Economics Class

For Econ

Opportunity Cost

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

Scarcity

The fact that resources are limited while human wants are unlimited.

Marginal Benefit (MB)

The benefit received from one additional unit of something

Marginal Cost (MC)

The opportunity cost of producing or consuming one additional unit.

Marginal Analysis

Making decisions by comparing the marginal benefit and marginal cost of one additional unit.

Decision at the Margin

A decision about whether the benefit of one additional unit is greater than its cost.

Efficient Resource Use

Occurs when marginal benefit equals marginal cost.

If MB > MC

Produce or consume more.

If MC > MB

Produce or consume less.

Positive Statement

A statement about what is that can be tested or verified with facts and evidence.

Normative Statement

A statement expressing an opinion or value judgment about what should be.

Incentive

Something that encourages a person or business to take a particular action.

Disincentive

Something that discourages a person or business from taking a particular action.

Production Possibilities Frontier (PPF)

The boundary between combinations of goods and services that can be produced and those that cannot be produced with available resources and technology.

Point on the PPF

An attainable and production-efficient combination of goods and services.

Points Inside the PPF

An attainable combination, but resources are not being used efficiently.

Point Outside the PPF

An unattainable combination with current resources and technology.

Tradeoff

Giving up some of one thing to obtain more of another.

Why the PPF Has a Negative Slope

Producing more of one good requires giving up some of another good.

Production Efficiency

Occurs when producing more of one good requires producing less of another good.

PPF Shifts Outward

Occurs when productive resources or technology increase.

PPF Shifts Inward

Occurs when productive resources are destroyed or reduced.

Unemployment and the PPF

Unemployment does not shift the PPF; it causes production to occur at a point inside the PPF.

Technology and the PPF

Improved technology can shift the PPF outward

Straight-Line PPF

Indicates constant opportunity cost.

Slope of the PPF

Shows the tradeoff/opportunity cost between two goods. The slope is negative because more of one good requires giving up another.

Absolute Advantage

The ability to produce more of a good or service than another producer using the same amount of resources.

Comparative Advantage

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

Rule for Comparative Advantage

The producer with the lower opportunity cost has the comparative advantage.

Specialization

Focusing production on the good or service in which a producer has a comparative advantage.

Why Specialization Increases Total Output

Each producer focuses on what they can produce at the lowest opportunity cost.

Gains from Trade

The benefits producers receive by specializing according to comparative advantage and trading.

Trade and the PFF

A nation can consume outside its own PPF through trade with other nations.

Opportunity Cost Formula

Amount of the good given up / amount of good gained.

To Find the Opportunity Cost of 1 Unit

Divide the amount of the other good forgone by the number of units gained.

Comparative Advantage Calculation

Calculate each producer’s opportunity cost for the same good. The lower opportunity cost wins.

Constant Opportunity Cost

The opportunity cost stays the same at every level of production, creating a straight-line PPF.

Market

Any arrangement that enables buyers and sellers to get information and do business with each other.

Competitive Market

A market with many buyers and many sellers, so no single buyer or seller can influence the price.

Money Price

The number of dollars that must be given up to obtain a good or service.

Relative Price

The ratio of the price of one good to the price of another good.

Relative Price as Opportunity Cost

It’s this because it shows how much of another good must be given up to obtain a good.

Demand

The entire relationship between the price of a good and the quantity demanded of that good.

Quantity Demanded

The amount of a good or service that consumers plan to buy during a given time period at a particular price.

Three Requirements for Demand

1. Want it

2. Be able to afford it

3. Plan to buy it

Law of Demand

Other things remaining the same, the higher the price of a good, the smaller the quantity demanded; and the lower the price, the greater the quantity demanded.

Why Does Quantity Demanded Decrease When Price Increases?

Because of the substitution effect and the income effect.

Substitution Effect

When the price of a good rises, people substitute away from that good and toward cheaper alternatives.

Income Effect

When the price of a good rises relative to income, consumers cannot afford to buy as much and decrease their quantity demanded of at least some good.

Demand Curve

A graph showing the relationship between the quantity demanded of a good and its price when all other influences on buying plans remains the same.

Demand Schedule

A list of the quantities demanded at each price when all other influences on consumers’ buying plans remain the same.

Demand Curve Axes

Quantity demanded is on the x-axis and price is on the y-axis.

Change in Quantity Demanded

A movement along the demand curve caused by a change in the price of the good itself.

Change in Demand

A shift of the entire demand curve caused by a change in an influence on buying plans other than the price of the good itself.

Demand Curve Shifts Right

Demand increases, meaning more is demanded at every possible price.

Demand Curve Shifts Left

Demand decreases, meaning less is demanded at every possible price.

Six Influences on Demand

1. Prices of related goods

2. Expected future prices

3. Income

4. Expected future income and credit

5. Population

6. Preferences

Substitute

A good that can be used in place of another good.

Price of a Substitute Rises —> Demand ____

Demand for the good increases.

Price of a Substitute Falls —> Demand _____

Demand for the good decreases.

Complement

A good that is used in conjunction with another good.

Price of a Complement Falls —> Demand

Demand for the good increases

Price of a Complement Rises —> Demand _____

Demand for the good decreases.

Expected Future Price Rises —> Current Demand _____

Current demand increases because consumers buy more now before the price rises.

Expected Future Price Falls —> Current Demand ____

Current demand decreases because consumers wait to buy at the lower future price.

Normal Good

A good for which demand increases when income increases

Inferior Good

A good for which demand decreases when income increases.

Income Increases —> Demand for a Normal Good ____

Demand Increases

Income Increases —> Demand for an Inferior Good

Demand decreases.

Expected Future Income or Easier Credit Increases —> Demand ___

Current demand may increase.

Population Increases —> Demand ____

Demand increases.

Population Decreases —> Demand _____

Demand decreases.

Preferences

The values people place on goods and services, which influence demand.

Supply

The entire relationship between the price of a good and the quantity supplied.

Quantity Supplied

The amount of a good or service that producers plan to sell during a given time period at a particular price.

Three Requirements for Supply

1. Have the resources and technology to produce the good

2. Be able to profit from producing it

3. Plan to produce and sell it

Law of Supply

Other things remaining the same, the higher the price of a good, the greater the quantity supplied; and the lower the price, the smaller the quantity supplied.

Why Does Quantity Supplied Increase When Price Increases?

Because producers are willing to incur a higher marginal cost when the price received is higher

Supply Curve

A graph showing the relationship between the quantity supplied of the good and its price when all other influences on producers’ planned sales remain the same.

Supply Schedule

A list of the quantities supplied at each price when all other influences on producers’ planned sales remain the same.

Supply Curve Axis

Quantity supplied is on the x-axis and price is on the y-axis

Minimum Supply Price

The lowest price at which someone is willing to sell an additional unit; this is the marginal cost of that unit.

Change in Quantity Supplied

A movement along the supply curve caused by a change in the price of the good itself.

Change in Supply

A shift of the entire supply curve caused by a change in an influence on selling plans other than the price of the good itself.

Supply Curve Shifts Right

Supply increases, meaning more is supplied at every possible price.

Supply Curve Shifts Left

Supply decreases, meaning less is supplied at every possible price.

Six Influences on Supply

1. Prices of factors of production

2. Prices of related goods produced

3. Expected future prices

4. Number of suppliers

5. Technology

6. State of nature

Factors of Production Becomes More Expansive —> Supply ____

Supply decreases

Cost of Production Fails —> Supply ____

Supply increases.

Substitutes in Production

Goods that can be produced using the same resources.

Price of a Substitute in Production Rises —> Supply of the Other Good ____

Decreases because firms shift resources toward the more profitable good.

Complements in Production

Goods that must be produced together.

Expected Future Price Rises —> Current Supply ___

Decreases because producers may wait to sell int the future.

Number of Suppliers Increases —> Supply _____

Supply increases

Number of Suppliers Decreases —> Supply ____

Supply decreases

Technology Improves —> Supply

Increases because production costs can decrease.

Good State of Nature/Weather —> Supply ____

Supply can increase.

Bad Weather/Nature Disaster —> Supply ____

Supply can decrease.

Equilibrium

A situation in which opposing forces balance each other.