Principles of Economics (Mankiw, 10th Edition) - Study Guide (Chapters 1-6)

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37 Terms

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Scarcity
Limited resources must be allocated efficiently.
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Opportunity Cost
The value of the next best alternative foregone.
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Marginal Changes
Small, incremental adjustments to decisions.
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Incentives
Factors that motivate decision-making.
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Market Economy
Allocates resources through decentralized decisions.
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Market Failure
When markets fail to allocate resources efficiently.
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Externalities
Uncompensated impact of one person’s actions on others.
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Positive Statement
Descriptive, fact-based statement.
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Normative Statement
Prescriptive, opinion-based statement.
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Production Possibilities Frontier (PPF)
Graph showing possible production combinations.
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Microeconomics
Study of individual decision-making.
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Macroeconomics
Study of economy-wide phenomena.
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Absolute Advantage
The ability to produce a good using fewer inputs than another producer.
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Comparative Advantage
The ability to produce a good at a lower opportunity cost than another producer.
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Specialization
Focusing on the production of goods where comparative advantage exists.
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Gains from Trade
Both parties benefit when they specialize and trade based on comparative advantage.
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Demand Curve
Shows the relationship between price and quantity demanded.
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Law of Demand
As price decreases, quantity demanded increases.
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Supply Curve
Shows the relationship between price and quantity supplied.
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Law of Supply
As price increases, quantity supplied increases.
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Equilibrium
The point where supply and demand intersect.
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Surplus
When quantity supplied > quantity demanded (price is too high).
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Shortage
When quantity demanded > quantity supplied (price is too low).
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Price Elasticity of Demand
Measures how much quantity demanded responds to price changes.
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Elastic Demand
|E_d| > 1 (luxury goods, close substitutes).
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Inelastic Demand
|E_d| < 1 (necessities, few substitutes).
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Total Revenue (TR) and Elasticity
Increasing price decreases TR with elastic demand; increases TR with inelastic demand.
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Price Elasticity of Supply
Measures how much quantity supplied responds to price changes.
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Income Elasticity of Demand - Normal Good
Positive income elasticity.
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Income Elasticity of Demand - Inferior Good
Negative income elasticity.
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Cross-Price Elasticity of Demand - Substitutes
Positive elasticity.
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Cross-Price Elasticity of Demand - Complements
Negative elasticity.
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Price Ceiling
Legal maximum price (e.g., rent control).
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Price Floor
Legal minimum price (e.g., minimum wage).
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Tax Incidence
The burden of a tax shared between buyers and sellers.
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Elasticity and Tax Burden
More inelastic side of the market bears more tax burden.
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Effects of Taxes
Lowers quantity bought and sold and creates a deadweight loss (inefficiency).