ECON-2302: Unit 1 Test

Scarcity

the inherently limited nature of society’s resources, given society’s unlimited wants and needs

Economics

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

Microeconomics

the study of the individual units that make up the economy

Macroeconomics

the study of the overall aspects and workings of an economy

Incentives, trade-offs, opportunity cost, marginal thinking, trade

five foundations of economics

Opportunity cost

the highest-valued alternative that must be sacrificed in order to get something else

Marginal thinking

requires decision makers to evaluate whether the benefit of one more unit is greater than its cost

Markets

bring buyers and sellers together to exchange goods and services

Economic thinking

requires a purposeful evaluation of the available opportunities to make the best decision possible

Circular flow diagram

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

Comparative advantage

refers to the situation where an individual, a business, or a country can produce at a lower opportunity cost than a competitor can

Absolute advantage

one producer’s ability to make more than another producer with the same quantity of resources

Capital goods

goods that help produce other valuable goods and services in the future

Ceretis Paribus

means “all else equal” and is used to build economic models. It allows economists to examine a change in one variable while holding everything else constant

Consumer goods

produced for present consumption

Endogenous factors

variables that are inside a model

Exogenous factors

variables that are outside a model

Investment

the process of using resources to create or buy new capital

Law of increasing opportunity cost

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

Long run

the period in which we make decisions that reflect our needs, wants, and limitations over a long time horizon. Consumers have time to fully adjust to market conditions

Normative statement

an opinion that cannot be tested or validated; it describes “what ought to be”

Positive statement

can be tested and validated, describes “what is”

Production Possibilities Frontier (PPF)

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

Short run

the period in which we make decisions that reflect our immediate or short-term wants, needs, or limitations. Consumers can partially adjust their behavior

Specialization

the limiting of one’s work to a particular area

Competitive market

exists when there are so many buyers and sellers that each only has a small impact on the market prices and output

Complements

two goods that are used together. When the price of this type of good rises, the quantity demanded of that good falls and the demand for the related good goes down

Demand curve

a graph of the relationship between the prices in the demand schedule and the quantity demanded at those prices

Demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

Equilibrium

occurs at the point where the demand curve and the supply curve intersect

Equilibrium price

the price at which the quantity supplied is equal to the quantity demanded, AKA market-clearing price

Imperfect market

a market in which either the buyer or seller can influence the market price

Inferior good

a good where demand declines as income rises

Inputs

resources used in the production process

Invisible hand

a phrase coined by Adam Smith to refer to the unobservable market forces that guide resources to their highest-valued use

Law of demand

all else being equal, quantity demanded falls when the price rises and rises when the price falls

Law of supply

all other things being equal, the quantity supplied of a good rises when the price of the good rises, and falls when the price of a good falls

Law of supply and demand

the market price of any good will adjust to bring the quantity supplied and the quantity demanded into balance

Market demand

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

Market economy

resources allocated among households and firms with little or no government interference

Market power

a firm’s ability to influence the price of a good or service by exercising control over its demand, supply, or both

Market supply

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

Monopoly

exists when a single company supplies the entire market for a particular good or service

Normal good

consumers of this type of good buy more as income rises, holding all other factors constant

Purchasing power

the value of your income expressed in terms of how much you can afford

Quantity demanded

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

Quantity supplied

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

Shortage

occurs when the quantity supplied is less than the quantity demanded, AKA excess demand

Subsidy

a payment made by the government to encourage the consumption or production of a good or service

Substitutes

two goods that are used in place of each other

Supply curve

a graph of the relationship between the prices in the supply schedule and the quantity supplied at those prices

Supply schedule

a table that shows the relationship between the price of a good and the quantity supplied

Surplus

occurs whenever the quantity supplied is greater than the quantity demanded AKA excess supply