Econ test 1

Economics

The study of how people, businesses, and societies use limited resources to satisfy unlimited wants.

Traditional economy

An economy based on customs, traditions, and beliefs; often relies on bartering and subsistence.

Command economy

An economy where the government makes all economic decisions about production and distribution.

Market economy

An economy where decisions are guided by supply, demand, and prices set in markets.

Mixed economy

A blend of market forces and government involvement in decision-making.

Budget constraint

The limited amount of income/resources available to spend.

Opportunity cost

The value of the next best alternative that you give up when making a choice.

Marginal analysis

Comparing additional benefits to additional costs when making a decision.

Utility

The satisfaction or happiness gained from consuming a good or service.

Law of diminishing marginal utility

Each additional unit consumed gives less added satisfaction than the one before.

Sunk costs

Costs already paid that cannot be recovered and should not affect current decisions.

Production possibilities frontier (PPF)

A curve showing the maximum possible output combinations of two goods.

Law of increasing opportunity cost

As more of one good is produced, the opportunity cost of producing it rises.

Productive efficiency

Producing goods using the fewest resources possible.

Allocative efficiency

Producing the mix of goods most desired by society.

Comparative advantage

The ability to produce a good at a lower opportunity cost than another producer.

Absolute advantage

The ability to produce more of a good with the same resources than another producer.

Factors of production: Land

Natural resources used to make goods and services.

Factors of production: Labor

Human effort and skills used in production.

Factors of production: Capital

Tools, machines, buildings, and technology used to produce.

Factors of production: Entrepreneurship

Bringing together resources to produce a good or service

Capital

Man-made resources (tools, machines, factories) used in production.

Demand

The willingness and ability to buy a good or service at different prices.

Quantity demanded

The specific amount consumers are willing to buy at a given price.

What causes demand curve to shift (TRIBE)

Tastes and preferences; Related goods' prices; Income; Buyers (number of consumers); Expectations of future prices.

Supply

The willingness and ability of producers to offer goods at different prices.

Quantity supplied

The specific amount producers are willing to sell at a given price.

What causes supply curve to shift (ROTTEN)

Resource costs; Other goods' prices; Taxes and subsidies; Technology; Expectations of future prices; Number of sellers.

Market equilibrium

The point where quantity demanded equals quantity supplied; no surplus or shortage.

Ceteris paribus

"All else equal"; holding other factors constant while analyzing one change.

Price controls

Government-set limits on prices (either ceilings or floors).

Price ceiling

A maximum legal price (set below equilibrium); can cause shortages.

Price floor

A minimum legal price (set above equilibrium); can cause surpluses.

Price support

Government intervention to keep prices of goods (like farm products) from falling too low.

Traditional economy benefit

Economy can keep traditions and live without stress of adapting

Traditional economy challenge

The economy cannot adapt and cannot grow very much

3 Questions for all economies

What should be produced, How should it be produced, For whom should it be produced

What is the cause of movement along a supply curve?

Price change

What is the fundamental economic problem for all societies

Scarcity