ECON002 Exam Study Guide: Key Concepts and Terms

Unlimited Wants

Desire for goods exceeds available resources.

Limited Resources

Finite inputs available for production.

Ceteris Paribus

Assumes all else remains constant.

Positive Statement

Factual claim that can be tested.

Normative Statement

Opinion-based claim about what ought to be.

Scarcity

Fundamental economic problem of limited resources.

Labor

Human effort in producing goods and services.

Land

Natural resources used in production.

Endogenous Variables

Variables explained by the model.

Exogenous Variables

Variables taken as given in the model.

Circular Flow Model

Describes flow of resources and money in economy.

Production Possibilities Curve

Graph showing trade-offs between two goods.

Opportunity Cost

Value of the next best alternative forgone.

Increasing Opportunity Cost

More production leads to greater sacrifices of other goods.

Marginal Cost

Cost of producing one additional unit of a good.

Production Possibility Frontier (PPF)

Illustrates maximum production capabilities of an economy.

Technological Advancement

Discovery that improves production efficiency.

Unattainable Points

Points outside the production possibilities frontier.

Attainable Points

Points within the production possibilities frontier.

Fully Utilizing Resources

Producing on the production possibilities frontier.

Concave PPF

Indicates differing resource efficiency for goods.

Revenue in Goods Market

Income firms earn from selling products.

Inputs in Factor Market

Resources firms purchase for production.

Empirical Evidence

Data used to conduct positive economic analysis.

Value Judgments

Assessments based on personal beliefs or opinions.

Trade-offs

Choices made when allocating limited resources.

Economic Models

Simplified representations of economic processes.

Production Efficiency

Optimal use of resources to produce goods.

Production efficiency

Achieved when producing on the PPF.

PPF

Production Possibility Frontier; shows maximum output.

Comparative advantage

Ability to produce at lower opportunity cost.

Specialization

Focusing production on specific goods.

Trade

Exchange of goods to benefit both parties.

Opportunity cost

Value of the next best alternative foregone.

Alice's opportunity cost of shoes

0.8 bookshelves per pair of shoes.

Alice's opportunity cost of bookshelves

1.25 pairs of shoes per bookshelf.

Roger's opportunity cost of shoes

0.6 bookshelves per pair of shoes.

Roger's opportunity cost of bookshelves

1.667 pairs of shoes per bookshelf.

Law of demand

Quantity demanded inversely related to price.

Movement along supply curve

Change in quantity supplied due to price change.

Law of supply

Producers reduce quantity supplied when prices fall.

Supply increase

Shift rightward in the supply curve.

Demand for pizza unchanged

No change in price of pizza.

Demand curve for donuts

Shifts right if coffee price declines.

Supply curve shift left

Caused by increased production costs.

Shortage

Quantity demanded exceeds quantity supplied.

Equilibrium price increase

Indicates increased demand for coffee.

Price below equilibrium

Causes a shortage in the market.

Surplus

Occurs when quantity supplied exceeds quantity demanded.

Equilibrium price fall

Results from decreased demand and increased supply.

Price of good falls

Occurs when there is a surplus.

Leftward shift in supply curve

Caused by increased production costs or regulations.

Leftward shift in supply curve

Caused by increased wage rates for refinery workers.

Cod supply curve shift

Government limits fish catch, reducing supply.

Market price below clearing level

Creates upward pressure on current market price.

Shortage in bread market

Occurs when actual price is below equilibrium.

Nursing services shortage

Increased demand leads to higher nursing wage rates.

Price ceiling on milk

Government sets price above equilibrium, causing surplus.

Surplus of milk

Quantity supplied exceeds quantity demanded at higher price.

Demand curve shift for good X

Rightward shift increases existing shortage.

Government price control effects

Some sellers find buyers; others do not.

Consumer benefits from price controls

Lower prices help some, but supply may be insufficient.

Non-binding price ceiling

Maximum price above current equilibrium price.

Binding price floor

Minimum price set above equilibrium causes excess supply.

Value of a good

Maximum price willing to pay for it.

Total surplus definition

Sum of consumer surplus and producer surplus.

Allocatively efficient market

Maximizes total consumer and producer surplus.

Efficient resource use

Maximizes sum of consumer and producer surplus.

Consumer surplus in equilibrium

No requirement to be less than or equal to producer surplus.

Economic inefficiency sources

Rapid technological change is not a source.

Deadweight loss

Decrease in consumer and producer surplus from inefficiency.

Tax impact on goods

Increases buyer's price, decreases seller's received price.

Sales tax on gasoline

Imposed on sellers, affecting market prices.

Sales Tax

Tax imposed on sellers of goods.

Supply Curve Shift

Movement of supply curve due to tax.

Tax Burden

Division of tax costs between buyers and sellers.

Elasticity of Demand

Responsiveness of quantity demanded to price changes.

Inelastic Demand

Buyers are less responsive to price changes.

Inelastic Supply

Sellers cannot easily change production levels.

Binding Price Ceiling

Regulation to keep prices below market equilibrium.

Price Floor

Minimum price set above equilibrium price.

Rent Control

Price ceiling that caps rent below equilibrium.

Opportunity Cost

Cost of time spent searching for apartments.

Quantity Demanded

Higher when price is below market price.

Surplus

Excess supply when price floor is above equilibrium.

Minimum Wage

Binding price floor in the labor market.

Labor Supply Increase

More workers willing to work at higher wages.

Labor Demand Decrease

Fewer workers hired due to higher costs.

Externality

Costs or benefits affecting third parties.

External Benefit

Positive effect on third parties from consumption.

Free-Rider

Benefits from a good without paying.

Free-Rider Problem

Lack of incentive to pay for consumption.

Non-Excludable Good

Cannot prevent others from benefiting.

Excludable Good

Possible to restrict access to benefits.

Non-Rival Good

One person's use does not reduce availability.

Public Good

Non-excludable and non-rival in consumption.

Production Function

Relationship between inputs and output levels.

Output Change

Variation in output with changes in input.

Variable Input

Input that can be changed in production.

Efficiency Quantity

Optimal output level for public goods.