MSU EC 202 Exam 1

Economics

the study of how individuals and societies choose how to use resources among many competing choices

Economics is about

choices

Microeconomics

the study of how households and firms make decisions and how they interact in markets

Macroeconomics

the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth

true cost

what you give up for it

opportunity cost

the value of the next best alternative; exists because of scarcity

People act in their own self interest

they do what they want

an incentive

an opportunity to make oneself better off

lots of decisions

"how much" not "either or"

decision making

done a little at a time

marginal decision making

focusing on small decisions

marginal benefit

-the additional benefit to a consumer from consuming one more unit of a good or service

- = (change in total benefits)/(change in quantity)

decreasing marginal benefit

The negative relationship between the marginal benefit associated with the use of a good or service and the quantity consumed; most activities have decreasing marginal benefits

marginal cost

-the additional cost associated with one more unit of activity

- = (change in total costs)/(change in quantity)

increasing marginal cost

The positive relationship between the marginal cost associated with the use of a good or service and the quantity produced; most acitivities have increasing marginal costs

Optimization

making the best or most efficient use of a situation, product, or resource

MC=MB

MB>MC

do it

MC>MB

don't do it

attainable

a set of goods that could be produced

efficient

an attainable set of goods where, when produced, there is no way to produce more of one good without producing less of another good

comparative advantage

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

Specialization

the concentration of the productive efforts of individuals and firms on a limited number of activities

Prices are determined by

buyers and sellers

demand

the relationship between price and the quantity demanded of a certain good or service that consumers will purchase

Law of Demand

as price goes up, quantity demanded goes down

demand graph

relates price of a good with quantity demanded at that price

demand curve

-downward sloping

-change in price: movement along curve

- change in something else: movement of the curve

diminishing marginal utility

-Decreasing satisfaction or usefulness as additional units of a product are acquired

-decreasing marginal benefits

income effect

a change in the price of a good has on the purchasing power of income

substitution effect

the change in the price of one good has on the demand for another good

normal good

a good for which, other things equal, an increase in income leads to an increase in demand

inferior good

a good for which, other things equal, an increase in income leads to a decrease in demand

taste and preferences

increased preference for a good causes an increase demand

number of buyers

-The greater the number of buyers in a market, the larger is the demand for any good.

-increase in price and quantity

expectations

demand can be affected by expectations of:

future income

future availability

future prices

substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other

compliments

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

Law of Supply

As the price of a good rises, the quantity supplied of the good increases

supply graph

a graph of the relationship between the price of a good and the quantity supplied

-change in price : movement along supply curve

- change in something else: movement of supply curve

Federal Excise Tax

payed by supplier

subsidy

A government payment that supports a business or market

resource

any item used to produce a good or service

increase in resource prices

decrease in supply

decrease in resource prices

increase in supply

Technology

new tech can reduce production costs and shift the supply curve out

Price expectations

A producers willingness to supply today might be affected by an expectation of tomorrows price

number of sellers

usually the number of sellers in a market changes as profits change; firms will enter when profit is high and exit when it is low

equlibrium

a situation where nobody has incentive to do something different

surplus

A situation in which quantity supplied is greater than quantity demanded

shortage

A situation in which quantity demanded is greater than quantity supplied

price ceilings

-A legal maximum on the price at which a good can be sold

- can cause shortage

binding ceiling

below equilibrium price and affects prices

non binding ceiling

above the equilibrium price and has no effect

lowest non binding price ceiling

equal to the equilibrium

effects of price ceiling

Quantity demand > Quantity supplied = shortage

black market

cost of enforcement

bypass restrictions

queuing

negative effects of rent control

-reduction in supply

- less likely to move

- deterioration and lack of investment

price floors

legally established minimum prices for goods or services

minimum wage

a minimum price that an employer can pay a worker for an hour of labor

Two big questions in economics

1. what makes econ grow

2. how can we prevent recessions

circular flow model shows

- movement of goods and services

- movement of money

Taxes

payments by individuals and businesses to support the activities of government

Transfers

Payments from governments to firms and households

net taxes

taxes minus transfer payments

income tax

A tax on people's earnings

payroll tax

tax on wages and salaries to finance Social Security and Medicare costs

progressive tax

A tax for which the percentage of income paid in taxes increases as income increases

proportional tax

a tax for which the percentage of income paid in taxes remains the same for all income levels

regressive tax

A tax for which the percentage of income paid in taxes decreases as income increases

budget surplus

an excess of tax revenue over government spending

budget deficit

a shortfall of tax revenue from government spending

national debt

the total amount of money that a country's government has borrowed, by various means.

Gross Domestic Product (GDP)

the total value of goods produced and services provided in a country during one year.

- = C + I + G + NX

consumption

all purchases made by households

gross investment

goods that are accumulated but not consumed during the time period

government purchases

all goods and services bought by the government

net exports

exports - imports

Real GDP

-the production of goods and services valued at constant prices

- holds prices constant

Nominal GDP

does not account for changing prices

per capita GDP

the GDP divided by the total population at midyear

two ways economic growth happens

1. population increases

2. productivity increases

productivity

- the quantity of goods and services produced from each unit of labor input

- GDP / hours worked

productivity occurs when there is an improvement in

- physical capital per worker

- human capital per worker

- natural resources per worker

- technological knowledge

frictional unemployment

unemployment that occurs when people take time to find a job

structural unemployment

unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

cyclical unemployment

unemployment caused by a business cycle recession

unemployment rate

the percentage of the labor force that is unemployed

fully employed economy

an economy that is operating at its natural rate of unemployment

Inflation

A general and progressive increase in prices

Consumer Price Index (CPI)

a measure of the overall cost of the goods and services bought by a typical consumer

CPI measures

price changes over time