Economics Terms Chapters 1-5

test prep

incentives

rewards for engaging in a particular activity, drives people to make choices based on perceived benefits.

examples of positive incentives

graduation chords, candy, grades, gold star, etc

examples of negative incentives

ticket, fines, jail, detention, etc

the economic way of thinking

a framework used to analyze solutions to economic problems —> the 5 why’s —> gives you the power to reach informed judgements about what is happening in the world

free-rider

someone pays for a particular thing, and you use it

microeconomics

making decisions as an individual, household, or firm, focusing on smaller parts of the economy

macroeconomics

the study of behavior of the economy as a whole, deals with aggregates (totals), inflation, national unemployment rates

the 3 basic economic questions

1. what and how much will be produced?

2. how will items be produced?

3. for when will items be produced?

2 opposing answers to the economic questions (systems)

1. centralized (command and control): authority makes all economic decisions, ex. Russia, North Korea, etc

2. price system (market system): decentralized decision-making process, prices used as signals to make all economic decisions, ex. America, western free-market eonomies

self-interest

the pursuit of one’s goals, you succeed = everyone succeeds, every choice we make is to please ourselves

rationality assumption

the assumption that people do not intentionally make decisions that would leave them worse off

individuals are motivated by self-interest

example: HEB produces goods to make money, NOT to do good. however, do they take care of their consumers? yes.

ceteris paribus assumption

nothing changes except the factor or factors being studied —> “other things equal or constant”

ex. price of coffee rises, economists use ____ to predict that demand for coffee will fall (assume consumer incomes, preferences, and price of tea stays same)

behavioral economics

the study of consumer behavior

positive economics

a statement of what IS, is strictly limited , ex. “if A, then B”

normative economics

analysis involving value judgements, whether outcomes are good or bad, what SHOULD be

bounded rationality

the hypothesis that people are nearly, not fully, rational, ex. they may use rules of thumb

what the economy needs for production

land, labor, capitalism (human: accumulated training and education of workers, and physical: all manufactured resources), and enterprise

scarcity

when ingredients for producing things that people desire are inefficient to satisfy all wants at zero price, there is not enough of a resource - (it is NOT a shortage or the same as poverty)

comparative advantage

the ability to produce a good or service at a lower opportunity cost compared to others

opportunity cost

the highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want —> ex. going to college; oppcost = money you could have made working full-time instead, orrrr playing video games; oppcost = time spent studying or sleeping in

absolute advantage

the ability to produce more units of a good or service using a given quantity of labor or resources inputs, very few countries have this —> producing high volume of a good using fewer resources than competitors

demand

what people want and are able to pay for

the law of demand

an inverse relationship between the price of any good/service and the quantity demanding (other factors constant) —> ex. when the price of a good goes up, people buy less of it (vice versa)

shift in quantity demanded

change in price leads to change in quantity demanded… ex. low price = increasing demand, vice versa

5 determinants of demand

income, consumer taste and preferences, prices of goods, expectations, market size (# of buyers),

subgroups for income (determinant of demand)

1. normal goods: goods for which the demand rises as income rises, most goods are normal goods

2. inferior goods: goods for which the demand falls as income rises/demand rises as income falls (inverse relationship)

subgroups for prices of goods (determinant of demand)

1. substitutes: goods used for the same purpose (as price of original rises, demand for substitute increases) —> same direction as price change

2. complements: goods that go together, ex. coffee, creamer (as price increases, demand for complement decreases) —> opposite direction of price change

expectations (determinant of demand)

ex. future prices, future income, product availability (sales, waiting until prices fall, buying before prices rise)

market size (determinant of demand)

the number of consumers in the market/buying a product

market

where buyers and sellers come together to exchange goods and services (ex. automobile markets, healthcare, labor, etc)

market demand

the public’s demand for a specific good or service

supply

suppliers able to provide for consumers

the law of supply

the higher the price of a good, the more of that good sellers will make available, holding other factors constant —> at lower prices, a smaller quantity of that good will generally be supplied

determinants for supply

technology and productivity, prices of inputs, price expectations, taxes and subsidies, number of firms/sellers in the industry

production

the conversion of raw materials into products

subsidy

a negative tax; a payment to a producer from the government, usually in the form of a cash grant per unit

profit

total revenue - total cost = profit (net revenue)

market supply

the sum of all producers in a market for a particular good or service

equilibrium

when the amount of supply is equal to the demand at a particular price, the demand curve intersects the supply curve —> (no price change unless the demand or supply changes): there is NO surplus OR shortage

equilibrium price (market clearing price)

the price at which quantity demanded equals quantity supplied

surplus

a situation in which the quantity supplied is greater than the quantity demanded (exist above market clearing price/equilibrium price)

shortage

a situation in which the quantity demanded is greater than the quantity supplied, is NOT scarcity (exists below market clearing price/equilibrium price)

tariffs

taxes on imported goods, when tariffs rise, business supply falls

price system (market system)

an economic system in which prices are constantly changing to reflect changes in supply and demand —> prices signal scarce and abundant resources and provide info to buyers/sellers

voluntary exchange

an act of trading between individuals in the market system

transaction costs

all the costs that are associated with the exchange (ex. informational costs of finding out: the price and quality, service record, and durability of a product; and the cost of contracting and enforcing that contract)

platform firms

companies whose services link people to other individuals who share their interests or who seek to buy firms’ products

intermediaries

specialize in lowering transaction costs

increase in supply does what to equilibrium? (price and quantity)

decreases equilibrium price, and increases equilibrium quantity, vice versa

increase in demand does what to equilibrium?

increases equilibrium price and quantity, vice versa

when both supply and demand increase/decrease

the equilibrium price is indeterminate, and the equilibrium quantity will increase/decrease with it —> conflicting (increased supply pushes price down, increased demand pushes price up, vice versa)

when demand decreases and supply increases

the equilibrium price decreases, and equilibrium quantity is indeterminate (vice versa) - (lowers prices to encourage buyers for surplus of goods)

conflicting quantity: increase in supply = equilibrium quantity up. decrease in demand = equilibrium quantity down

the rationing function of prices

the synchronization of decisions by buyers and sellers that leads to equilibrium; —> how market prices allocate scarce goods/services to those most willing and able to buy them

nonprice rationing devices

all methods used to ration scarce goods that are price-controlled

methods of nonprice rationing

rationing by: queues (waiting in line), random assignment/coupons, power, physical force

methods of price rationing

raising prices, spikes in selling price (ex. tickets, scarce resources with limited availability, price raises, those most willing to pay will pay)

price controls

government-mandated minimum or maximum prices that may be charged for certain goods or services

price ceiling

a legal maximum price: will take place if it is below equilibrium price —> a price ceiling set below the market clearing price creates a shortage (consumer demand increases, producer supply decreases —> ex. price ceiling on rent

price floors

a legal minimum price: a price floor that is set above the market clearing price results in a surplus

black market

a market in which price-controlled goods are traded at prices above their legal maximum prices or in which illegal goods are sold

minimum wage

a wage floor, legislated by the government, that sets the lowest hourly wage rate that firms must legally pay their workers

quantity restrictions

government imposed ownership bans/restrictions: ex. psychoactive drugs, human organs, starting new hospitals in some states, etc

importa quota

physical supply restriction on imports of a particular good, foreign exporters are unable to sell, in the united states, more than the quantity specified in the importa quota