Exam 2 - Contemporary Economic Issues

money

an asset that is socially and legally accepted as payment for goods/services

what are the 3 functions of money?

medium of exchange, store of value, and unit of measure

buyer’s reservation price

the maximum dollar amount a buyer is willing to give up in order to acquire an item

seller’s reservation price

the minimum dollar amount a seller is willing to accept in order to part with an item

reservation price

a “cutoff price” at which the behavior of the buyer or seller changes

bargaining range

the range of possible transaction prices when the two people trade without coercion

positive sum environment

a situation where the summation of gains and losses over all people is positive in value

zero sum environment

a situation where the summation of gains and losses over all people is exactly equal to zero

negative sum environment

a situation where the summation of gains and losses over all people are negative in value

negative sum environment

the type of environment created when the seller places more value on an item than the buyer does

positive sum environment

the type of environment created when the buyer places more value on an item than the seller does

demand

the relationship between the price of a good and the quantity that consumers are willing and able to produced, all other factors fixed

supply

the relationship between the price of a good and the quantity that firms are willing and able to sell, all other factors fixed

law of demand

all other factors fixed, a greater quantity of a good will be demanded at lower prices (demand curves are downward sloping)

law of supply

all other factors fixed, a greater quantity of a good will be supplied at higher prices (supply curves are upward sloping)

equilibrium

a “stable state” for a system which will persist as long as outside factors stay the same

what is equilibrium in the model of supply and demand?

stable, unique, and self-enforcing

entrepreneur

an individual who undertakes and oversees a business venture

laissez faire environment

interactions between economic decision makers are not influenced by government regulations, restrictions, mandates, taxes, or subsidies

win win outcome

an outcomes for which people are better off than they would’ve been if the outcome was not realized

win lose outcome

an outcome where some people are better off and some people are worse off than they would have been if the outcome was not realized

consumer’s surplus

when a buyer purchases an item for less than their reservation price, they obtain a “gain” or “surplus” from doing so

producer’s surplus

when a producer sells an item for more than their reservation price, they obtain a “gain” or “surplus” from doing so

social surplus

the sum of gains over every person in society

total social surplus

a measure of the total gains from trade, defined as the sum of total consumer’s surplus and total producer’s surplus in the market

total consumer’s surplus

a measure of the total gains from trade realized by consumers, defined as the difference between buyer’s reservation price and actual price paid added over all units produced

total producer’s surplus

a measure of the total gains from trade realized by sellers, defined as the difference between actual price received and seller’s reservation priced added over all units sold

deadweight loss

the difference between the “maximum possible level of total social surplus” and the “realized level of total social surplus

open-ended fallacy

the logical error where someone incorrectly concluded that simply because there are benefits (to some people) from higher levels of an activity, that more of the activity is always better