EXAM #1 Microeconomics Econ 110 University of Alabama

Chapter 1 - Principles of Microeconomics, Chapter 2 - Assumptions & Models Chapter 3 - Interdependence & the Gains from Trade, & Chapter 4 - Supply, Demand, & Equilibrium

Economics

the study of how society manages its scarce resources

Efficiency

Society getting the most from output its scarce resources

Equality/Equity

when prosperity is distributed uniformly among society's members

Opportunity Cost

the cost of any item is whatever must be given up to obtain it

Incentive

something that encourages a person to act, can be a reward or punishment

Trade

the act of specialization and exchange of goods and services for mutual benefit

Market

a group of buyers and sellers

The Invisible Hand

self-interested households and firms lead to maximize society's econ. well-being

Market Failures

occurs when the market fails to allocate resources efficiently, caused by externalities and market power

Absolute Advantage

producing a good at fewer inputs than another producer

Comparative Advantage

Producing a good at a lower (not lowest) opportunity cost than another producer

Can one producer have both absolute AND comparative advantage

NO

The Price of Trade

lies between the two opportunity costs

Can you have comparative advantage in both good?

NO

What are the gains from Trade?

1. Total economy rises

2. Allows Specialization

Interdependence

Mutual dependence of ppl. who trade to obtain products they cannot produce efficiently for themselves

Quantity Demanded

Amount of a good buyers are willing and able to pay at a specific price

Demand Curve

Set of various quantities demanded expressed on a graph

Law of Demand

Claim that the quantity demanded of a good falls when the price of the good rises

Demand Schedule

Table showing the price and corresponding quantities demanded

Market Demand

Sum of all quantities demanded of all buyers in the market at each price

Number of Buyers

Determinant that shifts the demand curve; increase shifts it right, decrease shifts it left

Income

Determinant that affects demand; normal goods have a positive relationship with income

Price of Related Goods

Determinant that affects demand; substitutes and complements influence demand

Tastes and Preferences

Factor that shifts demand; shift towards a good increases demand

Expectations

Factor influencing consumer buying decisions; affects demand for goods

Quantity Supplied

Amount that sellers are willing and able to sell at a specific price

Supply Curve

Set of various quantities supplied expressed on a graph

Law of Supply

Claim that quantity supplied rises when the price of the good rises

Market Supply

Sum of the quantities supplied by all sellers in the market at each price

Input Prices

Determinant that affects supply; fall increases profitability and shifts supply curve right

Technology

Factor that shifts supply; improvement increases efficiency and shifts supply curve right

Number of Sellers

Determinant that affects supply; increase in sellers shifts supply curve right

Expectations

Determinant that affects both supply and demand; adjusts supply based on future expectations

Equilibrium

Balanced state where demand equals supply in a market

Circular Flow Diagram

Illustrates how money flows through markets among households and firms, with two markets for goods + services and factors of production

Factors of Production

1. Labor

2. Land

3. Capital

4. Entrepreneurship

Production Possibilities Frontier

Graphical representation showing combinations of two goods an economy can produce given available resources and technology

Opportunity Cost

What is given up to obtain an item

Causes of PPF Shift Outward

Additional resources, improvement in technology, economic growth

Positive Statement

Describes the world as it is, based on facts

Normative Statement

Prescribes how the world should be, based on opinions