Econ mideterm 1

normal goods

an increase in income leads to an *INCREASE* in demand

inferior goods

an increase in income leads to a *DECREASE* in demand

economics

the study of choices that arise from scarcity

complements

additional goods that accompany a main good

substitutes

goods that replace an initial good

determinants of demand

the price of good X, the prices of substitutes & complements, income, tastes & expectations, population

determinants of supply

the price of good X, the prices of resources used to produce good X, technology, business expectqations, the number of firms in the market, the prices of other goods that can be produced by the firm

land

physical topography used for production

labor

the time and physical & mental efforts spent by humans in the production process

capital

includes the *physical* objects that are actually used for production (tools, machinery, equipment and factories)

entrepreneurship

the willingness to take risks to combine resources in new ways, to invent original products, to find new ways of manufacturing old products, or to combine old products in new ways

equilibrium price

occurs at the intersection of supply and demand curves

wage

the return to *labor*

rent

the return to *land*

interest

the return to *capital*

profit

the return to *entrepreneurship*

equilibrium quantity

changes if there are variations to either supply, demand, or both

microeconomics

the study of individual decision-making by households and firms, and how these households and firms interact in markets *(little picture)*

shortage

occurs when the price in the market is *too low*

macroeconomics

the study of aggregate economic variables, and how these variables affect each other and, ultimately our standard of living *(BIG picture)*

surplus

occurs when the price in the market is *too high*

positive economics

involves statements of *fact*

price floor

minimum price above the market price (causes *surplus*)

normative economics

involves statements of *opinion*

price ceiling

maximum price set below the equilibrium price (causes *shortage*)

economic good

goods that are scarce, have a positive price

transaction costs

cost of a financial trade or transaction

free good

goods that are abundant, have zero price

private sectors

part of the economy that is privately owned and operated by private enterprises

public sectors

part of the economy that is publicly owned and operated by the government

models

used to simplify and analyze real-world economic situations

socialism

economic system characterized by social ownership and democratic control of the means of production

ceteris paribus

Latin for all else is held constant

capitalism

market economy based on private ownership, price and competition. Laissez-faire economy

scientific method

employed in order to improve the accuracy and learning capabilities of the model-building process

communism

common economy, economic system where the government owns most of the factors of production and decides the allocation of resources and what products and services will be provided.

opportunity cost

the benefit foregone from not choosing the next best alternative

command and control

centrally planned economy where economic questions are answered through planning agencies by government bureaucrats

Type I error

when the government allows for the introduction of a drug that is either ineffective or causes side effects that outweigh the benefits

Type II error

when the government delays or fails to introduce a drug which causes death, pain or suffering. (more dangerous than Type I)

traditional economies

economic questions answered through old-age practices and production techniques

production possibilities curve

model that shows the maximum combination of two goods that can be produced given certain quantity of

market economies

capitalist economy where capital is privately owned. (laissez-faire, economic freedom, specialization)

economic questions

are answered through price mechanism

specialization

a party should focus on a good that they have a lower opportunity cost of producing

consumer sovereignty

markets respond to consumer preferences.

comparative advantage

each party should specialize in the production of a good that it is efficient in producing (has the lower opportunity cost)

four basic economic questions

1)what & how much to produce?, 2)how to produce it?, 3)for whom to produce it?, 4)when to consume the good?(rate of consumption)

absolute advantage

the ability to produce a good at a greater quantity than another

mercantilism

bullionism, colonialism, trade restrictions

terms of trade

rate at which both parties would be willing to make a trade

laissez-faire

the idea that government should leave the economy, markets, and individuals alone to increase the wealth of a nation

consumption possibilities curve

shows all of the combinations that can be consumed through trade

resource allocation

firms will produce more in a market where prices and profits are increasing and less where they aren't.

market

collection of buyers and sellers where exchange takes place

Adam Smith

author of *The Wealth of Nations* (1776) who is also known as the "father of economics"

supply

relationship between the price of a good and the quantity produced for sale in a market

public goods

a good that is non-rival in consumption and non-excludable

demand

relationship between price and quantity

externalities

costs or benefits that accrue to individuals not directly involved in the transaction

change in demand

represented by a shift of the entire demand curve

voting paradox

may cause inconsistent results that may be dependent on the order of the vote

change in quantity demanded

shown as a movement along a given demand curve

free trade

international trade left to its natural course without tariffs, quotas, or other restrictions.

change in supply

shown as a shift of the entire supply curve

fair trade

fair trade between countries with a goal of social and economic justice.

change in quantity supplied

results from a change in the price of a good *ONLY*; represented as a movement along a given supply curve

globalization

the integration of national economies into an international economy

rational self-interest

economic decisions are made with a purpose

WTO

replaced GATT, association of 150+ nations that help reduce trade barriers among its members, handles trade disputes

GATT

legal agreement between 117 countries to promote international trade by reducing or eliminating trade barriers such as tariffs and quotas

NAFTA

reduced trade barriers among citizens of Canada, Mexico and the U.S

minimum wage

is the minimum worker payment enforced by the government, currently $7.25/hour

Jerome Powell

chairman of the Federal Reserve appointed by President Trump