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Macro Ch1

Fundamentals of Economic Analysis

TermDefinition
Scarcity Limited nature of society's resources. Example: OIL
Choice Human behavior to choose how to spend/use the world's scarce resources.
Trade Offs 1st Principle of Economics-the fact that people's choice results in losing one quality or aspect of something in exchange for a quality or aspect of another
Opportunity Cost Whatever must be given up to obtain a good or service
There's no such thing as a free lunch! Milton Friedman famous quote explaining that even in a free lunch, you are still paying opportunity cost (gas to get somewhere, time it takes, etc)
Efficiency Society getting the most out of its scarce resources
Equality The property of distributing economic prosperity uniformly among the members of society
Marginal Change Small incremental changes to a plan of action (why buying in bulk is sometimes a better deal)
Circular Flow Model The illustration representing the flow of goods and services between firms and households
Production Possibilities Frontier/ Production Possibility Curve a graph that shows the combinations of output that an economy can possibly produce given the available factors of production and the available production technology
Absolute Advantage One nation produces a good at a lower resource cost than another nation
Comparative Advantage One nation produces a good a lower opportunity cost than another nation
Quantity Demanded The amount of a good that buyers are willing and able to purchase (change results in a movement along demand curve)
Factors that affect demand Income, Preferences, Price of Related Goods, Number of Buyers, Expectations
Factors that affect supply Resource Prices, Technology, Taxes, Subsidies, Quotas, Number of sellers in market, Weather, Government Regulations
Substitute Goods Two goods for which an increase in the price of one leads to an increase in the demand for the other
Complementary Goods Two goods for which an increase in the price of one leads to a decrease in the demand for the other
Income effect The change in consumption that results when a price change moves the consumer to a higher or lower indifference curve. More simply: when someone makes less, they will spend less.
Demand Schedule A table that shows the relationship between the price of a good and the quantity demanded
Supply Schedule A table that shows the relationship between the price of a good and the quantity supplied
Economics How society manages its resources
Law of Demand As the price of goods increases, the quantity demanded decreases. Price and Quantity demanded have an inverse relationship
Law of Supply Price and Quantity supplied have a direct relationship. As price rises, so does quantity supplied
Ceteris Paribus All other things are the same. When you compare two things, you keep in mind that all other things stay the same.
Total Revenue Test An decrease in price and decrease in total revenue means inelastic. A decrease in price and an increase in total revenue means elastic.
Elasticity of Demand A measure of how much the quantity demanded changes with a change in price
Elasticity of Supply A measure of how much the quantity supplied changes with change in price
Law of Diminishing Marginal Utility Maximum amount of money he or she is willing to pay for one more unit of the good or service
Normal Good A good in which an increase in income will result in an increase in demand (ex. TVs)
Inferior Good A good in which an increase in income will result in a decrease in demand (ex. McDonalds)
Neutral Good A good in which an increase in income will not result in a change in demand (ex. Toilet Paper)
Created by: prasadpari21
 

 



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