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378 Cards in this Set
- Front
- Back
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individual choice
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Individual choice is the decision by an individual of what to do
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resources
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Resources (anything that can be used to produce something else) includes capital, land, labor and entrepreneurship
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opportunity cost
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All costs are opportunity costs: what one must give up in order to get it
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marginal decisions
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Decisions about whether to do a bit more or a bit less of an activity are marginal decisions
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marginal analysis
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The study of such decisions is known as marginal analysis
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incentive
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"An incentive is anything that offers rewards to people who change their behavior. People usually exploit opportunities to make themselves better off."
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trade
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In a market economy, individuals engage in trade: they provide goods and services to others and receive goods and services in return
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gains from trade
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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
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specialization
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This increase in output is due to specialization: each person specializes in the task that he or she is good at performing
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Equilibrium
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Equilibrium is an economic situation in which no individual would be better off doing something different
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efficient
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an economy is efficient if it takes all opportunities to make some people better off without making other people worse off.
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equity
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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
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welfare (rationale)
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When markets don’t achieve efficiency, government intervention can improve society’s welfare
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production possibility frontier
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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
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efficiency on the ppf
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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)
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comparative advantage
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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
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absolute advantage
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An individual has an absolute advantage in an activity if he or she can do it better than other people.
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circular-flow diagram
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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.
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household
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A household is a person or a group of people that share their income
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firm
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A firm is an organization that produces goods and services for sale
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markets for goods and services
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Firms sell goods and services that they produce to households in markets for goods and services
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factors of production (factor markets)
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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)
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positive economics
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Positive economics is the branch of economic analysis that describes the way the economy actually works
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competitive market
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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
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supply and demand model
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The supply and demand model is a model of how a competitive market works
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demand schedule
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A demand schedule shows how much of a good or service consumers will want to buy at different prices
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demand curve
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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
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quantity demanded
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The quantity demanded is the actual amount consumers are willing to buy at some specific price
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law of demand
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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
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shift of the demand curve
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A shift of the demand curve is a change in the quantity demanded at any given price denoted by a new demand curve
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movement along the demand curve
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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
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substitutes
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Two goods are substitutes if a fall in the price of one of the goods makes consumers less willing to buy the other good
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complements
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Two goods are complements if a fall in the price of one good makes people more willing to buy the other good
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normal good
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A good is a normal good when a rise in income increases its demand.
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inferior good
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A good is an inferior good when a rise in income decreases its good
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Causes for shifts in the demand curve
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1. Change in the price of related goods, 2. changes in income, 3. changes in taste, 4. changes in expectations
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quantity supplied
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The quantity supplied is the actual amount of a good or service people are willing to sell at some specific price
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supply schedule
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A supply schedule shows how much of a good or service would be supplied at different prices
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supply curve
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A supply curve shows graphically how much of a good or service people are willing to sell at any given price
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shift of the supply curve
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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
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movement along the supply curve
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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
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Causes for shifts in the supply curve
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1. Changes in input prices, 2. Changes in technology, 3. Changes in expectations
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input
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An input is a good that is used to produce another good
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surplus
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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.
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shortage
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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
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price controls
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Price controls are legal restrictions on how high or low a market price may go.
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price ceiling
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A price ceiling is a maximum price sellers are allowed to charge for a good
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price floor
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A price floor is a minimum price buyers are required to pay for a good
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inefficiences of price ceilings
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1. Inefficient allocation to consumers, 2. Wasted resources (shortages), 3. Inefficiently low quality, 4. Black markets
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inefficient economy/market
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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
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inefficient allocation to consumers
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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
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wasted resources (shortages)
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people spend money and expend effort in order to deal with the shortages caused by the price ceiling
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inefficiently low quality
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sellers offer low-quality goods at a low price even though buyers would prefer a higher quality at a higher price
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black market
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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
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minimum wage
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a legal floor on the wage rate, which is the market price of labor
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inefficiencies caused by price floors
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1. Inefficient allocation of sales among sellers, 2. Wasted resources (surpluses), 3. Inefficiently high quality, 4. Black markets
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inefficient allocation of sales among sellers
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those who would be willing to sell the good at the lowest price are not always those who actually manage to sell it
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wasted resources (surpluses)
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the government (typically) spends money and expends effort in order to deal with the surpluses caused by the price ceiling
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inefficiently high quality
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sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price
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quantity control (quota)
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an upper limit on the quantity of some good that can be bought or sold
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quota limit
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The quota limit is the total amount of the good that can be legally transacted.
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demand price
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The demand price of a given quantity is the price at which consumers will demand that quantity.
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supply price
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The supply price of a given quantity is the price at which producers will supply that quantity
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wedge
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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
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quota rent
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Quota rent is the earnings that accrue from a license-holder from ownership of the right to sell the good
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costs of quantity controls
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1. Inefficiency due to missed opportunities, 2. Incentives to engage illegal activity
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excise tax
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An excise tax is a tax on sales of a good or service
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Why are taxes like quotas?
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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
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incidence
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The incidence of a tax is a measure of who really pays it.
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deadweight loss (excess burden)
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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.
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Economics
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The social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity.
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Features of Economic Perspective
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"1. Scarcity and Choice 2. Purposeful Behavior 3. Marginal Analysis: Benefits and Costs"
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Scarcity
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Limited goods and services that restricts options and demands choices.
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There is no free lunch"."
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You may not pay, but someone has to.
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Opportunity Cost
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The amount of products that must be forgone to produce a unit of another product.
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Individuals look for and pursue opportunities to increase their ______.
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utility
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Utility
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The satisfaction or pleasure one obtains from the consumption of a good or service.
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Economic decisions are rational because we weigh...
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costs and benefits.
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Oftentimes, proper" economic decisions are not reached because of..."
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faulty logic and emotion.
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Rational self-interest is not the same as...
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selfishness.
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Free" products may or may not be free to individuals--they are never free to _______."
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society
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Marginal (in economic terms)
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extra," " additional," or "a change in.""
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Marginal Analysis
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The comparison of marginal benefits and marginal costs. (Also known as: cost/benefit analysis).
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The scientific method used in economics as well as the hard sciences consists of:
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"1. Observing behaviors and outcomes. 2. Hypothesize based on observations. 3. Test hypothesis. 4. Accept, reject, or modify hypothesis."
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Economic Law or Economic Principle
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A well-tested and widely accepted economic theory.
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Economic Model
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A simplified representation of how something works in the economy-- a tool to explain cause and effect.
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Characteristics of Economic Principles:
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"1. Generalizations (not true in every instance).2. Other-Things-Equal Assumption (other variables except those being considered remain constant). 3. Graphical Expression."
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Microeconomics
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The part of economics concerned with individual units such as a person, a household, a firm, or an industry.
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Macroeconomics
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The part of economics concerned with the economy as a whole or its basic subdivisions or aggregates such as government, household, and business sectors.
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Aggregate
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A collection of economic units treated as a whole (i.e. households)
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Macroeconomics uses aggregates to obtain...
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an overview of the economy in relation to these aggregates.
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Many topics in economics are rooted in...
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both microeconomics and macroeconomics.
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Positive Economics
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The analysis of facts or data to establish scientific generalizations about economic behavior.
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Normative Economics
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Focuses on value judgments about what the economy should be like (policy economics).
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Economizing Problem
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The need to make choices because economic wants exceed economic means.
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Budget Line (Budget Constraint)
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A line that shows the different combinations of two products one could purchase with a given amount of money.
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Trade-off
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The sacrifice of some of all of one economic goal, good, or service to achieve some other goal, good, or service.
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Economic Resources include:
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"1. Land 2. Labor 3. Capital 4. Entrepreneurial Ability"
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Land includes ________.
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natural resources
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Labor includes...
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physical and mental talents of individuals.
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Capital (or Capital Goods)
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Human-made resources used to produce consumer goods and services.
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Consumer goods satisfy...
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consumer wants directly.
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Capital goods satisfy consumer wants _______.
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indirectly
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Money produces nothing. Therefore, it is not classified as an ___________.
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economic resource
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Money capital or financial capital is simply a means for...
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purchasing capital goods.
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Entrepreneurial Ability
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The human resource that combines the other resources to produce a product, makes non-routine decisions, innovates, and bears risks.
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Factors of Production (Inputs)
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Economic Resources (land, labor, capital, and entrepreneurial ability).
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Full Employment
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The use of all available resources to produce goods and services.
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Fixed Resources
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Any resource whose quantity cannot be changed by a firm in the short run.
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Fixed Technology
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The state of technology is constant.
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Production Possibilities Curve
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A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.
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Points on a production possibilities curve are attainable as long as...
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all available resources are being used.
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Points lying inside a production possibilities curve are attainable, but represent...
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less than full production.
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Points lying beyond a production possibilities curve are ________.
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unattainable
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Law of Increasing Opportunity Cost
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The principle that as the production of a good increases, the opportunity cost of producing a second item rises. (Illustrated by the increasing slope of the production possibilities curve).
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Optimal allocation of resources to produce a given item occurs when...
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marginal cost equals marginal benefit (at the intersection of their graphs).
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In the depths of the Great Depression of the 1930s, ___ of U.S. workers were unemployed and ___ of U.S. production capacity was idle.
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1/4, 1/3
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When an increase in the quality or quantity of resources occurs,...
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the production possibilities curve expands outwardly (economic growth).
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5 Pitfalls to Sound Economic Reasoning
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"1. Biases (against corporations, government, etc.) 2. Loaded Terminology in the Media (emotionally biased). 3. Fallacy of Composition (what is true for an individual may not be true for an entire group). 4. Post Hoc Fallacy (a preceding event does not always cause the current event). 5. Correlation but Not Causation (events may be correlated without one causing the other)."
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Technological Advances allow the production of more goods with...
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available resources.
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Economic Growth is the result of:
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"1. Increases in the supplies of resources. 2. Improvements in resource quality. 3. Technological advances."
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Static (no-growth) economies must sacrifice...
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one good or service to increase another.
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When an economy invests in future goods (capital goods, research and education, preventive medicine, etc.),...
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it increases its future production capacity and economic growth (at the opportunity cost of fewer present goods).
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2 Ways to obtain greater economic output:
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"1. Expansion of domestic production. 2. International trade."
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individual choice
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Individual choice is the decision by an individual of what to do
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resources
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Resources (anything that can be used to produce something else) includes capital, land, labor and entrepreneurship
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opportunity cost
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All costs are opportunity costs: what one must give up in order to get it
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marginal decisions
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Decisions about whether to do a bit more or a bit less of an activity are marginal decisions
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marginal analysis
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The study of such decisions is known as marginal analysis
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incentive
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"An incentive is anything that offers rewards to people who change their behavior. People usually exploit opportunities to make themselves better off."
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trade
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In a market economy, individuals engage in trade: they provide goods and services to others and receive goods and services in return
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gains from trade
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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
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specialization
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This increase in output is due to specialization: each person specializes in the task that he or she is good at performing
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Equilibrium
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Equilibrium is an economic situation in which no individual would be better off doing something different
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efficient
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an economy is efficient if it takes all opportunities to make some people better off without making other people worse off.
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equity
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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
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welfare (rationale)
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When markets don’t achieve efficiency, government intervention can improve society’s welfare
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production possibility frontier
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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
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efficiency on the ppf
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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)
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comparative advantage
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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
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absolute advantage
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An individual has an absolute advantage in an activity if he or she can do it better than other people.
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circular-flow diagram
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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.
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household
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A household is a person or a group of people that share their income
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firm
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A firm is an organization that produces goods and services for sale
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markets for goods and services
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Firms sell goods and services that they produce to households in markets for goods and services
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factors of production (factor markets)
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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)
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positive economics
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Positive economics is the branch of economic analysis that describes the way the economy actually works
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normative economics
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Normative economics makes prescriptions about the way the economy should work
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competitive market
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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
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supply and demand model
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The supply and demand model is a model of how a competitive market works
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demand schedule
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A demand schedule shows how much of a good or service consumers will want to buy at different prices
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demand curve
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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
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quantity demanded
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The quantity demanded is the actual amount consumers are willing to buy at some specific price
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law of demand
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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
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shift of the demand curve
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A shift of the demand curve is a change in the quantity demanded at any given price denoted by a new demand curve
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movement along the demand curve
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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
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substitutes
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Two goods are substitutes if a fall in the price of one of the goods makes consumers less willing to buy the other good
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complements
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Two goods are complements if a fall in the price of one good makes people more willing to buy the other good
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normal good
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A good is a normal good when a rise in income increases its demand.
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inferior good
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A good is an inferior good when a rise in income decreases its good
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Causes for shifts in the demand curve
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1. Change in the price of related goods, 2. changes in income, 3. changes in taste, 4. changes in expectations
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quantity supplied
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The quantity supplied is the actual amount of a good or service people are willing to sell at some specific price
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supply schedule
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A supply schedule shows how much of a good or service would be supplied at different prices
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supply curve
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A supply curve shows graphically how much of a good or service people are willing to sell at any given price
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shift of the supply curve
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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
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movement along the supply curve
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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
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Causes for shifts in the supply curve
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1. Changes in input prices, 2. Changes in technology, 3. Changes in expectations
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input
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An input is a good that is used to produce another good
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surplus
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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.
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shortage
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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
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price controls
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Price controls are legal restrictions on how high or low a market price may go.
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price ceiling
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A price ceiling is a maximum price sellers are allowed to charge for a good
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price floor
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A price floor is a minimum price buyers are required to pay for a good
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examples of price ceilings
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"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"
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inefficiences of price ceilings
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1. Inefficient allocation to consumers, 2. Wasted resources (shortages), 3. Inefficiently low quality, 4. Black markets
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inefficient economy/market
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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
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inefficient allocation to consumers
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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
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wasted resources (shortages)
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people spend money and expend effort in order to deal with the shortages caused by the price ceiling
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inefficiently low quality
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sellers offer low-quality goods at a low price even though buyers would prefer a higher quality at a higher price
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black market
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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
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minimum wage
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a legal floor on the wage rate, which is the market price of labor
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inefficiencies caused by price floors
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1. Inefficient allocation of sales among sellers, 2. Wasted resources (surpluses), 3. Inefficiently high quality, 4. Black markets
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inefficient allocation of sales among sellers
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those who would be willing to sell the good at the lowest price are not always those who actually manage to sell it
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wasted resources (surpluses)
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the government (typically) spends money and expends effort in order to deal with the surpluses caused by the price ceiling
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inefficiently high quality
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sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price
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quantity control (quota)
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an upper limit on the quantity of some good that can be bought or sold
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quota limit
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The quota limit is the total amount of the good that can be legally transacted.
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demand price
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The demand price of a given quantity is the price at which consumers will demand that quantity.
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supply price
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The supply price of a given quantity is the price at which producers will supply that quantity
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wedge
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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
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quota rent
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Quota rent is the earnings that accrue from a license-holder from ownership of the right to sell the good
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costs of quantity controls
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1. Inefficiency due to missed opportunities, 2. Incentives to engage illegal activity
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excise tax
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An excise tax is a tax on sales of a good or service
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Why are taxes like quotas?
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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
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incidence
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The incidence of a tax is a measure of who really pays it.
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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.
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|
What are common property resources?
|
Resources that are owned by the community at large and therefore tend to be overexploited because individuals have little incentive to use them in a sustainable fashion.
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|
What are complementary goods?
|
Goods that are typically consumed together.
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|
What are entrepreneurs?
|
Entrepreneurs combine land, labor and capital to produce goods and services. They absorb the risk of being in business, including ther risk of bankruptcy and other liabilities associated with doing business. Entrepreneurs receive profits fort his effort.
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|
What are inferior goods?
|
A good where an increase in income results in declining demand.
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|
What are markets?
|
Institutions that bring buyers and sellers together so they can interact and transact with each other.
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|
What are normal goods?
|
A good where an increase in income results in rising demand.
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|
What are opportunity costs?
|
The next best alternatives; what you give up to do something or purchase something.
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|
What are property rights?
|
The clear delineation of ownership of property backed by government enforcement.
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|
What are public goods?
|
Goods that, once provided, no one person can be excluded from consuming (nonexclusion), and one person's consumption does not diminish the benefit to others from consuming the good (nonrivalry).
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|
What are resources?
|
Productive resources include land, labor, capital, and entrepreneurial ability.
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What are substitute goods?
|
Goods consumers will substitute for one another depending on their relative prices.
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|
What are the determinants of demand?
|
Other nonprice factors that affect demand including tastes and preferences, income, prices of related goods, number of buyers, and expectations.
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|
What are the determinants of supply?
|
Other nonprice factors that affect supply including production technology, costs of resources, prices of other commodities, expectations, number of sellers, and taxes and subsidies.
|
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|
What is a change in demand?
|
Occurs when one or more of the determinants of demand changes, shown as a shift in the entire demand curve.
|
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|
What is a change in supply?
|
Occurs when one or more of the determinants of supply changes, shown as a shift in the entire supply curve.
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What is a change in the quantity demanded?
|
Occurs when the price of the product changes, and is shown as a movement along an existing demand curve.
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What is a change in the quantity supplied?
|
Occurs when the price of the product changes, and is shown as a movement along an existing supply curve.
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What is a consumer surplus?
|
The difference between market price and what consumers (as individuals or the market) would be willing to pay. It is equal to the area above market price and below the demand curve.
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|
What is a free rider?
|
When a public good is provided, consumers cannot by excluded from enjoying the product, so some consume the product without paying.
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|
What is a horizontal summation?
|
Market demand and supply curves are found by adding together how many units of the product will be purchased or supplied at each price.
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|
What is a moral hazard?
|
Asymmetric information problem that occurs when an insurance policy or some other arrangement changes the economic incentives and leads to a change in behavior.
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|
What is a price ceiling?
|
A government-set maximum price that can be charged for a product or service. When the price ceiling is set below equilibrium, it leads to shortages (EX. rent control).
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|
What is a price floor?
|
A government-set minimum price that can be charged for a product or service. If the price floor is set above equilibrium price, it leads to surpluses. (EX. minimum wages).
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|
What is a price system?
|
A name given to the market economy because prices provide considerable information to both buyers and sellers.
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|
What is a produce surplus?
|
The difference between market price and the price that firms would be willing supply the product. It is equal to the area below market price and above the supply curve.
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|
What is adverse selection?
|
Occurs when products of different qualities are sold at the same price because of asymmetric information.
|
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|
What is allocative efficiency?
|
The mix of goods and services produced are just what individuals in society desire.
|
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|
What is an external benefit?
|
Positive externalities such as education and vaccinations. Private markets provide too little at too high a price of goods with external benefits.
|
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|
What is an external cost?
|
Occurs when a transaction between two parties has an impact on a third party not involved with the transaction. External costs are negative such as pollution or congestion. The market provides too much of the product with negative externalities at too low a cost.
|
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|
What is an opportunity cost (Chapter 2)?
|
The cost paid for one product in terms of the output of another product that must be foregone.
|
|
|
What is asymmetric information?
|
Occurs when one party to a transaction has significantly better information that another party.
|
|
|
What is capital?
|
Includes manufactured products such as welding machines, computers and cellular phones that are used to produce other goods and services. The payment to capital is referred to as interest.
|
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|
What is Ceteris paribus?
|
Assumption used in economics where other relevant factors or variable are held constant.
|
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|
What is deadweight loss?
|
The loss in consumer and producer surplus due to inefficiency because some transactions cannot be made and therefor their value to society is lost.
|
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|
What is demand?
|
The maximum amount of a product that buyers are willing and able to purchase over some time period at various prices, holding all other relevant factors constant (ceteris paribus).
|
|
|
What is efficiency?
|
How well resources are used and allocated. Do people get the goods and services they want at the lowest possible resource cost? This is the chief focus of efficiency.
|
|
|
What is equilibrium price?
|
Market equilibrium price is the price that results when quantity demanded is just equal to quantity supplied.
|
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|
What is equilibrium quantity?
|
Market equilibrium quantity is the output that results when quantity demanded is just equal to quantity supplied.
|
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|
What is equilibrium?
|
Market forces are in balance where teh quantities demanded by consumers just equal quantities supplied by producers.
|
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|
What is equity?
|
The fairness of various issues and policies.
|
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|
What is labor?
|
Includes the mental and physical talents of individuals that are used to produce products and services. Labor is paid wages.
|
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|
What is land?
|
Includes natural resources such as mineral deposits, oil, natural gas, water, and land in the usual sense of the word. The payment to land as a resources called rents.
|
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|
What is macroeconomics?
|
Macroeconomics is concerned about the broader issues in the economy such as inflation, unemployment, and national output of goods and services.
|
|
|
What is microeconomics?
|
Microeconomics focuses on decision making by individuals, businesses, industries, and governments.
|
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|
What is production efficiency?
|
Goods and services are produced at their lowest resource (opportunity) cost.
|
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|
What is production?
|
The process of converting resources (factors of production) -- land, labor, capital, and entrepreneurial ability -- into goods and services.
|
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|
What is scarcity?
|
Our unlimited wants clash with limited resources, leading to scarcity. Everyone faces scarcity (rich or poor) because, at a minimum, our time is limited on earth. Economics focuses on the allocation of scarce resources to satisfy unlimited wants.
|
|
|
What is supply?
|
The maximum amount of a product that sellers are willing and able to provide for sale over some time period at various prices, holding all other relevant factors constant (ceteris paribus).
|
|
|
What is the absolute advantage?
|
One country can produce more of a good than another country.
|
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|
What is the comparative advantage?
|
One country has a lower opportunity cost of producing a good than another country.
|
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|
What is the demand curve?
|
Demand schedule information translated to a graph.
|
|
|
What is the law of demand?
|
Holding all other relevant factors constant, as price increases, quantity demanded falls, and as a price decreases, quantity demanded rises.
|
|
|
What is the law of supply?
|
Holding all other relevant factors constant, as price increases, quantity supplied will rise, and as price declines, quantity supplied will fall.
|
|
|
What is the Production Possibilities Frontier (PPF)?
|
Shows the combinations of two goods that are possible for a society to produce at full employment. Points on or inside the PPF are feasible, and those outside of the frontier are unattainable.
|
|
|
What is the supply curve?
|
Supply schedule information translated to a graph
|
|
|
When does a shortage occur?
|
When the price is below market equilibrium, and quantity demanded exceeds quantity supplied.
|
|
|
When does a surplus occur?
|
When the price is above market equilibrium, and quantity supplied exceeds quantity demanded.
|
|
|
Economics
|
The social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity.
|
|
|
Features of Economic Perspective
|
"1. Scarcity and Choice 2. Purposeful Behavior 3. Marginal Analysis: Benefits and Costs"
|
|
|
Scarcity
|
Limited goods and services that restricts options and demands choices.
|
|
|
There is no free lunch"."
|
You may not pay, but someone has to.
|
|
|
Opportunity Cost
|
The amount of products that must be forgone to produce a unit of another product.
|
|
|
Individuals look for and pursue opportunities to increase their ______.
|
utility
|
|
|
Utility
|
The satisfaction or pleasure one obtains from the consumption of a good or service.
|
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|
Economic decisions are rational because we weigh...
|
costs and benefits.
|
|
|
Oftentimes, proper" economic decisions are not reached because of..."
|
faulty logic and emotion.
|
|
|
Rational self-interest is not the same as...
|
selfishness.
|
|
|
Free" products may or may not be free to individuals--they are never free to _______."
|
society
|
|
|
Marginal (in economic terms)
|
extra," " additional," or "a change in.""
|
|
|
Marginal Analysis
|
The comparison of marginal benefits and marginal costs. (Also known as: cost/benefit analysis).
|
|
|
Economic Law or Economic Principle
|
A well-tested and widely accepted economic theory.
|
|
|
Economic Model
|
A simplified representation of how something works in the economy-- a tool to explain cause and effect.
|
|
|
Characteristics of Economic Principles:
|
"1. Generalizations (not true in every instance).2. Other-Things-Equal Assumption (other variables except those being considered remain constant). 3. Graphical Expression."
|
|
|
Microeconomics
|
The part of economics concerned with individual units such as a person, a household, a firm, or an industry.
|
|
|
Macroeconomics
|
The part of economics concerned with the economy as a whole or its basic subdivisions or aggregates such as government, household, and business sectors.
|
|
|
Aggregate
|
A collection of economic units treated as a whole (i.e. households)
|
|
|
Macroeconomics uses aggregates to obtain...
|
an overview of the economy in relation to these aggregates.
|
|
|
Many topics in economics are rooted in...
|
both microeconomics and macroeconomics.
|
|
|
Positive Economics
|
The analysis of facts or data to establish scientific generalizations about economic behavior.
|
|
|
Normative Economics
|
Focuses on value judgments about what the economy should be like (policy economics).
|
|
|
Economizing Problem
|
The need to make choices because economic wants exceed economic means.
|
|
|
Budget Line (Budget Constraint)
|
A line that shows the different combinations of two products one could purchase with a given amount of money.
|
|
|
Trade-off
|
The sacrifice of some of all of one economic goal, good, or service to achieve some other goal, good, or service.
|
|
|
Economic Resources include:
|
"1. Land 2. Labor 3. Capital 4. Entrepreneurial Ability"
|
|
|
Land includes ________.
|
natural resources
|
|
|
Labor includes...
|
physical and mental talents of individuals.
|
|
|
Capital (or Capital Goods)
|
Human-made resources used to produce consumer goods and services.
|
|
|
Consumer goods satisfy...
|
consumer wants directly.
|
|
|
Capital goods satisfy consumer wants _______.
|
indirectly
|
|
|
Money produces nothing. Therefore, it is not classified as an ___________.
|
economic resource
|
|
|
Money capital or financial capital is simply a means for...
|
purchasing capital goods.
|
|
|
Entrepreneurial Ability
|
The human resource that combines the other resources to produce a product, makes non-routine decisions, innovates, and bears risks.
|
|
|
Factors of Production (Inputs)
|
Economic Resources (land, labor, capital, and entrepreneurial ability).
|
|
|
Full Employment
|
The use of all available resources to produce goods and services.
|
|
|
Fixed Resources
|
Any resource whose quantity cannot be changed by a firm in the short run.
|
|
|
Fixed Technology
|
The state of technology is constant.
|
|
|
Production Possibilities Curve
|
A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.
|
|
|
Points on a production possibilities curve are attainable as long as...
|
all available resources are being used.
|
|
|
Points lying inside a production possibilities curve are attainable, but represent...
|
less than full production.
|
|
|
Points lying beyond a production possibilities curve are ________.
|
unattainable
|
|
|
Law of Increasing Opportunity Cost
|
The principle that as the production of a good increases, the opportunity cost of producing a second item rises. (Illustrated by the increasing slope of the production possibilities curve).
|
|
|
Optimal allocation of resources to produce a given item occurs when...
|
marginal cost equals marginal benefit (at the intersection of their graphs).
|
|
|
In the depths of the Great Depression of the 1930s, ___ of U.S. workers were unemployed and ___ of U.S. production capacity was idle.
|
1/4, 1/3
|
|
|
When an increase in the quality or quantity of resources occurs,...
|
the production possibilities curve expands outwardly (economic growth).
|
|
|
5 Pitfalls to Sound Economic Reasoning
|
"1. Biases (against corporations, government, etc.) 2. Loaded Terminology in the Media (emotionally biased). 3. Fallacy of Composition (what is true for an individual may not be true for an entire group). 4. Post Hoc Fallacy (a preceding event does not always cause the current event). 5. Correlation but Not Causation (events may be correlated without one causing the other)."
|
|
|
Technological Advances allow the production of more goods with...
|
available resources.
|
|
|
Economic Growth is the result of:
|
"1. Increases in the supplies of resources. 2. Improvements in resource quality. 3. Technological advances."
|
|
|
Static (no-growth) economies must sacrifice...
|
one good or service to increase another.
|
|
|
When an economy invests in future goods (capital goods, research and education, preventive medicine, etc.),...
|
it increases its future production capacity and economic growth (at the opportunity cost of fewer present goods).
|
|
|
2 Ways to obtain greater economic output:
|
"1. Expansion of domestic production. 2. International trade."
|
|
|
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
|
|
|
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
|
|
|
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.
|
