CH 1-3 ECO 2013 UCF

Economics

The study of how individuals and societies manage scarce resources.

Scarcity

Desires exceed resources available to fulfill them.

Rational behavior

Making choices to achieve goals efficiently.

Implicit cost

Something you give up but don’t pay for in monetary terms.

Explicit cost

Monetary costs that are directly accounted for in financial transactions.

Opportunity cost

the value of what you give up in order to gain something in return

Marginal decision making

The process of comparing the additional benefits and costs of a decision without considering related benefits and costs of past choices.

Marginal benefit

The additional satisfaction gained from consuming one more unit of a good or service.

Marginal cost

The cost of producing one more unit of a good or service

Total benefit

Overall amount of value, satisfaction, or profit you gain.

Total cost

Overall amount of money spent on something.

Net benefit

The difference between total benefits and total costs.

Profit

The financial gain obtained when total revenues exceed total costs; total revenue - total costs.

Incentive

Something that causes people to behave in a certain way by changing the trade-offs they face.

Efficiency

using all available resources in the most productive way to maximize outputs

Correlation

A consistently observed relationship between two variables.

Causation

A relationship between two events in which one brings about the other.

Model

A simplified representation of the important parts of a complicated situation.

Circular flow model

A simplified representation of how the economy’s transactions work together.

Factor of production

land, labor, and capital

Revenue

The total income generated from the sale of goods and services by a business.

Categories of income

wages, rent, profit, and interest

Positive statement

A factual claim about how the world actually works.

Normative statement

A claim about how the world should be.

Production Possibilities Frontier

Line or curve that shows all possible combos of outputs that can be produced using all available resources.

Feasible point

Point inside the line; Possible but inefficient

Efficient point

On the line; Possible and efficient

Unattainable

Beyond the line; Not possible and inefficient

Economic Growth

Acquirement of more resources or existing resources become more productive

Shift in PPF

x + y change due to nonprice determinants within supply and demand

Pivot in PPF

x or y change due to price determinants within quantity supplied and quantity demanded

Constant Opportunity Cost

Opportunity cost of producing a good remains constant as production increases, indicating a linear production possibilities frontier (PPF).

Increasing Opportunity Cost

Opportunity cost of producing a good increases as production of that good rises, reflecting a concave production possibilities frontier (PPF).

Specialized Resources

Resources have specific uses and are not equally productive

Specialization

Spending all your time on one good

Gains from Trade

Improve in outcomes when producers focus on one good or service and exchange

Absolute Advantage

Generating more output than others with available resources

Comparative Advantage

Generating output at a lower opportunity cost than others

Beneficial Rate of Exchange

The rate at which one good or service is exchanged for another which ends up benefitting both parties more than not trading.

Market Economy

Private individuals make decisions rather than a centralized planning authority

Market

Physical or virtual place where buyers and sellers interact and determine the price of a good or service

Demand

The desire and ability of consumers to purchase a good or service

Supply

The total amount of a good or service that producers are willing and able to sell

Quantity

the amount of a good or service that is available for sale or that consumers wish to buy at a given price.

Competitive Market

A market where multiple producers compete to offer goods or services

Characteristic of a Competitive Market

Fully informed, price taking participants, no transaction costs, standardized good

Price Taker

Buyer or seller who cannot affect market price

Standardized Good

A good or service that is identical in quality and type across different producers and is interchangeable among them.

Transaction Costs

Costs incurred by buyers and seller during a sale of goods or services

Normal goods

Goods for which demand increases as consumer income rises.

Inferior Goods

Goods for which demand decreases as consumer income rises.

Substitute

Goods that can replace each other in consumption, where an increase in the price of one leads to an increase in demand for the other.

Complements

Goods that are consumed together, where an increase in the price of one leads to a decrease in the demand for the other.

Demand Curve

Represents consumers willingness to buy

Law of Demand

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

Market Demand

Sum of all individual demand curves

Quantity Demanded

The total amount of a good that consumers are willing and able to purchase at a given price during a specific period.

Nonprice Determinants of Demand

1. Consumers preference

2. Income

3. Price of related goods

4. Expectations of future prices

5. # of buyers in the market

Supply Curve

Represents suppliers willingness to sell

Law of Supply

All else equal, an increase in the price of a good leads to an increase in the quantity supplied.

Market Supply

Sum of individual supply curves for each firm

Nonprice Determinants of Supply

1. Price of related goods

2. Technology

3. Price of resources

4. Consumer expectations

5. # of sellers

Surplus

Quantity demanded is less than quantity supplied

Shortage

Quantity demanded is greater than quantity supplied