ECON TEST 1

Economizing Problem

Individuals, firms, and governments face unlimited wants but limited resources, leading to the need to make optimal choices under scarcity.

Opportunity Cost

The potential gain lost from choosing one alternative over others.

Models/Theories/Laws & Assumptions

Economists use models to simplify complex situations, with assumptions like purposeful behavior and ceteris paribus.

Marginal Analysis

Examining the additional benefit (MB) and cost (MC) of a product or service to determine optimal allocation.

Asymmetric Information + Moral Hazard/Adverse Selection

Adverse selection occurs when individuals lack information, while moral hazard leads to risky behavior without consequences.

Logical Fallacies

Errors in reasoning like Post Hoc, Composition, and Correlation vs. Causation.

Post Hoc

Fallacy in which an event is presumed to have been caused by a closely preceding event merely on the grounds of temporal succession.

Fallacy of Composition

Arises when an individual assumes something is true of the whole just because it is true of some part of the whole.

Broken Window Fallacy

Physical destruction of property destroys wealth 

Requires stimulation of the economy to bring it back

PPF Curve

Represents possible combinations of two products, bows from the origin due to resource constraints when switching products.

Centrally Planned Economies vs

Contrasting systems like Command and Control vs. Invisible Hand by Adam Smith.

Central Planning

Designs of how things are meant to work

The “Invisible Hand” vs. The “Iron Fist”

The people, processes, and drive that leads people to create things through cooperation 

Self-Interest, Dollar Votes, Consumer Sovereignty

Concepts where consumer choices determine production and markets operate based on self-interest.

Supply and Demand

Understanding determinants, changes in quantity, consumer vs. producer surplus, price ceilings/floors, and deadweight loss in markets.

Price Ceilings

People/companies cannot charge above a certain price

If below the point of equilibrium, then there is a shortage; if above then nothing happens

Price Floor

People/companies cannot charge below a certain price

If above the point of equilibrium, then there is a surplus; if below nothing happens

Market Failures

Occur when resources are misallocated due to externalities, leading to demand-side and supply-side failures.

Rivalry

Situation where 2 individuals/firms can't consume the same good.

Excludability

Ability to prevent non-paying entities like firms/companies from using a good.

Free Rider Problem

Occurs when individuals benefit from a good without paying for it.

Public Goods

Goods that are non-excludable and non-rivalrous.

Private Goods

Goods that are excludable and rivalrous.

Time Preference

Refers to the choice between instant gratification (high time preference) and delayed gratification (low time preference).

Laffer Curve

Graphical representation used to determine optimal rates, such as taxes, at the peak.

Demand Determinants

Change in consumer tastes and preferences

Change in number of buyers

Change of income

Change in consumers’ expectations

Normal Goods

When income goes up, demand goes up

Inferior Goods

If income goes up, you won’t buy more

Supply Detereminants

Change in resource prices

Change in technology

Change in the number of sellers

Change in taxes and subsidies

Change in producer expectations

Praxeology

Humans act rationally and logically; the study of human action, based on notion that humans engage in purposeful behavior (humans do things for a reason) with two main assumptions

Praxeology Assumptions

Individuals act rationally and self-interestedly in order to maximize their “utility”

Ceteris paribus - all else is held constant; all are equal

Producer Surplus

The difference between the actual price a producer receives and the minimum price they would accept

The extra benefit of receiving a higher price

Consumer Surplus

The difference between what a consumer is willing to pay for a good and what the consumer actually pays

Extra benefit from paying less than the maximum price