ECO 232 Exam 1

Economics

The study of how individuals and societies manage scarce resources

Scarcity

Unlimited wants combined with limited resources

Oikos

Greek word meaning household

Nemein

Greek word meaning to manage

TINSTAAFL

There Is No Such Thing As A Free Lunch

Opportunity Cost

The value of the next best alternative given up when a choice is made

Utility

The satisfaction obtained from consuming a good or service

Efficiency

Maximizing benefits while minimizing costs

Economizing

Making the best use of limited resources

Incentives

Factors that motivate or encourage people to act

Disincentives

Factors that discourage people from acting

Market

A place where buyers and sellers interact

Free Market Economy

An economy with little government involvement where decisions are made by individuals

Adam Smith

The father of modern economics who wrote The Wealth of Nations

The Wealth of Nations

A book published in 1776 by Adam Smith

Invisible Hand

The idea that self-interested behavior benefits society

Rational Self-Interest

The assumption that people weigh costs and benefits when making decisions

Division of Labor

The process of breaking production into smaller tasks

Specialization

Focusing on a specific task where one has an advantage

Ceteris Paribus

All other things being equal

Positive Economics

Fact-based, testable statements about what is

Normative Economics

Opinion-based statements about what ought to be

Marginal Cost

The cost of producing one additional unit

Marginal Benefit

The benefit received from one additional unit

Microeconomics

The study of individual people or businesses

Macroeconomics

The study of the economy as a whole

Resource Constraints

Limits due to physical availability of resources

Technology Constraints

Limits caused by available technology

Time Constraints

Limits due to time being a scarce resource

Sunk Cost

A cost that has already been incurred and cannot be recovered

Fallacy of Composition

The mistaken belief that what is true for one is true for all

Post Hoc Fallacy

Assuming causation because one event follows another

Land

Natural resources used to produce goods and services

Labor

Human effort used in production

Capital

Man-made resources used to produce goods and services

Entrepreneurship

The ability to combine resources and take risks to produce goods

Production Possibilities Curve

A graph showing trade-offs and opportunity costs

Law of Demand

As price increases quantity demanded decreases and vice versa

Demand Schedule

A table showing quantity demanded at different prices

Demand Curve

A graph showing the relationship between price and quantity demanded

Change in Quantity Demanded

A movement along the demand curve caused by a price change

Change in Demand

A shift of the entire demand curve

Normal Good

A good whose demand increases as income increases

Inferior Good

A good whose demand increases as income decreases

Substitute Goods

Goods that can replace each other

Complementary Goods

Goods that are used together

Law of Supply

As price increases quantity supplied increases and vice versa

Supply

A schedule showing the amounts sellers are willing and able to sell

Supply Curve

A graph showing the relationship between price and quantity supplied

Change in Quantity Supplied

A movement along the supply curve caused by a price change

Change in Supply

A shift of the entire supply curve

Input Prices

The cost of resources used in production

Technology

Improvements that increase productive efficiency

Taxes

Government charges that decrease supply

Subsidies

Government payments that increase supply

Market Equilibrium

The point where quantity supplied equals quantity demanded

Equilibrium Price

The price at which supply equals demand

Equilibrium Quantity

The quantity at which supply equals demand

Shortage

When quantity demanded exceeds quantity supplied

Surplus

When quantity supplied exceeds quantity demanded

Price Ceiling

A legal maximum price that creates shortages

Price Floor

A legal minimum price that creates surpluses

Black Market

Illegal buying and selling due to price controls

Rationing

A method of distributing goods when shortages occur