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EXAM 1
ECON 120
| Question | Answer |
|---|---|
| scarcity | unlimited wants and limited resources |
| economics | the study of the choices consumers, business managers, and government officials make to attain their goals, given their scarce resources. |
| market | a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade |
| people are rational assumption | assume that consumers and firms use all available information purposefully and systematically as the act to achieve their goals |
| people respond to economic incentive assumption | positive and negative reinforcement influence/encourage certain behavior - DNA databases increase the likelihood that someone who commits a crime will be arrested, thereby reducing the economic incentive to commit crimes by raising the cost |
| optimal decisions are made at margin | the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost |
| marginal action | an incremental change to an already existing action |
| tradeoffs | producing more of one good or service means producing less of another |
| opportunity cost | the highest valued alternative that must be given up engaging in an activity - “guns vs. butter" - x-axis = slope of PPF, y axis = reciprocal slop |
| centrally planned economy | the government decides how economic resources will be allocated (North Korea) |
| market economy | the decisions of households and firms as they interact in markets determine the allocation of economic resources - firms produce goods based on consumer wants |
| voluntary exchange | both the buyer and seller of a product are made better off by the transaction, both parties must win |
| productive efficiency | occurs when a good or service is produced at the lowest possible cost – result of competition |
| allocative efficiency | occurs when production is in accordance with consumer preferences |
| mixed economies | while most economic decisions result from the interaction of buyers and sellers, the government plays a significant role in allocation of resources (US, China) |
| equity | a fair distribution of economic benefits -There is often a tradeoff between equity and efficiency |
| models | Simplified versions of reality used to analyze real-world economic situations |
| positive analysis | what is |
| normative analysis | what ought to be |
| microeconomics | the study of how households and firms make choices, interact with markets and how the government attempts to influence their choices |
| technology | the processes a firm uses to produce goods and services- skill, training, speed and efficiency of equipment |
| FOP | labor, capital, natural resources and entrepreneurial ability |
| PPF | a curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology |
| increasing marginal opportunity cost | occur because some workers, machines and other resources are better suited to one use than to another |
| comparative advantage | the ability of an individual, firm or country to produce a good at a lower opportunity cost than competitors: can only happen for one good – BASIS FOR TRADE |
| absolute advantage | the ability of an individual, firm or country to produce more of a good than competitors using same amount of resources |
| invisible hand | adam smith, self-interest, driving force of market |
| factor markets | markets for factors of production – the inputs used to make goods and services – households sell FOP |
| circular flow diagram | see how participants in a market are linked- firms, and households, market for goods and market for FOP - flow of goods and services and FOP |
| free market | when the government places few restrictions on how goods and services can be produced or sold or how factors of productions can be employed |
| property rights | the rights individuals have to the exclusive use of their property – intellectual property and patents |
| perfectly competitive market | good or service is homogenous, buyer and seller have negligible effect on market, no legal barrier to enter or leave market |
| law of demand | A rule that states that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease |
| substitution effect | the change in the quantity demanded of a good that results because a change in price makes the good more or less expensive compared to substitutes |
| income effect | the change in the quantity demanded of a good that results because a change in the goods price increases or decreases consumers purchasing power |
| demand schedules | tables that show the inverse relationship between the price of a product and the quantity of the product demanded |
| quantity demand | the amount of goods or services that a consumer is willing and able to buy at a given price |
| demand curve | shows the relationship between the price of a product and the quantity of the product demanded, represents marginal benefit of good |
| market demand | the demand by all consumers of a given good or service – horizontal sum of all individual demand curves |
| ceteris paribus condition | : the necessity of holding all variables other than the price constant in constructing a demand curve – all else equal |
| demand shifters | price, income, taste, demographics, natural disaster, expected future prices |
| change in demand | a shift of the demand curve because of a change in one of the variables that affect consumer willingness to buy |
| change in quantity demand | : a movement along the demand curve because of change in price |
| inferior good | : income increase, demand decrease and vice versa |
| normal good | income increase, demand increases and vice versa |
| price of related goods | price of coffee increase, demand decreases for coffee and increases for tea |
| price of complementary goods | price of coffee increase, demand for coffee decrease and demand for creamer decrease |
| law of supply | increases in price cause increases in the quantity supplied and decreases in price cause decreases in quantity supplied – holding everything constant |
| quantity supplied | : amount of a good or service that a firm is willing and able to supply at a given price |
| supply schedule | a table that shows the relationship between the price of a product and the quantity of the product supplied |
| supply curve | shows the relationship between the price of a product and the quantity of the product supplied (marginal cost curve) |
| market supply | : horizontal sum of all the individual supply curves, keep price same and added Qs |
| change in quantity supplied | movement along supply curve because of change in price of good itself |
| change in supply | shift in supply caused by change in something other than price |
| supply shifters | price of inputs, technological change, price of related goods, natural disaster |
| market equilibrium | point at a certain price (equilibrium price) that makes quantity demand = quantity supply - market clearing point |
| surplus | quantity supply > quantity demand – happens when market price is above equilibrium price, causes downward pressure on price |
| shortage | quantity supply < quantity demand – happens when market price is below equilibrium price, causes upward pressure on price |
| price ceiling | a legally determined max price that sellers may charge- rent control - Must be set below market equilibrium price- lead to shortage - PS transferred to CS |
| price floor - | legally determined minimum price that sellers may receive (minimum wage) - Must be set above market equilibrium price - lead to surplus - CS transferred to PS |
| consumer surplus | the difference between the highest price a consumer is willing to pay for a good and the actual price the consumer pays (measure on demand curve) - area below the demand curve and above market price |
| producer surplus | the difference between the lowest price a firm would be willing to accept for a good and the price it receives - area above the market supply and below the market price |
| transferred surplus - consumer to producer | transferred surplus area is calculated by the difference between the price floor and the equilibrium price multiplied by the quantity demanded at the price floor |
| economic efficiency | a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production, sum of consumer and producer surplus is at max |
| economic surplus | the sum of consumer and producer surplus, at a max when the market is at equilibrium |
| deadweight loss | the reduction is economic surplus resulting from a market not being in competitive equilibrium |
| illegal market | in which buying and selling take place at prices that violate government regulations |
| per unit taxes | taxes assessed as a particular dollar amount on the sale of a good or service - government revenue and incentive to buy |
| tax incidence | the actual division of the burden of a tax - the steeper the demand/supply curve, the larger the share of tax paid by buyer/seller and vice versa |
| effects of tax | Whenever a government taxes a good or service less of that good will be produced and consumed - creates a wedge between price paid by buyers and price received by sellers, creates tax revenue, creates deadweight loss |
| tax revenue | tax rate x quantity sold |
| tax rate efficiency | if tax revenue is higher than deadweight loss, tax system is efficient |
| sloped PPF vs linear PPF | increasing/decreasing opportunity cost vs. constant opportunity cost |
| shift in PPF represents | economic growth/decline |
Created by:
kayleejh0829