ECN211 Midterm #1 Terminology

Scarcity

The limited nature of society’s resources

Economics

The study of how society manages its scarce resources

Efficiency

The property of society getting the most it can from its scarce resources

Equality

The property of distributing economic prosperity uniformly among the members of society

Opportunity cost

Whatever must be given up to obtain some item

Rational People

People who systematically and purposefully do the best they can to achieve their objectives

Marginal Change

An incremental adjustment to a plan of action

Incentive

Something that induces a person to act

Market Economy

An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

Property Rights

The ability of an individual to own and exercise control over scarce resources

Market Failure

A situation in which a market left on its own does not allocate resources efficiently

Externality

The impact of one person’s actions on the well-being of a bystander

Market Power

The ability of a single economic actor (or small group of actors to have a substantial influence on the market prices

Productivity

The quantity of goods and services produced from each unit of labor input

Inflation

An increase in the overall level of prices in the economy

Business Cycle

Fluctuations in economic activity, such as employment and production

Circular-Flow Diagram

A visual model of the economy that shows how dollars flow through markets among households and firms

Productions Possibilities Frontier (PPF)

A graph that shows the combinations of output that the economy can possibly produce with the available factors of production and production technology

Mircoeconomics

The study of how households and firms make decisions and how they interact in markets

Macroeconomics

The study of economy-wide phenomena, including inflation, unemployment, and economic growth

Positive Statements

Claims that attempt to describe the world as it is

Normative Statements

Claims that attempt to prescribe how the world should be

Absolute Advantage

The ability to produce a good using fewer inputs than another producer

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer

Imports

Goods produced abroad and sold domestically

Exports

Goods produced domestically and sold abroad

Market

A group of buyers and sellers of a particular good or service

Competitive Market

A market in which there are so many buyers and sellers so each has a negligible impact on the market price

Quantity Demanded

The amount of a good that buyers are willing and able to purchase

Law of Demand

The claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises

Demand Schedule

A table that shows the relationship between the price of a good and the quantity demanded

Demand Curve

A graph of the relationship between the price of a good and the quantity demanded

Normal Good

A good for which, other things being equal, an increase in income leads to an increase in demand

Inferior Good

A good for which, other things being equal, an increase in income leads to a decrease in demand

Substitutes

Two goods for which an increase in the price of one leads to an increase in the demand for the other

Complements

Two goods for which an increase in the price of one leads to a decrease in the demand for the other.

Quantity Supplied

The amount of a good that sellers are willing and able to sell

Law of Supply

The claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises

Supply Schedule

A table that shows the relationship between the price of a good and the quantity supplied

Supply Curve

A graph of the relationship between the price of a good and the quantity supplied

Equilibrium

A situation in which the market price has reached the level at which the quantity supplied equals the quantity demanded

Equilibrium Price

The price that balances the quantity supplied and the quantity demanded

Equilibrium Quantity

The quantity supplied and the quantity demanded at the equilibrium price

Surplus

A situation in which the quantity supplied is greater than the quantity demanded

Shortage

A situation in which the quantity demanded is greater than the quantity supplied

Law of Supply and Demand

The claim that the price of any good adjusts to bringing the quantity supplied and the quantity demanded of that good into balance

Price Ceiling

A legal maximum on the price at which a good can be sold

Price Floor

A legal minimum on the price at which a good can be sold

Tax Incidence

The manner in which the burden of a tax is shared among participants in a market

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country in a given period

Consumption

Spending by households on goods and services, with the exception of purchases of new housing

Investment

Spending on business capital, residential capital, and inventories

Government Purchases

Spending on goods and services by local, state, and federal governments

Net Exports

Spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

Nominal GDP

The production of goods and services valued at current prices

Real GDP

The production of goods and services valued at constant prices

GDP Deflator

A measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

Components of GDP

Y (GDP) = C (Consumption) + I (Investment) + G (Government Purchases) + NX (Net Exports)

Economic Pie

Efficiency - the size of the pie

Equality - how evenly the pie is sliced

Productivity

The amount of goods and services produced by each unit of labor input

The Invisible Hand

The ability of free markets to reach desirable outcomes, despite the self interest of market participants