Studied by 30 peoplemicroeconomics
study of small economic units like individuals, firms, markets
macroeconomics
study of large economy as a whole; economic growth, government spending, inflation, international trade, unemployment
positive statement
based on facts, avoids value judgments
normative statement
includes value judgments and opinions
scarcity
there are unlimited wants but limited resources
tradeoff
when you give up something in order to have something else
utility
satisfaction
price
amount that a consumer/buyer pays
cost
amount that a seller pays to produce a good
consumer goods
created for direct consumption
capital goods
created for indirect consumption; goods used to make consumer goods
what are the four factors of production?
land, labor, capital, entrepeneurship
land
all natural resources that are used to produce goods and services
labor
any effort a person devotes to a task for which that person is paidc
physical capital
any human-made resource that is used to create other goods and services
human capital
any skills or knowledge gained by a worker through education and experience
entreprenuership
ambitious leaders that combine the other factors of production to create goods and services
productivity
a measure of efficiency that shows the number of outputs per unit of input
what are the three economic question?
what goods and services should be produced? how are they produced? who are they produced for?
economic system
the method used by a society to produce and distribute goods and services — answers economic questions
command economy
the govt owns all resources, answers the three economic questions — communism
what are some pros to command economy
low unemployment, great job security, free healthcare, less income inequality
what are some cons to command economy
no incentive to work harder or innovate, no competition - the quality of goods stays poor, corrupt leaders, few individual freedoms
free market system
little govt involvement in the economy, individuals own resources and answer all three economic questions, opportunity to make a profit gives people incentive to produce quality items, wide variety of goods, competition and self-interest regulate economy
invisible hand
society’s goals will be met as individuals meet their own self-interest
what is the invisible hand that regulates the free market?
competition and self interest
product market
the “place” where goods and services produced by businesses are sold to households/individuals
resource (factor) market
the “place” where resources (land, labor, capital, entrepreneurship) are sold to businesses
private sector
part of the economy run by individuals and businesses
public sector
part of the economy that’s controlled by the government
factor payments
payment for the factors of production; namely rent, wages, interest, profit
transfer payments
when the government redistributes income (ex. welfare, social security)
subsidies
government payments to businesses
do individuals supply or demand?
both
do businesses supply or demand?
both
who demands in the product market?
individual/consumer
who supplies in the product market
businesses
opportunity cost
the value of the next best alternative that you must give up when you make a choice
production possibilities curve/frontier (PPC/PPF)
a model that shows alternative ways that an economy can use its scarce resources
what does a PPC show graphically?
scarcity, trade-offs, efficiency, opportunity cost
what are the four key assumptions of a PPC?
only two goods can be produced, full employment of resources, fixed resources (4 factors), fixed technology
what is the law of increasing opportunity cost?
as you produce more of any good, opportunity cost will increase
why is the law of increasing opportunity cost applicable?
resources are not adaptable to producing both goods
what does the forgone production of another good result in?
a convex/downward curve
constant opportunity cost
resources are easily adaptable for producing either good
what does constant opportunity cost result in?
straight PPC line (uncommon)
what are the three PPC shifters?
quality/quantity of a resource, change in technology, change in trade
what does limiting trade result in?
a reduction of choices
what does more access to trade result in?
more choices and a higher standard of living
absolute advantage
the producer that can produce the most output or requires the least amount of resources
comparative advantage
the producer with the lowest opportunity cost
when should countries trade?
if they have a relatively lower opportunity cost
what goods should countries specialize in?
one that is “cheaper” for them to produce — the one with a comparative advantage
terms of trade
the agreed upon conditions that would benefit both countries
when can both countries benefit from trade?
if they each have relatively low opportunity costs
marginal
additional
marginal analysis
making decisions based on increments
law of diminishing marginal utility
as you consume anything, the additional satisfaction you receive will eventually start to decrease
utility maximization rule
the consumer’s money should be spent so that the marginal utility per dollar of each good equals the other
incentives
rewards/punishments that motivate particular choices
property rights
establish ownership and give individuals the right to trade goods and services with each other
explicit costs
traditional out of pocket costs associated with making a decision
are explicit costs monetary or nonmonetary?
monetary
implicit costs
the opportunity cost of making a decision
are implicit costs monetary or nonmonetary?
nonmonetary (still costs opportunity cost though)
marginal analysis
costs and benefits of one more one less
marginal cost
added cost of one additional unit
marginal benefit
added benefit to one additional unit
when is the optimal quantity achieved?
when marginal benefit is equal to marginal cost
rational agents
consumers, producers, and others who behave rationally and make optimal decisions, incorporate opportunity costs into their decisions (implicit or explicit)
revenue
the amount of money a firm receives
do firms prefer revenue or utility?
revenue
sunk cost
cost that has already been incurred and cannot be recovered. It is irrelevant to future decision-making since the money or resources spent are irretrievable
why are most PPCs bowed out and not linear?
most goods aren’t perfectly substitutable
Note
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