Microeconomics Test 1 Flashcards

economics

the study of how individuals and societies allocate their limited resources to satisfy their practically unlimited wants

economy

system that coordinates society’s productive activities

scarcity

limited and desirable; choices are necessary because resources are scarce

resources

land (nature resources), labor, and capital (things that produce other things)

microeconomics

the study of individual units that make up the economy, focus on individuals, businesses, and industries

macroeconomics

the study of overall aspects and workings of an economy, focus on big picture

incentives

factors that motivate you to act or exert effort (positive, negative, direct, indirect)

trade-offs

with scarce resources, people have to choose some things over others

opportunity cost

the next-best alternative that must be sacrificed to get something else

marginal thinking

evaluating whether the benefit of one or more unit of something is greater than or equal to the cost

trade creates value

the voluntary exchange of goods/services between 2 or more parties allows specialization and exchange of goods

circular flow diagram

shows how goods, services, and resources flow through the economy

model

simplified versions of reality to understand complex situations in the world; good models are simple, flexible, and accurate in making predictions

positive statement

can be tested (T/F); describes what is

normative statement

an opinion cannot be tested or validated; describes what ought to be

ceteris paribus

“other things being equal”, central assumption in model building

endogenous

variables that are inside a model

exogenous

variables that are outside a model (cannot be accounted for in a model)

production possibilities frontier (PPF)

model that illustrates the combinations of outputs a society can produce of all of its resources are being used efficiently

Efficient

resources are fully utilized, potential output is maximized (on PPF)

inefficient

wasting resources (under PPF)

feasible

possible (on or under PPF)

not feasible

not possible (above PPF)

opportunity cost

slope on PPF (for x-axis use slope, for y-axis use reciprocal of slope)

law of increasing opportunity cost

the opportunity cost of producing a good rises as society produces more of it

bowed out versus straight line

straight line means constant opportunity cost of both goods; bowed outward means resources are not all equally productive in all activities

shifts in PPF

occurs because of new resources or technology

specialization

the limiting of one’s work to a particular area

absolute advantage

ability to produce more of a good or service than a competitor (who can produce more?)

comparative advantage

the ability to produce a good or service for a lower opportunity cost than a competitor (who has lower opportunity cost?)

gains from trade

each person can consume more than they otherwise could have

short run

the period in which me make decisions that reflect our immediate or short-term wants, needs, or limitations (consumers can only partially adjust behavior)

long run

the period in which we make decisions that reflect our needs, wants, and limitations over a long-term horizon (consumers have time to fully adjust to market conditions)

consumer goods

goods produced for current consumption (ex: food)

capital goods

goods that help produce other valuable goods (ex: factories)

investment in capital instead of consumer goods

allow an economy to expand its PPF in the future

supply and demand model

model of how a competitive market behaves

market economy

resources are allocated among households and firms with little to no government interference

command economy

resources and production are controlled by a central government

invisible hand

guides resources to their highest valued resources

3 characteristics of a competitive market

many buyers and sellers, goods sold are similar, no one individual has any influence over the prices

demand

behavior of buyers

quantity demanded

the amount of a good buyers are willing and able to purchase at the current price

demand schedule

table of relationship between price and quantity

demand curve

graph of relationship between price and quantity

law of demand

inverse relationship between price and quantity demanded

market demand

horizontal sum of all individual quantities demanded by each buyer in the market at each price

what shifts demand curve?

Change in non-price factors (income, related goods, tastes and preferences, price expectations, number of buyers in the market, taxes and subsidies)

What causes movement along the demand curve?

Change in price

normal goods

consumers buy more of a normal good as income rises, holding all other factors constant

inferior goods

demand declines as income rises

substitutes

two goods that are used in place of each other (when the price of a substitute good rises, the quantity demanded of that good falls, and the demand of the related good goes up)

complements

two goods that are used together (when the price of a complementary good rises, the quantity demanded of that good falls, and the demand for the related good decreases

supply

behavior of sellers

quantity supplied

the amount of the good of service that producers are willing and able to sell at the current price

supply schedule

table of relationship between price and quantity supplied

supply curve

graph of relationship between price and quantity supplied

law of supply

all else equal, there is a direct relationship between price and quantity supplied

market supply

horizontal sum of all individual quantities supplied by each seller in the market at each price

what shifts the supply curve?

Change in non-price factors (input costs, technology developments, taxes and subsidies, number of firms, price expectations)

what causes movement along the supply curve?

Change in price

input

resources used in the production process

equilibrium

when quantity supplied equals quantity demanded at a certain price

equilibrium price

the price at which the quantity supplied is equal to the quantity demanded (market-clearing price)

equilibrium quantity

the amount at which the quantity supplied is equal to the quantity demanded

surplus (excess supply)

market condition when the quantity supplied of a good is greater than the quantity demanded

shortage (excess demand)

market condition when the quantity supplied of a good is less than the quantity demanded

Be able to calculate the surplus and shortage from a graph or table

Compare Qd to Qs; when Qd>Qs = shortage; when Qs>Qd = surplus

What happens to the equilibrium price and quantity when demand curve shifts?

positive correlation (P↑Q↑, P↓Q↓)

What happens to the equilibrium price and quantity when supply curve shifts?

inverse correlation (P↓Q↑, P↓Q↓)

What happens to the equilibrium price and quantity when both supply and demand shift simultaneously? (how to)

draw each effect on supply and demand individually; compare both prices and quantities, the one that is consistent is the guaranteed shift, while the one that is different is ambiguous/indeterminate