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ECON 101

Test 1 Supply & Demand

TermDefinition
division of labor the way in which the work required to produce a good or service is divided into tasks performed by different workers
economics the study of how humans make choices under conditions of scarcity
scarcity when human wants for goods and services exceed the available supply
specialization when workers or firms focus on particular tasks for which they are well-suited within the overall production process
fiscal policy economic policies that involve government spending and taxes
macroeconomics the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance.
Microeconomics the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms
monetary policy policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing
circular flow diagram a diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market
goods and services market a market in which firms are sellers of what they produce and households are buyers
labor market the market in which households sell their labor as workers to business firms or other employers
model see theory
theory a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation
command economy an economy where economic decisions are passed down from government authority and where resources are owned by the government
exports products (goods and services) made domestically and sold abroad
globalization the trend in which buying and selling in markets have increasingly crossed national borders
gross domestic product (GDP) measure of the size of total production in an economy
imports products (goods and services) made abroad and then sold domestically
market interaction between potential buyers and sellers; a combination of demand and supply
market economy an economy where economic decisions are decentralized, resources are owned by private individuals, and businesses supply goods and services based on demand
private enterprise system where the means of production (resources and businesses) are owned and operated by private individuals or groups of private individuals
traditional economy typically an agricultural economy where things are done the same as they have always been done
underground economy a market where the buyers and sellers make transactions in violation of one or more government regulations
budget constraint all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set
law of diminishing marginal utility as we consume more of a good or service, the utility we get from additional units of the good or service tend to become smaller than what we received from earlier units
marginal analysis examination of decisions on the margin, meaning a little more or a little less from the status quo
opportunity cost measures cost by what is given up in exchange; opportunity cost measures the value of the forgone alternative
opportunity set all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income
sunk costs - costs that are made in the past and cannot be recovered
utility satisfaction, usefulness, or value one obtains from consuming goods and services
allocative efficiency when the mix of goods being produced represents the mix that society most desires
comparative advantage when a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production
law of diminishing returns as additional increments of resources are added to producing a good or service, the marginal benefit from those additional increments will decline
production possibilities frontier (PPF) a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.
productive efficiency when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)
invisible hand idea that self-interested behavior by individuals can lead to positive social outcomes
normative statement statement which describes how the world should be
positive statement statement which describes the world as it is
demand curve a graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis
demand schedule a table that shows a range of prices for a certain good or service and the quantity demanded at each price
demand the relationship between price and the quantity demanded of a certain good or service
equilibrium price the price where quantity demanded is equal to quantity supplied
equilibrium quantity the quantity at which quantity demanded and quantity supplied are equal for a certain price level
equilibrium the situation where quantity demanded is equal to the quantity supplied; the combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to change
excess demand at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage
excess supply at the existing price, quantity supplied exceeds the quantity demanded; also called a surplus
law of demand the common relationship that a higher price leads to a lower quantity demanded of a certain good or service and a lower price leads to a higher quantity demanded, while all other variables are held constant
law of supply the common relationship that a higher price leads to a greater quantity supplied and a lower price leads to a lower quantity supplied, while all other variables are held constant
price what a buyer pays for a unit of the specific good or service
quantity demanded the total number of units of a good or service consumers are willing to purchase at a given price
quantity supplied the total number of units of a good or service producers are willing to sell at a given price
shortage at the existing price, the quantity demanded exceeds the quantity supplied; also called excess demand
supply curve a line that shows the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis and price on the vertical axis
supply schedule a table that shows a range of prices for a good or service and the quantity supplied at each price
supply the relationship between price and the quantity supplied of a certain good or service
surplus at the existing price, quantity supplied exceeds the quantity demanded; also called excess supply
ceteris paribus other things being equal
complements goods that are often used together so that consumption of one good tends to enhance consumption of the other
factors of production the combination of labor, materials, and machinery that is used to produce goods and services; also called inputs
inferior good a good in which the quantity demanded falls as income rises, and in which quantity demanded rises and income falls
inputs the combination of labor, materials, and machinery that is used to produce goods and services; also called factors of production
normal good a good in which the quantity demanded rises as income rises, and in which quantity demanded falls as income falls
shift in demand when a change in some economic factor (other than price) causes a different quantity to be demanded at every price
shift in supply when a change in some economic factor (other than price) causes a different quantity to be supplied at every price
substitute a good that can replace another to some extent, so that greater consumption of one good can mean less of the other
price ceiling a legal maximum price
price control government laws to regulate prices instead of letting market forces determine prices
price floor a legal minimum price
total surplus see social surplus
consumer surplus the extra benefit consumers receive from buying a good or service, measured by what the individuals would have been willing to pay minus the amount that they actually paid
deadweight loss the loss in social surplus that occurs when a market produces an inefficient quantity
economic surplus see social surplus
producer surplus the extra benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to accept
social surplus the sum of consumer surplus and producer surplus
Created by: EdL
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