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Econ 1-6
| Question | Answer |
|---|---|
| scarcity: | the limited nature of society’s resources |
| economics: | the study of how society manages its scarce resources |
| Principle 1: People Face Trades Offs | "No free lunch," efficiency/equality trade off, recognize trade offs exist but don't indicate decisions |
| efficiency: | the property of society getting the most it can from its scarce resources |
| equality: | the property of distributing economic prosperity uniformly among the members of society |
| Principle 2: The Cost of Something Is What You Give Up to Get | opportunity cost: whatever must be given up in order to obtain some item |
| Principle 3: Rational People Think at the Margin | rational people, marginal change, rational decision makers takes action only if the marginal benefit is at least as large as the marginal cost |
| rational people: | people who systematically and purposefully do the best they can to achieve their objectives |
| marginal change: | a small incremental adjustment to a plan of action |
| Principle 4: People Respond to Incentive | rational people decisions may change in response to incentives (price of good rises, consumers buy less/producers allocate more resources) |
| incentive: | something that induces a person to act |
| Principle 5: Trade Can Make Everyone Better Off | Both sides can gain from trade |
| Principle 6: Markets Are Usually a Good Way to Organize Economic Activity | Market prices reflect product value to consumers and resource costs used to produce it, gov interference distorts h and f decisions, "Invisible Hand" |
| market economy: | an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services |
| "Invisible Hand:" | invisible hand guides this self-interest into promoting society’s economic well-being. |
| Principle 7: Governments Can Sometimes Improve Market Outcomes | Property rights, market failure (externality/market power), market economy leads to unequal distribution of economic well-being |
| property rights: | the ability of an individual to own and exercise control over scarce resources |
| market failure: | a situation in which a market left on its own fails to allocate resources efficiently |
| externality: | the impact of one person’s actions on the well-being of a bystander |
| market power: | the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices |
| productivity: | the quantity of goods and services produced by each unit of labor input |
| inflation: | an increase in the overall level of prices in the economy |
| business cycle: | fluctuations in economic activity, such as employment and production |
| production possibilities frontier: | graph showing combinations of output that the economy can possibly produce given available factors of production and available production technology |
| PPF points outside the curve: | not possible given the economy’s current level of resources and technology |
| PPF points on the curve: | efficient points |
| PPF points inside the curve: | inefficient points |
| PPF outward shift: | illustrates economic growth |
| microeconomics: | the study of how households and firms make decisions and how they interact in markets |
| macroeconomics: | the study of economy-wide phenomena, including inflation, unemployment, and economic growth |
| positive statements: | claims that attempt to describe the world as it is |
| normative statements: | claims that attempt to prescribe how the world should be |
| circular flow diagram: | a visual model of the economy that shows how dollars flow through markets among households and firms |
| absolute advantage: | the ability to produce a good using fewer inputs than another producer does |
| comparative advantage: | the ability to produce a good at a lower opportunity cost than another producer |
| When specialization in a good occurs: | total output will grow |
| For both parties to gain from trade: | the price at which they trade must lie between the opportunity costs |
| imports: | goods produced abroad and sold domestically |
| exports: | goods produced domestically and sold abroad |
| market: | a group of buyers and sellers of a particular good or service |
| competitive market: | a market in which there are so many buyers and so many sellers that each has a negligible impact on the market price |
| quantity demanded: | the amount of a good that buyers are willing and able to purchase |
| law of demand: | the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rise |
| demand schedule: | a table that shows the relationship between the price of a good and the quantity demanded |
| demand curve: | a graph of the relationship between the price of a good and the quantity demanded |
| increase/decrease in supply/demand: | shift curve right/shift curve left |
| normal good: | a good for which, other things equal, an increase in income leads to an increase in demand |
| inferior good: | a good for which, other things equal, an increase in income leads to a decrease in demand |
| substitutes: | two goods for which an increase in the price of one good leads to an increase in the demand for the other |
| complements: | two goods for which an increase in the price of one good leads to a decrease in the demand for the other |
| quantity supplied: | the amount of a good that sellers are willing and able to sell |
| law of supply: | the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises |
| supply schedule: | a table that shows the relationship between the price of a good and the quantity supplied |
| supply curve: | a graph of the relationship between the price of a good and the quantity supplied |
| equilibrium: | a situation in which the market price has reached the level at which quantity supplied equals quantity demanded |
| equilibrium price: | the price that balances quantity supplied and quantity demanded |
| equilibrium quantity: | the quantity supplied and the quantity demanded at the equilibrium price |
| surplus: | a situation in which quantity supplied is greater than quantity demanded |
| shortage: | a situation in which quantity demanded is greater than quantity supplied |
| law of supply and demand: | the claim that the price of any good adjusts to bring the supply and demand for that good into balance |
| elasticity: | a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants |
| price elasticity of demand: | a measure of how much quantity demanded of a good responds to a change in the price of that good |
| price elasticity of demand > 1: | elastic |
| price elasticity of demand < 1: | inelastic |
| price elasticity of demand = 1: | unit elasticity |
| price elasticity of demand = 0: | perfectly inelastic |
| price elasticity of demand = infinity: | perfectly elastic |
| total revenue: | the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold |
| If demand is inelastic: | the percentage change in price will be greater than the percentage change in quantity demanded |
| If demand is elastic: | the percentage change in quantity demanded will be greater than the percentage change in price |
| If demand is unit elastic: | the percentage change in price will be equal to the percentage change in quantity demanded |
| income elasticity of demand: | a measure of how much the quantity demanded of a good responds to a change in consumers’ income |
| cross-price elasticity of demand: | a measure of how much the quantity demanded of one good responds to a change in the price of another good |
| price elasticity of supply: | a measure of how much the quantity supplied of a good responds to a change in the price of that good |
| elasticity = 0 | supply is perfectly inelastic/vertical line |
| elasticity = infinity: | supply is perfectly elastic/horizontal line |
| price ceiling: | a legal maximum on the price at which a good can be sold |
| price floor: | a legal minimum on the price at which a good can be sold |
| price ceiling/floor > or = equilibrium price: | not binding, no effect on price or quantity sold |
| price ceiling is < equilibrium price: | binding constraint, shortage created |
| price floor is < equilibrium price: | binding constraint, surplus created |
| tax incidence: | the manner in which the burden of a tax is shared among participants in a market |
Created by:
IanMcCormick20