eco ch1-3.3

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66 Terms

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circular flow diagram

a diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market

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command economy

an economy where economic decisions are passed down from government authority and where the government owns the resources

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exports

products (goods and services) made domestically and sold abroad

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globalization

the trend in which buying and selling in markets have increasingly crossed national borders

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goods and services market

a market in which firms are sellers of what they produce and households are buyers

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gross domestic product (GDP)

measure of the size of total production in an economy

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imports

products (goods and services) made abroad and then sold domestically

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labor market

the market in which households sell their labor as workers to business firms or other employers

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market

interaction between potential buyers and sellers; a combination of demand and supply

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market economy

an economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand

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model

a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation; also known as theory

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private enterprise

system where private individuals or groups of private individuals own and operate the means of production (resources and businesses)

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theory

a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation

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traditional economy

typically an agricultural economy where things are done the same as they have always been done

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underground economy

a market where the buyers and sellers make transactions in violation of one or more government regulations

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ceteris paribus

other things being equal

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complements

goods that are often used together so that consumption of one good tends to enhance consumption of the other

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factors of production

the resources such as labor, materials, and machinery that are used to produce goods and services; also called inputs

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inferior good

a good in which the quantity demanded falls as income rises, and in which quantity demanded rises and income falls

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inputs

the resources such as labor, materials, and machinery that are used to produce goods and services; also called factors of production

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normal good

a good in which the quantity demanded rises as income rises, and in which quantity demanded falls as income falls

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shift in demand

when a change in some economic factor (other than price) causes a different quantity to be demanded at every price

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shift in supply

when a change in some economic factor (other than price) causes a different quantity to be supplied at every price

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substitute

a good that can replace another to some extent, so that greater consumption of one good can mean less of the other

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budget constraint

all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set

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law of diminishing marginal utility

as we consume more of a good or service, the utility we get from additional units of the good or service tends to become smaller than what we received from earlier units

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marginal analysis

examination of decisions on the margin, meaning a little more or a little less from the status quo

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opportunity cost

measures cost by what we give up/forfeit in exchange; opportunity cost measures the value of the forgone alternative

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opportunity set

all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income

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sunk costs

costs that we make in the past that we cannot recover

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utility

satisfaction, usefulness, or value one obtains from consuming goods and services

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allocative efficiency

when the mix of goods produced represents the mix that society most desires

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comparative advantage

when a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production

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law of diminishing returns

as we add additional increments of resources to producing a good or service, the marginal benefit from those additional increments will decline

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production possibilities frontier (PPF)

a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.

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productive efficiency

when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)

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invisible hand

Adam Smith's concept that individuals' self-interested behavior can lead to positive social outcomes

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normative statement

statement which describes how the world should be

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positive statement

statement which describes the world as it is

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demand curve

a graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis

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demand schedule

a table that shows a range of prices for a certain good or service and the quantity demanded at each price

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demand

the relationship between price and the quantity demanded of a certain good or service

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equilibrium price

the price where quantity demanded is equal to quantity supplied

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equilibrium quantity

the quantity at which quantity demanded and quantity supplied are equal for a certain price level

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equilibrium

the situation where quantity demanded is equal to the quantity supplied; the combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to change

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excess demand

at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage

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excess supply

at the existing price, quantity supplied exceeds the quantity demanded; also called a surplus

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law of demand

the common relationship that a higher price leads to a lower quantity demanded of a certain good or service and a lower price leads to a higher quantity demanded, while all other variables are held constant

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law of supply

the common relationship that a higher price leads to a greater quantity supplied and a lower price leads to a lower quantity supplied, while all other variables are held constant

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price

what a buyer pays for a unit of the specific good or service

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quantity demanded

the total number of units of a good or service consumers are willing to purchase at a given price

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quantity supplied

the total number of units of a good or service producers are willing to sell at a given price

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shortage

at the existing price, the quantity demanded exceeds the quantity supplied; also called excess demand

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supply curve

a line that shows the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis and price on the vertical axis

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supply schedule

a table that shows a range of prices for a good or service and the quantity supplied at each price

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supply

the relationship between price and the quantity supplied of a certain good or service

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surplus

at the existing price, quantity supplied exceeds the quantity demanded; also called excess supply

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division of labor

the way in which different workers divide required tasks to produce a good or service

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economics

the study of how humans make choices under conditions of scarcity

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economies of scale

when the average cost of producing each individual unit declines as total output increases

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fiscal policy

economic policies that involve government spending and taxes

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macroeconomics

the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance

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microeconomics

the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms

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monetary policy

policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing

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scarcity

when human wants for goods and services exceed the available supply

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specialization

when workers or firms focus on particular tasks for which they are well-suited within the overall production process