Econ Exam 1

theory

simplified representation of how 2+ variables interact with each other

model

applied representation of a theory

scarcity

limited resources, unlimited wants

economics studies peoples’ decision about how to allocate resources

opportunity cost

value (net gain) of the forgone opportunity (best alternative choice)

production possibilites fronteir

shows how much a country can produce

inside the PPF

inefficient allocation of resources

outside the PPF

not possible unless there are

* technological advancement
* trade

on the PPF line

efficient production and allocation of resources

technical efficient

economy getting all it can from the scarce resources it has

* on the PPF line = technical efficient
* inside the PPF line = technical inefficient

technical efficiency

using fewest possible resources to produce the greatest possible amount of output given inputs

allocative efficiency

producing the output that people value most

specialization

* workers focus on parts of production process where they have an advantage
* learn to produce more quickly and higher quality

economies of scale

level of production increase, average cost of producing each unit decrease

interdependence occurs because

people are better off when they specialize and trade with others

patterns of production and trade based on

differences in opportunity cost

quantity demanded

amount of good that buyers are willing/able to purchase

* want it
* can afford it
* plan to buy it

market demand

sum of quantities demanded by all buyers at each price

law of demand

price increase, quantity demanded decrease

ceteris-paribus

holding all others the same

change in price or Qd

movement along demand curve

non-price determinants of demand

shift in demand curve

1. income increase for normal good
2. income decrease for normal good

1. shift right demand curve
2. shift left demand curve

1. income increase for inferior good
2. income decrease for inferior good

1. shift left demand curve
2. shift right demand curve

normal good

when income increase, demand increase

inferior good

when income increase, demand decrease

price increase of substitute goods

demand curve shift right

price increase of complement goods

demand curve shift left

quantity supplied

sum of quantities by all sellers at each price

shortage

* excess demand
* price increase
* increase supply to close gap

surplus

* excess supply
* price decrease
* less supply in market to close gap

law of supply and demand

* $ adjust to balance supply and demand
* equilibrium $ guide economic decisions and allocate scarce resources

elasticity of demand

* how much Qd responds to a change in price
* measures $ sensitivity of buyers’ demand

perfectly inelastic

* elasticity of demand= 0
* no change of Qd due to change of price
* shape: vertical line

inelastic

* elasticity of demand < 1
* % change Qd < % change P
* shape: very steep line

unitary elastic

* elasticity of demand = 1
* % change Qd = % change P
* shape: medium steep line

elastic

* elasticity of demand > 1
* % change Qd > % change P
* shape: flatter than steep line

perfectly elastic

* elasticity of demand = infinity
* infinite change Qd, no change P
* shape: horizontal line