ECON 110A 1-3

economics

study of the use of scarce resources to satisfy unlimited human wants

factors of production

resources used to produce goods and services (land, labour, capital)

opportunity cost

value of the next best alternative that is forgone when one alternative is chosen, slope is o.c. (o.c. of a:c is a/c)

production possibilities boundary

a curve showing which alternative combinations of output can be attained if all available resources are used efficiently; economic growth shifts PPB outwards

self-organizing economy

individual consumers and producers act independently to pursue their own interests → collective outcome is coordinated

self-interest

individuals buy and sell what is best for them

maximization

consumers maximize their utility; producers maximize their profits

marginal decisions

decide whether they will be better off by buying or selling a little more/less of any given product

specialization

allows individuals to do what they can do well while leaving everything else to be done by others; must be accompanied by trade

division of labour

breaking up of a production process into a series of specialized tasks, each done by a different worker

trade and money

money greatly facilitates trade, which itself facilitates specialization

traditional economies

economies in which behaviour is based mostly on tradition

command economies

economies in which most economic decisions are made by a central planning authority

free-market economies

economies in which most economic decisions are made by private households and firms

mixed economies

economies in which some economic decisions are made by firms and households and some by the government

comparative advantage

a firm has the lower opportunity cost

positive statement

statement about what actually is/was/will be; not based on judgement

normative statement

statement about what ought to be; based on judgement

correlation

X causes Y, not direct evidence of this relationship

variable

well-defined item (price or quantity) that can take on various values

assumptions

motives, direction of causation, conditions under which the theory is meant to apply

endogenous variable

variable that is explained within a theory

causation

a change is X is predicted to CAUSE a change in Y

exogenous variable

variable determined outside a theory

quantity demanded

(desired) amount of a product that consumers want to purchase during some time period

demand curve

negative slope, represents negative correlation between demand and price

change in quantity demanded

ONLY AFFECTED BY PRICE. change in the specific quantity of the good demanded, change of one point on the demand curve to another (on original demand curve or a new one)

change in demand

NOT AFFECTED BY PRICE. change in quantity demanded at every price of the product, shift in the whole demand curve

quantity supplied

amount of a product that producers want to sell during some time period

supply curve

positive slope, represents positive relationship between supply and price

change in quantity supplied

change in the specific quantity supplied, represented by a change from one point on a supply curve to another, either on the original supply curve or a new one

change in supply

change in quantity supplied at every price of the product, represent by a shift in the whole supply curve

equilibrium price and quantity

price where quantity demanded = quantity supplied

disequilibrium

situation in which there is excess demand or supply, quantity exchanged is determined by the lesser of quantity demanded or quantity supplied

relative prices

ratio of two absolute prices, used in microeconomics

absolute prices

amount of money that must be spent to acquire one unit of a product

stock variable

at a point in time

flow variable

over period of time

increase in demand/supply

shifts curve to the right

decrease in demand/supply

shifts curve to the left

substitutes in consumption

goods placed in used of another good to satisfy similar needs (increase in P in one leads to increase in D of the other, v.v.)

complements in consumption

goods tend to be consumed together (demand curve shift in one will lead to same shift in the other)

inferior good

as one’s income rises, they buy less of that good

normal good

as one’s income rises, they buy more of that good