microecon exam 1

the limited nature of society’s resources

opportunity cost

whatever must be given up to obtain some item

scarcity

the limited nature of society’s resources

efficiency

the property of society getting the most it can from its scarce resources

equality

the property of distributing economic prosperity uniformly among the members of society

rational people

people who systematically and purposefully do the best they can to achieve their objectives

marginal change

an incremental adjustment to a plan of action

incentive

something that induces a person to act

market economy

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

property rights

the ability of an individual to own and exercise control over scarce resources

market failure

a situation in which a market left on its own does not allocate resources efficiently

externality

the impact of one person’s actions on the well-being of a bystander

market power

the ability of a single economic actor (or small group of actors) to have a substantial influence on market price

productivity

the quantity of goods and services produced from each unit of labor input

inflation

an increase in the overall level of prices in the economy

business cycle

fluctuations in economic activity, such as employment and production

economics

the study of how society manages its scarce resources

circular-flow diagram

a visual model of the economy that shows how dollars flow through markets among households and firms

production possibilities frontier

a graph that shows the combinations of output that the economy can possibly produce with the available factors of production and production technology

microeconomics

the study of how households and firms make decisions and how they interact in markets

macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

positive statements

claims that attempt to describe the world as it is

normative statements

claims that attempt to prescribe how the world should be

absolute advantage

the ability to produce a good using fewer inputs than another producer

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

imports

goods produced abroad and sold domestically

exports

goods produced domestically and sold abroad

market

competitive market

quantity demanded

law of demand

the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

demand curve

a graph of the relationship between the price of a good and the quantity demanded

normal good

a good for which, other things being equal, an increase in income leads to an increase in demand

inferior good

a good for which, other things being equal, an increase in income leads to a decrease in demand

substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other

complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other

quantity supplied

the amount of a good that sellers are willing and able to sell

law of supply

the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises

supply schedule

a table that shows the relationship between the price of a good and the quantity supplied

supply curve

a graph of the relationship between the price of a good and the quantity supplied

equilibrium

a situation in which the market price has reached the level at which the quantity supplied equals the quantity demanded

equilibrium price

the price that balances the quantity supplied and the quantity demanded

equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price

surplus

a situation in which the quantity supplied is greater than the quantity demanded

shortage

a situation in which the quantity demanded is greater than the quantity supplied

law of supply and demand

the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded of that good into balance

elasticity

a measure of the responsiveness of the quantity demanded or quantity supplied to a change in one of its determinants

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in its price, calculated as the percentage change in quantity demanded divided by the percentage change in price

total revenue

the amount paid by buyers and received by the sellers of a good, calculated as the price of the good times the quantity sold

income elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in consumers’ income, calculated as the percentage change in quantity demanded divided by the percentage change in income

cross-price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, calculated as the percentage change in the quantity demanded of the first good divided by the percentage change in the price of the second good

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in its price, calculated as the percentage change in quantity supplied divided by the percentage change in price