Econ Exam 1 Review

Scarcity

Not enough of everything for everyone to get what they want

Scarce Goods

Goods with less in existence than people want (e.g. O2 in scuba tank)

Free Goods

Goods that exist in amounts sufficient for everyone

trade-off

giving up one good to get another (every decision is this)

opportunity cost

value of the next best alternative to a chosen option (only cost that matters to economists)

Institutions

social rules (laws, constitutions, social norms)

Incentive

benefit or drawback of a certain option that influences people choices

Microeconomics

Branch of econ that studies the behavior of individuals, firms, and households under scarcity

Good

anything an agent prefers to have more of rather than less

Bad

another an agent prefers to have less rather than more

Reservation Price

minimum price you’d be willing to sell a good

Production Possibilities Frontier (ppf)

Absolute Advantage

who can make more of a good (can have in both goods)

Comparative Advantage

Who can make a good at the lowest opp. cost (can only have in one good)

Demand

relationship between price and quantity demanded

Quantity Demanded

amount of a good that someone wants to purchase at a given price

Law of demand

as price increases quantity demanded decreases, ceteris paribus

Consumer surplus

benefit recieved - actual price paid (consumer values it more than price paid)

Demand shifted

tastes
population

Income
taxes+subsidies
future expectations

Normal Good

income increases, demand increases

bad good

income increases, demand decreases

Supply

relationship between price and quantity supplied

law of supply

as price increases quantity supplied increases

Producer surplus

prices received - cost

Supply shifted

technology

taxes and subsidies

expectations

change in price of inputs

entry or exit of producers

change in the opp. cost of production

Market clearing

quantity supplied = quantity demanded

things market prices incentivize

maximizing gains from trade

invent new products

invent new production tech

specialization

Allocation

Assign to a purpose

allocation mechanism

a means of deciding how to allocate resources (all scarce resources have this) (implies some source of comp)

Allocation Mech
First come first serve
lottery
might makes right
status

Comp
queuing
get entries

violence

social gains

Spontaneous order

An orderly arrangement of society that is the result of human action but not of any human design
- no central planner

speculation

buy/sell now to get profit from selling or buying later

abritrage

buying low to sell high usually in 2 different markets