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Chapters 1-5
Microeconomics
21
Economics
Undergraduate 2
09/20/2009

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Term
Definition of Economics
Definition
The study of how scarce resources and factors of production are allocated to satisfy unlimited wants.
Term
4 Factors of Production
Definition
1. Land.
2. Labor.
3. Capital.
4. Entreprenurial Spirit.
Term
Opportunity Costs
Definition
How much you have to give up of your next best alternative to get more of something.
Term
Government Incentives
Definition
Taxes-Make you buy less because you don't want to pay more.
Subsidies-you get more because you want the government to give you money.(farm subsidies)
Term
Adam Smith
Definition
Scottish enlightenment--"Wealth of Nations" 1776.
2 ideas: division of labor and invisible hand of the market.
Term
Production Possibilities Frontier
Definition
PPF has a negative slope, implying tradeoffs: to produce more of A, you have to move factors of production and make less of B.
Term
Absolute Trade Advantage
Definition
You can produce more with the same inputs than another entity.
Term
Law of Comparitive Advantage
Definition
By specializing in the good for which a country has the comparative advantage (lower opp. costs), countries can engage in mutually beneficial trade.
Term
Terms of trade for mutual benefit:
Definition
Price must be between opporutunity costs.
If parties have the same opp costs, there can't be benefit from trade.
Term
Why are price and quantity demanded in an inverse relationship?
Definition
Income effect- the more expensive a good is, the less income you have to buy it with.
Substitution- shifting between two products depending on price.
Term
Law of diminishing marginal utility
Definition
Utility goes up by smaller amounts with consumption of each extra unit.
Term
Marginal Utility
Definition
Change in utility/change in quantity consumed.
As you consume additional units, you gain additional utility.
Term
Compliments
Definition
Goods that work together.
(Cars and Tires)
Term
5 causes for shifts in demand
Definition
Income (Normal vs Inferior goods).
Related goods (sustitiutes).
Tastes.
Expectations.
# of Buyers.
Term
4 causes of shifts in supply
Definition
Input Price.
Technology.
Expectations.
# of Suppliers.
Term
Equillibrium Price
Definition
Where quantity demanded equals quantity supplied.
Where the supply and demand curves intersect.
Term
Surplus
Definition
Too much supply, not enough demand.
Price will be bid down to sell inventory.
Term
Shortage
Definition
Not enough supply, too much demand.
Price will go up and consumers that want the good most will buy it.
Term
Determinants of Elasticity
Definition
1. The more substitutes, the more elasticity.
2. The greater the portion of your income is spent, the more elastic.
3. The more time considered, the more elastic the product becomes.
4. The larger the market, the more elastic.
Term
Elasticity
Definition
Measure of responsiveness of q demanded or q supplied to one of its determinants.
Term
Price elasticity of demand
Definition
how much q demanded changes in response to change in price
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