Unit 1

utility

utility

happiness obtained from consuming a product

marginal

additional/extra

aggregate

combining different elements

positive economics

fact and cause-and-effect

normative economics

what we should do about the economy, what needs to be done

economizing problem

choices because want > need

four resource categories

land, labor, capitol, entrepreneurial ability

production possibilities model assumes

full employment, fixed resources, fixed technology, only produce 2 goods

future goods

capitol goods, like machinery

present goods

consumer goods, like pizza

limits to terms of trade

in between opportunity costs

laissez-faire capitalism

gov not involved

command systems

gov controls everything

market system

capitalism or mixed economy

characteristics of the market system (9)

private property, freedom of enterprise and choice, self interest, competition, markets and prices, technology and capitol goods, specialization, use of money, active but limited gov

private property (characteristics of the market system)

ensure only mutually agreeable economic transactions

protection of intellectual prop as well

freedom of enterprise (characteristics of the market system)

free to obtain and use economic resources to produce their goods and services and to sell them in the market

freedom of choice (characteristics of the market system)

enable owners to employ/dispose of property and money how they want

market (characteristics of the market system)

institution bringing together buyers and sellers

specialization (characteristics of the market system)

human and geographical specialization

use of money (characteristics of the market system)

money is medium of exchange

virtues of market system (3)

efficiency, incentives, freedom

demise of the command system (2)

coordination problem, incentive problem

types of business (3)

sole proprietorship, partnerships, corporation

law of demand

inverse relationship between price and quantity

law of diminishing marginal utility

as you buy more you gain less utility from each subsequent purchase

income effect

have more money, smaller percentage of income, buy more

substitution effect

buy a cheaper produce that can be substituted for a more expensive one

demand x and y axis

x axis - quantity

y axis - price

determinants of demand (5)

consumer taste, number of buyers, consumer income, price of related goods, consumer expectations

law of supply

as price goes up, quantity supplied also goes up

changes in supply (6)

resource prices, technology, taxes and subsidies, prices of other goods, producer expectations, number of sellers

equilibrium price

quantity demanded = quantity supplied

productive efficiency

allocating resources in least costly way

allocative efficiency

using capitol that best fits the product

price ceiling

max price

price floor

minimum price

demand side market failures

impossible to charge consumers exactly what they are willing to pay

supply side market failures

a company doesn’t have to pay the full cost of producing their product (ex. pollution)

consumer surplus

difference between consumer max price and actual price

producer surplus

producer minimum acceptable price, what they are actually charging

deadweight loss

result from over/under production (efficiency losses)

public goods

non rivalrous

nonexcludability

private goods

rivalry

excludability

club goods

non rivalrous

excludability

common goods

rivalrous

nonexcludability

externality

cost/benefit seeps into a third party

negative externality

supply side market failures

cost goes to a third party

positive externalities

demand side market failures

benefits go to everyone, not just the people who pay for them

coase theorem

private negotiation is better than government intervention for a negative externality

principal-agent problem

principal is like the politician who wants to be re-elected, but the agent are the interests of societyspe

special interest effect

only want to help the larger groups, while ignoring the small groups

pork-barrel politics

only make projects for specific groups

rent-seeking behavior

like lobbying

clear benefits, hidden costs

do stuff that benefits short term because they’re trying to get reelected

fiscal policy

tax rates + gov spending

monetary policy

interest rates

positive externalities have 2 ______ curves

and are always on the ______

1. demand

2. left

negative externalities have 2 ______ curves

and are always on the ______

1. supply

2. right