Eco 202 Exam 1 Vocab

Microeconomics

Focuses on how human behavior affects narrowly defined units

Macroeconomics

Focuses on how human behavior affects highly aggregated markets

Scarcity

The concept that there is less of a good freely available than people would like

Rationing

Allocating a limited supply of of a resource/ good among people who want more of it.

Competition behavior

Is a reaction to scarcity

Opportunity Cost

The highest values alternative that must be sacrificed as a result of choosing an option

Normative Economics

Based on value judgements and therefore cannot be proven false

Positive Economics

The scientific study of “what is” and can be tested

Positive Sum Games

Benefit everyone at least on average

Zero Sum Games

Winners gain is exactly offset by losers loss

Negative Sum Games

Are socially undesirable the expected costs outweigh the expected benefits. Losses exceed gains

Moral Hazard Problem

A driver in possession of a car insurance policy may exercise less care while operating their vehicle than an individual with no car insurance

Ceteris Paribus

“Other things constant”

Utility

Benefit from choice

Marginal

The difference between the cost and benefits of alternatives

Fallacy of Competition

Mistaken view that what is true for the individual is also true for the group

Tragedy of the Commons

When cattle herders can place as many cattle or sheep on the commons as they want

Maximum Sustainable Yield (MSY)

Limited number of resource to use

Private Property Rights

The right to exclusive use, protection from invaders, and the right to trade or sell it

How does Trade Create Value

Value in economics is subjective. A hamburger is worth more in utility to a buyer/consumer than a seller.

Facilitates specialization & division of labor. If we each specialize in or comparative advantage, total output will increase and we all share the benefits in trade.

Helps to encourage and spread knowledge.

Transaction Costs

Barriers to trade such as middleman costs, taxes, and legal restrictions

Factors of Production

Land, Labor, and Capital

Entrepreneurs

They introduce new products, production techniques, open up new markets etc.

Poverty

Implies that some basic level of need has not been attained

When collective decision making (the political process) is used to resolve economic questions regarding the allocation of resources

Central planning and political bargaining will replace market forces

Law of Comparative Advantage

Individuals, states, and nations can all benefit if they trade with others

Capitalism

A form of economic organization that relies primarily on private ownership of productive assets, freedom of exchange, and market prices to allocate goods and resources

Middlemen

Specialize in reducing transactions costs

Pitfalls of Economic Reasoning

Violation of ceteris paribus condition. Association is not causation. Fallacy of composition. Blind projection of trends. And finally, the misuse of mathematics (math models only as good as assumptions-static budgeting, sometimes math obscures rather than clarifies).

Eight Guideposts of Economic Thinking

Tradeoffs must be made between the alternative uses of scarce resources. Individuals choose purposefully. Incentives matter. Individuals make decisions at the margin (marginal benefits = marginal costs; Marginal tax rates affect incentives-behavior). Information is costly. Economic actions often have secondary consequences. Economic value is subjective. The test of a theory is its ability to predict.

Consumer Surplus

The difference between the maximum price consumers are willing to pay and the price they actually pay

Law of Demand

Principle that states there is an inverse relationship between the price of a good and the quantity of it buyers are willing to purchase

Substitues

Products that serve similar purpose. An increase in the price of one will cause an increase in demand for the other

Market Demand Schedule

A table that shows the quantity of a good people will demand at varying prices

Change in Demand

A shift in the entire demand curve when something other than price changes

Change in Quantity Demanded

A movement along the same demand curve in response to a change in price

Demand Curve Shifters

Changes in consumer income. Change in the number of consumers. Change in the price of a related good. Changes in expectations. Demographic changes. Changes in consumer tastes

Law of Supply

There is a positive relationship between the price of a product and the amount of it that will be supplied (holding other things constant

Complements

Products that are usually consumed jointly. A decrease in the price of one will cause an increase in demand for the other.

Changes in Supply

Shifts in the entire supply curve

Changes in Quantity Supplied

Movement along the same supply curve in response to a change in price.

Supply Curve Shifters

Changes in resource prices. Change in technology. Elements of nature and political disruptions. Changes in taxes

Producer Surplus

The difference between the price that suppliers actually receive and the minimum price they would be willing to accept

Market

An abstract concept encompassing the forces of supply and demand and the interaction of buyers and sellers with the potential for exchange to occur

Equilibrium

Demand and Supply are in balance

Economic Efficiency

A situation in which all of the potential gains from trade have been realized

Market Equilibrium is Determined By:

The one price where plans of every buyer and seller can be carried out. The equilibrium price will not change until a new force acts (new market information Is revealed). Consumer + Producer Surplus is Maximum

Invisible Hand Principle

The tendency of market prices to direct individuals pursuing their own interests to engage in activities promoting the economic well-being of society

Price Ceilings

Legal maximum prices

Black Market

Operates outside the legal system

Tax incidence

The way the burden of the tax is distributed among economic units

Excess Burden of Taxation

Reflects losses that occur when beneficial activities are forgone because they are taxed

Progressive Tax

In which the average tax rate rises with income

Proportional Tax

In which the average tax rate is the same at all income levels

Regressive Tax

In which the average tax rate falls with income

Statutory Incidence

The legal assignment of a tax

Actual Incidence

The person who writes the check for the tax

Arbitrage

The practice of buying a good in a cheap market and reselling the same good almost immediately at a higher price in another market

Speculation

The practice of buying a good today in expectation of reselling it at a future time when the price is higher, and involves risk and forecasting

Marginal Tax Rate

Are imposed upon the last dollar

Laffer Curve

Illustrates the relationship between the tax rate and tax revenues. Tax revenues will be very low at both high and very low tax rates. When tax rates are quite high, lowering them can increase tax revenue

John Locke Believes the State Should

No Monarchy could ever be a legitimate government.

1. Not enact laws imposing different rules upon the rich and poor, or between favorites at court (lobbyists) and the average citizen,

2. Draft laws for only for the good of the public (not for special interests),

3. Never raise taxes without the consent of the people through their representatives, and finally,

4. Never transfer rule-making power to any other body (i.e. regulatory commissions)

Conditions Necessary for Ideal Efficiency:

All activities that provide individuals with more benefits than costs must be undertaken. No activities that provide benefits less than costs should be undertaken

Four Forms of Market Imperfections

Lack of Competition (monopoly—This will be analyzed extensively in a future lecture). Externalities (postitive or negative). Public Goods. Potential Information Problems

Negative Externality

A cost imposed upon a third party (such as pollution)

Positive Externality

A benefit conferred upon a non-paying third party (such as a vaccine against the flu)

Public Good Characteristics

(1)  Joint Consumption vs. exclusive consumption

(2)  Non-excludable vs. excludable or High vs. low exclusion costs

Public Goods

Goods for which rivalry among consumers is absent and exclusion of nonpaying customers is difficult

Voluntary Exchange

Both the buyer and seller will be made better off