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69 Cards in this Set

  • Front
  • Back
oppurtunity cost
the real cost of something is what you give up to get it
people make decisions on the margin...
costs and benefits change depending on how much you already have
self interest
people usually make decisions based on this; usually leads to the best social outcome
positive economics
"what is"
normative economics
"what should be"
economic method
1. observation
2. model-building
3. testing the model
fallacy of composition
just b/c something works for one person does not mean that it will work for everybody
post-hoc fallacy
assuming that one event caused another just because it follows that event
situation where no one can be made better or worse off
rules of trade and markets
1. trade makes everyone better off
2. markets move towards equilibrium
3. markets lead to efficiency
4. we can use govt. to correct markets when they fail
factors of production
* labor
* capital: machines, tools, factories, etc.
* natural resources
* entreprenuership
production possibilities frontier
illustrates scarcity, opp. costs , efficiency

all points of PPFs are efficient

cost on PPF: what you give up to get something else
oppurtunity cose formal
what you give up/ what you get
cause of changes on PPF
changes in factors of production


absolute advantage
able to produce more
comparative advantage
able to produce the good for cheaper

this is when you should trade a good
hire FOB, organize and produce goods and services
arrangement that allows buyers and sellers to do business
property rights
legal framework that defines ownership
price index
average of prices
relative price
monetary price of one good/monetary price of another
competitive markets
many buyers and sellers, no individual buyer or seller affects the price, relative price and monetary price
people want it, can afford it, plan on buying it; price is the most important variable
law of demand
the higher the price, the less that will be demanded - holding all other factors constant
substitution effect
as prices get higher, people begin to look for substitutes
income effect
as the price rises, it makes everyone comparatively poorer
demand curve
shows willingness to pay for units of a good

* the more that you have of something, the less that you will be willing to pay for it
goods that are consumed with another good
goods that are consumed instead of another good; changes in prices of these goods can cause demand to shift
normal goods
when income increases, demand increases
inferior goods
when income goes up, consumption goes down; ex.: you are only buying it b/c you cannot afford anything better
firm must have the resources, mus be able to profit, plan on selling and producing
qty. supplied
amt. that firms plan on producing and selling; usually tied in a time-frame
law of supply
if you hold everything constant and are looking only at price and qty. supplied, the higher the price, the higher the qty. supplied
increasing marginal cost
the more you produce, the more expensive that it becomes; drives the law of supply
causes of market failure
1. market power
2. externalities: social cost/benefit is different from the private cost/ benefit
3. public goods: goods produced by one person/organization that can be enjoyed by all
4. taxes
5. price controls/qty. control
6. price ceiling/price floor
price ceiling
mex. price in market that cannot be succeeded (ex: rent);

problems: illegal activity, quality is too low; inefficient allocation to consumers

effort towards fairness
price floors
min. in market that price cannot fall below

causes surpluses!!
quality is too high
cause higher prices, which in turn causes surpluses
what effects elasticity
having close subsitutes
whether or not it is a neccessity
time frame
fraction of income
total revenue
all of the money collected from the sale of goods and services

price * qty.

if P is inelastic, then P is high, and TR is high

if P is elastic, P is high, TR is low
elasticity =
% change in Q/ % change in P
cross price elasticity
if CPE > 0, subsititues

if CPE < 0, compliments
income elasticity of demand
% change in Q/ % change in income

IE > 0 = normal good, b/c if income rises, consumption increases

IE < 0 =inferior good, b/c if income rises, consumption goes down
elasticity of supply
% change in Qs/ % change in P

high levels = very responsive
low levels = fairly unresponsive

>1 = elastic
<1 = inelastic
what effects of elasticity of supply
availability of inputs, substitutability of inputs; the more that is available, the more elastic; the longer the time frame the more elastic supply is
perfectly inelastic
e=0; vertical
perfectly elastic
e=infinity; horizontal

can occur with competition
taxes and elasticity
elasticities tell us who will pay for the majority of the tax

E of S > E of D: buyer will pay for most of the tax
consumer surplus
difference b/t willingness to pay and price

1/2 base * height

the lower the price, the higher the consumer surplus
producer surplus
difference b/t price and marginal cost;

.5 base * height

the higher the price, the higher the PS
total surplus

equilibrium yields the highest total surplus
surplus loss
dead weight loss; loss of efficiency
transferring the wealth until everyone is equal

wrecks incentive, destroys market economy

modified - trying to keep things as close to equal as possible
marginal utility
amt. of utility for one additional unit of a good, usually positive, but decreases as economy increases
economic scarcity
forces people to make choices
focuses on decisions of individuals
aggregate behavior of the economy
long-run growth
aimed at increasing productive resources
net taxes
net exports
exports - imports
market value of all of the final goods and services produced w/in a country depending on a given time period
market value
assigns price to output final goods (goods that are sold to the final user) produced w/in a certain country
calculation GDP
1. surveying firms and determining values of output (be careful to avoid double counting)
2. value added approach
what GDP shows
the size the economy

as time goes on the price level changes
Real GDP
measure of a production that is adjusted for price

qty * price + ""

inflation not included
missing from GDP
household production
health/ life expectancy
underground activity
leisure time
quality of environment
political stability
GDP formula
consumption + investments + govt. spending + exports - imports