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103 Cards in this Set

  • Front
  • Back
Principles that underlie the
economics of individual
1. Resources are scarce.
2. The real cost of something is
what you must give up to get it.
3. “How much?” is a decision at
the margin.
4. People usually exploit
opportunities to make
themselves better off.
anything that can be
used to produce something else.
what does it mean when resources are scarce?
the quantity available isn’t large enough to satisfy
all productive uses.
oppurtunity cost
the real cost of something; what you must give up in
order to get it.
when you compare
the costs with the benefits of
doing something.
marginal decisions
Decisions about whether to do a bit
more or a bit less of an activity
marginal analysis
The study of the decision about whether to do a bit more or a bit less of an activity
anything that offers
rewards to people who change their
Principles that underlie
the interaction of
individual choices
1. There are gains from trade.
2. Markets move toward
3. Resources should be used as
efficiently as possible to achieve society’s goals.
4. Markets usually lead to
5. When markets don’t achieve
efficiency, government intervention
can improve society’s welfare.
interaction of choices
my choices affect yours and vice versa
provide goods
and services to others and receive
goods and services in return.
gains from trade
you can make more by trading than trying to be self sufficient
each person specializes in
the task that he or she is good at
when no individual would be
better off doing something different.
An economy is efficient
if it takes all
opportunities to make some people
better off without making other people
worse off.
everyone gets his
or her fair share
why do markets fail
 Individual actions have side effects that are not properly taken into account by the market.

 One party prevents mutually beneficial trades from occurring in the attempt to
capture a greater share of resources for itself.

 Some goods, by their very nature, are unsuited for efficient management by markets.
is a simplified
representation of a
real situation that is
used to better
understand real-life
other things equal assumption
means that all other relevant factors
remain unchanged.
production possibility frontier (PPF)
illustrates the trade-offs facing an
economy that produces only two
shows the maximum quantity
of one good that can be produced
for any given production of
the other.
comparative advantage
the opportunity cost of
producing the good is lower for that individual than for other people.
absolute advantage
an individual can do better at an activity than anyone else.
exchange goods/services they want for goods/services they have
circular-flow diagram
model that represents the transactions
in an economy by flows around
a circle
person or a group
of people that share their income.
organization that produces
goods and services for sale.
factors of production
resources firms need to produce goods/services
factor markets
where firms buy their factors of production
Positive economics
way economy actually works
normative economics
perscriptions about the way things should work
a prediction of the future
demand schedule
shows how much
of a g/s consumers will
want to buy at different prices
demand curve
graphical representation of the demand schedule
Qd is ..
the actual amount consumers are willing to buy at some specific price.
law of demand
a higher
price for a good, other things equal,
leads people to demand a smaller quantity
of the good.
shift of the demand curve
in the quantity demanded at any given
movement along the demand curve
change in Qd that is the result of a change in
that Qp.
two goods are substitutes if..
a fall in the
price of one of the goods makes consumers less willing to buy the other good.
Two goods are complements if..
a fall in
the price of one good makes people
more willing to buy the other good.
a good is a NORMAL GOOD when
a rise in income increases the demand for a good
a good is an INFERIOR GOOD when
a rise in income decreases the demand for a good.
Qs is the
actual amount
of a good or service
people are willing to
sell at some specific
supply schedule
shows how much of
a good or service
would be supplied at
different prices.
supply curve
graph showing how
much of a good or service people are
willing to sell at any given price.
shift of the supply curve shows a change in.
the quantity supplied of a good at any given
movement along the supply curve
change in the quantity supplied of a
good that is the result of a change in
that good’s price.
good that is used to produce
another good.
when supply increases it shifts
to the right
when supply decreases
it shifts to the left
when demand increases it shifts
to the right
when demand decreases
it shifts to the left
equillibrium price
aka market-clearing price
Qd = Qs
quantity of the good
bought and sold at
equillibrium price
when Qs exceeds the Qd
surpluses occur when ..
the P is above its equillibrium price
when Qd exceeds Qs
shortages occur when..
price is below its equilibrium level.
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
people who want the good
badly and are willing to pay a high price don’t get it, and those who care relatively little about the good and are only willing to pay a low price do get it.
why price ceilings cause inefficiency
1. Inefficient Allocation to Consumers

2. Wasted Resources

3. Inefficiently Low Quality

4. Black Markets
wasted resources
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
market in which goods or services are bought and sold
minimum wage
legal floor on the
wage rate
price floors lead to:
* Inefficient Allocation of Sales Among Sellers
* Wasted Resources
* Inefficiently High Quality
* Illegal Activity
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
limit on the quantity of some good that
can be bought or sold
quota limit
total amount
of the good that can be legally transacted
gives its owner the right to
supply a good.
demand price (Dp)
the price at which consumers will demand that quantity
suppy price (Sp)
price at which producers will supply
that quantity.
price paid by buyers ends up being
higher than that received by sellers.
A quantity control, or quota, drives a
_____ between the demand price and
the supply price of a good
quota rent
difference between the demand
and supply price at the quota limit
excise tax
tax on sales of a
good or service.
incidence of a tax
a measure of
who really pays it.
excess burden
deadweight loss
the extra cost in the form
of inefficiency that results because the
tax discourages mutually beneficial
demand equation
Qd = 100 - 3P
supply equation
Qs = -40 + 4P
law of demand
if price increases
Qd decreases
law of supply
P increases
Qs increases
equation to find out oppurtunity cost
what you are giving up
what you are getting
all points on the PPF represent
efficient production points
if a company is not fully utilizing their resources, where will they be on the PPF?
price decrease ____ not ___ in terms of demand
Qd not Demand
economists usually make the assumption that production is subject to increasing oppurtunity costs because
all resources are not equally suited to producing every good.
the effect of an increase in productive inputs such as labor and capital can be shown by __________ of the PPF
outward expansion
free trade between countries will allow for
greater levels of consumption without trade
2 types of costs
explicit & implicit
implicit cost is directly asc with
op cost
what can cause a PPF to shift outward?
more resources
better technology
every society has 3 basic resource allocation ?s
what to produce
how to produce
for whom to produce
factors that cause demand curve to shift to the right
-prices of related goods
-tastes and preferences
-expectations about future price and income
-population increase
movement along the curve is caused by
change in P
shift of curve caused by
changes in factors other than P
supply increases or supply curve shifts to the right if
1 cost of prod decreases
2 P of alternate good falls
3 expectations of future price changes
4 # of producers increases
excess demand =
excess supply =
Principle of Excess Supply and Excess Demand
as long as there is excess supply, price will continue to fall. as long as there is excess demand, price will continue to increase.
explain why:

Equilibrium Q increases P increases
At initial eq. price, excess demand is created. P increases until it reaches new eq. and Q is higher than initial qty.
explain why:

Equilibrium Q increases P decreases
at the initial eq. excess supply is created. price decreases until it reaches new eq. with lower price and high Qty.
a price ceiling can not be __ than the eq.
a price floor can not be __ than the eq.