ECON 120 - Quiz 1
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| Principles of economics: individual choice | resources are scarce, opportunity cost, decisions are taken at the margin, decision-makers respond to incentives
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| Principles of economics: interaction of individual choices | gains from trade, markets move toward equilibrium, resources should be used as efficiently as possible, markets (usually) lead to efficiency (the invisible hand), government intervention is needed to correct market's shortcomings
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| Principles of economics: thinking at the margin | not yes/no, but extra
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| Equilibrium: definition | a situation in which no individual would be better off doing something different
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| Equilibrium: cause | agents respond to and exploit incentives until no further gain can be made
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| Efficiency and fairness | efficiency may not be in line with fairness
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| Market economy: definition | resources are allocated through individual decisions of firms and buyers
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| Centrally-planned economy: definition | the government determines resource allocation and prices
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| Problem with government intervention | officials do not know every single market
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| Adam Smith | "Wealth of Nations" 1776; the market would do better if its own foces were left to act freely
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| Roles of government | protect private property, improve income distribution, correct market failures, reduce monopoly power
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| Model: definition | a simplified representation of a real situation
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| Model: representation | usually put in equations because equations give more clarity about what the author has to say (words can be misinterpreted)
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| Model: production possibilities frontier: definition | shows the combinations of outputs X and Y that an economy is able to produce given the available factors of production and technology
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| Model: production possibilities frontier: slope | the negative slope indicates that there is a tradeoff (if you want to increase the production of X you have to sacrifice some production of Y)
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| Free trade: why it is not everywhere | just because free trade benefits society as a whole, it does not mean that everyone is strictly better off
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| Model: circular flow diagram: agents | firms and households
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| Model: circular flow diagram: firms | produce goods and services using inputs (factors of production)
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| Model: circular flow diagram: households | consume goods and services; own the inputs
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| Positive economics: definition | offers a description of an economic phenomenon; a positive statement can be confirmed or rejected with facts (empirical evidence)
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| Normative economics: definition | concerned with what should be done; influenced by past experience and facts, ethics and moral beliefs
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| Normative economics: difference in scientific opinions | because economists employ different empirical research methods
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| Market: definition | group of buys and sellers of a particular good or service
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| Supply and demand: quantity demanded/supplied: definition | the amount of a good or service that buyers/producers are willing and able to acquire/sell at a given price
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| Supply and demand: demand: contributors | income, prices of other goods, tastes, expectations, weather
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| Supply and demand: demand: law of demand | everything else being the same, the quantity of a good goes up if the price of the good goes down
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| Supply and demand: demand: demand curve | graphical representation of the relationship between the price of a good and its quantity demanded
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| Supply and demand: demand: market demand curve: definition | the horizontal summation of the quantities individually demanded at any given price
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| Supply and demand: demand: demand curve: shifts | right = demand has increased; left = demand has decreased
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| Supply and demand: demand: demand curve: normal: definition | if its demand increases as the consumer's income goes up
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| Supply and demand: demand: demand curve: inferior: definition | if demand decreases when the consumer's income goes up
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| Supply and demand: demand: demand curve: substitutes: definition | if demand for X decreases as a consequence of a fall of the price of Y
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| Supply and demand: demand: demand curve: complements: definition | if fall in price of X increases the demand for Y
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| Supply and demand: supply: law of supply | as prices to up the quantity supplied of any good or service also rises
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| Supply and demand: supply: supply curve | depicts the quantity supplied of a good or service at different price levels
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| Supply and demand: supply: supply curve: slope | positively inclined
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| Supply and demand: supply: supply curve: shifts: causes | input prices, technological advance, weather, expectations, number of suppliers
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| Supply and demand: E | market equilibrium = intersection of supply and demand curves
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| Supply and demand: Pe | clearing-market price (equilibrium price) = price at equilibrium
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| Supply and demand: Qe | equilibrium quantity = quantity at equilibrium
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| Supply and demand: simultaneous shifts | depends on which shifts more
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