Untitled Flashcards Set

Economic models

Simplified representations of reality used to analyze economic behavior and predict outcomes.

Ceteris paribus

The assumption that all other factors remain constant while examining one variable's effect.

Rational choice theory

The principle that consumers aim to maximize satisfaction and firms aim to maximize profits.

Production Possibilities Curve (PPC)

A graph showing maximum production combinations of two goods given available resources.

Law of Demand

Quantity demanded decreases when price increases, all else equal.

Law of Supply

Quantity supplied increases when price increases, all else equal.

Equilibrium

The price and quantity where demand equals supply.

Veblen goods

Luxury items where demand increases with price due to prestige.

Giffen goods(inferior goods with no close substitutes,)

Essential goods where demand increases with price because consumers can't afford alternatives.

Price Elasticity of Demand (PED)

Percentage change in quantity demanded divided by percentage change in price.

Income Elasticity of Demand (YED)

Percentage change in quantity demanded divided by percentage change in income.

Price Elasticity of Supply (PES)

Percentage change in quantity supplied divided by percentage change in price.

Price ceiling

Maximum legal price set below equilibrium, causing shortages.

Price floor

Minimum legal price set above equilibrium, causing surpluses.

Deadweight loss (DWL)

Lost economic efficiency when equilibrium isn't achieved.

Negative externality

Costs imposed on third parties not involved in the transaction.

Positive externality

Benefits received by third parties not involved in the transaction.

Public goods

Goods that are non-excludable and non-rivalrous in consumption.

Tragedy of the commons

Overuse of shared resources due to lack of ownership.

Nudges

Policy tools that influence behavior without restricting choices.

Asymmetric information

Situations where one party has more or better information than another.

Gross Domestic Product (GDP)

Total value of final goods and services produced in a country in one year.

Cyclical unemployment

Unemployment caused by economic downturns.

Structural unemployment

Unemployment caused by skills mismatches.

Inflation

Sustained increase in general price levels.

Demand-pull inflation

Too much spending chasing too few goods.

Cost-push inflation

Rising production costs increase prices.

Gross national income (GNI)

Aggregate value of the gross balances of primary incomes for all sectors.

Aggregate Demand (AD)

Total spending in the economy: Consumption plus Investment plus Government spending plus Net Exports.

Short-run Aggregate Supply (SRAS)

Shows production at different price levels when some costs are fixed.

Long-run Aggregate Supply (LRAS)

Shows maximum sustainable output when all resources are fully employed.

Stagflation

Combination of high inflation and high unemployment.