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Exam 1

Economics

TermDefinition
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.
Created by: heintzhistory
 

 



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