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63 Cards in this Set

  • Front
  • Back
system for coordinating society's productive activities
Market Economy
economy in which decisions about productions and consumption are made by individuals---not a central authority
study of how individuals, firms, governments make DECISIONS about what to do with SCARCE resouces and how they INTERACT with eachother
Opportunity Cost
"real" (economic) cost of an item -- what you must give up to get it
Marginal Analysis
solves the question of "how much"?
we each do the task we're best at performing
Adam Smith
looked at assembly line for pins and came up with SPECIALIZATION
anything that offers rewards to individuals for a change in behavior
situation in which no one is better off by changing their behavior
--arises out of arbitrage
--ex. 2nd grocery line opens & they eventually stabilize at the same length
Pareto Efficiency
no one can be better off without making someone worse off
4 Themes in Econ

How Individuals Make Decisions
1. Resources are scarce (income, natural resources, labor, land, time)

2. Opportunity Cost
(the next best alternative)

3. Marginal Analysis
(decide not to buy a second..)

4. Arbitrage
(agents exploit opportunities to make themselves better off---incentives matter)
5 Themes in Econ

How Economies Work
1. There are gains from trade
(we're not self sufficient --higher standard of living through specialization

2. Equilibrium
(no one's better off changing their behavior -- arises from arbitrage)

3. Efficiency is desirable
(using resources to their fullest ability--(not the same as equity))

4. Markets Usually lead to Efficiency
(idividuals doing the best for themselves brings us to efficiency -- incentives are key -- makes individuals use resources wisely)

5. Government Intervention can improve well being by correcting market failures
(environmental pollution, provision of public services, monopolies, labor rights, natural disasters(releif), civil rights

(& 2 Types)
simplified representation of reality to better understand real situations

1) Production Possibilities Frontier [PPF]
2)Circular Flow Diagram
Production Possibilites Frontier [PPF]
Shows Maximum quantitiy of a good that can be produced for a given quantity of another good

(ex. france's production of airplanes decreases with increasing production of wheat)
Opportunity Cost
(what you give up) / (what you give)
Command Economy
-opp of market
Central authorities make decisions about production/consumption
Invisible Hand
the tendency of market economies to harness the power of self interest for the good of society
(a person is led to make decisions that are good for society as a whole)
Market Failure
when the pursuit of one's own interest makes society worse off
A downturn in the economy

---main concern of MACROeconomics (overall ups & downs of society)
Economic Growth
the growing ability of the economy to produce goods/services
Trade Off
When you compare the costs/benefits of doing something (studying for chem = less studying for econ)
Marginal Decision
decisions making trade-offs at the margin
the study of marginal decisions
Marginal Analysis
Gains From Trade
people get more of what they want by specializing and trading

The economy as a whole can produce more w/ trade & specialization
when no individual would be better off doing something different

[ex. rule of road-everyone stays to the right before law was in place]
When is an economy efficient?
When it takes all opportunities to make people better off without making anyone worse off
-all resources are being used efficiently

*the invisible hand enforces officiency --brain surgeons don't plow fields
Why Markets Fail
1) Individual actions have side effects not taken into account by the market
2)one party tries to capture more resources for themselves preventing mutually beneficial trades
3)Some goods by nature are unsuited for efficient management in markets
Supply/Demand Model
describes how competetive markets work
mechanism which allows buyers/selleers to exchange goods/services
Competitive Market
many buyers & sellerns of the same good or service
Demand Curve
Shows how much goods/services consumers buy at a given price
Quantity Demanded
The actual amount consumers are willing to buy at a certain point
Market Demand
sum (aggregate) of all the individuals demands
Law of Demand
a higher price for a good = a smaller quantity demanded of the good

*exceptions = Giffen Goods
Determinants of Demand
*Demand Shifters*
1)Price of a related good
a)substitute goods
b)complimentary goods
2)Change in Income
a)normal goods
b)inferior goods
*big sunglasses*
*if price will be higher in the future (xmas) demand will increase now
5) # of consumers
Substitute Goods
an increase in the price of one good = an increase in the demand of a second good
*coke & pepsi*
Complimentary Goods
an increase in the price of one good = a decrease in demand for the other good
(*hot dogs & hot dog buns,
dvds & dvd players*)
Normal good
with an increase in income there is an increase in demand for the good
Inferior Goods
with an increase in income there is a decrease in demand for the good
Supply Curve
shows how much of a good/service producers want to sell at a given price
Quantity Supplied
actual amount sellers are willing to sell at a given price
Market supply
sum (aggregation) of an individual firm's supplies
Law of Supply
increasing price for a good = firms supply a larger quantity
Determinants of supply
(supply shifters)
1) change input prices (wages, rent)
-with increase in resource prices, firms will supply a lower quantity at each given price
-increase in technology = increase in supply
-when planning increase in future price (xmas) supply is lowered now
4)number of sellers
Price Control
legal restriction of how low/high the price can go

a)price celing (legal max)
b)price floor (legal min)
quantity contorls
-legal restrictions on quantity of good that can be bought/sold

*taxi liscences*
----can = shortages, higher prices, gypsy cabs
Excise Tax
tax on sales of a good/service
ex. cigs, gas, alcohol
Tax Revenue
Quantity taxed times tax

(Qt x t)
Tax Amount
consumer price - producer price

Pc - Pp = tax amt
measure of responsiveness to changes in price / income

(how sensitive you are to price)
Price Elasticity of Demand

(same equation for supply)
% changes in quantity demanded
% change in price

absval* %Qchange/%Pchange *absval
% Change
(new value - old value) /
(old value)

Elasticity of Something
(Ed) Values for inelatic v elastic
Ed > 1 = Elastic
Ed = 1 = Unit Elastic
Ed < 1 = Inelastic
Perfectly Elastic v
Perfectly Inelastic
Perfectly Elastic
Ed = infinity

Perfectly Inelastic
Ed = 0
Midpoint Formula
*absval* Q2-Q1/([Q1+Q2]/2)
divided by
P2-P1/([P1+P2]/2) *absval*
Decision Rules for Elasticity
Elastic---->lower price
Inelastic---->raise price
Unit Elastic---->stay the same
Determinants of Elasticity of Demand
1)are there close substitutes?
-yes=more elastic
2)Time Frame
-longer time frame=more elastic
3)Necessities = more inelastic
Luxuries = more elastic
Cross-price elasticity of Demand

definition & equation
How is the demand of one good affected by a price change in another good

% change in Qa /
% change in Pb

(quantity a & price b)
(goods that are similar)

affecting cross price
substitues = + cross price

complements = - cross price
Income Elasticity of Demand
How is the demand for a good affected by a change in income

Ei = %change in Qd /
%change in I
Determinants of Price Elasticity of Supply
1)availability of inputs
-lots of substitute inputs=more elastic

-longer time periods=more elastic
Market Equilibrium Maximized Total Surplus

1)Buyer who values good the most actually purchases it

2)Seller who values the sale the most will make the sale
(sellers with the lowest cost)
When is the market outcome not efficient
[1 seller]
2)Public Goods
[H20, public transportation]