Econ Exam 1 review

Economics

The study of how humans make decisions in the face of scarcity, involving individual, family, business, or societal decisions.

Scarcity

A condition where human wants for goods, services, and resources exceed what is available.

FRED website

A resource including data on nearly $400,000$ domestic and international economic and social variables over time.

Adam Smith

The author of the $1776$ book titled The Wealth of Nations, which introduced the idea of dividing labor into discrete tasks.

Division of labor

The way in which different workers divide required tasks to produce a good or service.

Specialization

When workers or firms focus on particular tasks for which they are well-suited within the overall production process.

Economies of scale

An economic concept meaning that for many goods, as the level of production increases, the average cost of producing each individual unit declines.

Microeconomics

The branch of economics that focuses on the actions of individual agents within the economy, such as households, workers, and businesses.

Macroeconomics

The branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance.

Monetary policy

Policy determined by a nation’s central bank that involves altering the level of interest rates, the availability of credit, and the extent of borrowing.

Fiscal policy

Economic policies determined by a nation’s legislative body involving government spending and taxes.

John Maynard Keynes

One of the most influential economists in modern times who believed that economics teaches you how to think, not what to think.

Theory

A simplified representation of how two or more variables interact with each other; used interchangeably with the term model in this course.

Circular flow diagram

A diagram showing how households and firms interact in the goods and services market and in the labor market.

Traditional economy

The oldest economic system, typically agricultural, where occupations stay in the family and what is produced is what is consumed.

Command economy

An economy where economic decisions are passed down from government authority and the government owns the resources.

Market economy

An economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand.

Market

An interaction between potential buyers and sellers representing a combination of demand and supply.

Private enterprise

A system where private individuals or groups of private individuals own and operate the means of production.

Underground economies

Also known as black markets, these are markets where buyers and sellers make transactions without government approval.

Globalization

The trend in which buying and selling in markets have increasingly crossed national borders.

Exports

The goods and services that a nation produces domestically and sells abroad.

Imports

The goods and services that are produced abroad and then sold domestically.

Gross domestic product (GDP)

A measure of the size of total production in an economy.

Budget constraint

All possible combinations of goods someone can afford when all income is spent; it is the boundary of the opportunity set.

Opportunity set

All possible combinations of consumption that someone can afford given the prices of goods and the individual’s income.

Opportunity cost

The value of the next best alternative; it indicates what people must give up to obtain what they desire.

Marginal analysis

The process of examining the benefits and costs of choosing a little more or a little less of a good.

Utility

The satisfaction, usefulness, or value one obtains from consuming goods and services.

Law of diminishing marginal utility

As a person consumes more of a good, the extra satisfaction from each additional unit decreases.

Sunk costs

Costs that were incurred in the past and cannot be recovered; the lesson is to ignore them when making future decisions.

Production possibilities frontier (PPF)

A diagram showing the productively efficient combinations of two products an economy can produce given resources.

Law of diminishing returns

As more resources are added to production, the additional benefit from each extra resource eventually declines.

Productive efficiency

When it is impossible to produce more of one good without decreasing the quantity produced of another good.

Allocative efficiency

When the mix of goods produced represents the mix that society most desires.

Comparative advantage

When a country can produce a good at a lower opportunity cost than another country.

Positive statements

Factual descriptions of the world as it is.

Normative statements

Subjective statements describing how the world should be; based on opinions.

Invisible hand

Adam Smith's concept that individuals' self-interested behavior can lead to positive social outcomes.

Demand

The amount of a good or service consumers are willing and able to purchase at each price.

Quantity demanded

The total number of units of a good or service consumers are willing to purchase at a given price.

Law of demand

Holding all else equal, when price rises, quantity demanded falls; when price falls, quantity demanded rises.

Demand schedule

A table showing a range of prices for a certain good and the quantity demanded at each price.

Demand curve

A graphic representation of the relationship between price on the vertical axis and quantity demanded on the horizontal axis.

Supply

The amount of some good or service a producer is willing to supply at each price.

Quantity supplied

The total number of units of a good or service producers are willing to sell at a given price.

Law of supply

Holding all else equal, when price rises, quantity supplied rises; when price falls, quantity supplied falls.

Supply schedule

A table showing the quantity supplied at a range of different prices.

Equilibrium

The combination of price and quantity where quantity demanded equals quantity supplied and there is no pressure from surpluses or shortages.

Equilibrium price

The specific price where quantity demanded is equal to quantity supplied.

Surplus

Also called excess supply; the condition where quantity supplied exceeds quantity demanded at the existing price.

Shortage

Also called excess demand; the condition where quantity demanded exceeds quantity supplied at the existing price.

Ceteris paribus

A Latin phrase meaning "other things being equal," identifying the assumption that all external factors are held constant.

Normal good

A product whose demand rises when income rises, and falls when income falls.

Inferior good

A good whose demand falls when income rises, and whose demand rises when income falls.

Substitute

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

Complements

Goods or services often used together so that consumption of one tends to enhance consumption of the other.

Price controls

Laws enacted by governments to regulate prices, including ceilings and floors.

Price ceiling

A legal maximum price that one pays for a good or service, keeping the price from rising above a certain level.

Price floor

A legal minimum price; it keeps a price from falling below a certain level.

Consumer surplus

The difference between what individuals were willing to pay and the amount they actually paid; the area above the market price and below the demand curve.

Producer surplus

The price the producer actually received minus the price they would have been willing to accept; the area between market price and the supply curve below equilibrium.

Social surplus

The sum of consumer surplus and producer surplus; also known as economic surplus or total surplus.

Deadweight loss

The loss in social surplus that occurs when a market produces an inefficient quantity.

Model

A simplified representation used to explain or test how something works in the economy.

Mixed Economy

An economy that combines elements of market, command, and traditional systems.

Regulations

Government rules that define how markets operate.

Goods and Services Market

The market where households buy goods and services from firms.

Labor Market

The market where households provide labor to firms in exchange for wages, salaries, and benefits.

Households

Individuals or families that buy goods and services and provide labor.

Firms

Businesses that produce goods and services and hire labor.

Tradeoff

A situation where choosing more of one thing means giving up something else.

Marginal Benefit

The additional benefit gained from consuming or producing one more unit.

Marginal Cost

The additional cost of consuming or producing one more unit.

Marginal Utility

The additional satisfaction gained from consuming one more unit of a good.

Out-of-Pocket Cost

The direct money cost paid for something, such as tuition, books, or fees.

Opportunity Cost of College

The direct costs of college plus the income you give up by not working during that time.

PPF Slope

The slope of the production possibilities frontier shows opportunity cost.

Point Inside the PPF

A point that is possible but inefficient because resources are not fully used.

Point On the PPF

A point that is possible and productively efficient.

Point Outside the PPF

A point that is impossible with current resources and technology.

Budget Constraint Slope

The slope shows the tradeoff between two goods based on their relative prices.

Budget Constraint vs. PPF

A budget constraint shows individual choices with limited income, while a PPF shows society’s production choices with limited resources.

Price

What a buyer pays for one unit of a good or service.

Supply Curve

A graph showing the relationship between price and quantity supplied, with price on the vertical axis and quantity on the horizontal axis.

Equilibrium Quantity

The quantity where quantity demanded equals quantity supplied.

Excess Supply

Another name for surplus; quantity supplied is greater than quantity demanded.

Excess Demand

Another name for shortage; quantity demanded is greater than quantity supplied.

Movement Along a Demand Curve

A change in quantity demanded caused only by a change in price.

Movement Along a Supply Curve

A change in quantity supplied caused only by a change in price.

Shift in Demand

A change in demand caused by something other than the good’s own price.

Shift in Supply

A change in supply caused by something other than the good’s own price.

Increase in Demand

Demand shifts right; consumers want more at every price.

Decrease in Demand

Demand shifts left; consumers want less at every price.

Increase in Supply

Supply shifts right; producers are willing to sell more at every price.

Decrease in Supply

Supply shifts left; producers are willing to sell less at every price.

Determinants of Demand

Factors that shift demand: income, tastes or preferences, population, prices of substitutes and complements, and future expectations.

Determinants of Supply

Factors that shift supply: natural conditions, input prices, technology, and government policies.

Inputs or Factors of Production

The labor, materials, and machinery used to produce goods and services.

Substitute Price Effect

If the price of a substitute rises, demand for the original good increases.