Economics Exam 1

Chapters 1-5

economics

The social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity.

scarcity

The condition in which human wants are forever greater than the available supply of time, goods, and resources.

economic perspective

A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions.

opportunity cost

The amount of other products that must be forgone or sacrificed to produce a unit of a product.

utility

The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service.

marginal analysis

The comparison of marginal ("extra" or "additional") benefits and marginal costs, usually for decision making.

scientific method

The procedure for the systematic pursuit of knowledge involving the observation of facts and the formulation and testing of hypotheses to obtain theories, principles, and laws.

economic principle

A widely accepted generalization about the economic behavior of individuals or institutions.

other-things-equal assumption (ceteris paribus)

The assumption that factors other than those being considered are held constant.

microeconomics

The part of economics concerned with decision making by individual units such as a household, a firm, or an industry.

macroeconomics

The part of economics concerned with the performance and behavior of the economy as a whole.

aggregate

A collection of specific economic units treated as if they were one unit.

positive economics

The branch of economic analysis that describes the way the economy actually works; deals with "what is,” not, “what should be.”

normative economics

The part of economics involving value judgments about what the economy should be like; deals with "what ought to be."

economizing problem

The choices necessitated because society’s economic wants for goods and services are unlimited but the resources available to satisfy these wants are limited.

budget line

A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products' prices.

economic resources

The land, labor, capital, and entrepreneurial ability that are used to produce goods and services; also known as factors of production.

factors of production

The four categories of resources used to produce goods and services: land, labor, capital, and entrepreneurial ability.

land

In economics, all natural resources ("gifts of nature") used in the production process.

labor

The physical and mental talents of individuals used in producing goods and services.

capital

Human-made resources (buildings, machinery, and equipment) used to produce goods and services.

investment

The purchase of capital goods that used to produce goods and services.

entrepreneurial ability

The human resource that combines the other factors of production to produce a product, makes nonroutine decisions, innovates, and bears risks.

consumer goods

Products and services that satisfy human wants directly.

capital goods

Human-made resources used to produce goods and services; goods that do not directly satisfy human wants.

production possibilities table

A table listing the different combinations of two products that can be produced with a specific set of resources, assuming full employment.

production possibilities curve

A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.

law of increasing opportunity costs

The principle that as the production of a good increases, the opportunity cost of producing an additional unit rises.

economic growth

An outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology.

economic system

A particular set of institutional arrangements and a coordinating mechanism for solving the economizing problem.

laissez-faire capitalism

A hypothetical economic system in which government's role is limited to protecting private property and establishing a legal environment appropriate to the operation of markets.

command system

A method of organizing an economy in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities.

market system

An economic system in which individuals and firms own most resources and in which markets and prices are used to coordinate and direct economic activity.

private property

The right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property.

freedom of enterprise

The freedom of firms to obtain economic resources, to use those resources to produce products of the firm's own choosing, and to sell those products in markets of their choice.

freedom of choice

The freedom of owners of property resources to employ or dispose of them as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in a manner that they think is appropriate.

self-interest

That which each focal unit (person or institution) believes is best for itself and seeks to obtain.

competition

The effort and striving between two or more independent rivals to secure the business of one or more third parties by offering the best possible terms.

market

An institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of a particular good or service.

specialization

The use of the resources of an individual, a firm, a region, or a nation to concentrate production on one or a few goods and services.

division of labor

The separation of the work required to produce a product into a number of different tasks that are performed by different workers.

money

Any item that is generally acceptable to sellers in exchange for goods and services.

medium of exchange

Any item sellers generally accept and buyers generally use to pay for a good or service; a convenient means of exchanging goods and services without engaging in barter.

barter

The direct exchange of one good or service for another good or service of equal value.

consumer sovereignty

The determination by consumers of the types and quantities of goods and services that will be produced with the scarce resources of the economy.

dollar votes

The "votes" that consumers cast for the production of preferred products when they purchase those products rather than other available products.

creative destruction

The hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies and older ways of doing business.

"invisible hand"

The tendency of firms and resource suppliers that seek to further their own self-interests in competitive markets to also promote the interests of society.

circular flow diagram

An illustration showing the flow of resources from households to firms and of products from firms to households.

households

Economic entities (of one or more persons occupying a housing unit) that provide resources to the economy and use the income received to purchase goods and services that satisfy economic wants.

businesses

Economic entities (firms) that purchase resources and provide goods and services to the economy.

sole proprietorship

An unincorporated business owned and operated by a single person.

partnership

An unincorporated business firm owned and operated by two or more persons.

corporation

A legal entity ("person") chartered by a state or the Federal government that is distinct and separate from the individuals who own it.

product market

A market in which households purchase and businesses sell the goods and services that businesses have produced.

resource market

A market in which households sell and firms purchase resources or the services of resources.

demand

A schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time.

demand schedule

A table of numbers showing the amounts of a good or service buyers are willing and able to purchase at various prices over a specified period of time.

law of demand

The principle that, other things equal, an increase in a product's price will reduce the quantity of it demanded, and conversely for a decrease in price.

diminishing marginal utility

The principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases.

income effect

A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price.

substitution effect

A change in the quantity demanded of a consumer good or service that results from a change in its relative price, making it more or less expensive than other similar goods.

demand curve

A curve illustrating the inverse relationship between the price of a product and the quantity of it demanded.

determinants of demand

Factors other than price that determine the quantities of a good or service purchased (income, tastes, prices of related goods, etc.).

normal goods

A good or service whose consumption increases when income increases and falls when income decreases, price remaining constant.

inferior goods

A good or service whose consumption declines as income rises, price remaining constant.

substitute good

Products or services that can be used in place of each other; when the price of one falls, the demand for the other falls.

complementary good

Products and services that are used together; when the price of one falls, the demand for the other rises.

change in demand

A shift of the demand curve to the right (an increase in demand) or to the left (a decrease in demand) due to a change in a determinant of demand.

change in the quantity demanded

A movement from one point to another point on a fixed demand curve caused by a change in the product's price.

supply

A schedule or curve that shows the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period.

supply schedule

A table showing the amounts of a good or service sellers are willing and able to make available for sale at various prices over a specified period of time.

law of supply

The principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied,, and conversely for a price decrease.

supply curve

A curve illustrating the direct relationship between the price of a product and the quantity of it supplied.

determinants of supply

Factors other than price that determine the quantities of a good or service supplied (resource prices, technology, taxes, etc.).

change in supply

A shift of the supply curve to the right (an increase in supply) or to the left (a decrease in supply) due to a change in a determinant of supply.

change in the quantity supplied

A movement from one point to another on a fixed supply curve caused by a change in the product's price.

equilibrium price

The price in a competitive market at which the quantity demanded and the quantity supplied are equal.

equilibrium quantity

The quantity at which the intentions of buyers and sellers match, so that the quantity demanded and the quantity supplied are equal at the equilibrium price.

surplus

The amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above-equilibrium) price.

shortage

The amount by which the quantity demanded of a product exceeds the quantity supplied at a specific (below-equilibrium) price.

productive efficiency

The production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum.

allocative efficiency

The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers).

price ceiling

A legally established maximum price for a good or service.

price floor

A legally established minimum price for a good or service.

market failures

The inability of a market to bring about the allocation of resources that best satisfies the wants of society; in particular, the over-allocation or under-allocation of resources to the production of a particular good or service because of externalities or informational problems.

demand-side market failures

Under-allocations of resources that occur when the market demand curve does not reflect consumers' full willingness to pay for a good or service.

supply-side market failures

Over-allocations of resources that occur when the market supply curve does not reflect the full cost of producing a good or service.

consumer surplus

The difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price.

producer surplus

The difference between the actual price a producer receives (or producers receive) and the minimum acceptable price.

efficiency losses (or deadweight losses)

Reductions in combined consumer and producer surplus caused by an under-allocation or over-allocation of resources to the production of a good or service.

private goods

A good or service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude nonpayers from receiving the benefits.

rivalry

The characteristic of a private good, the consumption of which by one party excludes other parties from also consuming it.

excludability

The characteristic of a private good, for which the seller can keep non-buyers from obtaining the good.

public goods

A good or service that is characterized by non-rivalry and non-excludability; a good or service with these characteristics provided by the government.

nonrivalry

The idea that one person's benefit from a specific good does not reduce the benefit available to others.

nonexcludability

The inability to keep nonpayers from obtaining the benefits from a public good.

free-rider problem

The inability of potential providers of an economically desirable good or service to obtain payment from those who benefit, because of nonexcludability.

cost-benefit analysis

A comparison of the marginal costs of a government project or program with the marginal benefits to decide whether or not to employ resources in that project or program and to what extent.

marginal-cost–marginal-benefit rule

As it applies to cost-benefit analysis, the tenet that a government project or program should be expanded to the point where the marginal cost and marginal benefit of additional expenditures are equal.