Chapter 1-4 test

Scarcity and Choice

We want more than we can have—money, time, stuff. So we must choose.

Scarcity Necessitates Rationing

Limited resources mean we need a system to decide who gets what.

Competition Results from Scarcity

When things are scarce, people compete to get them.

Opportunity Cost

The value of what you give up when you choose something.

Utility

The satisfaction or happiness you get from something.

Incentives Matter

People respond to rewards and punishments.

Making Decisions at the Margin

You decide whether doing a little more is worth it.

Positive Economics

Describes facts and cause-effect relationships.

Normative Economics

Expresses opinions or what should happen.

Microeconomics

Zooms in on individuals and businesses.

Macroeconomics

Zooms out to look at the whole economy.

Opportunity Cost (again)

Same idea—what you give up when you choose something.

Opportunity Cost and the Real World

Used in budgeting, time management, and policy.

Trade and Mutual Gain

Both sides benefit from voluntary trade.

Trade Creates Value

Even if nothing new is made, trade makes people happier.

Transaction Costs

The 'extra' costs of making a trade—like time, effort, or fees.

Private Property and Markets

Ownership encourages care and smart use.

Production Possibilities Curve (PPC)

Shows trade-offs between two goods.

Law of Comparative Advantage

Countries or people should specialize in what they do best.

Mass Production and Innovation

Making lots of stuff efficiently often leads to new ideas.

3 Basic Questions Faced by All Economies

1. What to produce? 2. How to produce it? 3. For whom to produce?

Market vs. Political Organization

Markets use prices and voluntary exchange. Political systems use laws and votes.

Law of Demand

As price goes up, people buy less.

Consumer Surplus

The extra value you get from buying something at a lower price than you were willing to pay. Example: You'd pay $5 for coffee, but it only costs $3 your surplus is $2.

Elastic vs. Inelastic Demand

Elastic = sensitive to price changes. Inelastic = not sensitive. Example: Luxury cars are elastic. Insulin is inelastic.

Increase in Quantity Demanded

Happens when price drops (movement along the curve). Example: A sale on chips makes you buy more.

Increase in Demand

Happens when something other than price changes (shift of the curve). Example: A new health trend makes more people want kale.

Demand Curve Shifters

Income, tastes, population, expectations, prices of related goods. Example: If your income rises, you might buy more organic food.

Role of Profits and Losses

Profits signal success; losses signal problems. Example: A bakery making profits keeps baking. One losing money may close.

Producer Surplus

The extra money a seller makes above their minimum acceptable price. Example: You'd sell lemonade for $1, but someone pays $2—your surplus is $1.

Change in Quantity Supplied

Caused by price change (movement along the curve). Example: Higher prices make farmers grow more corn.

Decrease in Supply

Caused by something other than price (shift of the curve). Example: A drought reduces the amount of wheat farmers can grow.

Market Equilibrium

Where supply equals demand—no shortage or surplus. Example: At $3 per apple, buyers and sellers are both happy.

Economic Efficiency

Resources are used in the best way—no waste. Example: A factory producing max output with minimal cost.

Market Adjustment to Decrease in Supply

If supply drops, prices rise until demand matches. Example: Avocado shortage → higher prices → fewer buyers.

The Invisible Hand

Markets guide people to good outcomes without anyone planning it. Example: You buy what you want, sellers offer what's profitable—everyone benefits.

Link Between Resource and Product Management

Resources (like labor and materials) must be managed to make products efficiently. Example: A pizza shop must manage dough, ovens, and workers to serve customers.

Price Controls

Government sets max or min prices. Example: Rent control limits how much landlords can charge.

Price Ceilings

Max legal price—can cause shortages. Example: If gas is capped at $2, stations may run out.

Effects of Rent Control

Lower rent → more demand, less supply → housing shortage. Example: More people want cheap apartments, but landlords don't want to rent them.

Price Floor

Min legal price—can cause surpluses. Example: Minimum wage is a price floor for labor.

Economics of Minimum Wage

Helps workers earn more, but may reduce jobs if businesses can't afford it.

Tax Imposed on Buyers

Shifts demand curve down buyers pay more, buy less.

Elasticity and Tax Burden

Who pays more of the tax depends on elasticity. Example: If demand is inelastic, buyers bear more of the tax.

The Laffer Curve

Shows that raising tax rates too high can reduce total tax revenue. Example: If taxes are 90%, people might stop working or cheat.

Impact of a Subsidy

Government helps pay for something → more supply, lower prices. Example: Subsidizing solar panels makes them cheaper and more common.