Economics: Key Concepts, Theories, and Market Systems Flashcards | Quizlet

What is economic theory?

A set of ideas or principles used to explain how the economy works and predict how people, businesses, and governments will behave.

What does ceteris paribus mean?

A Latin phrase meaning 'all other things being equal' or 'holding all other variables constant' (the assumption that factors other than those being considered did not change).

What occurs if the market price is below equilibrium?

A market price below the equilibrium price creates a shortage (or excess demand).

What are the virtues of the market system?

Efficiency, incentives, and freedom.

What is the shape and meaning of a production possibility curve (PPC) showing increasing opportunity costs?

The curve bends outward away from the origin (like a hill or a dome), which shows increasing opportunity costs.

When the price of coffee goes up, what happens to the demand for sugar (a complement)?

The demand for sugar decreases, shifting the sugar demand curve to the left.

Which law states that as more of a particular good is produced, its marginal opportunity costs increase?

Law of Increasing Opportunity Cost.

What is an economic system?

A set of institutionalized arrangements and coordinating mechanism; the method a society uses to allocate scarce resources and distribute goods and services through the decisions of individual households and firms.

What are the elements of the scientific method of study in economics?

Observe; Formulate a hypothesis; Test the hypothesis; Accept, reject, or modify the hypothesis; Continue to test the hypothesis, if necessary.

What are normative statements in economics?

Economic statements that involve value judgments, based on personal values, ethics, or political ideologies rather than scientific data.

What is productive efficiency?

When an economy or firm produces goods and services at the lowest possible cost per unit without wasting any scarce resources.

What is the role of government in laissez-faire capitalism?

To keep the government from interfering, with government power needed only to protect private property from theft and provide a legal environment for contract enforcement.

What are the key characteristics and examples of the command system?

Also known as Socialism or Communism, characterized by government ownership of resources and decisions made by a central planning board; examples include North Korea, Cuba, and Myanmar.

What two main problems cause command systems to fail to deliver adequate amounts of goods and services?

The coordination problem (setting output targets for all goods and services) and the incentive problem (no adjustments for surplus or shortage).

How does consumer demand affect businesses in the economy?

Through their purchasing decisions, consumers decide which businesses survive and which do not.

What characterizes the market systems found in much of the world?

A mix of decentralized decision making with some government control, where private markets are the dominant force, resources are privately owned, and behavior is self-interested.

What is the Invisible Hand?

Refers to how individuals and firms pursuing their own self-interest can unintentionally promote the interests of society as a whole through the market system.

What defines market equilibrium?

The ability of forces of demand and supply to establish a price, occurring where the demand curve and supply curve intersect (also called price mechanism or price system).

According to the laws of demand and supply, what is the implication of price for individuals/consumers?

Price is an obstacle (barrier) — a higher price can stop an individual from buying something.

According to the laws of demand and supply, what is the implication of price for businesses/producers?

Price is an incentive — a higher price encourages businesses to produce and sell more because they can earn more profit.

What happens in the market in the face of positive externalities?

The market tends to underproduce the good or service (underproduction/underconsumption).

What are the characteristics of private goods?

They are produced in the market by firms and characterized by rivalry and excludability.

What is the coordination problem in a command system?

The difficulty where the central planning board must correctly set output targets for all goods and services.

What is the incentive problem in a command system?

The issue where there are no adjustments made for surplus or shortage.

What are the three criteria required for achieving productive efficiency?

1. Producing goods in the least costly way, 2. Using the best technology, 3. Using the right mix of resources.