economics terms

chapters 1-3

Allocative efficiency

resources distributed to maximum benefit in society

centrally planned economy

government makes all economic decisions and plans distributions of goods and production

macroeconomics

focuses on economy as a whole. production, income, consumption.

marginal analysis

evaluates benefits of something vs the costs of it

market

the place of trade. production and consumption

market economy

supply and demand determine allocation of resources

microeconomics

economics studying individual decisions and their impact

mixed economy

mostly free market with some planned resource allocation. ex: government funding the building of a bridge

normative analysis

evaluates economic based on what COULD BE

opportunity cost

the cost of the next best option that you could be giving up

positive analysis

evaluating the economy based on what IS

productive efficiency

producing max output given resources

scarcity

unlimited wants exceed resources

trade off

more of one thing = less of another

voluntary exchange

buyer and seller are both better off from transaction

production possibilities frontier

max attainable combination of 2 goods. ex: produce maximum of both guns and roses

absolute advantage

the ability to produce more goods with equal resources used

comparitive advantage

produce at a lower opportunity cost. ( specialize in whatever is easiest for you to produce based on resources)

factor market

market for things like production, labor, entrepreneurial ability

free market

few governmental restrictions

circle flow diagram

shows how households, product markets, factor markets, and firms are all related

demand schedule

table showing relationship of price/ quantity

demand curve

curve showing relationship of price/ quantity

law of demand

when the price increases, quantity decreases

substitution effect

when price changes, people switch to the cheaper option

income effect

price change is similar to changing people’s income

ceteris paribus “ all else is equal”

when analyzing price v quantity, assume all other variables are constant

variables in market shift demand ( who would buy it )

1. income

2. prices

3. tastes

4. population and demographics

5. expected future prices

6. natural disaster and pandemic

normal good

demand increases as income increases

inferior good

demand decreases as income increases ( ex: fast fashion )

substitutes

goods used for same purpose

complements

goods used well together ( ex: iphone and iphone charger )

supply schedule

table for price/ quantity for sellers

supply curve

curve for price/ quantity for sellers

law of supply

as price increases, the people that want to sell/ produce also increases

variables of market supply

1. price of inputs

2. technological change

3. prices of related goods

4. # of firms on market

5. expected future prices

6. natural disaster and pandemics

market equilibrium

#supplied = #demanded

surplus

#supplied > #demanded

shortage

#supplied < #demanded

price ceilings

legal max price sellers can charge ( ex: drug cap)

price floor

legal minimum price sellers can receive

consumer surplus

difference in how much a consumer is willing to pay vs how much they end up paying

marginal benefit

the additional benefit a consumer gets per unit. ( ex: buy one get one free )

marginal cost

what it costs a firm to produce one more unit

producer surplus

the difference in the lowest a producer will sell for vs what they end up selling for

economic surplus

consumer surplus + producer surplus

deadweight loss

reduction in economic surplus resulting from market not being in equillibrium

economic efficiency

the market outcome when the marginal cost = the marginal benefit. when the consumer surplus and the producer surplus are at a maximum

illegal market

buying and selling at prices that violate government regulations

tax incidence

the division of the tax burden between buyers and sellers

elasticity

how much one variable affects another

price elasticity of demand

how the prifce change impacts the demand curve

price elasticity formula

(% change in Qd) / % change in P

elastic

the (change in Qd) / ( change in P ) is > 1 abs value

inelastic

the (change in Qd) / ( change in P ) is < 1 abs value

unit elastic

the (change in Qd) / ( change in P ) is = 1 abs value

perfectly inelastic demand

the curves are vertical lines

perfectly elastic demand

the curves are horizontal lines