Unit 1 Flashcards Econ

Positive Economics

Making alterations in the economy based on tested and formulated theory

Normative Economics

Making alterations to the economy through beliefs and judgement calls

4 Major Resources of Economics

• Land - Natural resources

• Labor - Human work to make a product/complete service

• Capital - Machine work to make a product/complete service

• Entrepreneurship - Drive to open businesses/join markets

Opportunity Costs

The POSSIBLE produce you give up while making one thing

Law of Increasing Cost

Producing more resources results in higher costs(due to specialization)

Law of Comparative Advantage

National specialization of goods can increase productivity, due to regional specializations/advantages

Comparative Advantage

Advantage in losing less(Opportunity Cost) in making a product

Absolute Advantage

Advantage in being able to make MORE of a product

Law of Demand

As Price increases, Quantity Demanded decreases

Income Effect

As price increases, it takes up more spending power

• decreases Quantity Demanded

Substitute Effect

As price increases, people will choose to buy cheaper alternatives instead

Diminishing Marginal Utility

You gain less enjoyment for each unit consumed

• ex. Overeating

P.I.P.E.D

Determinants of Demand

• Preference: Social reputation of a brand

• Income: How much money the public has to buy

• Population: How many buyers are in the market

• Expectations: Prospective future prices

• Demand

Normal Goods

Goods demanded more at higher income levels

• Louis Vuitton bags that people can only buy when they’re rich

Inferior Goods

Goods demanded more at lower income levels

• Struggle foods(ex. Instant Ramen)

Substitutes

Similar goods that are replaceable

• Positive Cross Price Elasticity

Complements

Goods commonly bought together

• Negative Cross Price Elasticity

Cross Price Elasticity

How sensitive the relationship between A’s Price and B’s Quantity

• Substitutes: A’s Price increases, B’s Quantity increases(buy it more instead)

• Complements: A’s Price increases, B’s Quantity decreases(buy less together)

Law of Supply

When Price increases, Quantity Supplied increases

S.N.O.T.T.E.R.

Determinants of Supply

• Supply

• Number of Sellers: How many sellers are in a market

• Other Good’s prices: Prioritization of goods with higher prices, shifting production away from cheap production

• Technology: Tools that can make production more efficient

• Taxes/Subsidies: Government intervention to add/remove production costs

• Expectations: Prospective Future Prices

• Resource Cost: Costs of production

Equlibrium

Where Supply = Demand

Shortage

When Supply < Demand

Surplus

When Supply > Demand