Microeconomics Exam 1A Study Set

New Defenition of Economics

The study of how people make choices in a world of scarcity

Old Defenition of Economics

The study of how societies produce and distribute goods and services to meet their needs.

Microeconomics

The study of individual parts of the economy, such as individual consumers, workers, and businesses.

Macroeconomics

The study of the economy as a whole.

Scarcity

Limited resources and unlimited wants

Inputs

Labor, resources, materials, and energy—that are converted into outputs

Outputs

The goods, services, and ideas that result from the conversion of inputs

Production

The transformation of inputs(resources) to outputs(services)

Distribution/Allocation

A decision of how products or resources are divided among different groups of people

Opportunity Cost

The next-best alternative given up when making a choice

What are the three ways to organize economic life?

Tradition, market, and command system.

What is a tradition/custom economy?

An economy where people produce and distribute goods and services based on how their ancestors did it.

Example of Tradition in the Modern World

A family business continues using the same traditional methods and practices that have been passed down through generations.

What is a market?

A place where buyers and sellers interact to set prices and quantities.

Example of the Market Mechanism

If people want more smartphones, demand increases, prices rise, and businesses produce more smartphones to meet the demand.

What do prices and quantities do in a market?

They act as signals that coordinate economic life.

What is a command system?

A system where one person in a bureaucracy orders another person around.

Example of Command System

In a company, a manager tells employees what tasks to do and how to do them.

What is a bureaucracy?

An organization where people have different levels of authority and one person can give orders to another.

What is the economic method?

Building and using models or theories to understand the complex real world.

What is a model?

A simplified replica of the real world, much like a map.

What is a Good Model?

One that is useful in the real world.

What are assumptions?

Simple but false statements about the real world that are used as the building blocks of models.

What are the three steps of the economic method?

1. Make assumptions about the real world.

2. Use the assumptions to build a model.

3. Use the model to understand the real world.

What makes a good economic model?

It helps us understand the real world, predict events in the real world, and guide policy in the real world.

What is the Post Hoc Fallacy?

The belief that because Event A happens before Event B, Event A must have caused Event B.

What is the lesson of the Post Hoc Fallacy?

It is very difficult to observe cause and effect.

What is the Fallacy of Composition?

The belief that if something is true for an individual or part, it must also be true for a group or whole.

What is the lesson of the Fallacy of Composition?

A macroeconomic outcome does not necessarily follow from microeconomic intentions.

What is the ceteris paribus assumption?

The assumption that all other things remain unchanged, or that one thing changes at a time.

What does Ceteris Paribus mean in simple terms?

Keep everything else the same.

What is the Production Possibilities Frontier (PPF)?

A model showing the combinations of two goods that can be produced using available resources and technology.

What does the PPF (Production Possibilities Frontier) model explain?

How producers use resources and technology to produce goods and services.

What are the three basic assumptions of the PPF model?

A nation has given resources, given technology, and produces two goods.

What are the three economic resources?

Land, labor, and capital.

What is land?

The natural resource or gifts of nature used in production.

What are examples of land resources?

Topsoil, minerals, clean water, air, and fossil fuels.

What is labor?

The human resource, consisting of people who are willing and able to work.

What determines the productivity of labor?

Partly, the quality of the labor force and human capital investment.

What is human capital investment?

Investment in people that increases their ability to produce goods and services.

What are examples of human capital investment?

Education, healthcare, and training.

What is capital?

The produced resource consisting of equipment, tools, and structures used to assist workers in production.