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111 Cards in this Set
- Front
- Back
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economics |
the study of how people make choices under conditions of scarcity, and the results of these choices for society |
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microeconomics |
the study of individuals, firms and particular industries (the economy in parts) |
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macroeconomics |
the study of aggregate economic activity (big picture) |
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econometrics |
the development and application of statistical techniques for economic data
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economic model |
is a representation of economic reality that highlights particular variables and their relationships |
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a rational decision maker |
someone who behaves logically to achieve clear goals |
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the scarcity problem |
because material and human resources are limited, having more of one thing usually means making do with less of another good thing
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cost-benefit principle |
a rational thinker will only take economic action if the extra benefits, exceed the cost |
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ignoring opportunity costs |
the opportunity cost is the value of the next best alternative that must be foregone to undertake an activity |
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failure to ignore sunk costs |
a sunk cost is a cost that has already been spent and is beyond recovery |
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failure to understand marginal-average distinction |
the marginal benefit is the increase in profit from producing 1 extra unit, average benefit is profit per unit of production. these 2 can vary greatly |
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spurious correlation |
a case in which two variables move together but are otherwise unrelated |
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the fallacy of composition |
the flawed argument that because something is true for the part, it must be true for the whole |
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economic naturalism |
how simple economic theories answer societal questions |
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capitalism |
an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state |
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state controlled economy |
where money and purchases are controlled by the state |
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absolute advantage |
the advantage a person has over another person if they take less time to perform a task |
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comparative advantage |
the advantage someone has over another person if their opportunity cost of performing a task is lower than the other person |
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principle of comparative advantage |
total output is largest when each person specializes in what they have a comparative advantage in |
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production possibilities curve |
a graph that can be produced for every possible level of production of two goods |
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an attainable point |
any combination of goods that can be produced using currently available resources |
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an unattainable point |
any combination of goods that cannot be produced using currently available resources |
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production efficiency |
occurs when an economy is using all their resources in their technically most efficient way |
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allocative efficiency |
occurs when it is impossible to reorganize economic resources so that at least one person is better off while nobody is worse off |
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capital goods (or physical capital) |
are durable, long lasting assets produces by the economy and used as an input in production |
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market |
context in which potential buyers and sellers of a good or service can negotiate exchange |
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supply curve |
a simple schedule or graph showing, for every possible price, the quantity of a good that all the sellers to ether would be willing to produce, ceteris paribus |
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quantity supplied |
quantity of a good that all sellers would be willing to supply at a specific price, ceteris paribus |
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demand curve |
a simple schedule or graph showing, at every possible price, the quantity of a good buyers would be willing to purchase |
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equilibrium |
a state of rest that occurs when all the forces that act on all variables are in balance (mutually beneficial to buyers and sellers) |
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the equilibrium principle |
a market in equilibrium leaves no unexplored trades between individuals |
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average benefit |
total revenue/quantity |
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average cost |
total cost / quantity |
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marginal benefit |
change in total revenue / change in quantity |
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marginal cost |
change in total cost / change in quantity |
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equilibrium formula |
quantity demanded = quantity supplied |
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opportunity cost formula (with 2 goods) |
quantity of good Y / quantity of good X (both produced in the same amount of time) |
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principle of increasing opportunity cost |
when expanding production of a good, first employ those resources with the lowest opportunity cost. Only when all of the lowest cost resources are employed does it make economic sense to use resources that have higher opportunity cost. |
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four components of circular market flow |
labour market, goods and services market, firms and households |
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PPC shifts |
PPC shifts can be caused by technological progress or capital accumulation |
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normal good |
a good whose demand increases when income increases (demand curve shifts right) |
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inferior good |
a good you buy less of when your income increases (demand curve shifts leftward) |
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substitutes |
2 goods are substitutes if an increase in the price of one causes an increase in demand for the other |
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complements |
2 goods are complements if the increase of the price of one causes a decrease in demand for the other |
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four rules |
1. an increase in demand will lead to an increase in price and quantity, 2. and vice versa 3. an increase in supply will lead to a decrease in price and an increase in quantity 4. and vice versa |
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Quantity supplied formula |
Qs = a + bPs a = horizontal intercept b = reciprocal of slope p = price |
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Quantity demanded formula |
Qd = c - dPd c = horizontal intercept d = reciprocal of slope p = price |
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equilibrium formula |
Qs = Qd a + bP = c - dP bP + dP = c - a (isolate P) P = (c - a) / (b +d) sub P into supply / demand equation |
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The law of demand |
Ceteris paribus, people will purchase a smaller quantity of a good as the price of purchasing one more unit increases |
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utility |
is the sense of well-being, satisfaction or pleasure a person derives from consuming a good or service |
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util |
is a unit of pleasure or utility obtained from an item |
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marginal utility |
additional utility gained from an additional unit of a good |
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marginal utility formula |
change in total utility / change in quantity |
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law of diminishing marginal utility |
as consumption of a good increases beyond some point, the additional utility gained from an extra unit of the good (marginal utility) tends to decline |
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the rational spending rule |
to maximize utility, spending must be allocated so that the marginal utility per dollar is equal for each good |
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rational spending rule formula |
Marginal utility of X / price of X = Marginal utility of Y / price of Y |
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marginal utility per dollar formula |
marginal utility / price |
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nominal price |
the dollar price of a good |
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real price |
the real price is the dollar price in comparison to the dollar price of other goods in that market |
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real price formula (for 2 goods) |
Px / (Px+Py / 2) |
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elasticity |
sensitivity of demand to price changes |
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price elasticity of demand |
the percentage change in quantity demanded of a good that results from a 1% change in its price |
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price elasticity of demand formula |
E = % change in Qd / % change in P = (change in Q / Q) / (change in P / P) = (change in Q / Q) / (P / change in P) = (P / Q) (1 / slope) |
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slope formula |
rise / run change in X / change in Y = (Y2 - Y1) / (X2 - X1) |
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larger values of elasticity indicate that demand... |
is more sensitive to change |
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smaller values of elasticity indicate that demand.. |
is less sensitive to change |
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demand is elastic if |
E > 1 |
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demand is inelastic if |
E < 1 |
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demand is unit elastic if |
E = 1 |
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demand is perfectly inelastic if |
E = 0 (horizontal line) |
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demand is perfectly elastic if |
E = infinity (vertical line) |
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income elasticity of demand |
the percentage change in the quantity demanded of a good in response to a 1% change in income |
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income elasticity of demand formula |
% change in Qd / % change in income |
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a good is normal if |
I > 0 |
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a good is inferior if |
I < 0 |
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a good is a luxury if |
I > 1 |
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cross price elasticity of demand |
for 2 goods, the percentage change in the quantity demanded of one good in response to a 1% change in the second good |
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cross price elasticity of demand formula |
% change in Qd of Y / % change in P of X |
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elasticity of substitutes |
E > 0 |
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elasticity of complements |
E < 0 |
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profit |
the total revenue a firm receives from the sale of its products minus all costs, explicit and implicit incurred in producing it |
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profit maximizing firm |
a firm whose primary goal is to maximize profit |
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a factor of production |
a resource used to produce output. falls into one of three categories: labour, land and capital |
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labour |
physical or mental exertion of human beings used to produce output |
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land |
any naturally occurring resource used to produce output |
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capital |
any durable good (buildings, machines, tools) produced by other factors of production for use in the production process |
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intermediate input |
any input that are used up in the production process (i.e. paint used to paint a house) |
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short run |
a period of time sufficiently short that at least one of the firms factors of production cannot be altered |
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long run |
a period of time sufficient in length that all of the firms factors of production are variable |
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production function |
a technological relationship between inputs and outputs |
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marginal product |
the increase in total output caused by an increase of one unit (i.e. a worker) in the variable factor of production |
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variable factor of production |
an input whose quantity can be altered in the short run |
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fixed factor of production |
an input whose quantity cannot be altered in the short run |
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law of diminishing marginal return |
as equal increments of one input are added, there is a point, beyond which the marginal product of that will decrease, ceteris paribus |
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average product |
total output divided by the total number of units of the variable factor of production |
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marginal revenue |
increase in total cost incurred by producing one more unit of output |
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price increase leads to |
increase in ouput increase in variable input increase in profit |
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wage increases leads to |
output decreases decrease in variable input decrease in profit |
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marginal revenue formula |
P x Q (P = MC)p |
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profit formula |
total revenue - total cost = TR - TC =P x Q - ATC x Q =(P - ATC) x Q |
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total cost formula |
TFC + TVC |
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if TR _> TVC or P _> min AVC |
the firm should keep producing |
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if TR < TVC or P < AVC |
the firm should shut down |
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shut down point |
minimum average variable cost |
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price elasticity of supply |
the change in quantity supplied arising from a change in price |
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price elasticity of supply formula |
% change in Qs / % change in P = (P / Q) / (1 / slope) |
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marginal cost formula |
change in TC / change in Q = change in TVC / change in Q |
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average fixed cost formula |
TFC / Q |
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accounting prodit |
total revenue - explicit cost |
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economic profit |
total revenue - explicit costs - implicit costs |
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normal profit |
accounting profit - economic profit |
