econ exam

economics

The social science that studies

production and trade.

spontaneous order

Order that is the

product of human action, but not human

design.

positive analysis

Analysis that attempts to

describe the way things are in reality.

normative analysis

Analysis that describes a

value judgment.

theory

An abstract explanation of some

phenomenon.

society

A group of people who have moral,

political, or economic relationships with each other

social system

A set of rules that

determine the role of physical force in human relationships

market economy

A social system in which resources are

privately owned and controlled.

property right

A moral and legal right to control a resource, and

to exclude others from using it.

command economy

A social system in which resources are

collectively owned or controlled (typically through a government).

mixed economy

A social system in which some

resources are privately owned and controlled, and

some are owned or controlled by the government

scarcity

The amount of goods available is not

sufficient to satisfy all human desires.

unlimited desires

No matter what one’s

current circumstances, it is always possible to

imagine and achieve a more desirable state of affairs

methodological individualism

The principle

that the individual human being is the basic

unit of research in the social sciences.

rational choice

People pursue their values.

Or:

– People are goal directed

– People are self-interested

– People respond to incentives

price system

A network of interrelated

prices of goods and services.

exchange of equivalents

The theory that

people exchange one good for another when

both parties value the goods equally

just price theory

The theory that there is a

single just price at which each good should be sold

nominal value of money

The

face value of a certain amount of money.

real value of money

The goods

and services that can be purchased with a

certain amount of money

zero-sum game

A situation in which for one

party to gain, another must lose.

mutually beneficial exchange

An

exchange that benefits both parties.

mercantilists believed that

• Social order requires government planning

• Money constitutes real wealth for a nation

• Exchange is a zero-sum game

• There is a “public interest” separate from the

interests of actual individuals

invisible hand

Adam Smith’s metaphor

for the power of individual self-interest to

create spontaneous order.

utility

Usefulness in satisfying human desires

subjective theory of price

The theory that the price of a good is

determined by its utility.

water-diamonds paradox

Water is very useful but has a low

price, while a diamond is not very useful but

has a high price.

labor theory of value

The theory that the price

of a good is determined by its cost of production.

or

The theory that the price

of a good is determined by the amount of labor used to

produce it.

problems with labor theory of value

1. How do you measure labor?

2. Labor has a price.

3. It is a theory of intrinsic value.

4. It ignores the context of the exchange

iron law of wages

The theory that the

price of labor is determined by the cost of

human subsistence and reproduction.

intrinsic value theory

The theory that

the value of an object is inherent in the object

itself.

marginal revolution

The discovery of

the theory of marginal utility in the early

1870s

good

A useful thing that is subject to human

control.

consumer good (first order good)

A good that

serves our desires directly.

producer good (higher order good)

A good that is

used in the production of another good.

structure of production

The set of steps by which

producer goods are used to produce a consumer good.

theory of derived demand

The

[value] of goods of higher order is derived

from that of the corresponding goods of lower

order.”

marginal

At the edge

marginal unit

The next unit gained or given up

marginal utility

The additional utility

that a person gets from having one more unit

of a good, or loses from having one less unit of

a good

theory of marginal utility

The

theory that the price of a good is determined

by its marginal utility

ordinal ranking

A list in order of

preference.

opportunity cost

The best alternative

given up when making a choice.

diminishing marginal utility

As a

person acquires more units of a good, the satisfaction they

derive from each new unit is lower than the previous unit.

increasing marginal opportunity cost

As a person gives up more units of a good, the

satisfaction they give up with each new unit is higher than the

previous unit.

range of indeterminacy

The range of potential

prices.

market clearing price (first definition)

A price at which anyone who

wants to buy or sell can find a willing trade partner

quantity demanded

The amount of a good a person

is willing and able to buy at a particular price.

demand curve

The curve that shows the relationship

between the price of a good and the quantity demanded.

law of demand

Ceteris paribus, there is a

negative relationship between the price of a good and the

quantity demanded.

ceteris paribus

Holding all other variables

constant (all else equal).

quantity supplied

The amount of a good a person is

willing and able to sell at a particular price.

supply curve

The curve that shows the relationship

between the price of a good and the quantity supplied.

law of supply

Ceteris paribus, there is a

positive relationship between the price and the quantity

supplied.

market clearing price (second definition)

A price where the

quantity demanded and quantity supplied are

equal

market clearing quantity

The number of

exchanges that take place at a market clearing

price

comparative statics

elasticity

income elasticity of demand

normal good

inferior good

cross-price elasticity

substitutes

complements

elastic

inelastic

consumer surplus

producer surplus

total gain from trade

equilibrium

surplus

shortage

dead weight loss

economic efficiency

entrepreneur

direction of causation

price control law

effective price control

max price control law (price ceiling)

min price control law (price floor)

rent control

minimum wage law

unemployment rate

specialization

theory of absolute advantage

theory of comparative advantage

export

import

free trade

trade barrier

protectionism

tariff

total cost

total fixed cost

total variable costs

marginal cost

increasing marginal returns

diminishing marginal returns

law of diminishing marginal returns

marginal product

average fixed costs