Shared Flashcard Set

Details

AP Microeconomics Unit 1
Terms and Concepts from Chapters 1, 2, & 5
78
Economics
08/29/2012

Additional Economics Flashcards

 


 

Cards

Term
Economics
Definition
Social science concerned with how individuals, society, and institutions make optimal choices under conditions of scarcity
Term
Opportunity Costs
Definition
Sacrifices made by society to forgo the opportunity of getting the next best alternative so that more of the other thing can be obtained
Term
Utility
Definition
The pleasure, happiness, or satisfaction obtained from consuming a good or service
Term

Marginal Analysis

 

  • If marginal benefits exceed marginal costs, economic production increases
  • If marginal costs exceed marginal benefits, economic production ceases
Definition

Comparison of marginal ("extra") benefits to marginal costs for the purpose of decision making.

 

Term
Economic Principle
Definition
Statement about economic behavior or the economy that enables prediction of the probable effects of certain actions. These are generalizations.
Term
Other-Things-Equal Assumption (Ceteris Paribus)
Definition
Assumption used in economic principles that factors others than those being considered do not change.
Term
Microeconomics
Definition
The part of economics concerned with decision making by individual customers and small economic units.
Term
Macroeconomics
Definition
The part of economics that examines the economy as a whole or in subdivisions to obtain an overview of the structure and relationships between aggregates.
Term
Aggregate
Definition
Collection of specific economic units that are treated as if they were one single unit.
Term
Positive Economy
Definition
Rooted in scientific-based analysis by focusing on facts and cause-and-effect relationships as is necessary for good policy analysis (answers "what is" in the economy).
Term
Normative Economy
Definition
Incorporates value judgments about what the economy should be like and focuses on desirability of certain economic aspects creating economic controversy (answers "what ought to be" of the economy).
Term
Economizing Problem
Definition
The need to make choices because economic wants exceed economic means (limited income vs. insatiable wants).
Term

Budget Line

 

 

Definition

A line or curve that shows various combinations of two products a consumer can purchase with a specific income. All combinations of produces inside or on the budget line are attainable to consumer while all combinations outside the line are unattainable. The slope is representative of the opportunity cost for the two items.

 

[image]

Term
Economic Resources
Definition
All natural, human, and manufactured resources that go into the production of goods and services.
Term
Land
Definition
All natural resources used in the production process such as sunlight, wood, and oil deposits.
Term
Labor
Definition
The physical and mental actions that people contribute to the production of goods and services
Term
Capital
Definition
All manufactured aid used in producing consumer goods such as storage and transportation.
Term
Investment
Definition
The money that pays for the production and accumulation of capital goods.
Term
Entrepreneurial Ability
Definition
Individuals willing to take the initiative in an attempt to commercialize new products that progress society and improve the standard of living.
Term
Production Possibilities Curve
Definition

Graphical display of a curve which shows the different combinations of two goods and services that society can porduce in a fully employed economy. Each point on the production curve represents maximum output of the two products. A point inside the curve indicates the economy is not operating in its fullest capacity (recession, high unemployment), and a point outside the curve indicates that the economy cannot currently produce an output that great unless there are technological advances.

 

[image]

Term
Law of Increasing Opportunity Cost
Definition
States that as the production of a particular good increases, the opportunity cost of producing each additional unit successively rises. This is reflected in the concave appearance of the graph and the opportunity cost can be calculated by finding the vertical height or horizontal span between two given points.
Term
Optimal Allocation
Definition
Process of allocating a specific quantity of resources to the production of goods such that the marginal benefits equal the marginal costs (MB = MC). Economic activity should be increased so long as the marginal beneftis exceed the marginal costs.
Term
Economic Growth
Definition
Growth of economic capacity and a larger total output that results from increasing resource quantities, better resource quality, and technological advances. Also affected by the present economic choices a nation makes - more capital goods than consumer goods ensure greater economic growth in the future.
Term
Comparative Advantage
Definition
The ability of an individual or nation to specialize in performing the task for which they have the lowest opportunity cost and then trading with others to acquire their desired products.
Term
Absolute Advantage
Definition
Ability to perform an activity using fewer resources than others.
Term
Economic System
Definition
Particular set of institutional arrangements and a coordinating mechanism to respond to the economizing problem.
Term
Command System (Communism/Socialism)
Definition
Economic system in which the government owns most property resources and economic decision-making occurs through a central economic plan. Businesses are government-controlled and must produce goods and services according to government directives.
Term
Market System (Capitalism)
Definition
Economic system characterized by the private ownership of resources and the use of markets and prices to coordinate and direct economic activity. Businesses act out of self-interest and the potential for large profit acts as an incentive to progress goods and services.
Term
Laissez-Faire
Definition
Main tenet of pure capitalism that postulates government's role in the economy is limited to protecting private property and establishing an environment conducive to the market system.
Term
Private Property
Definition
The ownership of most of the land and resources by private individuals and firms that encourages only mutually agreeable economic transactions that benefit both parties.
Term
Freedom of Enterprise
Definition
Ensures that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and sell them in their chosen market.
Term
Freedom of Choice
Definition
Enables owners to employ or dispose of their property and money as they see fit as well as ensuring that consumers are free to buy the goods that best satisfy their wants.
Term
Self-Interest
Definition
Motivating force of the various economic units as they exercise their free choices by attempting to achieve their own particular goals
Term
Competition
Definition
Basis is the freedom of choice exercised in pursuit of a monetary return which requires at least two buyers and two sellers acting independently and the freedom of either party to enter or leave markets due to self-interest. Basic regulatory force of the market as it diffuses economic power and limits the potential abuses.
Term
Market
Definition
An institution or mechanism that brings buyers (demand) and sellers (supply) into contact and affects the prices of goods.
Term
Specialization
Definition
Using the resources of an individual, firm, region, or nation to produce one or a few goods rather than an entire range of goods so as to maximize efficiency.
Term
Division of Labor
Definition
Human specialization that makes use of differences in ability, fosters learning by doing a specific task, and saves time, thereby increasing the total output society derives from limited resources.
Term
Medium of Exchange
Definition
Anything that is generally accepted as a standard of value and a measure of wealth.
Term
Barter
Definition
The swapping of goods for other goods that limits exhcange as a coincidence of wants must exist otherwise trade will be stymied.
Term
Money
Definition
Social invention used to facilitate exchanges of goods and services when there is a noncoincidence of wants among buyers and sellers.
Term
Consumer Sovereignty
Definition
The power of consumers to determine what goods and services are produced and in what quantity. Businesses look at the total revenue and total costs to make this determination, but TR and TC directly result from consumer purchases.
Term
"Dollar Votes"
Definition
Manner in which consumers spend their income and exercise their sovereignty that allows them to register their wants. This collectively directs the production of goods and services.
Term
Creative Destruction
Definition
Creation of new products and production methods completely destroys the market positions of firms that are wedded to existing products and older ways of doing business.
Term
"Invisible Hand"
Definition
Theory postulated by Adam Smith in The Wealth of Nations that the self-interest of businesses not only regulate capitalism, but also automatically further the best interest of society in a competitive market.
Term
Circular Flow Diagram
Definition

Illustration that depicts the flow for a simplified economy in which there is no government.

 

[image]

Term
Households
Definition
One or more persons occupying a housing unit that buy goods business make by selling their resources
Term
Businesses
Definition
Commercial establishments that attempt to earn profits for owners by selling goods and services.
Term
Sole Proprietorship
Definition
Businesses owned and managed by a single person that may or may not have additional employees.
Term
Partnership
Definition
Two or more individuals agree to own and run a business together by pooling their financial resources.
Term
Corporation
Definition
Independent legal entity that can acquire resources and assets as its owners bear no personal financial responsibility. Furthermore, corporation can be sued, but its owners cannot be.
Term
Product Market
Definition
Place where goods and services produced by the businesses are purchased by the households.
Term
Resource (Factor) Market
Definition
Place where households sell resources to businesses for the purpose of generating income (households) and producing goods (businesses).
Term
Market Failure
Definition
A situation whereby the market fails to allocate the right amounts of resources to the production of economically desirable goods.
Term
Demand-Side Market Failure
Definition
Arise when demand curves do not reflect consumers' full willingness to pay for a good or service. Sometimes it is impossible to charge consumers what they are willing to pay as others will inevitably benefit without paying.
Term
Supply-Side Market Failure
Definition
Occur when supply curves do not reflect the full cost of producing a good and the firm does not pay the full cost. The external costs of production are not factored into the total cost of the good.
Term
Consumer Surplus
Definition

Benefit surplus consumers receive that is the difference between the maximum price a consumer is willing to pay for a product and the actual price that they do pay. Consumer surplus is the vertical distance from horizontal market price line to the maximum price they are willing to pay. The consumer surplus and price are inversely related given the negative slope.

 

[image]

Term
Producer Surplus
Definition

Benefit surplus producers receive that is the difference between the actual price a producer receives and the minimum acceptable price. The supply of goods is dependent upon market price as only those producers whose minimum acceptable prices are below that will choose to porduce. The producer surplus is the vertical distance from minimum acceptable price to the equilibrium price.

 

[image]

Term
Productive Efficiency
Definition
Competition forces producers to use the best technology and resources available to minimize costs
Term
Allocative Efficiency
Definition

Correct quantity of goods are produced relative to other goods and services because the correct amount of resources are allocated for this optimum production. Optimal allocation occurs when MB=MC, where supply curves show marginal costs and demand curves show marginal benefits. Producing the optimal quantity of goods maximizes the area of the total surplus.

 

[image]

Term
Efficiency Losses
Definition
Reductions of combined consumer and producer surpluses that results from both underproduction and overproduction. Underproduction efficiency losses diminishes total surplus as resources go toward production of another good with less utility. Overproduction efficiency losses also reduce total surplus as production of such a large quantity has a high opportunity cost. Also, the minimum acceptable price exceeds the consumers' maximum willingness to pay.
Term
Deadweight Loss
Definition
The cost to society created by market inefficiency (namely from allocative inefficiency).
Term
Private Goods
Definition
Goods offered for sale in stores, shops, and the Internet that are produced by firms in the market. Characterized by rivalry (when one person buys and consumes a product, it is not available for another person to buy and consume) and excludability (sellers can prevent people who do not pay from receiving the product's benefits).
Term
Public Goods
Definition
Goods provided by the government and offered for free to its citizens. Characterized by nonrivalry (one person's consumption of the good does not preclude another's consumption) and nonexcludability (there is no effective way of excluding individuals from the benefit of the good once it comes into existence).
Term
Free-Rider Problem
Definition
Problem created when producers provide a public good and everyone including nonpayers can obtain its benefit; as such, the willingness to pay is not expressed in the market because people will not voluntarily pay for an item that they could get for free. This issue causes low demand which prevents profit-seeking businesses from producing public goods and forces the government to provide public goods as they can pay for them via taxation. To determine the amount of public goods to produce, government uses a willingness to pay schedule that measures what consumers are willing to pay for each additional unit of the good. Ideal quantity is still MB=MC.
Term
Cost-Benefit Analysis
Definition
Assessment of the costs and benefits associated with production of a public good that is ues to determine how much of the good should be provided and to what extent. The costs include resources diverted from private to the public sector as well as the private goods that will not be produced. The benefits are the extra satisfaction from the output of more public goods.
Term
Marginal-Cost-Marginal-Benefit Rule
Definition
Shows which option provides the maximum excess of total benefits over total costs (maximum net benefits) by selecting the plan closest to the theoretical optimum MB=MC. In some instances, choices can be too modest where MB greatly exceeds MC, while in others choices can overallocate resources such that MC greatly exceeds MB.
Term
Quasi-Public Goods
Definition
Goods provided by the government that could be priced and provided by private firms but are not because the market would underproduce them since the benefits of these goods flow beyond the individual buyers. Include education, streets, libraries, and museums. To combat the low demand, government levies taxes on the citizenry to lower the demand for private goods.
Term
Externality
Definition
Occurs when some of the costs or benefits of a good are passed onto or "spill over to" someone other than the immediate buyer or seller (a third party external to the market transaction).
Term
Negative Externality
Definition

Causes supply-side market failures because producers do not take into account the costs imposed on others, causing the supply curve to shift to the right and resulting in overproduction of the good. New supply curve understates the total cost, whereas original supply curve reflects all costs. The unaccounted costs are transferred to society, permitting the firm to produce more goods at a lower price. Ultimately, society experiences a net loss (expressed as the area between optimum quantity and equilibrium quantity).

 

[image]

Term
Positive Externality
Definition

Causes demand-side market failures because demand curves fail to include willingness to pay of third parties that receive external benefits, causing in a shift of the demand curve to the right that results in underproduction. The new demand curve does not include external benefits as the original demand curve does. The equilibrium quantity is greatly below the optimum quantity, robbing society of the net benefits associated with ideal production quantities. MB actually exceeds MC for all units between Qo and Qe, yet they are not produced. Efficiency loss is represented by the triangle.

 

[image]

Term
Direct Controls
Definition
Legislation passed by Congress that forces offending firms to incur the actual costs of production, reducing overallocation and returning the good to its optimum output. Remedy for negative externalities.
Term
Specific Taxes
Definition
Government levies taxes specifically on the good that raises the marginal cost of production, thereby eliminating overallocation and overproduction. Remedy for negative externalities.
Term
Subsidy to Buyer
Definition
Government-issued discount that encourages buyers to purchase a particular good which shifts the demand curve upward where it should be. Remedy for positive externalities.
Term
Subsidy to Producer
Definition
Payment from the government to a firm that decreases the producer's costs and shifts the supply curve rightward to move from Qe to Qo. Remedy for positive externalities.
Term
Government Provision
Definition
Government provides the product free to everyone when positive externalities are extremely large and detrimental to society's net benefits.
Term
Coase Theorem
Definition
States that under the right conditions, private firms and individuals can negotiate own solutions to the externalities through private bargaining, effectively avoiding government intervention.
Term
Optimal Reduction of an Externality
Definition
Occurs where society's marginal cost and marginal benefit of reducing that externality are the same. Downsloping marginal benefit curve reflects the law of diminishing utility and the upsloping marginal cost curve reflects the law of diminishing returns. Reduction of externalities curve is not stagnant; it changes as technology improves or scientific advances are made.
Term
"Government Failure"
Definition
Describes the economically inefficient outcomes caused by short-comings in the public sector.