
households supply work for wages to firm that demand labor
capital market
households supply savings for interest or calims to future profits (bonds)
land market
households supply land or other real property in exchange for rent
quantity demanded
amount of a good or service that consumers plan to buy during a given time at a given price
demand schedule
shows quanitities that consumers will be willing to buy at each price
demand curve

x and y axes
graphical representation of demand schedule

x- quantity
y- price
normal goods

inferior goods
as income rises (falls) demand rises (falls)

as income rises (falls) demand falls (rises)
law of demand
negative relationship between price and quantity demanded, as price rises, demand falls. (vice versa)

good that can be used in place of another

good that is used in combination with another good
shifting curve vs movement along curve (demand curve)
change in price

change in anything else (income, preferences, prices of other goods or services)
pefect substitutes
identical products
market demand
the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service
difference between revenue and costs
quantity supplied
amount of product produced and sold during a certain time period
supply schedule
shows quantitites that producers would be willing to sell at each price
supply curve
a graphical representation of the supply schedule
law of supply
increasse in price leads to decrease in demand (vice versa)
shifting curves vs moving along curves
change in price leads to movement along curve.

anything else (production costs, input costs, price of related goods or services) leads to movement of curve
market supply
sum of all firms' supply in an economy

excess demand/shortage
when quanitity supplied exceeds quanitity demanded

qD is greater than qS
condition where qS and qD are equal
decentralized decisions
decisions made by the operation of the market
price rationing
how market allocates goods and services to consumers when quantity demanded exceeds quantity supplied

a drop in supply will result in an increase of product (lobster ex)
means by which a free market allocates goods and services
price floor
MIN price you can charge for a good/service
price ceiling
MAX price you can charge for a good or service.
waiting in line to recieve goods: nonprice rationing
favored customers
those who recieve special treatment from dealres during situations of excess demand
ration coupons
entitle individualds to purchase a certain amount of a given product per month
black market
a market in which illegal trading takes place at market demand prices
when is supply lines perfectly vertical
when there is a set number of quanity (54000 tickets, 1 painting)
consumer surplus
the difference between the max amount a person is willing to pay for a good and its current market price
producer surplus
the difference between the current market price and the full cost of production for the firm
deadweight loss

the net loss of producer and consumer surplus from underproduction or overproduction
quantified response in one variable when another variable changes
price elasticity of demand equation
Change %q / Change%P
range of numbers

unitary elastic
perfectly inelastic
cross price elasticity of demand equation

Change % Q X/ Change %P Y

elasticity of supply
Change %Q supplied/ Change %P
income elasticity of demand

normal good
inferior good
% change in Q demanded/ % change income

deteriminants of elasticity

time dimension
higher elasticity if sub exists
higher elasticity if not as important
increases as time progresses
households and firms
households demand outputs and supply inputs

firms demand inputs and supply outputs
perfect competition
many firms, each small, producing similar products who dont have control over prices
homogeneous products
products in a perfectly competitive industries
perfect knowledge
the assumption that households posses knowledge of quality and price in the market
3 basic decisions of a household
1. how much of each product to demand
2. how much labor to supply
3. how much to spend today and how much to save.
budget constraint income equation
PxX + PyY = income
choice set, opportunity set
the set of options that is defiend and limited by a budget constraint
budget constraint
the limits imposed on household choices by income, wealth, and prices
real income
set of opportunities to purchase real goods and services available to a household as determined by prices and money income

(if prices fall, real income increases even though actual income doesnt)
benefit or satisfaction that a person gets from the consumption of a good or service
marginal utility
additional satisfaction gained by the consumption of one or more units of something
total utility
the total amount of satisfaction obtained from consumption of a good or service
law of diminishing marginal utility
the more of any one good consumed in a given period, the less satisfaction generated by consuming each additonal unit of the same good
utility maximizing rule
MUx/Px = MUy/Py
income/substitution effect
if price falls, people by more

if price rises, people by less

real income, substitution effect
cost benefit analysis
formal technique where the benefits of a public project are weighed against its costs
diamond water paradox
things of have value have little values in exchange.
labor supply curve
diargram that shows the quantity of labor supplied at differnt wage rates.
indifference curves
shows combination of goods in which a person will be equally happy
labor supply decision
whether to work
how mych to work
what kind of job to have
labor vs leisure decision
decision of how much to work and how much to rest
income effect/substitution effect of wage increase
people will make more per hour, people will work less

opportunity cost of leisure increases, people will work more.