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Economics Terms

Study review for Unit 1 Test

TermDefinition
scarcity Refers to the limited nature of society's resources, given society's unlimited wants and needs.
economics The study of how people allocate their limited resources to satisfy their nearly unlimited wants.
microeconomics The study of individual units that make up the economy.
macroeconomics The study of the overall aspects and workings of an economy.
incentives Factors that motivate a person to act or exert effort.
opportunity cost The highest-valued alternative that must be sacrificed in order to get something else.
economic thinking requires a purposeful evaluation of the available opportunities to make. Also can mean the process of systematically evaluating a course of action.
marginal thinking requires decision-makers to evaluate whether the benefit of one more unit of something is greater than its cost.
markets bring buyers and sellers together to exchange goods and services.
trade The voluntary exchange of goods and services between two or more parties.
comparative advantage refers to the situation where an individual, business, or country can produce at a lower opportunity cost than a competitor
double coincidence of wants Occurs when each party in an exchange transaction has what the other party desires.
economic models simplifications of reality that allow us to understand the situation at hand.
economic theory seeks to provide understanding of the causes of a phenomenon. (like a diagnosis, provided before a solution or cure is proposed)
economic policy seeks to implement solutions of problematic phenomenon. (The cure to a problem)
circular flow Shows how resources and final goods and services flow through the economy.
barter Involves individuals trading a good they already have or providing a service in exchange for something they want
Richard Thaler Econ Nobel Prize Winner 2017
Adam Smith Founding Father of Economics
David Ricardo Promoted idea of comparative advantage in as a basis for trade, as opposed to absolute advantage.
Positive Statement Can be tested and validated; it describes "what is."
Normative statement Is an opinion that cannot be tested or validated; it describes "what ought to be."
ceteris paribus Process where economists examine one variable while holding everything else constant.
endogenous factors Variables that can be controlled for in a model.
exogenous factors Variables that cannot be controlled for in a model.
production possibilities frontier illustrates the combinations of outputs that a society can produce if all of its resources are being used effectively.
law of increasing opportunity cost The opportunity cost of producing a good rises as a society produces more of it.
specialization The limiting of one's work to a particular area.
absolute advantage Refers to the ability of one producer to make more than another producer with the same quantity of resources.
short run Period in which we make decisions that reflect our immediate or short-term wants, needs, or limitations. In the short run, consumers can partially adjust their behavior.
long run The decisions we make that reflect our needs, wants, and limitations over a long time horizon. In the long run, consumers have time to fully adjust to market conditions.
consumer goods Produced for present consumption.
capital goods Help produce other valuable goods and services in the future.
investment The process of using resources to create or buy new capital.
The Wealth of Nations Adam Smith, founding father of economics, wrote it.
Market economy Resources are allocated among households and firms with little or no government interference.
Invisible hand A phrase coined by Adam Smith to refer to the unobservable market forces that guide resources to their highest - valued use.
Competitive Market Exists when there are so many buyers and sellers that each has only a small (negligible) impact on the market price and output
Imperfect Market Where either the buyer or seller can influence the market price
Market Power A firm's ability to influence the price of a good or service by exercising control over its demand, supply, or both.
Monopoly Exists when a single company supplies the entire market for a particular good or service.
Quantity Demanded The amount of a good or service that buyers are willing and able to purchase at the current price.
Law of Demand States that, all other things being equal, quantity demanded falls when the price rises, and rises when the price falls.
Demand Schedule Table that shows relationship between the price of a good and the quantity demanded.
Demand Curve Graph of the relationship between the prices in the demand schedule and the quantity demanded at those prices.
Market Demand The sum of all the individual quantities demanded by each buyer in the market at each price.
Purchasing Power The value of your income expressed in terms of how much you can afford.
Normal Goods Consumers buy more of these as income rises, holding all other factors constant.
Inferior Good Purchased out of necessity rather than choice.
Complements Two goods that are used together. When the price of a complementary good increases, the demand for the related good also goes down.
Substitutes Two goods that are used in place of each other. When the price of a substitute good rises, the quantity demanded of that good falls and the demand for the related good goes up.
Quantity Supplied Amount of a good or service that producers are willing and able to sell at the current price.
Law of Supply States that, all other things being equal, the quantity supplied of a good rises when the price of the good rises, and falls when the price of the good falls.
Supply Schedule Table that shows relationship between the price of a good and the quantity supplied.
Supply Curve Graph of the relationship between the prices in the supply schedule and the quantity supplied at those prices.
Market Supply The sum of the quantity supplied by each seller in the market at each price.
Inputs Resources used in the production process
Subsidy A payment made by the government to encourage the consumption or production of a good or service.
Equilibrium The point where the supply curve and the demand curve intersect.
Equilibrium Price The price at which the quantity supplied is equal to the quantity demanded. It is also known as the market - clearing price.
Equilibrium Quantity The amount at which the quantity supplied is equal to the quantity demanded.
Law of Supply and Demand States that the market price of any good will adjust to bring the quantity supplied and the quantity demanded into balance.
Shortage Occurs when the quantity supplied is less than the quantity demanded. A shortage is also called excess demand.
Surplus Occurs when the quantity supplied is greater than the quantity demanded. A surplus is also called excess supply
Price controls Attempt to set prices through government involvement in the market.
Price ceiling A legally established maximum price for a good or service. If binding, can create a shortage
Black Markets Illegal markets that arise when price controls are in place.
Rent Control A price ceiling that applies to the market for apartment rentals
Price Gouging Laws Place a temporary ceiling on the prices that sellers can charge during times of emergency.
Price Floor A legally established minimum price for a good or service. If binding, can create a suprlus.
Minimum Wage The lowest hourly wage rate that firms may legally pay their workers.
Inflation An overall increase in prices.
Binding price ceilings Price ceilings that are set BELOW the equilibrium price.
Nonbinding price ceilings Price ceilings that are set ABOVE the equilibrium price.
Binding price floors Price floors that are set ABOVE the equilibrium price.
Nonbinding price floors Price floors that are set BELOW the equilibrium price.
Elasticity Refers the degree to which individuals, consumers or producers change their demand or the amount supplied in response to price or income changes.
Created by: AlanMGM