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73 Cards in this Set
- Front
- Back
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Economics |
-The "dismal science" -Study of how people allocate their limited resources to satisfy their nearly unlimited wants; study of how people make decisions |
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Microeconomics |
Concerned with decisions of individuals , households, and businesses; Study of the individual units that make up the economy. |
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Macroeconomics |
Looks at the broader economy, including inflation, growth, employment, interest rates, and productivity; Study of overall aspects and workings of an economy. |
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Scarcity |
The limited nature of society's resources; Nothing is infinite in nature; Wants & needs of individuals is always greater than the resources we have; Forces individuals to choose what to do with resources. |
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Thomas Malthus |
Economist who said that humankind will eventually experience widespread starvation; He was wrong because he missed that there would be many increases in technology and agricultural productivity. |
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The 5 Foundations of Economics |
1. Incentives 2. Trade Offs 3. Opportunity Cost 4. Marginal Thinking 5. Trade Creates Value |
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Incentives |
Factors that motivate you to act or exert effort; people respond to incentives |
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Examples of Positive Incentives |
Pay raise, bonus points, tax return, etc. |
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Examples of Negative Incentives |
Speeding ticket, traffic fine, get fired, get grounded, etc. |
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Direct Incentive |
Easy to recognize. Ex. "Cut my grass, I'll pay you $30" |
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Indirect Incentive |
Harder to recognize; Ex. Pay a child $50 to get all A's, so they might cheat. |
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Trade Offs |
Doing one thing often means that you will not have the time, resources, or energy to do something else; Spending lots of money for college means not being able to spend that money elsewhere. |
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Opportunity Cost |
The highest valued alternative that must be sacrificed in order to get something else. |
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Decision Making Key |
Minimize opportunity cost by selecting the option that has the largest benefit for you. Do whatever you enjoy more. |
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Marginal Thinking |
Requires decision makers to evaluate whether the benefit of one more unit of something is greater than its cost; Marginal benefit must be greater than marginal cost. |
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Economic Thinking |
Requires purposeful evaluation of the available opportunities to make the best decision possible. |
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Trade |
Voluntary exchange of goods and services between two or more parties; Trade only occurs if both parties feel that they gain from the trade. |
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Markets |
Bring buyers and sellers together to exchange goods and services. |
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Comparative Advantage |
Situation where an individual, business, or country can produce at a lower opportunity cost than the competitor can; allows gains from trade to occur. |
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Specialization |
You don't have to do everything yourself; people specialize in what they're best at. (Lowest Opportunity Cost) |
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How is Economics similar to "hard sciences"? |
-construct a theory (or hypothesis) -design experiments to test the theory -collect data -revise or refute the theory based on evidence |
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How is economics different from "hard sciences"? |
-an Economists lab is the world around us -firm and consumer behavior is studied -not always able to design experiments with economics |
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Positive Statement |
A claim that can be tested to be true or false |
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Normative Statement |
Statement of opinion; cannot be tested to be true or false. |
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Why do economists use models? |
To understand the complex real world economy |
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What are Economic Models? |
-simplified versions of reality -models that provide frameworks that enable us to predict the effect that changes in prices, production processes, and government policies have on real life behavior. |
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Ceteris Paribus |
Economists examine a change in one variable while holding everything else constant. |
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Factors of Production (Limited Resources) |
1. Land 2. Labor 3. Capital 4. Entrepreneurship |
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What determines a persons wage rate? |
Education, Age, Experience, Skills, Pleasant conditions, Gender |
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Endogenous Factors |
Factors that we know and can control |
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Exogenous Factors |
Factors that we can't control |
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Production Possibilities Frontier |
Combinations of outputs that a society can produce if all its resources are being used efficiently |
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In order to preserve Ceteris Paribus in a PPF, what must remain fixed? |
Technology available for production and the quantity of resources. |
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Absolute Advantage |
the ability of one producer to make more than another producer with the same quantity of resources |
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Consumer Goods |
are produced for present consumption |
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Capital Goods |
help produce other valuable goods and services in the future |
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Investment |
is the process of using resources to create or buy new capital. |
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Market Economy |
-resources are allocated among households and firms with little or no government interference. -prices are determined by supply and demand -main economic structure of the U.S. -buying and selling is voluntary |
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A Buyer.. |
has the ability and willingness to pay |
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A Seller.. |
has the ability and willingness to supply to market |
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Non Price Determinants of Demand |
-income -demographics -number of buyers -prices of other goods -quality -supply? -tastes and preferences -expectations of future |
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Quantity Demanded |
is the amount of a good or service that buyers are willing and able to purchase at the current price |
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Law of Demand |
-Inverse relationship between price and quantity demanded while all other things held constant; when price goes up, quantity demanded goes down. -price only affects quantity demanded, not Demand. |
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Demand Schedule |
a table showing the relationship between price and quantity demanded |
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Demand Curve |
graph of relationship between price and quantity demanded |
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Market Demand |
sum of all individual quantities demanded by each buyer in the market at each price |
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Movements Along a Demand Curve |
-caused only by a change in the price of the good -inverse relationship between price and quantity demanded |
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Demand Shifters |
1. Income 2. Price of Related Goods 3. Changes in tastes and preferences 4. expectations regarding future price 5. number of buyers |
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Factors that Shift Demand Curve to Left(Decrease) |
-income falls(demand for normal good) -income rises(demand for inferior good) -price of substitute falls -price of complement rises -good falls out of style -future price expected to decline -number of buyers falls |
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Factors that Shift Demand Curve to Right (Increase) |
-income rises(demand for normal good) -income falls(demand for inferior good) -price of substitute rises -price of complement falls -new style becomes popular -future price expected to rise -number of buyers increases |
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Normal Good |
-a good in which we buy more of when we get more income -direct relationship between income and demand |
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Inferior Goods |
-a good in which we buy less of when we get more income -inverse relationship between income and demand |
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Complementary Goods |
-two goods used together -inverse relationship between price of good X, and demand for good Y ex- when price of PB drops, demand for jelly rises |
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Substitute Goods |
-goods that can be used in place of another -direct relationship between price of good X, and demand for good Y ex-when price of Coke goes up, demand for Pepsi goes up |
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Law of Supply |
direct relationship between quantity supplied, and the price of a good; when price goes up, quantity supplied goes up |
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Quantity Supplied |
-is the amount of a good or service that producers are willing and able to sell at a current price
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Market Supply |
is the sum of the quantities supplied by each seller in the market at each price |
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Movements in Supply Curve |
-only occur when the price changes -shows change in quantity supplied -direct relationship between price of good and QS |
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Shifts in the Supply Curve |
-occurs when anything outside of the price of the good changes
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Supply Shifters AKA (Non Price Determinants of Supply) |
-costs of inputs -change in technology or production process -changes in taxes and subsidies -number of sellers -expected future price changes |
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Factors that Shift Supply Curve to Left(Decrease) |
-cost of inputs rise -business taxes increase -subsidies decrease -number of sellers decrease -price expected to rise in future |
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Factors that Shift Supply Curve to Right(Increase) |
-cost of inputs fall -business taxes decrease -subsidies increase -number of sellers increase -price expected to drop in future |
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Equilibrium |
occurs at the point where the demand curve and supply curve intersect |
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Equilibrium Price |
price at which the quantity supplied is equal to the quantity demanded |
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Equilibrium Quantity |
the amount at which the quantity supplied is equal to the quantity demanded |
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Shortage |
occurs whenever the quantity supplied is less than the quantity demanded |
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Surplus |
occurs whenever the quantity supplied is greater than the quantity demanded |
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PPF Line |
-anything on the line is efficient and obtainable -line=the best society and economy can do -points above the line are unobtainable with current resources -points below the line are inefficient with current resources -resources improve when the PPF line shifts outward...vise versa |
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Shifts in Supply and Demand |
-when supply and demand both shift, the resulting equilibrium can no longer be identified as an exact point
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Demand and Supply Both Increase |
-demand and supply curves both shift right -Quantity increases, while price can increase or decrease |
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Demand and Supply Both Decrease |
-demand and supply curves shift to left -quantity decreases, while price can increase or decrease |
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Demand Increases and Supply Decreases |
-demand curve shifts right, while supply curve shifts left -price increases, while quantity can increase or decrease
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Demand Decreases and Supply Increases |
-demand curve shifts left, while supply curve shifts right -price decreases, while quantity can increase or decrease |
