Studied by 1 personscarcity
our inability to satisfy our wants
incentive
a reward that encourages an action or a penalty that discourages one
economics
the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influences and reconcile those choices
microeconomics
the study of the choices that individuals and businesses make, the way these choices interact in markets, and the influence of governments
macroeconomics
the study of the performance of the national economy and the global economy
factors of production
the resources used to produce goods and services (labour, land, capital, entrepreneurship)
four issues in todays world
globalization; information-age monopolies; climate change; economic instability
globalization
the expansion of international trade, borrowing and lending and investment; is in the self interest of those consumers who buy low cost goods and services produced in other countries
six key ideas that define the economic way of thinking
a choice is a tradeoff; people make rational choices by comparing benefits and costs; benefits is what you gain from something; cost is what you must give up to get something; most choices are "how much" choices made at the margin; choices respond to incentives
production possibilites frontier
the boundary between those combinations of goods and services that can be produced and those that cannot; to illustrate the PPF, we look at a model economy in which the quantities produced of only two goods change, while the quantities produced of all other goods and services remain the same
production efficiency
if we produce goods and services at the lowest possible cost; this outcome occurs at all points on the PPF, at points inside the PPF, production is efficient because we are giving up more than necessary of one good to produce a given quantity of the other good
opportunity cost
the highest valued alternative forgone; the PPF makes this idea precise and enables us to calculate opportunity cost
allocative efficiency
when goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit
marginal cost
the opportunity cost of producing one more unit of it
marginal benefit
the benefit recieved from consuming one more unit of the good; the benefit is subjective-it depends on peoples preferences
marginal benefit curve
a curve that shows the relationship between the marginal benefit from a good and the quantity consumes of that good; note that the marginal benefit curve is unrelated to the PPF and cannot be derived from it
economic growth
the expansion of production possibilites; increases our standard of living, but it doesnt overcome scarcity and avoid opportunity cost
technological change
the development of new goods and of better ways of producing goods and services
capital accumulation
the growth of capital resources, including human capital
comparative advantage
if a person can perform the activity at a lower opportunity cost than anyone else
absolute advantage
a person who is more productive than others
firm
an economic unit that hires factors of production and organizes them to produce and sell goods and services
market
any arrangement that enables buyers and sellers to get information and to do business with each other
property rights
the social arrangements that govern the ownership, use , and disposal of anything that people value; real property includes lands and buildings and durable goods such as plants and equipment; financial property includes stocks and bonds and money in the bank; intellectual property is the intangible product of creative effort
money
any commodity or token that is generally acceptable as a means of payment; the invention of money makes trading in markets much more efficient
competitive market
a market that has many buyers and many sellers, so no single buyer or seller can influence the price
relative price
the ratio of one price to another; a relative price is the opportunity cost; to calculate the relative price, we divide the money price of a good by the money price of a basket of all goods
quantity demanded
the amount that consumers plan to buy during a given time period at a particular price; the quantity demanded is not necessarily the same as the quantity actually bought
law of demand
other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the greater is the quantity demanded
substitution effect
when the price of a good rises, other things remaining the same; its opportunity cost rises. as the opportunity cost rises, the incentive to economize on its use and switch to a substitute becomes stronger
income effect
when a price rises, other things remaining the same, the price rises relative to income. Normally, the good whose price has increased will be one of the goods people buy less of
demand
refers to the entire relationship between the price of a good and the quantity demanded of that good; the term quantity demanded refers to a point on a demand cure- the quantity demanded at a particular price
demand curve
shows the relationship between the quantity demanded of a good and its price when all other influences on a consumer's planned purchased remain the same
change in demand
when any factor that influences buying plans changes, other than the price of the good; when demand increases, the demand curve shifts rightward and the quantity demanded at each price is greater
substitute
a good can be used in place of another good
compliment
a good that is used in conjunction with another good
normal good
is one for which demand increases as income increases
inferior good
is one for which demand decreases as income increases
quantity supplied
the amount that producers plan to sell during a given time period at a particular price; the quantity supplied is measured as an amount per unit of time
law of supply
other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied
supply
refers to the entire relationship between the price of a good and the quantity supplied of it
supply curve
shows the relationship between the quantity supplied of a good and its price when all other influences on producer's planned sales remain the same; the supply curve is a graph of a supply schedule
change in supply
when any factor that influences selling plans other than the price of the good changes
six main factors bring changes in supply
the prices of factors of production; the prices of related goods produced; expected future prices; the number of suppliers; technology; the state of nature
change in the quantity supplied
a point on the supply curve shows the quantity supplied at a given price. a movement along the supplied curve
equilibrium price
the price at which the quantity demanded equals the quantity supplied
equilibrium quantity
the quantity bought and sold at the equilibrium price; a market moves toward its equilibrium because price regulates buying and selling plans, price adjusts when plans dont match
price of elasticity of demand
a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same; we calculate the price of elasticity of demand and by using the formula
price of elasticity of demand = % change in quantity demanded/ % change in price
perfectly inelastic demand
if the quantity demanded remains constant when the price changes, then the price elasticity of demand is zero
unit elastic demand
if the percentage change in the quantity demanded equals the percentage change in the price, then the price elasticity equals 1
inelastic demand
the price elasticity of demand is between zero and 1
perfectly elastic demand
if the quantity demanded changes by an infinitely large percentage in response to a tiny price change, then the price elasticity of demand is infinity
elastic demand
the percentage change in the quantity demanded exceeds the percentage change in price; the price elasticity of demand is greater than 1
total revenue
equals the price of the good multiplied by the quantity sold
rules of total revenue
if demand is elastic, a 1% price cut increases the quantity sold by more than one % and total revenue increases
if demand is inelastic, a 1% price cut increases the quantity sold by less than 1% and total revenue decreases
if demand is unit elastic, a 1% price cut increases the quantity sold by 1% and total revenue does not change
total revenue test
a method of estimating the price elasticity of demand by observing the change in the price, when all other influences on the quantity sold remain the same
total revenue test rules
if a price cute increases total revenue, demand is elastic
if a price cut decreases total revenue, demand is inelastic
if a price cut leaves total revenue unchanged, demand is unit elastic
income elasticity of demand
a measure of the responsiveness of the demand for a good or service to a change in income, other things remaining the same; it tells us by how much a demand curve shifts at a given price
cross elasticity of demand
a measure of the responsiveness of the demand for a good to change in the price of a substitute or complement, other things remaining the same
elasticity of supply
measures the responsiveness of the quantity supplied to a charge in the price of a good when all other influences on selling plans remain the same
momentary supply
when the price of a good changes, the immediate response of the quantity supplied is determined by the momentary supply of that good
short-run supply
the response of the quantity supplied to a price change when only some of the possible adjustments to production can be made is determined by short-run supply
long-run supply
the response of the quantity supplied to a price change after all the technologically possible ways of adjusting supply have been explored is determiend by long-run supply
command system
allocates resources by the order (command) of someone in authority
market demand
the market demand curve is the horizontal sum of the individual demand curves and is formed by adding the quantities demanded by all the individuals at each price
consumer surplus
the excess of the benefit received from a good over the amount paid for it
market supply
the market supply curve is the horizontal sum of the individual supply curves and is formed by adding the quantities supplied by all the other producers at each price
producer surplus
the excess of the amount recieved from the sale of a good or service over the cost of producing it; we calculate producer surplus as the price recieved minus the marginal cost (or minimum supply price), summed over the quantity sold
total surplus
the sum of consumer surplus and producer surplus
market failure
when a market is inefficient; either too little (underproduction) or too much (overproduction) of an item is produced
deadweight loss
the decrease in total surplus that results from an inefficient level of production
transaction cost
the costs of the services that enable a market to bring buyers and sellers together
utilitarianism
a principle that states that we should strive to acheive the greatest happiness for the greatest number; argued that income must be transferred form the rich to the poor up to the point of complete equality
big tradeoff
the costs of making income transfers; a trade off between efficiency and fairness
symmetry principle
the requirement that people in similar situations be treated similarly
Robert Nozick and fairness
the state must enforce laws that establish and protect private property
private property may be transferred from one person to another only by voluntary exchange
price ceiling/price cap
a government regulation that makes it illegal to charge a price higher than a specified level; the effects of a price ceiling on a market depend on whether it is imposed at a level that is above or below the equilibrium price
rent ceiling
when a price ceiling is applied to a housing market; a rent ceiling set below the equilibrium rent creates housing shortage, increased search activity, and a black market
search activity
the time spent looking for someone with whom to do business with; we spend some time in search activity almost every time we make a purchase
black market
an illegal market in which the equilibrium price exceeds the price ceiling; occur in rent-controlled housing and many other markets
lottery
allocates housing to those who are lucky
first-come first served
allocates housing to those who have the greatest foresight and get on the list first
discrimination
allocates scarce housing based on the views and self-interest of the owner
price floor
a government regulation that makes it illegal to charge a price lower than specified level; the effects of a price floor on a market depend on whether the floor is imposed at a level is above or below the equilibrium price
minimum wage
when a price floor is applied to a labor market; a minimum wage imposed at a level that is above the equilibrium wage creates unemployment
tax incidence
the division of the burden of a tax between buyers and sellers; if the price paid rises by the amount of the tax, the burden is on the buyers; if the price paid rises by a lesser amount, it falls partly on buyers and partly on sellers; if the price doesnt change, the tax falls on the sellers
benefits principle
the proposition that people should pay taxes equal to the benefits they recieve from the services provided by the government
ability to pay principle
the proposition that people should pay taxes according to how easily they can bear the burden of the tax; a rich can bear the burden more, so this reinforces the benefits principle to justify high rates of income tax on high incomes
production quota
an upper limit to the quantity of a good that may be produced in a specified period
subsidy
a payment made by the government to a producer
imports
the goods and services we buy from other countries
exports
the goods and services we sell to people in other countries
national comparative advantage
a situation in which a nation can perform an activity or produce a good or service at a lower opportunity cost than any other nation
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