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Exam 1
Economics
| Term | Definition |
|---|---|
| Economics | the study of choices on how to allocate the scarce resources |
| Macroeconomics | studies the economy as a whole |
| Microeconomics | studies parts of the economy or some certain type of market |
| Basic problem | resources are scarce; people's wants are unlimited but resources are limited |
| Principle 1 | People face trade-offs; if you want x, you must give up y because you can't have them both. |
| Principle 2 | the cost of something is what you give up to get it; opportunity cost: |
| Opportunity cost | next best alternative that you had to give up because you chose a particular option (best alternative); includes not only money but time spent too; |
| Principle 3 | rational people think at the margin |
| Marginal change | small incremental adjustments to an existing plan of action. |
| Marginal benefit | additional benefit resulting from a one unit increase in the level of an activity |
| Marginal cost | additional cost associated with one unit increase in the level of an activity. |
| Principle 3 Rule | when MB > MC, rational people will increase the activity; when MB < MC, rational people will stop doing this activity. |
| Principle 4 | people respond to incentives; ex - incentive is wanting to be fit and result is exercising. |
| Principle 5 | markets are usually good ways to organize the economic activities. |
| Competitive market | many sellers and many buyers; no one can influence the price |
| Monopoly market | one seller and many buyers |
| Oligopoly market | a few sellers and many buyers. |
| Principle 6 | Sometimes we need help form the government to improve the market outcome because of two phenomenons: market failure and market power: |
| Market Failure | market on its own fails to produce an efficient allocation of resources. |
| Market Power | the ability of a single person or small group to have a substantial influence on market prices. |
| Slope of Horizontal line | 0 |
| Slope of Vertical line | infinity |
| PPF - production possibilities frontier | all combinations of output that an economy can possibly produce if resources are used efficiently. |
| What is always downward sloping? | PPF |
| What is the slope of a PPF? | opportunity cost |
| Positive statement | attempts to describe the world as it is. |
| Normative statement | attempts to prescribe how the world should be. |
| Perfect Competitive Market | many buyers and sellers; all goods exactly the same; free entry and exit; buyers and sellers can't influence price (called price takers). |
| Demand | the amount of a good that buyers are willing and able to purchase. |
| Law of Demand | when the price of a good rises, the quantity demanded drops; when the price of a good drops, the quantity demanded rises; makes a negative relationship. |
| Schedule of Demand/Supply | table that shows the relationship between the price of a good and the quantity demanded or supplied. |
| Demand curve or Supply curve | graph |
| Market demand or supply | horizontal sum of all buyers demands or all sellers supplies at each price. |
| Endogenous Variable | a type of variable that is shown in a model; ex - price of a good. |
| Exogenous Variable | type of variable that is not show in the model. |
| Rule of Endogenous variable | if there is a change in the endogenous variable, then a moving along the curve will occur in the model. |
| Rule of exogenous variable | if there is a change in the exogenous variable, then there is a shift of the curve. |
| Normal good | when income increases, the quantity demanded increases; they go to the same direction; ex - diamonds, expensive houses and car. |
| Inferior good | when income increases, quantity demanded decreases; they go in opposite directions; ex - instant noodles, bus rides, frozen dinners. |
| Substitutes | goods that can satisfy the same set of goals/preferences; ex - coke and pepsi, tea and coffee. |
| Complements | goods that are used in combination with each other; ex - tea and sugar, ketchup and fries. |
| Factors that affect a demand curve | Number of buyers, income, price of related goods, taste, expected price. |
| Supply | the amount of a good that sellers are willing to and able to sell |
| law of Supply | when the price of a good rises, the quantity supplied also rises; positive relationship. |
| Supply curve factors | input prices, technology, number of sellers, expected price. |
| P and q | p - equilibrium price; q - equilibrium quantity. |
| equilibrium | situation in which the market price has reached a level where quantity demanded equals quantity supplied. |
| Surplus | quantity supplied > quantity demanded; sellers will cut price and Qd will increase and Qs will decrease; won't stop until reaches equilibrium. |
| Shortage | Q supplied < Q demanded; sellers will increase price to raise profit; Qd will decrease and Qs will increase until equilibrium. |
| 3 Step analysis | analyze changes of equilibrium; Step1-determine whether the event affects supply, demand, or both; Step2-determine which direction curve shifts; Step3-use supply-demand diagrams to compare old eq point to new eq point and determine changes in the market. |
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heintzhistory
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