EC 201 EXAM 1.5

Economics

The study of how people and societies allocate limited resources to satisfy nearly unlimited wants.

Scarcity

The fundamental economic problem where unlimited human wants exceed limited available resources, forcing choices.

Microeconomics vs. Macroeconomics

Microeconomics examines individual decision-making units such as consumers, firms, and specific markets, whereas macroeconomics analyzes the economy as a whole, including topics like inflation, unemployment, and growth.

Opportunity cost

The value of the single highest-valued alternative that must be sacrificed when a choice is made.

Marginal decision rule

The principle stating that an action should be taken if its additional benefit is greater than or equal to its additional cost ($MB \ge MC$).

Factors of production

The four fundamental inputs used to produce goods and services: labor, capital (physical capital), natural resources, and entrepreneurship.

Circular flow diagram

A economic model illustrating how goods, services, resources, and money flow between households and firms across product and factor markets.

Positive vs. Normative statements

Positive statements describe 'what is' and can be tested or verified against facts, whereas normative statements express opinions about 'what ought to be' and cannot be empirically tested.

Ceteris paribus

A Latin phrase meaning 'other things being equal,' used in economic modeling to isolate the relationship between two variables by holding all other factors constant.

Production Possibilities Frontier (PPF)

A graph showing the maximum attainable combinations of two goods an economy can produce given available resources and fixed technology.

Comparative advantage

The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than another producer.

Law of demand

The principle stating that, all else equal, an increase in price causes a decrease in quantity demanded, creating a downward-sloping demand curve.

Law of supply

The principle stating that, all else equal, an increase in price causes an increase in quantity supplied, creating an upward-sloping supply curve.

Change in quantity demanded vs. Change in demand

A change in quantity demanded is a movement along a fixed curve caused solely by a price change of the good, whereas a change in demand is a shift of the entire curve caused by non-price factors.

Normal good vs. Inferior good

Demand for a normal good rises as consumer income rises, whereas demand for an inferior good falls as consumer income rises.

Market equilibrium

The point at which quantity demanded equals quantity supplied ($Q_d = Q_s$), establishing a market-clearing price.

Price elasticity of demand ($E_d$)

A measure of how responsive buyers are to a change in price, calculated as percentage change in quantity demanded divided by percentage change in price.

Midpoint method formula for elasticity

An elasticity calculation using average prices and quantities: $E_d = \frac{\frac{Q_2 - Q_1}{(Q_1 + Q_2)/2}}{\frac{P_2 - P_1}{(P_1 + P_2)/2}}$

Cross-price elasticity of demand ($E_c$) for substitutes vs. complements

For substitute goods, $E_c > 0$ (positive); for complement goods, $E_c < 0$ (negative).