ECON 201 EXAM #1 Terms

Economics

The study of the choices consumers, business managers, and government officials make to attain their foals, give scarce resources.

Scarcity

Although our wants are unlimited, the resources available are not.

3 Key Economic Ideas

People are rational. People respond to economics incentives. Optimal decisions are made at the margin.

Tradeoffs

Producing more of one good or service means producing less of another good or service.

Opportunity Cost

The highest valued alternative that must be given up to engage in an activity.

Centrally Planned Economy

An economy in which the government decides how economic resources will be allocated.

Market Economy

An economy in which the decisions of households and firms interacting in markets allocate economic resources.

Market Economy

Households and firms

Centrally Planned

Government

Mixed Economy

An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.

Productive Efficiency

When a good or service is produced at the lowest possible cost.

Allocative Efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.

Steps Economists use to make a useful economic model

Decide on the assumptions to use in developing the model. Formulate a testable hypothesis. Use economic data to test the hypothesis. Revise the model if it fails to explain the economic data well. Retain the revised model to help answer similar economic questions in the future.

Economic Variable

Something measurable that can have different values, such as the incomes of doctors.

Hypothesis

Statement that can be correct or incorrect about an economic variable.

Equity

The fair distribution of economic benefits.

Positive Analysis

Analysis concerned with what is.

Normative Analysis

Analysis concerned with what ought to be.

Example of Positive Analysis

Minimum wage is $7.25

Example of Normative Analysis

Minimum wage should be $8.00

Microeconomics

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Macroeconomics

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Increasing Marginal Opportunity Cost

increasing the production of a good requires larger and larger decreases in the production of another good.

Production Possibilities Frontier (PPF)

Will be bowed outward.

Production Possibilities Frontier (PPF)

A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.

Along

A change in the variables being related will be movement (TERM) the curve.

Shift

A change in any of the things being held constant will (TERM) the curve.

Absolute Advantage

The ability to produce more of a good or service than competitors using the same amount of resources.

Comparative Advantage

The ability to produce a good or service than competitors using the same amount of resources.

Comparative Advantage

The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.

Comparative Advantage

The basis for trade is (TERM) for them to benefit from each party.

How a country can gain from specialization and trade

Specialize in producing that for which it has a comparative advantage and then trade for other needed goods and services.

Causes Shift in Demand Curve

Changes in income, the prices of related goods, tastes, population and demographics, and expected future prices.

Normal Good

A good for which the demand increases as income rises and decreases as income falls.

Inferior Good

A good for which the demand increases as income falls and decreases as income rises.

Substitutes (Substitute Goods)

Goods & services that can be used for the same purpose.

Complements (Complementary Goods)

Goods that are used together.

Distinction between normal and an inferior good

When income increases, demand for a normal good increases while demand for an inferior good falls.

Perfectly Competitive Market

The model of demand and supply assumes that we are analyzing a (TERM).

Perfectly Competitive Market

There are many buyers and sellers, all firms sell identical products, there are no barriers to entry.

Quantity Demanded

The amount of a good or service that a consumer is willing and able to purchase at a given price.

Demand Curve

A curve that shows the relationship between the price of a product and the quantity demanded of the product.

Market Equilibrium

Occurs when the demand curve intersects the supply curve.

Market Equilibrium

Quantity Demanded = Quantity Supplied

Competitive Market Equilibrium

Has a market equilibrium with many buyers and many sellers. Only at this point is the quantity demanded equal to the quantity supplied.

Surplus

Prices above equilibrium, with the quantity supplied being greater than the quantity demanded. (TERM) causes the market to fall.

Surplus

Qs > Qd

Shortage

Qd > Qs

Shortage

Prices below equilibrium, with the quantity demanded being greater than the quantity supplied. (TERM) causes the market price to rise.

Trade Off

The idea that because of scarcity, producing more of one good or service means producing less of another good or service

Not Physically Possible

Production beyond the production possibilities frontier.

Circular-Flow Diagram

Shows how households and firms are linked through product markets and factor markets.

Firms & Households

2 main categories of participants in markets

Households

Market participant that determine what goods and services are produced.

Free Market

The government does not control the production of goods and services

Entrepreneur

Operate businesses that produce goods and services. They bring together factors of production.

Property Rights

The rights individuals and firms have to the exclusive use of tangible, physical property and intellectual property.

Private Property Rights

Encourage a significant number of people to be willing to risk funds by investing them in business. Encourage firms to spend money on research and development.

Factor Market

Aspects of production, such as labor, capital, natural resources, and entrepreneurial ability.

Product Market

Markets for goods-such as computers- and services- such as medical treatment.

Demand Schedule

A table showing the relationship between the price of a product and the quantity of the product demanded.

Law of Demand

The quantity demanded of a product is inversely related to its price.

Law of Demand

Holding everything else constant, P increases so Quantity demanded decreases. When P decreases, then quantity demanded increases.

Quantity Supplied

The amount og a good or service that a producer is willing and able to supply at a given price.

Law of Supply

Holding everything else constant. When P increases quantity supplied increases. When P decreases, Quantity supplied decreases.

Quantity Supplied

(TERM) is displayed graphically as a movement along a supply curve

Supply

A change in (TERM) is shown as a shift in the supply curve.

Substitution Effect

As the price of a good increases, other goods become less expensive relative to that good.

Substitution Effect

Example of (TERM). If price of pepsi increases more than coke, people will start buying coke over pepsi.

Income Effect

The change in the quantity demanded of a good that results from the effect of a goo's price on the consumer's purchasing power.

Ceteris Paribus

All else equal

Quantity Demanded

When we move along the curve there is a change in (TERM)

Quantity Demanded

The only thing that changes (TERM) is price.

5 Main variables that shift demand

Income, Price of related good, Tastes, Population & demographics, & Expected Future Prices.

Complements

Goods and services that tend to be used together.

Supply Curve

A curve that shows the relationship between the price of a product and the quantity supplied of the product.

5 Main variables that shift supply

Price of Inputs, Technological change, Price of substitutes in production, Number of firms in the market, Expected future prices.

Consumer Surplus

The difference between the highest price a consumer is willing to pay for a good or service and the price the consumer actually pays.

Producer Surplus

The difference between the lowest price a producer is willing to accept for a good or service and the price the producer actually receives in the market.

Economic Surplus

The sum of Consumer & Producer surplus.

Deadweight Loss (DWL)

The reduction in economic surplus that results from the market not being at the competitive equilibrium.

Price Floor

A legally determined minimum price that sellers may receive.

Price Ceiling

A legally determined maximum price that sellers may charge

Externality

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

Positive Externality

Examples: Garden, Perfume

Negative Externality

Pollution, vandalized buildings, too much perfume.