midterm study guide

Scarcity

The fundamental economic problem of having seemingly unlimited human wants in a world of limited resources.

Purposeful behavior

The idea that individuals and firms make decisions with some desired outcome in mind.

Marginal analysis

Comparing the additional benefits of an action to the additional costs incurred.

Microeconomics

The study of individual economic units, such as consumers, firms, and markets.

Macroeconomics

The study of the economy as a whole, including topics like inflation, unemployment, and economic growth.

Budget Line

A graphical representation of all possible combinations of two goods that a consumer can afford given their income and the prices of goods.

Economic Resources

Also called factors of production, these include land, labor, capital, and entrepreneurship.

Land

Natural resources used in production.

Labor

Human effort used in production.

Capital

Manufactured goods used to produce other goods and services.

Entrepreneurship

The ability to bring together resources and take risks to create goods and services.

Production Possibilities Curve (PPC)

A graph that shows the maximum possible output combinations of two goods given limited resources and technology.

Opportunity Cost

The value of the next best alternative that is forgone when making a choice.

Full employment

When all available resources are being used efficiently.

Economic growth

Shown as an outward shift of the PPC, indicating an increase in resources or technological advancements.

Market Economy (Capitalism)

Economic decisions are made by individuals and businesses with little government intervention.

Command Economy

The government makes all economic decisions.

Mixed Economy

A combination of market and government control.

Invisible Hand

A concept by Adam Smith suggesting that individuals pursuing their self-interest unintentionally benefit society.

Creative Destruction

The process where innovation and new technologies replace outdated industries and jobs.

Law of Demand

As the price of a good increases, quantity demanded decreases, and vice versa.

Demand

The overall relationship between price and quantity demanded, shown as a demand curve.

Supply

The overall relationship between price and quantity supplied.

Determinants of Demand

Factors that shift the demand curve, including income, tastes, prices of related goods, expectations, and population.

Income Effect

The change in demand due to a consumer’s real income changing with price changes.

Substitution Effect

The change in demand due to consumers switching to cheaper alternatives.

Normal Good

Demand increases as income rises.

Inferior Good

Demand decreases as income rises.

Complements

Goods that are used together.

Substitutes

Goods that can replace each other.

Market Equilibrium

The price and quantity at which demand equals supply.

Price Floor

A minimum legal price, causing a surplus if above equilibrium.

Price Ceiling

A maximum legal price, causing a shortage if below equilibrium.

Elasticity

A measure of how much quantity demanded or supplied responds to price changes.

Price Elasticity of Demand (PED)

Formula: % change in quantity demanded / % change in price.

Total Revenue Test

If price and total revenue move in opposite directions, demand is elastic.

Cross-Price Elasticity of Demand

% change in qty demanded of x / % change in price of y.

Income Elasticity of Demand

% change in qty demanded / % change in income.

Utility

The satisfaction gained from consuming a good.

Law of Diminishing Marginal Utility

As consumption increases, the additional satisfaction (marginal utility) decreases.

Explicit cost

Direct, out-of-pocket payments for resources used in production.

Implicit cost

The opportunity costs of using resources that could have been employed elsewhere.

Accounting Profit

Total Revenue - Explicit Costs.

greater than economic profits because the former do not take implicit costs into account.

Economic Profit

Total Revenue - (Explicit + Implicit Costs).

Fixed Cost

Costs that don’t change with output.

any cost that does not change when the firm produces zero units of output

Variable Cost

Costs that change with output.

Average Total Cost

Total Cost / Quantity

declines continually as output increases.

Marginal cost

Change in total cost / change in quantity.

change in total cost that results from producing one more unit of output.

Short Run vs. Long Run Costs

Short Run: At least one input is fixed; Long Run: All inputs are variable.

Absolute Advantage

The ability to produce more of a good with the same resources.

Comparative Advantage

The ability to produce a good at a lower opportunity cost.

Gains from Trade

Both countries benefit by specializing and trading based on comparative advantage.

Marginal utiltiy

b. change in total utility obtained by consuming one more unit of a good

Other things equal, an increase in the price of product A will

decreases the marginal utility per dollar spent on A

If the supply and demand curves for a product both decrease, then equilibrium

quantity must decline, but equilibrium price may rise, fall, or remain unchanged