Untitled Flashcards Set

• money – an asset that is socially and legally accepted as a medium of exchange.
• three functions of money:
▪ medium of exchange – an asset used as payment when purchasing goods/services
▪ store of value – an asset that serves as a means of holding wealth
▪ unit of measure – a basic measure of economic activity
• demand – the relationship between the price of a good and the quantity that consumers
are willing and able to purchase, all other factors fixed
• supply – the relationship between the price of a good and the quantity that firms are
willing and able to sell, all other factors fixed
• Law of Demand – all other factors fixed, a greater quantity of a good will be
demanded at lower prices (demand curves are downward sloping).
• Law of Supply – all other factors fixed, a greater quantity of a good will be supplied at
higher prices (supply curves are upward sloping).
• “Horizontal Interpretation” of Demand Curve – start by focusing on a particular
price, and then go over to the demand curve horizontally to determine the
corresponding quantity demanded at this particular price.
• “Vertical Interpretation” of Demand Curve – start by focusing on a particular
quantity demanded, and then go up to the demand curve vertically to determine
the corresponding price at which this particular quantity would be demanded.
• “Horizontal Interpretation” of Supply Curve – start by focusing on a particular
price, and then go over to the supply curve horizontally to determine the
corresponding quantity supplied at this particular price.
• “Vertical Interpretation” of Supply Curve – start by focusing on a particular quantity
supplied, and then go up to the supply curve vertically to determine the corresponding
price at which this particular quantity would be supplied.
• buyer's reservation price – the maximum amount of money that he is willing to give
up to acquire the item.
• seller’s reservation price – the minimum amount of money that she is willing to
accept in exchange for the item.
• equilibrium – a “stable state” for a system which will persist as long as outside factors
do not change.
▪ at the market equilibrium no individual buyer and no individual seller can alter
his or her own behavior in such a way as to increase his or her own surplus.
• excess supply – a situation in which quantity supplied is greater than quantity
demanded (resulting in “downward pressure” on price).

• excess demand – a situation in which quantity demanded is greater than quantity
supplied (resulting in “upward pressure” on price).
• The Market Equilibrium in the model of Supply and Demand is:
▪ stable – if we are there we will stay there, unless outside forces change
▪ unique – there is one and only one equilibrium, a property which follows from the
“Law of Demand” and “Law of Supply”
▪ self enforcing – at higher prices there is downward pressure on price; at lower
prices there is upward pressure on price – therefore if we are at some other price,
we will be pushed toward the equilibrium price
• Increase in Demand – a change in demand consistent with consumers being more
willing to purchase the good, in that at every price the new quantity demanded is
greater than the previous quantity demanded (visually, such a change is illustrated as a
“rightward shift” of the demand curve).
• Decrease in Demand – a change in demand consistent with consumers being less
willing to purchase the good, in that at every price the new quantity demanded is less
than the previous quantity demanded (visually, such a change is illustrated as a
“leftward shift” of the demand curve).
• Increase in Supply – a change in supply consistent with firms being more willing to
sell the good, in that at every price the new quantity supplied is greater than the
previous quantity supplied (visually, such a change is illustrated as a “rightward shift”
of the supply curve).
• Decrease in Supply – a change in supply consistent with firms being less willing to
sell the good, in that at every price the new quantity supplied is less than the previous
quantity supplied (visually, such a change is illustrated as a “leftward shift” of the
supply curve).
• Determinants of Demand (factors that change demand) – changes in the following
will result in an increase in demand: (1) a decrease in the price of a Complement
Good; (2) an increase in the price of a Substitute Good; (3) an increase in income
(for a Normal Good); (4) a decrease in income (for an Inferior Good); (5) an
increased
preference for the good by consumers; (6) an increase in “market size”; (7) an
expectation of higher future prices. Changing any of these factors in “the opposite
direction” would result in a decrease in demand.
• Determinants of Supply (factors that change supply) – changes in the following will
result in an increase in supply: (1) a decrease in the cost of any factors of production
used to produce the good; (2) an improvement in technology that reduces production
costs; (3) a favorable realization of “natural events”; (4) an increase in “market size”;
(5) an expectation of lower future prices. Changing any of these factors in “the
opposite direction” would result in a decrease in supply.
• Role of Profits in a free market economy – profits serve as a vital “signaling device”
in free market economies, directing resources to their most valuable use.
• entrepreneur – someone who organizes and manages a business, typically with
considerable initiative and exposure to risk.
• Role of the Entrepreneur – profits can only serve as effective signals insofar as
someone is able to recognize, appreciate, and respond according to different levels
of profit.

• Spontaneous Order – the natural and undirected emergence of order out
of seeming chaos
• three surprising insights from “I, Pencil”:
▪ no one person possesses the know-how to make a pencil
▪ most who helped make the pencil did not intend to or necessarily care to
specifically make a pencil
▪ but yet, the entire process takes place (and valued goods, such as pencils, are
produced) without any planner overseeing or dictating the process