ECON 1202 MIDTERM

overall understanding of the 12 principles

first four- guide the choices made by individuals
next five- govern how individual choices interact
last three- illustrate economy- wide interactions

resource

anything that can be used to produce something

scarce

when there is not enough of the resource available to satisfy all the various ways a society wants to use it

opportunity cost

what you must give up in order to get something

trade- off

comparison of the costs and the benefits of doing something

marginal decision

decision made at the margin of an activity about whether to do a bit more or a bit less of an activity

marginal analysis

the study of marginal decisions

equilibrium

an economic situation in which no individual would be better off doing something different

specialization

the situation in which each person specializes in the task that he or she is good at performing

efficient

taking all opportunities to make some people better off without making other people worse off

equity

a condition in which everyone gets their "fair share"

other things equal assumption

all other relevant factors remain unchanged

production possibilities frontier

a diagram that shows the combinations of two goods that are possible for a society to produce at full employment

what causes economic growth

an increase in factors of production and better technology

comparative advantage

if opportunity cost is lower than others opportunity cost

circular- flow diagram

represents the transactions in an economy by flows around a circle

positive economics

the branch of economic analysis that describes the way the economy actually works

normative economics

makes prescriptions about the way the economy should work

competitive market

has many buyers and sellers of the same good or service, none of whom can influence the price

demand curve

shows the quantity demanded at various prices

quantity demanded

the quantity that buyers are willing (and able) to purchase at a particular price

what causes the demand curve to shift

changes in price of related goods
changes in income
changes in tastes
changes in expectations
changes in the number of consumers

substitutes

if a decrease in the price of one good leads to the decrease in demand for the other (or vice versa)

complements

if a decrease in the price of one good leads to an increase in the demand for the other (or vice versa)

normal good

demand increase when income increases (and vice versa)

inferior good

demand decreases when income increases (and vice versa)

supply curve

shows the quantity supplied at various prices

quantity supplied

the quantity that producers are willing and able to sell at a particular price

what causes supply to shift?

changes in input prices
changes in the prices of related goods or services
changes in technology
changes in expectations
changes in the number of producers

surplus

when the quantity supplied exceeds the quantity demanded

shortage

when the quantity demanded exceeds the quantity supplied

price controls

legal restrictions on how high or low a market price may go

price ceiling

a maximum price sellers are allowed to charge for a good or service

price floor

a minimum price buyers are required to pay for a good or service

how do price ceilings cause inefficiency?

inefficiently low quality
inefficient allocation to customers
wasted resources, time, and effort
inefficiently low quality
black markets

how do price floors cause inefficiency?

inefficient allocation of sales among sellers
wasted resources
inefficiently high quality
temptation to break the law by selling below the legal price

quota/ quantity control

an upper limit on the quantity of some good that can be bought or sold

quota limit

the total amount of a good under a quota/ quantity that can be legally transacted

license

the right, conferred by the government, to supply a good

demand price

the price of a given quantity at which consumers will demand that quantity

supply price

the price of a given quantity at which producers will supply that quantity

the wedge

the difference between the demand price and the supply price at the quota limit

autarky

a situation in which a country does not trade with other countries

sources of comparative advantage

differences in climate
factor abundance
factor intensity
differences in technology
increasing returns to scale

tariff

tax levied on imports

two effects of tariffs

increase in domestic production, reduction in domestic consumption. less is consumed, leading to lower gains from trade

import quote

the legal limit on the quantity of a good that can be imported

arguments for trade protection

national security
trade and domestic employment
infant industry argument

NAFTA

trade agreement between the US, Canada, and Mexico

EU

a customs union among 28 European nations

WTO

oversees international trade agreements and rules on disputes between countries over those agreements

offshore outsourcing

hiring people in another country to perform various tasks

3 main factors that helped shape macroeconomics

the great depression
periods of hyperinflation
large budget deficits

paradox of thrift

when families and businesses are worried about the possibility of economic hard times, they prepare by cutting their spending. this reduction in spending depresses the economy as consumers spend less and businesses react by laying off workers

self- regulating economy

problems such as unemployment are resolved without government intervention through the working of the invisible hand

keynesian economics

economic slumps are caused by inadequate spending, and they can be mitigated by government intervention

monetary policy

uses changes in the quantity of money to alter interest rates and affect overall spending

fiscal policy

uses changes in government spending and taxes to affect overall spending

recessions (contractions)

periods of economic downturn, when output and employment are falling

expansions (recoveries)

periods of economic upturn, when output and employment are rising

business cycle

the short- run alternation between recessions and expansions

3 measures of the economy that tend to move together during the business cycle

employment
inflation
industrial output

business cycle peak

the point at which the economy turns from expansion to recession

business- cycle trough

the point at which the economy turns from recession to expansion

what is the main concern of modern policy makers

the business cycle; they try to smooth it out

long- run economic growth

the sustained upward trend in the economy's output over time

inflation

rising overall level of prices; discourages people from holding onto cash

deflation

falling overall level of prices; holding on to cash is more attractive than investing

trade deficit

the value of goods and services bought from foreigners is more than the value of goods and services sold to them

trade surplus

the value of goods and services bought from foreigners is less than the value of the goods and services sold to them