Microeconomics

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75 Terms

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How do scarcity and poverty differ?

Scarcity is limited resources, Poverty is limited income

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Why can't opportunity cost exist without scarcity?

If some things aren't limited (scarce), then you wouldn't need an alternative (trade-off method)

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Does an economy that is inside its production possibilities curve face any trade-offs?

Yes, if there are opportunity costs

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How can a good be costly yet not scarce?

If it is high in demand, yet abundant

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Scarcity

When a society does not have enough resources to produce all the things people would like to have

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Factors of Production

Resources that help a society produce and distribute its goods and services

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FoP: Land

Natural resources

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FoP: Capital

Tools, equipment, factories used in the production of goods and services

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FoP: Financial capital

Money used to buy the tools and equipment used in production

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FoP: Labor

People with their skills

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FoP: Entrepreneurs

People who start new businesses or bring new products to market

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Economics

Study of human efforts to satisfy wants through use of scarce resources

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Opportunity Cost

The cost of the next best alternative use of money, time, or resources when one choice is made rather than another

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Production Possibilities Curve/Frontier

A diagram representing combinations of goods or services an economy can produce when all productive resources are employed

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Need

Basic requirement for survival

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Want

Means of expressing a need

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Free Products

Sunshine, Air, etc. (v plentiful that no one can own)

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Good

A tangible commodity (car, book, etc.)

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Consumer Good

Intended for final use by individuals

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Capital Good

A good used to produce other goods

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Durable Good

An item that lasts more than 3 years when used on a regular basis (oven, stove, etc.)

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Nondurable Good

An item that lasts for less than 3 years when used on a regular basis (food, clothing, etc.)

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Service

Work that is performed for someone

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Consumers

People who use goods and services to satisfy wants and needs

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Consumption

The process of using up goods and services to satisfy wants and needs

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Value

Something that has a worth that can be expressed in dollars and cents

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Paradox of Value

Water, essential, has little value Diamond, nonessential, has high value

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Utility

Capacity to be useful

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Wealth

Sum of those economic products that are tangible, useful, transferable from one person to another

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Production

The process of creating goods and services

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Productivity

The efficient use of productive resources

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Specialization

Productive inputs do whatever task they are able to do best

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Division of Labor

Workers perform fewer tasks more frequently

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Human Capital

The sum of skills, abilities, motivation of people

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Economic Interdependence

When the actions in one part of the country or world have an economic impact on what happens elsewhere

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Market

A location that allows buyers and sellers to deal in a certain economic product

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Factor Markets

The markets where productive resources are bought and sold (where individuals earn their incomes)

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Product Markets

Markets where producers offer goods and services (where individuals spend their incomes)

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Standard of Living

The quality of life based on the possession of necessities and luxuries that make life easier

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Free Enterprise Economy

Consumers and privately owned businesses, instead of government, make the majority of WHAT, HOW, and FOR WHOM decisions

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Traits of Free Enterprise

Economic freedom, voluntary exchange, private property rights, and the profit motive

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Role of Government in a Free Enterprise

A protector, provider of goods, consumer, regulator, promoter of national goals

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Mixed Economy

People carry on their economic affairs freely, but are subject to government regulation

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Demand

The desire, ability, and willingness to buy a product

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Law of Demand

when prices increase, the quantity demanded decreases

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Demand Elasticity

The extent to which changes in price cause changes in the quantity demanded

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Economic Variables of Demand

  1. # of consumers (population) 2. Prices of complementary goods 3. Prices of substitute good 4. Consumer income 5. Taste and preferences 6. expectations
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Diminishing Marginal Utility

The more one buys of a product, the less eager they are to want it

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Supply

A schedule of quantities that would be offered for sale at all possible prices that could prevail in the market

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Law of Supply

Supplies offer more at high prices than at low prices

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Supply Elasticity

How changes in quantity supplies are affected by changes in price

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Economic Variables of Supply

Cost of Inputs, Productivity, Technology, # of sellers, taxes and subsides, expectations, govt regulations, cost of joint products

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Stages of Production

  1. Increasing Returns 2. Diminishing Returns 3. Negative Returns
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Fixed Costs

Cost of production that does not change when output changes

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Variable Costs

Cost that varies as output changes

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Marginal Cost

Extra cost of producing one additional unit of production

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Price

Helps sellers decide where to sell, and producers where to buy (signals that allocate resources between markets

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Price System

Flexible, provides maximum freedom of choice for everyone, no cost of administration, efficient, understood by everyone

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Rationing

Government agencies decide everyone's fair shares

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Market Equilibrium

Quantity Supplied = Quantity Demanded

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Surplus

Quantity supplied > Quantity Demanded

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Shortage

Quantity supplied < Quantity Demanded

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TINSTAAFL

"There is no such thing as a free lunch" -> there are o free products, you pay for it in other ways (ex: higher taxes)

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How is the price of a good decided?

Wealth, value, and utility

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Pillars of a free market

voluntary exchange, private property, profit, economic freedom

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capitalism

an economic system based on private ownership of capital

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5 characteristics of capitalism

economic freedom, voluntary exchange, private property rights, profit motive, and competition

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consumer sovereignty

consumer decides WHAT good and services to produce

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What kind of economy does the US have?

mixed economy/modified private enterprise economy: some govt intervention/regulation

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elastic

a small change in price causes a big change in # demanded

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inelastic

a change in price causes a small change in the # demanded.

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determinants of elasticity

time, substitutes, income

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causes for change in supply

cost of inputs, productivity, new technology, taxes, subsidies, expectations, government regulations and number of sellers

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price floor

if prices are considered too low, steps are taken to keep them higher ex: minimum wage

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price ceiling

a maximum legal price that can be charged for a product