Econ notes for midterm

Rationality

People make decisions using available information to achieve their goals.

Economic Incentives

Individuals and firms respond to economic incentives consistently.

Marginal Analysis

Optimal decisions are made by comparing marginal benefits and marginal costs.

Market

A group of buyers and sellers of a good or service facilitating trade.

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Opportunity Cost

The highest-valued alternative that must be given up to engage in an activity.

Trade-off

Producing more of one good or service means producing less of another.

Centrally Planned Economy

The government allocates economic resources.

Market Economy

Decisions of households and firms in markets determine resource allocation.

Mixed Economy

A combination of market-driven decisions and significant government intervention.

Productive Efficiency

Goods/services produced at the lowest possible cost.

Allocative Efficiency

Production aligns with consumer preferences, where marginal benefit equals marginal cost.

Voluntary Exchange

Transactions in markets benefit both buyers and sellers.

Equity

The fair distribution of economic benefits.

Positive Analysis

Analysis concerned with what is.

Normative Analysis

Analysis concerned with what ought to be.

Microeconomics

The study of how households and firms make choices and interact in markets.

Macroeconomics

The study of the economy as a whole, including topics like inflation and economic growth.

Technology

The processes a firm uses to produce goods and services.

Capital

Manufactured goods that are used to produce other goods and services.

Production Possibilities Frontier (PPF)

A curve showing the maximum attainable combinations of two goods that can be produced with available resources.

Comparative Advantage

The ability of an individual or firm to produce a good at a lower opportunity cost than competitors.

Absolute Advantage

The ability of an individual or firm to produce more of a good using the same amount of resources.

Natural Resources

Land, water, oil, iron ore, etc. utilized in producing goods.

Entrepreneurial Ability

The ability to bring together the other factors of production to successfully produce and sell goods and services.

Circular-flow Diagram

A model that illustrates how participants in markets are linked.

Surplus

A situation in which the quantity supplied is greater than the quantity demanded.

Shortage

A situation in which the quantity demanded is greater than the quantity supplied.

Price Elasticity of Demand

Measures the responsiveness of quantity demanded to a change in price.

Inelastic Demand

Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price.

Elastic Demand

Demand is elastic when the percentage change in quantity demanded exceeds the percentage change in price.

Utility

The enjoyment or satisfaction received from consuming goods and services.

Marginal Utility

The change in total utility from consuming one more unit of a good or service.

Budget Constraint

The limit on consumer spending due to income.

Law of Diminishing Marginal Utility

Satisfaction decreases as more of a good/service is consumed.

Market Mechanism

The process through which supply and demand interact to determine prices.

Indifference Curve

Shows combinations of goods that provide the same utility.

Marginal Rate of Substitution (MRS)

Rate at which a consumer is willing to trade one good for another.

Nudge

Using behavioral insights to guide people toward better decisions.

Endowment Effect

People value goods they own more than equivalent goods they do not own.