Basic Economics: Theory and Practice Exam 1

Economics

the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity, the incentives that influence those choices, and the arrangements that coordinate them

Scarcity

the condition that arises because wants exceed the ability of resources to satisfy them

Microeconomics

the study of the choices that individuals and businesses make and the way these choices interact with and are influenced by the government

Macroeconomics

the study of aggregate (total) effects on the national economy and the global economy of the choices that individuals, businesses, and governments make

Goods and services

the objects and actions that people value and produce to satisfy human wants

Self interest

the choices that are best for the individual who makes them

Social interest

the choices that are best for society as a whole

Tradeoff

an exchange; giving up one thing to get something else

Opportunity cost

the best thing you must give up in order to get something

Benefit

the gain or pleasure that something brings, measured by what you are willing to give up to get it

Rational choice

a choice that uses the available resources to best achieve the objective of the person making the choice

Choice on the margin

a choice that is made by comparing all the relevant alternatives systematically and incrementally

Marginal cost

the opportunity cost that arises from a one unit increase in an activity. What you must give up to get one additional unit of it

Marginal benefit

the benefit that arises from a one unit increase in an activity. Measured by what you are willing to give up to get one additional unit of it

Incentive

reward or penalty that encourages or discourages an action

Economic model

a description of the economy or a part of the economy that includes only those features assumed necessary to explain the observed facts

Positive relationship

a relationship between two variables that move in the same direction. Also called direct relationship

Linear relationship

relationship that graphs in a straight line

Negative relationship

relationship between two variables that move in opposite directions. Also called inverse relationship

Globalization

the acceleration of economic growth in the last two decades has made economic decision-making more complex as multinational concerns must be taken into account. Rational business decisions which bring a wider variety of lower-price choice to consumers may have negative side-effects on some producers

Natural experiment

a situation that arises in the ordinary course of economic life in which the one factor of interest is different and other things are equal (or similar)

Economic experiment

an experiment that puts people in a decision-making situation and varies the influence of one factor at a time to discover how they respond

2 parts of social interest

efficiency and equity

Production possibilities frontier

the boundary between the combination of goods and services that can be produces and the combinations that cannot be produced, given the available factors of production and state of technology

Production efficiency

a situation in which the economy is getting all it can from its resources and cannot produce more of one good or service without producing less of something else

Economic growth

the sustained expansion of production possibilities

Absolute advantage

when one person (or nation) is more productive than another - needs fewer input or takes less time to produce a good or perform a production task

Comparative advantage

the ability of a person to perform an activity or produce a good or service at a lower opportunity cost than anyone else

Productivity

how long does it take to produce one unit of a good

Quantity demanded

the amount of any good, service, or resource that people are willing and able to buy during a specified period at a specified price

Law of demand

other things remaining the same, if a price of a good rises, the quantity demanded of that good decreases; and if the price of a good falls, the quantity demanded of that good increases

Demand

the relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same

Demand schedule

a list of the quantities demanded at each different price when all the other influences on buying plans remain the same

Demand curve

a graph of the relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same

Change in demand

a change in the quantity that people plan to buy when any influence on buying plans other than the price of the good changes

Substitute

a good that can be consumed in the place of another good

Complement

a good that is consumed with another good

Normal good

a good for which the demand increases as income increases and decreases as income decreases

Inferior good

a good for which the demand decreases as income increases and increases as income decreases

Change in the quantity demanded

a change in the quantity of a good that people plan to buy that results from a change in the price of the good with all other influences on buying plans remain the same

Quantity supplied

the amount of any good, service, or resource that people are willing and able to sell during a specified period at a specified price

Law of supply

other things remaining the same, if the price of a good rises, the quantity supplied of that good increases; and if the price of that good falls, the quantity supplied of that good decreases

Supply

the relationship between the quantity supplied and the price of a good when all other influences on buying plans remain the same

Supply schedule

a list of the quantities supplied at each different price when all the other influences on selling plans remain the same

Supply curve

a graph of the relationship between the quantity supplied and the price of a good when all other influences on buying plans remain the same

Change in supply

a change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes

Substitute in production

a good that can be produced in place of another good

Complement in production

a good that is produced along with another good

Change in the quantity supplied

a change in the quantity of a good that suppliers plan to sell that results from a change in the price of the good

Market equilibrium

when quantity demanded equals quantity supplied (buyers' and sellers' plans are in balance)

Equilibrium price

price at which quantity demanded equals quantity supplied

Equilibrium quantity

quantity bought and sold at equilibrium price

Price elasticity of demand

a measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyer plans reman the same

Elastic demand

when the percentage change in the quantity demanded exceeds the percentage change in price

Unit elastic demand

when the percentage change in the quantity demanded is equal to the percentage change in price

Inelastic demand

when the percentage change in the quantity demanded is less than the percentage change in price

Perfectly elastic demand

when the quantity demanded changes by a very large percentage in response to an almost zero percentage change in price

Perfectly inelastic demand

when the percentage change in the quantity demanded is zero for any percentage change in price

Total revenue

the amount spent on a good and received by its seller and equals the price of the good multiplied by the quantity sold

Total revenue test

a method of estimating the price elasticity of demand by observing the change in total revenue that results from a price change

Cross elasticity of demand

a measure of the responsiveness of demand for a good to a change in the price of a substitute or complement when other things remain the same

Income elasticity of demand

a measure of the responsiveness of the demand for a good to change in income when other things remain the same

Command system

a system that allocates resources by the order of someone in authority

Allocative efficiency

a situation in which the quantities of goods and services are those that people value most highly

Consumer surplus

the marginal benefit from a good or service in excess of the price paid for it summed over the quantity consumed

Producer surplus

the price of a good in excess of the marginal cost of producing it, summed over the quantity produced

Total surplus

the sum of producer surplus and consumer surplus

Deadweight loss

the decrease in total surplus that results from inefficient underproduction or overproduction

Transaction costs

opportunity costs of making trades in a market

Big tradeoff

tradeoff between efficiency and fairness

Tax incidence

the division of the burden of a tax between the buyer and seller

Excess burden

the amount by which the burden of a tax exceeds the tax revenue received by the government

Price ceiling

upper limit on the price a good, service, or factor can be traded for

Search activity

time spent looking for someone to do business with

Subsidy

payment by government to the producer to cover part of the cost of production