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50 Cards in this Set
- Front
- Back
Economics definition |
Social sciencestudying how individual institutions and society make choices given scarceresources |
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Scarcity |
limited resources and unlimited wants |
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Opportunity cost |
value of what must be given up ‘value of thenext best alternative’ |
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Rational self-interest |
individualsmaking purposeful choices to maximize utility |
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Utility |
measure of satisfaction enjoyment or happiness |
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Marginal analysis |
economics examines decisions at the margin |
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Scientific method |
1. Observe realworld outcomes 2. Formulatehypothesis 3. Test hypothesis 4. Accept, reject,or modify hypothesis 5. Well testhypothesis becomes economic theory |
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Economic models |
economic models simplify reality while retainingkey features |
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Microeconomics |
small scale economics choices behavior ofindividual consumers, firms and how they interact with the market |
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Macroeconomics |
large scale economics, choices behavior andperformance of economy as a whole. |
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Positive |
describes the world as it is, fact, true/false |
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Normative |
describes how the world should be, opinion |
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Individual’s economizing problem |
unlimited wants -> with limited resources/income -> leads to choices/tradeoffs |
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Production possibilities curve |
assumes fixedresources, full employment of resources, fixed production of technology, twogoods |
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Law of increasing opportunity cost |
opportunity costs increase as production of agood or service increases |
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3 economic systems |
Laisse Faire Capitalism (pure capitalism) Command System Market System |
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laisse faire capitalism (pure capitalism) |
government role is only establishing + enforcingproperty rights + contracts |
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command system |
government owns most of the resources, centralplanner makes all the decisions |
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market system |
capitalism, mixed economy, the government stepsin to fix market failures, there is decentralized decision making, individualsact in self interest |
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Invisible hand |
the unobservablemarket force that helps the demand and supply in a free market to reachequilibrium automatically |
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Circular flow model |
Idk look at pic |
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Market |
any place ofexchange for buyers and sellers |
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Demand |
amount of goods and services consumers arewilling and able to purchase at various prices |
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Law of demand: |
all else equal, as price increases our quantityand demand decrease, and vice versa |
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Diminishing marginal utility |
as we consume additional units of a good theutility gained becomes less and less (the more you consume of something theless joy it brings you) |
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Income effect |
lower price increases purchasing power andallows more consumption of goods and services. Higher prices will decreasepurchasing power and lead to lower consumption of goods and services. |
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Substitution effect |
lower price causes consumers to substitute awayfrom relatively more expensive goods in favor of less expensive goods |
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Determinants of demand |
i. If incomeincreases demand will also increase ii. Consumertastes and preferences iii. If number ofbuyers increases the demand will also increase |
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Supply |
amount producers are willing and able to sell atvarious prices |
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Law of supply |
all elseequal, an increase in price results in an increase in quantity supplied. Inother words, there is a direct relationship between price and quantity:quantities respond in the same direction as price changes. |
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Determinants of supply |
i. Technology ii. Taxes and subsides iii. Prices of related goods iv. Producer expectations v. Number of sellers |
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Market equilibrium |
i. Surplus: excessquantity supplied ii. Shortage:excess quantity demanded iii. Price floor, price ceiling: market cannot be below the floor or above the ceiling |
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Comparative advantage |
ability toproduce at a lower opportunity cost |
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Absolute advantage |
ability to produce using fewer resources |
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Principle of comparative advantage |
total output is maximized when each good isproduced by producer with comparative advantage in that good |
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Terms of trade |
ratio at which two countries exchange goods |
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Trading possibilities line |
combinations of goods possible by specializingin good with comparative advantage in trading |
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Gains from trade |
increase in output from specializing and trading |
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Trade barriers |
i. Tariff- taxon imported goods ii. Import quota- limit on the number of goods with a lower opportunity cost imported iii. Non-tariff barrier- licensing requirement, unreasonable qualitystandards, bureaucratic delay iv. Export subsidy |
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Cases for protection |
1. Military self-sufficiency 2. Diversification for stability 3. Infant Industry 4. Anti-Dumping 5. Increased domestic employment 6. Cheap foreign labor |
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Demand side market failure |
demand curve not reflective of consumer’swillingness to pay (WTP) |
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Supply side market failure |
supply curve not reflective of costs ofproduction |
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Market efficiency |
1. consumer surplus: their WTP minus the amount they actually pay 2. producersurplus: price minimum minus priceproducers will pay 3. total surplus=consumer surplus + producer surplus |
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Productive efficiency |
Productive efficiency is concerned withproducing goods and services with the optimal combination of inputs to producemaximum output for the minimum cost. |
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Allocative efficiency |
Occurs when there is an optimal distribution ofgoods and services, taking into account consumer’s preferences. |
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Deadweight loss |
by altering the supply and demand of a goodthrough price manipulation. In order to calculate deadweight loss, you need toknow the change in price and the change in quantity demanded. The formula tomake the calculation is: Deadweight Loss = .5 * (P2 - P1) * (Q1 - Q2). |
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Public goods |
1. Non-rivalrous-one person’s consumption of the good does not prevent anothers consumption 2. Non excludable-there is no effective way to prevent someone from benefiting from this good |
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Free rider problem |
investment with a personal cost but a commonbenefit leads to under provision |
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Externalities |
market transactions that impose a cost/benefiton an uninvolved third party |
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Price elasticity of demand |
i. Impact on total revenue ii. Determinants of price elasticity of demand |