Pre-Midterm Econ

3 Fundamental Questions of Economy

• What goods and services to produce

• How will these goods and service be produced

• who receives them

Opportunity Cost

the value of the next best alternative that is forgone when a choice is made

Substitution Effect

the change in quantity demanded of a good from a change in the relative price of a good

Income Effect

the impact of a change in the price of a good on a consumer’s purchasing power

Graph Analysis: Increase of Substitutes

Supply curve shift to the left

Inferior Goods

When income increases, demand decreases

Normal Goods

When income increases, demand increases

When does a decrease in equilibrium price occur

When there is an increase in supply and decrease in demand

Price Floor

Government imposed minimum price for a good or service, set above the market equilibrium to prevent prices from falling to low

Graph Analysis: Decrease in the price of a product

Movement along the supply curve

Graph Analysis: An increase of inputs

Supply curve shift to the left

Comparative Advantage

a firm can produce a good at a lower opportunity cost than others

Absolute Advantage

the ability for a firm to produce a good or service more efficiently, using fewer resources or less time than another producer

Graph Analysis: an increase in he number of firms in the market

Supply Curve shift to the right

Taxes

monetary payment imposed by the government to influence economic behaviour to stop producing a good

Subsidies

financial assistance provided by the government to encourage production/consumption of a good

Tarriffs

a tax imposed by the government on imported/exported goods to raise revenue, protect domestic industries, or influence trade

Positive Externality

benefit received by a party as an indirect effect of the transactions of another party

Negative Externality

a party’s actions cause harm to another party without the responsible party bearing the costs.

Pigovian Tax

tax imposed on activities that generate negative externalities, designed to align private costs with social costs and improve economic effiiciency