Micro Economics

What are the three basic economic questions?

What to produce, how to produce, and for whom to produce.

Why must every economy make choices?

Resources are scarce, so not all wants can be satisfied.

What is scarcity?

Resources are limited relative to human wants.

What is the consequence of scarcity?

Individuals and societies must choose how to use limited resources.

What does economics study?

How scarce resources are allocated among competing uses.

What is the scarcity principle?

Resources are limited while human wants are effectively unlimited.

What is the economic problem?

Unlimited wants must be satisfied with limited resources.

What is purposeful behavior?

The idea that people make choices intended to achieve their goals.

What is rational behavior?

Making choices based on expected benefits and costs.

What is a trade-off?

Getting more of one thing requires giving up some of another.

What is opportunity cost?

The value of the best alternative forgone when making a choice.

What is the opportunity cost of a choice?

The value of the next-best alternative given up.

What does guns versus butter illustrate?

Producing more military goods requires sacrificing some civilian goods.

What are production possibilities?

The alternative combinations of goods and services an economy can produce.

What is a production possibilities table?

A table showing different combinations of two goods that can be produced.

What is a production possibilities curve?

A graph showing possible combinations of two goods that can be produced.

What does a PPC assume about resources?

The quantity of available resources is fixed.

What does a PPC assume about technology?

Technology is held constant.

What does a point on the PPC represent?

A combination produced with resources fully and efficiently employed.

What does a point inside the PPC represent?

An inefficient combination because resources are not fully or efficiently used.

What does a point outside the PPC represent?

A combination currently unattainable with available resources and technology.

What does movement along a PPC represent?

A trade-off between producing different goods.

What does a PPC demonstrate?

Scarcity, choice, trade-offs, and opportunity cost.

What causes an outward shift of the PPC?

Economic growth from more resources, better resources, or improved technology.

What causes an inward shift of the PPC?

A reduction in productive resources or productive capacity.

What can increase productive capacity?

More resources, improved resource quality, or better technology.

What is economic growth?

An increase in an economy's ability to produce goods and services.

What is economic efficiency?

Using resources so that maximum possible output or benefit is obtained.

What is productive efficiency?

Producing a good or service at the lowest possible resource cost.

What is allocative efficiency?

Producing the combination of goods most desired by society.

What is an efficient point on a PPC?

Any point on the PPC where resources are fully and efficiently employed.

What is an inefficient point on a PPC?

A point inside the PPC where resources are not fully utilized.

What is an unattainable point?

A point outside the current PPC that cannot currently be produced.

What is constant opportunity cost?

Opportunity cost stays the same as additional units are produced.

What does a straight-line PPC illustrate?

Constant opportunity costs.

What does a bowed-out PPC illustrate?

Increasing opportunity costs.

Why does opportunity cost often increase?

Resources are not equally suited to producing every good.

What is the law of increasing opportunity costs?

Producing more of one good requires increasingly larger sacrifices of another.

What is the optimal point on a PPC?

The most desirable mix of goods where marginal benefit equals marginal cost.

What is marginal analysis?

Comparing additional benefits with additional costs.

What is a marginal benefit?

The additional benefit from one more unit of an activity.

What is marginal cost?

The additional cost of one more unit of an activity.

What is the optimal decision rule?

Continue an activity while marginal benefit is at least as large as marginal cost.

When is an activity economically worthwhile?

When its marginal benefit exceeds its marginal cost.

When should an activity be reduced?

When its marginal cost exceeds its marginal benefit.

What are the four factors of production?

Land, labor, capital, and entrepreneurial ability.

What does land include?

All natural resources used to produce goods and services.

What does labor include?

The physical and mental talents used in production.

What is capital in economics?

Human-made resources used to produce other goods and services.

Is financial money itself economic capital?

No. Economic capital consists of productive human-made resources such as tools and machinery.

What is entrepreneurial ability?

The ability to organize resources, innovate, make decisions, and accept business risk.

What is an entrepreneur?

Someone who organizes resources, makes decisions, innovates, and accepts business risk.

What are economic resources?

Inputs used to produce goods and services.

What are factors of production?

Land, labor, capital, and entrepreneurial ability.

What are consumer goods?

Goods and services that directly satisfy consumer wants.

What are capital goods?

Goods used to produce other goods and services.

What is investment?

Spending that increases the economy's stock of capital goods.

What is the difference between capital and money?

Capital is a productive resource; money is a medium of exchange.

What is specialization?

Using resources to concentrate on producing particular goods or services.

What is division of labor?

Dividing production into separate tasks performed by different workers.

Why does specialization increase productivity?

Workers become more skilled and efficient at particular tasks.

What is human specialization?

Individuals concentrating on particular skills or occupations.

What is geographic specialization?

Regions or countries concentrating on goods they can produce relatively efficiently.

What is a medium of exchange?

Something generally accepted as payment for goods and services.

What is money?

Anything generally accepted as a medium of exchange.

What is barter?

Directly exchanging one good or service for another.

What is the coincidence of wants?

The situation in barter where each person wants what the other offers.

Why is barter inefficient?

It requires a coincidence of wants between trading parties.

What is consumer sovereignty?

Consumers determine which goods and services are produced through their purchases.

What are dollar votes?

Consumer spending choices that influence which products businesses produce.

What is creative destruction?

The replacement of outdated products, technologies, or businesses by new innovations.

What is the invisible hand?

The idea that self-interested market decisions can coordinate economic activity.

What is self-interest?

The pursuit of one's own economic goals and well-being.

What is competition?

Rivalry among buyers or sellers for economic resources, customers, or opportunities.

What is a market?

An institution or arrangement through which buyers and sellers exchange goods and services.

What is the market system?

An economic system in which decisions are largely coordinated through markets and prices.

What is a command system?

An economic system in which central authorities make major economic decisions.

What is a mixed economy?

An economy combining market forces with government involvement.

What is capitalism?

An economic system characterized by private ownership and market coordination.

What is laissez-faire?

The idea that government should interfere minimally with economic activity.

What is private property?

The right of individuals and businesses to own and control resources.

What are property rights?

Legal rights to use, control, and transfer property.

What is freedom of enterprise?

The freedom to own and operate a business.

What is freedom of choice?

The freedom of consumers and producers to make economic decisions.

What is a profit?

Revenue minus the costs of producing a good or service.

What is a loss?

A situation in which costs exceed revenue.

What is the profit-and-loss system?

A system in which profits and losses guide business decisions.

What is the rationing function of price?

Prices allocate scarce goods and services among competing buyers.

How do prices ration scarce resources?

Higher prices discourage some buyers while allocating goods to those willing and able to pay.

What is economic coordination?

The process of coordinating the decisions of consumers and producers.

What are market signals?

Information communicated through prices that influences economic decisions.

What is the circular flow diagram?

A model showing how households and businesses interact through product and resource markets.

What are households?

Economic units that consume goods and services and supply resources.

What are businesses?

Economic units that produce goods and services using resources.

What is the product market?

The market where households purchase goods and services from businesses.

What is the resource market?

The market where businesses purchase or hire economic resources.

What is a factor market?

A market in which resources such as labor and capital are bought and sold.

What is a real flow?

The movement of resources, goods, and services through the economy.

What is a money flow?

The movement of money payments through the economy.

What do households provide in resource markets?

Land, labor, capital, and entrepreneurial resources.