Economics (Exam 1)

Incentives

rewards and penalties that motivate behavior

Scarcity

when there isn’t enough of a specific resource to satisfy all of our wants

Great Economic Problem

how to arrange our scarce resources to satisfy as many of our wants as possible

Opportunity Cost

the value of possibilities lost when a choice is made

Inflation

an increase in the general or average level of prices (too much $$ not enough resources)

Absolute Advantage

the ability to produce the same good using fewer inputs than another producer

Comparative Advantage

the ability to produce a good or service at a lower opportunity cost than another producer

Demand curve

a function that shows the quantity demanded at different prices

Quantity Demanded

the quantity that buyers are willing and able to buy at a particular price

Consumer Surplus

the consumer’s gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price

Normal Good

a good for which demand increases when income increases

Inferior Good

a good for which demand decreases when income increases

Substitues

two goods for which a decrease in the price of one leads to a decrease in demand for the other

Complements

two goods for which a decrease in the price of one leads to an increase in the demand for the other; for example, hamburgers and hamburger buns

Supply Curve

a function that shows the quantity supplied at different prices

Quantity Supplied

the quantity that sellers are willing and able to sell at a particular price

Producer surplus

the producer’s gain from exchange, or the difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity

Shortage

a situation in which the quantity demanded is greater than the quantity supplied

Equilibrium Price

the price at which the quantity demanded is equal to the quantity supplied

Equilibrium quantity

the quantity at which the quantity demanded is equal to the quantity supplied

Elasticity of demand

a measure of how responsive the quantity demanded is to a change in price

Inelastic

when the absolute value of the elasticity is less than 1

Elastic

when the absolute value of the elasticity is greater than

Unit Elastic

when the absolute value of the elasticity is exactly equal to 1

Elasticity of supply

a measure of how responsive the quantity supplied is to a change in price