Kaarten: Economie flashcards | Quizlet

Economics

The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.

Scarcity

The fact that resources are limited and insufficient to satisfy all human wants.

Opportunity Cost

The best alternative that we forgo, or give up, when we make a choice or a decision.

Marginalism

The process of analyzing the additional or incremental costs or benefits arising from a choice or decision.

Marginal Cost (MC)

The increase in total cost resulting from producing or consuming one additional unit.

Marginal Benefit (MB)

The increase in benefit resulting from producing or consuming one additional unit.

Efficient Market

A market in which profit opportunities are eliminated almost instantaneously.

Microeconomics

The branch of economics that examines the behavior of individual decision-making units—firms and households.

Macroeconomics

The branch of economics that examines the economic behavior of aggregates—income, employment, and output—on a national scale.

Bio-economy (EU Definition)

Parts of the economy that use renewable biological resources from land and sea to produce food, materials, and energy.

Sustainability

An economy that serves society and respects planetary boundaries.

Circular Economy

An economic system aimed at eliminating waste and the continual use of resources.

Positive Economics

An approach to economics that seeks to understand behavior and systems without making judgments (describes "what is").

Normative Economics

An approach that analyzes outcomes and evaluates them as good or bad, prescribing courses of action (describes "what ought to be").

Ockham's Razor

The principle that irrelevant detail should be cut away when formulating a theory or model.

Ceteris Paribus

All else equal; analyzing the relationship between two variables while holding all other variables constant.

Empirical Economics

The collection and use of data to test economic theories.

Post Hoc, Ergo Propter Hoc

A common error in thinking about causation: "After this, therefore because of this."

Efficiency

Evaluation criterion: producing what people want at the least possible cost.

Equity

Evaluation criterion: fairness or a more equal distribution of income and wealth.

Economic Growth

An increase in the total output of an economy.

Stability

A condition in which national output grows steadily with low inflation and full employment.

Capital Goods

Goods produced by the economic system used as inputs to produce other goods and services in the future.

Consumer Goods

Goods produced for present consumption.

Factors of Production

The inputs into the production process: Land, Labor, and Capital.

Production Possibility Frontier (PPF)

A graph showing all combinations of goods and services that can be produced if all society's resources are used efficiently.

Marginal Rate of Transformation (MRT)

The slope of the PPF; the amount of one good that must be given up to produce more of another.

Law of Increasing Opportunity Costs

As you produce more of a good, the opportunity cost of producing it in terms of the other good increases.

Absolute Advantage

A producer can produce a product using fewer resources (lower absolute cost) than another producer.

Comparative Advantage

A producer can produce a product at a lower opportunity cost (forgoing less of other goods) than another producer.

Theory of Comparative Advantage

Ricardo's theory that specialization and free trade benefit all trading parties, even those who are absolutely more efficient.

Consumer Sovereignty

The idea that consumers ultimately dictate what will be produced by choosing what to purchase.

Laissez-faire Economy

A free market economy where individuals and firms pursue self-interest without any central direction or regulation.

Command Economy

An economy in which a central government sets output targets, incomes, and prices.

Market

The institution through which buyers and sellers interact and engage in exchange.

Law of Demand

The negative relationship between price and quantity demanded: as price rises, quantity demanded decreases (ceteris paribus).

Demand Schedule

A table showing how much of a product a household is willing to buy at different prices.

Demand Curve

A graph illustrating how much of a given product a household is willing to buy at different prices.

Substitutes

Goods that can serve as replacements; when the price of one increases, the demand for the other increases.

Complements

Goods that "go together"; a decrease in the price of one results in an increase in demand for the other.

Normal Goods

Goods for which demand increases when income is higher.

Inferior Goods

Goods for which demand falls when income rises.

Giffen Goods

Inferior goods for which demand increases when price increases (upward sloping demand curve).

Law of Supply

The positive relationship between price and quantity supplied: as market price rises, quantity supplied increases.

Supply Curve

A graph illustrating how much of a product a firm will sell at different prices.

Market Equilibrium

The condition when quantity supplied equals quantity demanded; no tendency for price to change.

Shortage (Excess Demand)

Quantity demanded exceeds quantity supplied at the current price; price tends to rise.

Surplus (Excess Supply)

Quantity supplied exceeds quantity demanded at the current price; price tends to drop.

Price Rationing

The process by which the market system allocates goods when quantity demanded exceeds quantity supplied.

Price Ceiling

A maximum price that sellers may charge, usually set by the government.

Price Floor

A minimum price below which exchange is not permitted (e.g., Minimum Wage).

Queuing

A non-price rationing mechanism involving waiting in line.

Black Market

A market in which illegal trading takes place at market-determined prices.

Consumer Surplus

The difference between the maximum amount a person is willing to pay and the market price.

Producer Surplus

The difference between the market price and the cost of production for the firm.

Deadweight Loss

The total loss of producer and consumer surplus from underproduction or overproduction.

Price Elasticity of Demand

Ratio of % change in quantity demanded to % change in price; (%ΔQd / %ΔP).

Perfectly Inelastic Demand

Demand where quantity does not respond at all to price changes (Elasticity = 0).

Perfectly Elastic Demand

Demand where quantity demanded drops to zero at the slightest increase in price (Elasticity = infinity).

Elastic Demand

Demand where the % change in quantity demanded is larger than the % change in price (Elasticity > 1).

Inelastic Demand

Demand where the % change in quantity is smaller than the % change in price (0 < Elasticity < 1).

Unitary Elasticity

Demand where the % change in quantity is exactly the same as the % change in price (Elasticity = 1).

Income Elasticity of Demand

Measures responsiveness of demand to changes in income; (%ΔQd / %ΔIncome).

Cross-Price Elasticity of Demand

Measures responsiveness of demand for one good to changes in price of another; (%ΔQy / %ΔPx).

Elasticity of Supply

Ratio of % change in quantity supplied to % change in price.

Excise Tax

A per-unit tax on a specific good.

Budget Constraint

The limits imposed on household choices by income, wealth, and product prices.

Choice Set (Opportunity Set)

The set of options defined and limited by a budget constraint.

Real Income

Income adjusted for inflation; the set of opportunities to purchase goods determined by prices and money income.

Utility

The satisfaction or pleasure that the consumption of a product provides.

Marginal Utility (MU)

The additional satisfaction gained by consuming one more unit of a good.

Law of Diminishing Marginal Utility

As consumption increases, the utility derived from each additional unit declines.

Indifference Curve

A set of points representing combinations of goods X and Y that yield the same total utility.

Marginal Rate of Substitution (MRS)

The ratio at which a household is willing to substitute good Y for good X (MUx / MUy).

Preference Map

A consumer's complete set of indifference curves.

Utility-Maximizing Rule

Maximizing utility by equating MU/P for all goods (MUx / Px = MUy / Py).

Diamond/Water Paradox

The observation that things with the greatest value in use (water) have little value in exchange compared to diamonds.

Income Effect

Change in consumption due to the improvement in well-being/purchasing power from a price decline.

Substitution Effect

Change in consumption due to a product becoming relatively cheaper/more expensive compared to substitutes.

Labor Supply Decision

The choice between working for a wage and enjoying leisure or unpaid work.

Profit

The difference between Total Revenue and Total Cost (TR - TC).

Economic Profit

Total revenue minus total economic cost (including both explicit and implicit costs).

Explicit Costs

Actual cash outlays or expenses (e.g., wages, rent).

Implicit Costs

The opportunity cost of resources used in production (e.g., normal rate of return on capital).

Normal Rate of Return

A rate of return on capital just sufficient to keep investors satisfied; considered an economic cost.

Short Run

A period where the firm operates under a fixed scale of production and cannot enter or exit the industry.

Long Run

A period where there are no fixed factors of production; firms can change scale and enter/exit the industry.

Optimal Production Method

The method that minimizes cost for a given output or maximizes output for given inputs.

Labor-Intensive Technology

Production technology that relies heavily on human labor instead of capital.

Capital-Intensive Technology

Production technology that relies heavily on capital instead of human labor.

Production Function

The relationship between inputs and the total product (output).

Marginal Product (MP)

The additional output produced by adding one more unit of a specific input.

Law of Diminishing Returns

When additional units of a variable input are added to fixed inputs, the marginal product of the variable input eventually declines.

Average Product

The average amount of output produced by each unit of a variable factor (Total Product / units of input).

Fixed Cost (FC)

Any cost that does not depend on the firm's level of output; incurred even if output is zero.

Variable Cost (VC)

A cost that depends on the level of production chosen.

Total Cost (TC) Formula

TC = TFC + TVC.

Average Fixed Cost (AFC)

Total fixed cost divided by the number of units of output (TFC / q).

Average Variable Cost (AVC)

Total variable cost divided by the number of units of output (TVC / q).

Marginal Cost (MC) Formula

MC = ΔTVC / Δq.