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Vocab: First Three Chapters
The Nature of Economics, Scarcity and the World of Trade-Offs, Demand and Supply
108
Economics
Undergraduate 1
10/02/2010

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Term
Incentives
Definition
Rewards for engaging in a particular activity
Term
Resources
Definition
Things used by people to produce goods and services
Term
Wants
Definition
what people would buy were their incomes unlimited
Term
Microeconomics
Definition
the study of decision-making undertaken by individuals and by firms
Term
Macroeconomics
Definition
the study of an economy's behavior as a whole
Term
Aggregates
Definition
Total amounts or quantities
Term
Neuroeconomics
Definition
Field of study directed at determining how the human brain makes choices
Term
The Rational Assumption
Definition
The assumption that people do not intentionally make decisions that would leave them worse-offss
Term
Enlightened self-interest
Definition
Individuals, in their quests to become better-off, also achieve the betterment of those around them
Term
models or theories
Definition
Simplified representations of the real world used as the basis for predictions or expectations
Term
Assumptions
Definition
Define the array of circumstances in which our model is most likely to be applicable
Term
The Ceteris paribus Assumption
Definition
"All things being equal." The assumption that nothing changes except the factor or factors being studied
Term
empirical
Definition
relying on real-world data in evaluating a model
Term
Behavioral economics
Definition
An approach to the study of consumer behavior that emphasizes psychological limitations and complications that potentially interfere with rational decision-making
Term
Bounded Rationality
Definition
people are nearly, but not fully, rational, so they cannot examine every possible choice available to them
Term
Three unrealistic tendencies
Definition
Unbounded Selfishness- people interested only in their own satisfaction
Unbounded Willpower- their choices are always consistent with long-term goals
Unbounded Rationality- able to consider every relevant choice
Term
Rules of Thumb
Definition
Because every possible choice cannot be considered, an individual will tend to fall back on methods of making choices that are similar
Term
Positive Analysis
Definition
Refers to statements such as "if A, then B." A statement of "what is," not a statement of value judgment or subjective feelings. A value-free approach to inquiry
Term
Normative Economics
Definition
Analysis involving value judgments about economic policy; relates to whether things are good or bad. A statement of "what ought to be"
Term
Scarcity
Definition
A situation in which the ingredients for producing the things that people desire are insufficient to satisfy all wants at a zero price
Term
production
Definition
any activity that results in the conversion of resources into products that can be used in consumption
Term
Resources
Definition
"Factors of production"
Term
Land
Definition
The natural resources that are available from nature
Term
Labor
Definition
Productive contributions of people who work
Term
Physical capital
Definition
all manufactured resources used for production
Term
Human Capital
Definition
the accumulated training and education of workers
Term
Entrepreneurship
Definition
The component of human resources that performs the functions of raising capital, organizing, managing, and assembling other factors of production, making basic policy decisions, and taking risks
Term
Goods
Definition
All things from which individuals derive satisfaction or happiness
Term
Economic Goods
Definition
goods that are scarce- for which the quantity demanded exceeds the quantity supplied at a zero price
Term
Needs
Definition
From the economist's point of view, virtually undefinable
Term
Opportunity cost
Definition
The highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want
Term
Production Possibilities Curve
Definition
A curve representing all possible combinations of maximum outputs that could be produced assuming a fixed amount of productive resources of a given quantity
Term
Technology
Definition
Society's pool of applied knowledge concerning how goods and services can be produced
Term
Efficiency
Definition
The case in which a given level of inputs is used to produce the maximum output possible. Alternatively, the situation in which a given output is produced at a minimum cost.
Term
Inefficient point
Definition
Any point below the PPC, at which the use of resources is not generating the maximum possible output
Term
Law of Increasing Relative Cost
Definition
The fact that the opportunity coat of additional units of a good generally increases as society attempts to produce more of that good. This accounts for the bowed-out shape of the PPC.
Term
Consumption
Definition
The use of goods and services for personal satisfaction
Term
Specialization
Definition
The organization of economic activity so that what each person consumes is not identical to what that person produces. An individual may specialize, for example, in law or medicine. A nation may specialize in the production of coffee, computers, or digital cameras
Term
Comparative advantage
Definition
The ability to produce a good or service at a lower opportunity cost compared to other producers
Term
Absolute advantage
Definition
The ability to produce more units of a good or service using a given quantity of labor or resource inputs. Equivalently, the ability to produce the same quantity of a good or service using fewer units of labor or resource inputs
Term
Division of Labor
Definition
The segregation of resources into different specific tasks; for example, one automobile worker puts on bumpers, another doors, and so on
Term
Market
Definition
All of the arrangements that individuals have for exchanging with one another. Thus, for example, we can speak of the labor market, the automobile market, and the credit market
Term
Demand
Definition
A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being constant
Term
Law of Demand
Definition
The observation that there is a negative, or inverse, relationship between the price of any good or service and the quantity demanded, holding other factors constant
Term
Relative Price
Definition
The money price of one commodity divided by the money price of another commodity; the number of units of one commodity that must be sacrificed to purchase one unit of another commodity
Term
Money price
Definition
The price that we observe today, expressed in today's dollars; also called the absolute or nominal price
Term
Demand Curve
Definition
A graphical representation of the demand schedule; a negatively sloped line showing the inverse relationship between the price and the quantity demanded
Term
Market Demand
Definition
The demand of all consumers in the marketplace for a particular good or service. The summation at each price of the quantity demanded by each individual
Term
Ceteris Paribus assumption
Definition
Determinants of the relationship between price and quantity that are unchanged along a curve; changes in these factors cause the curve to shift
Term
Normal Goods
Definition
Goods for which demand rises as income rises. Most goods are normal goods.
Term
Inferior goods
Definition
Goods for which demand falls as income rises.
Term
Substitutes
Definition
Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change.
Term
Complements
Definition
Two goods are complements when a change in the price of one causes an opposite shift in the demand for the other
Term
Supply
Definition
A schedule showing the relationship between price and quantity supplied for a specific period of time, other things being equal.
Term
Law of Supply
Definition
The observation that the higher the price of a good, the more of that good sellers will make available over a specified time period, other things being equal
Term
Supply Curve
Definition
The graphical representation of the supply schedule; a line showing the supply schedule, which generally slopes upward, other things being equal
Term
Subsidy
Definition
A negative tax; a payment to a producer from the government, usually in the form of a cash grant per unit.
Term
Market clearing (equilibrium) price
Definition
The price that clears the market, at which quantity demanded equals quantity supplied; the price where the demand curve intersects the supply curve
Term
Equilibrium
Definition
The situation when quantity supplied equals quantity demanded at a particular price
Term
Shortage
Definition
A situation in which quantity demanded is greater than quantity suppled at a price below the market clearing rate
Term
Surplus
Definition
A situation in which quantity supplied is greater than quantity demanded at a price above the market clearing price
Term
Price System
Definition
An economic system in which relative prices are constantly changing to reflect changes in supply and demand for different commodities. The prices of these commodities are signals to everyone within the system as to what is relatively scarce and what is relatively abundant
Term
Voluntary exchange
Definition
An act of trading, done on an elective basis, in which both parties to the trade expect to be better off after the exchange.
Term
Terms of exchange
Definition
The conditions under which trading takes place. Usually, the terms of exchange are equal to the price at which a good is traded.
Term
Transaction costs
Definition
All of the costs associated with exchange, including the informational costs of finding out the price and quality, service record, and durability of a product, plus the cost of contracting and enforcing that contract
Term
Price controls
Definition
Govt-mandated minimum or maximum prices that may be charged for goods or services
Term
Price Ceiling
Definition
A legal maximum price that may be charged for a particular good or service
Term
Price floor
Definition
A legal minimum price that may be charged for a particular good or service
Term
Nonprice rationing devices
Definition
All methods used to ration scarce goods that are price-controlled. Whenever the price system is not allowed to work, nonprice rationing devices will evolve to ration the affected goods and services
Term
Black market
Definition
A market in which goods are traded at prices above their legal maximum prices or in which illegal goods are sold
Term
Rent control
Definition
Price ceiling on rents
Term
Minimum wage
Definition
A wage floor, legislated by government, setting the lowest hourly rate that firms may legally pay workers
Term
Import quota
Definition
A physical supply restriction on imports of a particular good, such as sugar. Foreign exporters are unable to sell in the US more than the quantity specified in the import quota
Term
Market failure
Definition
A situation in which the market economy leads to too few or too many resources going to a specific economic activity
Term
Externality
Definition
A consequence of an economic activity that spills over to affect third parties. Pollution is an example
Term
Third parties
Definition
Parties who are not directly involved in a given activity or transaction
Term
Property rights
Definition
The rights of an owner to use and to exchange property
Term
Effluent fee
Definition
A charge to a polluter that gives the right to discharge into the air or water a certain amount of pollution; also called a pollution tax
Term
Antitrust legislation
Definition
Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices
Term
Monopoly
Definition
A firm that can determine the market price of a good. In the extreme case, a monopoly is the only seller of a good or service
Term
Private goods
Definition
Goods that can be consumed by only one individual at a time. Subject to the principle of rival consumption
Term
Principle of rival consumption
Definition
The recognition that individuals are rivals in consuming private goods because one person's consumption reduces the amount available for others to consume
Term
Public goods
Definition
Goods for which the principle of rival consumption does not apply; they can be jointly consumed by many simultaneously at no additional cost and with no reduction in quality or quantity. Also, no one who fails to help pay for the good can be denied the benefit of the good.
Term
Free-rider problem
Definition
A problem that arises when individuals presume that others will pay for public goods so that, individually, they can escape paying for their portion without causing a reduction in production
Term
Government-sponsored good
Definition
A good that has been deemed socially desirable through the political process.
Term
Transfer payments
Definition
Money payments made by govts to individuals for which no services or goods are rendered in return
Term
Majority rule
Definition
A collective decision-making system in which group decisions are made on the basis of a 50%+ vote.
Term
Proportional rule
Definition
Decision-making system in which actions are based on the proportion of "votes" cast and are in proportion to them.
Term
Price Elasticity of Demand
Definition
The responsiveness of the quantity demanded of a commodity to changes in its price; defined as the percentage change in quantity demanded divided by the percentage change in price
Term
Unit elasticity of demand
Definition
A demand relationship in which the quantity demanded changes exactly in proportion to the change in price
Term
Inelastic demand
Definition
A demand relationship in which a given percentage change in price will result in a less than proportionate change in the quantity demanded
Term
Perfectly inelastic demand
Definition
A demand that exhibits zero responsiveness to price changes; no matter what the price is, the quantity demanded remains the same
Term
Perfectly elastic demand
Definition
A demand that has the characteristic that even the slightest increase in price will lead to zero quantity demanded
Term
Cross price elasticity of demand (E sub xy)
Definition
The percentage change in the demand for one good divided by the percentage change in the price of a related good
Term
Income elasticity of demand (E sub i)
Definition
The percentage change in demand for any good, holding its price constant, divided by the percentage change in income; the responsiveness of demand to changes in income, holding the good's relative price constant
Term
Price elasticity of supply (E_s)
Definition
The responsiveness of the quantity supplied of a commodity to a change in its price; the percentage change in quantity supplied divided by the percentage change in price.
Term
Perfectly elastic supply
Definition
A supply characterized by a reduction in quantity supplied to zero when there is the slightest decrease in price
Term
Perfectly inelastic supply
Definition
A supply for which quantity supplied remains constant, no matter what happens to price.
Term
Utility
Definition
The want-satisfying power of a good or service
Term
Utility analysis
Definition
The analysis of consumer decision making based on utility maximization
Term
Util
Definition
A representative unit by which utility is measured
Term
Marginal utility
Definition
The change in total utility due to a one-unit change in the quantity of a good or service consumed

Change in total utility / change in number of units consumed
Term
Diminishing marginal utility
Definition
The principle that as more of any good or service is consumed, its extra benefit declines. Increases in total utility from the consumption of a good or service become smaller and smaller as more is consumed during a given time period
Term
Consumer optimum
Definition
A choice of a set of goods and services that maximizes the level of satisfaction for each customer, subject to limited income
Term
Substitution effect
Definition
The tendency of people to substitute cheaper commodities for more expensive commodities
Term
Principle of Substitution
Definition
The principle that consumers shift away from goods and services that become priced relatively higher in favor of goods and services that are now priced relatively lower
Term
Purchasing power
Definition
The value of money for buying goods and services. If your money income stays the same but the price of one good goes up, your effective purchasing power falls, and vice versa
Term
real-income effect
Definition
The change in people's purchasing power that occurs when, other things being constant, the price of one good that they purchase changes. When price goes up, real income falls, and vice versa
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