microeconomics (all)

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79 Terms

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scarcity

the reason the economy exists (conditions: desirable and limited in supply)

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economic system

a system for allocating scarce resources

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economics

the social science that studies the allocation of scarce resources between society’s competing wants & needs

  • how to deal with the problem of scarcity

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3 basic economic questions

  1. who will get the resources

  2. what will be produced with the resources

  3. who will receive the finished output of resources

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opportunity cost

the value of the next-best alternative that you give up in order to get an item

  • what could have been done with resources when a decision is made about their use

  • the opportunity lost

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production possibilities curve

a model that shows the tradeoffs society/individuals face in how to use scarce resources

  • shows what is possible in our use of scarce resources between 2 competing wants/needs

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linear PPC curve

when variable1 and variable2’s trade-offs are equal

  • constant opportunity cost

  • the 2 goods produced are identical and require the same resources

  • 1 million pizzas = 1,000 cars

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inefficient uses of time/resources

inside the PPC curve

<p>inside the PPC curve</p>
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impossible use of time/resources

outside the PPC curve

<p>outside the PPC curve</p>
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law of increasing opportunity cost

↑ production of a good/service = ↑ opportunity cost of producing each unit

  • bowed out PPC curve

  • this is because resources are not perfectly adaptable to all uses

  • the opportunity cost in terms of the other good that must be given up increases

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decreasing opportunity costs in the PPC

as output for one good increases, the opportunity cost (in terms of how many units of the other good given up) decreases

  • resources needed to produce some goods become less scarce as outputs increases

  • therefore, the cost of additional units decreases

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circular flow

a simplified diagram of macroeconomy

  • shows flow of money, goods/services, factors of production

  • flow of $ into each market/sector = flow of $ out of each market/sector

<p>a simplified diagram of macroeconomy</p><ul><li><p>shows flow of money, goods/services, factors of production</p></li><li><p><strong>flow of $ into each market/sector = flow of $ out of each market/sector</strong></p></li></ul><p></p>
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physical flow in the circular flow diagram (red)

goods, services, labor, raw materials

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payment flow in the circular flow diagram

payment for goods, services, labor, raw materials

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product markets

market where goods and services are 

  • bought (by households)

  • sold (by firms)

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consumer spending

household spending for goods and services

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factor markets

market where resources are

  • bought (by firms)

  • sold (by households)

    • households own and receive income from all factors of production

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government spending

everything spent on goods and services by federal, state, and local governments

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taxes

required payments to the government from firms and households

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tax revenue

the total amount of funds the government receives from taxes

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factors of production

the economy’s resource

  • land, labor, capital, entrepreneurship

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payments for factors of production

wages, rent, interest, profit

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disposable income

(income + govt transfers) - taxes

  • total amount of household income available to spend on consumption

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government transfers

payments the government makes to individuals without expecting a good/service in return

  • ex: unemployment insurance payments

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private savings

disposable income - consumer spending

  • household income that’s not spent on consumption

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financial markets

markets that channel private savings into investment spending and government borrowing

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government borrowing

an amount of funds borrowed by the government in financial markets

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investment spending

  • spending by firms on new productive physical capital

    • capital segways into future streams of $/output

    • buying machines, factories, houses

  • changes in inventory

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inventory

stocks of goods and raw materials held to facilitate business operations

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land

all natural resources (plants, water, minerals, raw materials)

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labor

effort of workers

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capital

manufactured goods used to make other goods and services

  • machinery, buildings, tools

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entrepreneurship

risk-taking, innovation, organization of resources for production

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marginal benefit

what you gain from doing something one more time

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marginal cost

the cost of doing something one more time

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marginal decisions

marginal benefit/cost

  • the gain/loss of doing something one more time

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marginal analysis

the study of the costs/benefits of doing something a little more/less

  • “how much” should you do of an activity?

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microeconomics

the study of how individuals, households, and firms make decisions and how those decisions interact

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macroeconomics

the study of overall ups and downs of the economy

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positive economics

economic analysis used to answer questions about how the economy works

  • has definitive right/wrong answers

  • descriptive

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normative economics

economic analysis that involves saying how an economy should work

  • prescriptive

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traditional economies

production and consumption are based on precedent

  • small villages, amish communities

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market economies

factors of production are privately owned, and the decisions of individual producers and consumers largely dictate what, how, and for whom to produce

  • capitalist

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free enterprise

a market economy with minimal government involvement

  • laissez-faire from the gilded age (late 1800s-1900)

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command economies

factors of production are publicly owned, and a central authority makes production and consumption decisions

  • communism, socialism

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mixed economies

combines elements of traditional, market, command economies

  • most modern markets (US, CHN, RUS, etc.)

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incentives

rewards/punishments that motivate particular choices

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property rights

establish ownership and grant individuals the right to trade goods and services with each other

  • applied to resources, goods, firms, intellectual property (inventions, art, etc.)

  • incentivize people to produce, keep, or trade for better things

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ceteris paribus

“other things equal”

  • all other relevant factors remain unchanged in economic models

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efficiency

there is no other way to make anyone better off without making at least one person worse off in an economy

  • no missed opportunities

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productive efficiency

if an economy is producing at any point on its PPC

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allocative efficiency

if an economy is producing at a point on its PPC that’s preferred by consumers

  • when a company produces goods/services that society desires most

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economic growth

an increase in the maximum amount of goods/services an economy is able to produce

  • PPC shifts outwards

  • sources: tech, availability of resources used to produce g/s

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economic shrinkage

a decrease in the maximum amount of goods/services an economy is able to produce

  • PPC shifts inwards

  • economy has shrunk

  • causes: loss of resources/tech, war, natural disasters

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perfectly competitive market

a market with many buyers/sellers of the same good/service.

  • no individual’s actions have a noticeable effect on the price of a good/service sold

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supply and demand model

a model that shows how a perfectly competitive market works

  • demand curve

    • factors that make the D curve shift

  • supply curve

    • factors that make the S curve shift

  • market equilibrium

    • eq price

    • eq quantity

  • the way the market changes when S or D curve shifts

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demand schedule

a table that shows how much of a good/service consumers will be willing and able to buy at different prices

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Law of Demand

a higher price for a good/service = less demand for that good/service

  • given ceteris paribus

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change in demand

a shift of the demand curve

  • changes quantity demanded for any given price

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increase in demand

a rightward shift of the D curve

  • consumers want a larger quantity of the good/service

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decrease in demand

leftward shift of the D curve

  • consumers want less of a good/service

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causes for a D curve shift

changes in taste, price of related goods/services, income, # of consumers, expectations that lead to a change in the economy

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changes in taste

due to trends, beliefs, cultural shifts

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changes price of related goods/services

when demand for a good changes due to changes in prices of substitutes or complements

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complements

goods/services that are consumed together

  • cars + gas, phones + apps, etc.

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changes in income

when demand for a good changes:

increased income = increased demand for normal goods

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normal goods

demand for this good increases when consumer income increases

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inferior goods

demand for this good increases when consumer income decreases

  • a less desirable version of more expensive dupes

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changes in # of buyers

when demand for a good changes:

more consumers = more demand

less consumers = less demand

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changes in expectation

when demand for a good changes because of expected changes in price/salary/other

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equilibrium

an economic situation where no buyer/seller would be better off doing something different.

  • where S and D curves intersect

  • quantity of a good demanded = quantity supplied

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equilibrium price

the price of an item that matches the quantity supplied and quantity demanded

  • price = Q demanded by consumers = Q supplied by sellers

  • “market-clearing prices”

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equilibrium quantity

quantity bought/sold at the equilibrium price

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disequilibrium

when the market price is above/below the price that equals the quantity demanded and quantity supplied

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market price

all sellers receive and all buyers pay around the same price

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surplus

quantity supplied (Qs) > quantity demanded (Qd)

  • occurs when the price is above equilibrium

  • “excess supply”

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shortage

quantity demanded (Qd) > quantity supplied (Qs)

  • occurs when price is below equilibrium

  • “excess demand”

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market response to changes in demand

increased demand = raised eq price & eq quantity

decreased demand = lowered eq price & eq quantity

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market response to changes in supply

increased supply = decreased eq price & increased eq quantity

decreased supply = increased eq price. & decreased eq quantity