Econ Midterm 1

Scarcity

Resources are scarce and therefore humanity cannot produce all the good and services people want

Economics

The study of how society manages its scare resources

Efficiency

Society is getting the most it can from its scarce resources

Equality

Distributing economic prosperity uniformly among the members of society  

Opportunity Cost

Whatever must be given up to obtain some item

Opportunity Cost Example

The money that could be earned while in class

Rational People

Systematically and purposefully do the best they can to achieve their goals, given the available opportunities

Marginal Change 

Small incremental adjustment to a plan of action 

Take action if

Marginal benefits > Marginal costs

Incentive

Something that induces a person to act

Countries benefit from trade

Allows a countries to specialize in what they do best

Market Economy 

The decisions of a central planner are replaced by those if millions of firms and households

What guides the decisions of households and firms

self-interest

What is the government needed to do

Enforce property rights

Productivity

Quantity of goods and services produced from each unit of labor input

What does a higher level of productivity mean?

A higher standard of living

Inflation

An increase in the overall level of prices in the economy

What is inflation almost always caused by

Excessive growth in the quantity of money, which causes the value to fall

Short term effects of increasing money growth

A lower level of unemployment

Business cycle 

Fluctuations in economic activity, such as employment and production 

Assumptions 

Can simply the complex world 

Circular Flow Diagram

Shows how dollars flow through markets among households and firms 

Production possibilities frontier (PPF)

a graph that shows the various combinations of outputs that the economy can possibly produce with the available factors of production and production technology

What do the points on the line mean

The economy is getting all it can from the scarce resources it has available

Points inside PPF are

inefficient

Outward shift of the PPF

Produce more of both goods

Positive statements 

make a claim about how the world is

Normative statements

make a claim about how the world ought to be

Market

A group of buyers and sellers of a particular good or service

Competitive market

Market in which there are many buyers and sellers, each buyer and seller has a  negligible impact on market price

Perfectly Competitive Market

Goods offered for sale are exactly the same 

Law of demand

when the price goes up demand falls, when price falls demand goes up

Quantity demanded

Amount of a good that buyers are willing and able to purchase

Individual demand

an individuals demand for a product

Demand schedule 

A table that shows the relationship between the price of a good and the quantity demanded

Demand curve

A graph of the relationship between the price of a good and the quantity demanded

Market demand

The sum of all the individual demands for a particular good or service

Market demand curve

Shows how the total quantity demanded of a good varies as its price changes, holding constant all the other factors that affect consumer purchases

Shift demand curve to the right

Change that increases quantity buyers want to purchase at any price shift

Shift demand curve to the left

Change that decreases quantity buyers want to purchase at any price shifts

normal good

an increase in income leads to an increase in demand

inferior good

an increase in income leads to a decrease in demand

Substitutes

pairs of goods that are used in place of each other

Complements

Pairs of goods that used together

Law of supply

other things being equal, when the price of a good rises, the quantity supplied also rises, and when the price falls, the quantity supplied falls well

Quantity supplied

Amount of a good that sellers are willing and able to sell 

Supply schedule

A table that shows the relationship between the price of a good and the quantity supplied

Supply curve

A graph of the relationship between the price of a good and the quantity supplied

Equilibrium

Quantity of the good that buyers are willing and able to buy exactly balances quantity that sellers are willing and able to sell

Equilibrium price

balances the quantity supplied and quantity demanded

Equilibrium quantity 

Quantity supplied and quantity demanded at the equilibrium price

Law of supply and demand

Claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded of that good into balance

Change in supply

A shift in the supply curve 

Change in demand

A shift in the demand curve

Change in the quantity supplied

A movement along a fixed supply curve

Change in the quantity demanded 

A movement along a fixed demand curve