Economics 101 Exam 1 - SDSU Cullivan

Microeconomics

the study of the economy at the small-scale level, examining individuals and specifics markets

-deals with individual households and markets (gasoline market)

-how market prices are determined and how they will adjust to a variety of different events (weather and government regulation)

Macroeconomics

The study of the economy at the large-scale level, examining total output, the price level, and other aggregate measures of the economy

-examines entire economy of a state, a country, or the world

-deals with large-scale issues of an economy like total output, average price levels (and inflation) and unemployment

-the whole economy can be affected by important national and global events (wars, natural disasters, and technological innovation, decisions made by government policy makers)

Aggregate

Means "total"

-Used in macroeconomics (aggregation)

Aggregation

In macroeconomics:

-Adds up output across all industries

-Adds up prices to arrive at one measure of how expensive goods and services are this year compared to last year

-Adds up data about whos employed and who isn't so we know the state of all labor markets and develop a measure of the unemployment rate

Economics

The study of how individuals and societies allocate scarce resources among many competing uses

Resource

Any item, whether a gift of nature, the result of production, or the result of human effort, that is used to produce goods and services

Land

All natural resources used in production; sometimes referred to as "gifts of nature"

Labor

All physical and mental activity devoted to producing goods and services

Capital

The tools, machinery, infrastructure and knowledge used to produce goods and services.

-Sometimes divided into "physical" and "human"

Physical capital

refers to tangible items that are created to increase productivity

Human capital

refers to the knowledge and skills that people acquire in order to increase productivity

Entrepreneurial ability

The talent or ability to combine land, labor, and capital to produce goods and services.

-Different from human capital and in that it primarily involves assuming risk and organizing resources into a productive process

Scarcity

A condition that results from the inability of limited resources to satisfy unlimited wants

-reflects the fact that unlimited wants cannot be completely satisfied with limited resources

Relative scarcity

The comparison of the scarcity of one good, service or resource to that of another

(relative scarcity of drinkable water as compared to water in general)

Allocation

The process of assigning a good, service, or resource to one use instead of another

(proposal that would change the allocation of public space for recreational use by demolishing a skating park and building an arboretum)

Opportunity Cost

The value of the next-best forgone alternative; the value of the opportunity that you gave up when you chose one activity, or opportunity, instead of another

-Exist because of scarcity

Self-interest

The idea that people choose to do the things that interest them

Marginal benefit

The additional benefit associated with 1 more unit of an activity

Marginal cost

The additional cost associated with 1 more unit of an activity

Marginal decision making

The process of making choices in increments by evaluating the additional, or marginal, benefit against the additional, or marginal, cost of an action

Optimization

The idea that people make choices in order to maximize the overall benefit, or utility, of an action subject to its cost; people will engage in an activity as long as the marginal benefit of an activity is greater than or equal to its marginal cost

Decreasing marginal benefit

The negative relationship between the marginal benefit associated with the use of a good or service and the quanitity consumed; the more of a good or service that is consumed, in a given period of time, the lower the marginal benefit associated with each additional unit

Increasing marginal cost

The postive relationship between the marginal cost associated with the use of a good or service and the quanitity produced; the more of a good or service that is produced, in a given period of time, the higher the marginal cost associated with each additional unit

Decreasing marginal benefit

The negative relationship between the marginal benefit associated with the use of a good or service and the quantity consumed; the more of a good or service that is consumed, in a given period of time, the lower the marginal benefit associated with each additional unit

Increasing marginal cost

The positive relationship between the marginal cost associated with the use of a good or service and the quantity produced; the more of a good or service that is produced, in a given period of time, the higher the marginal cost associated with each additional unit

Optimal level of output

the level of output at which the marginal benefit of the last unit produced and consumed is equal to the marginal cost of that unit

MB=MC

Production possibilities schedule

a table that shows the possible combinations of two different goods or services that can be produced with fixed resources and technology

Production Possibilities frontier (PPF)

A graph that shows the possible combinations of two different goods or services that can be produced with fixed resources and technology. The PPF shows the production combinations that are both attainable and efficient

Constant opportunity costs

A characteristic of production whereby the opportunity cost associated with increasing the production of one good or service, in terms of another, is constant at every level of production.

Efficient allocation of resources

Allocation of resources in such a way that it is possible to increase the production of one good only by decreasing the production of another.

Inefficient allocation of resources

allocation of resources in such a way that it is possible to increase the production of one good without decreasing the production of another

Constant Opportunity Costs

A characteristic of production whereby the opportunity cost associated with increasing or decreasing the production of one good or service, in terms of another, is constant at every level of production.

Comparative advantage

the ability to produce a good or service at a lower relative opportunity cost than other producers

Specialization

The practice of producing a single good or service rather than producing multiple goods or services

Terms of trade

the price of one good, service, or resource in terms of another

Gains from trade

The benefit, or wealth, that accrues to a buyer or seller as a result of trading one good, service, or resource for another. The wealth, or additional well-being, created by trade does not have to be monetary.

Law of increasing opportunity cost

A principle in economics that holds that because some resources are better suited to producing one good or service than another, as the production of a good or service increases, the opportunity cost of each additional unit rises

Circular flow model

A model that concisely describes how goods, services, resources, and money flow back and forth in an economy.

Market

Any place where, or mechanism by which, buyers and sellers interact to trade goods, services, or resources

Good

a tangible product that consumers, firms, or governments wish to purchase

Service

an intangible product or action that consumers, firms, or governments wish to purchase

Resource

Any item, whether a gift of nature, the result of production, or the result of human effort, that is used to produce goods and services.

Law of demand

A principle in economics that states that as the price of a good, service, or resource rises, the quantity demanded will decrease, and vice versa, all else held constant

Demand schedule

A tabular representation of the relationship between the price of a good, service, or resource and the quantities consumers are willing and able to buy over a fixed time period, all else are held constant

Demand curve

A tabular representation of the relationship between the price of a good, service, or resource and the quantities consumers are willing and able to buy over a fixed time period, all else held constant

Quantity demanded

The quantity of a good, service, or resource that consumers are willing and able to buy at a given price

Income effect

The effect that a change in the price of a good, service, or resource has on the purchasing power of income.

-When prices decrease, the purchasing power of income increases and consumers are able to purchase more goods, services, or resources

Substitution effect

The effect that a change in the price of one good, service, or resource has on the demand for another.

-An increase in the price of one good will increase the demand for it's substitutes, and vice versa

Diminishing marginal utility

The negative relationship between the quantity of a good, service, or resource and the marginal utility obtained from each additional unit consumed in a given period of time.

Market demand

The overall or total demand for a good, service, or resource. It represents the horizontal summation of the quantities demanded by individuals, firms, states or even nations at each price over a fixed time period, all else held constant

Shift in demand

A change in the quantity of a good, service, or resource demanded at every price.

-Graphically:

-an increase in demand is represented by a rightward shift of the demand curve

-a decrease in demand in represented by a leftward shift of the demand curve

movement along the demand curve

a change in the quantity of a good, service, or resource demanded that is the result of a change in that good's price.

-Graphically:

-This change is represented as a movement along an existing demand curve

Normal good

A good for which there is a direct relationship between the demand for the good and income.

-Normal goods: an increase in income increases demand

-Decrease in income decreases demand

-Good with a positive income elasticity of demand

Inferior good

a good for which there is an inverse relationship between the demand for the good and income.

-Inferior goods:

-increase in income decreases demand

-decrease in income increases demand

-Good with negative income elasticity of demand

Tastes and preferences

The perception of the desirability associated with consuming a good, service or resource

Buyers

Market participants who seek to obtain goods, services and resources

Expectations

the anticipation by individuals and firms of costs and benefits that lie in the future

Substitutes

Goods, services, or resources that are viewed as replacements for one another.

Complements

Goods, services, or resources that are used or consumed with one another.

Law of supply

A principle in economics that states that as the price of a good, service, or resource rises, the quantity supplied will increase, and vice versa, all else held constant

Diminishing marginal productivity

The principle that if at least one input of production is fixed, the marginal productivity of additional variable resources will eventually fall, all else held constant.

Supply schedule

A tabular representation of the relationship between the price of a good, service or resource and the quantities producers are willing and able to supply over a fixed time period, all else held constant

Supply curve

A graphical representation of the relationships between the price of a good, service or resource and the quantities producers are willing and able to supply over a fixed time period, all else held constant

Quantity supplied

The quantity of a good, service, or resource that producers are willing and able to supply at a given price

Market supply

The overall, or total, supply of a good, service, or resource.

-Represents the horizontal summation of the quantities supplied by individuals, firms, states or even nations at each price over a fixed time period

-All else held constant

Shift in supply

A change in the quantity of a good, service, or resource supplied at every price.

-Graphically:

-Increase in supply is represented by a rightward shift of the supply curve

-Decrease in supply is represented by a leftward shift of the supply curve

Movement along a supply curve

Change in the quantity of a good, service, or resource supplied due to a change in its price

-Graphically:

-This change is represented as a movement along an existing supply curve

Subsidy

A payment made by the government that does not necessarily require an exchange of economic activity in return.

-Most often take the form of payments to buisnesses

Tax

A payment made to government that is the result of economic activity.

-Generally collected from both individuals and firms

Resources (Supply)

The inputs used to produce goods and services (factors of production)

-Fall into one of the four categories: land, labor, capital and entrepreneurial ability

Technology

The knowledge, inventions, and innovations that can potentially increase resource productivity

Sellers

Market participants who are willing and able to sell goods, services or resources

Seller expectations

The anticipated future outcomes, including prices, that sellers associate with the production of a good, service or resource

Equilibrium price

the price at which the quantity supplied of a good, service, or resource equals the quantity demanded

-the price at which the demand and supply curves intersect

-known as the market-clearing price

equilibrium quantity

The quantity traded when the quantity supplied of a good, service, or resource equals its quantity demanded

Shortage

A situation in which the quantity demanded is greater than the quantity supplied at the current market price

-Also called excess supply

Nonprice determinant (demand)

a characteristic of the demand for a good, service, or resource other than its own market price.

-Change in non-price determinant of demand changes the relationship between price and quantity demanded, either increasing or decreasing quantity demanded at every price

-Referred to as non-own-price determinant

Change in demand

An increase or a decrease in the quantity demanded of a good, service, or resource at each possible price.

-Graphically:

-Represented by a shift in the demand curve

-Changes in demand are caused by changes in the nonprice determinants of demand

nonprice determinants of demand

A characteristic of the supply of a good, service, or resource other than its own market price

-Change in supply causes a change in the relationship between price and quantity supplied

-Either increasing or decreasing quantity supplied at every price

-Referred to as "non-own price determinant"

Change in supply

an increase or decrease in the quantity supplied of a good, service, or resource at every price.

-Graphically:

-Changes are represented by a shift of the supply curve

-Changes in supply are caused by changes in a nonprice determinant of supply

Price ceiling

a maximum legal price at which a good can be sold

-Market equilibrium price is lower than the price ceiling, the ceiling has no effect on the market

-Nonbinding

Binding price ceiling

A maximum legal price that is set below the existing equilibrium price.

-Because the market equilibrium price is greater than the price ceiling, the ceiling restricts trade

-Binding

Price floor

A minimum legal price at which a good, service, or resource can be sold

Nonbinding price floor

A minimum legal price that is set below the existing equilibrium

-Because the market equilibrium price is greater than the price floor, the floor has no effect on the market

-nonbinding

Binding price floor

A minimum legal price that is set above the existing equilibrium price

-Because the market equilibrium price is lower than the price floor, the floor restricts trade

-Binding

Minimum wage

The lowest wage firms can legally pay employees in the labor market

Excise tax

A tax based on the number of units purchased, not on the price paid for a good or service