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Definition
| society has limited resources and, therefore, cannot produce all goods and services people wish to have |
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| study of how society manages its scarce resources |
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1) people face trade-offs
2) the cost of something is what you give up to get it
3) rational people think at the margin
4) people respond to incentives
5) trade can make everyone better off
6) markets are usually a good way to organize economic activity
7) governments can sometimes improve market outcomes |
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| society getting maximum benefits from its scarce resources |
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| benefits distributed uniformly among society's members |
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| what you give up to get an item |
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| small incremental adjustments to an existing plan of action |
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| decisions of millions of firms and households when prices and self-interest guide their decisions |
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| government's role in economy |
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| promote efficiency or promote equality |
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| a situation in which the market on its own fails to produce an efficient allocation of resources |
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| the impact of one person's actions on the well-being of a bystander |
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| the ability of a single person (or small group) to unduly influence market prices (monopoly-like) |
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| a visual model of the economy that shows how dollars flow through markets among households and firms |
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| labor, land, capital, entrepreneurship |
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| markets for goods and services |
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| households are the buyers and firms are the sellers |
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| markets for the factors of production |
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Definition
| households and the sellers and firms are the buyers |
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Term
| production possibilities frontier |
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| graph that shows the various combinations of output that the economy can possibly produce given the factors of production and the available production technology that firms use to turn these factors into output |
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Definition
economy is getting all that it can from scarce resources available
opposite = inefficient outcome |
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| the study of how households and firms make decisions and how they interact in specific markets |
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| the study of economy-wide phenomena |
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| make a claim about how the world is; descriptive |
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| make a claim about how the world ought to be; prescriptive |
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Term
| economic report of the president |
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Definition
| discusses recent developments in the economy and presents the council's analysis of current policy issues |
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| all material things that possess economic value at one point in tim |
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1) single proprietor
2) partnership
3) corporation (people own stock) |
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| when the producer requires a smaller amount of inputs to produce a good |
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| the ability to produce a good at a lower opportunity cost than another producer |
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| what we give up to get an item |
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-allows people to specialize
- for both parties to gain, the price at which they trade must lie between the 2 opportunity costs |
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Term
| perfectly competitive market |
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Definition
1) large number of sellers each acting independently
2) producing homogeneous product
3) no one firm has significant control over price/cost
4) freedom of entry and exit
5) full utilization of resources |
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Term
| the law of increasing costs |
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Definition
| as you produce more of a product the cost to produce it goes up |
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| group of buyers and sellers of a particular good or serivce |
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| market in which there are so many buyers and sellers that each has a negligible impact on the market price |
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| the amount of a good that buyers are willing and able to purchase |
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Definition
| other things equal, when the price of a good rises, the quantity demanded falls and when the price of a good falls, the quantity demanded rises |
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| table that shows the relationship between the price of a good and the quantity demanded, holding all other factors constant |
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| downward-sloping line/curve relating price and quantity demanded |
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| the sum of all the individual demands for a particular good or service |
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Definition
| any change that increases the quantity demanded at every price shifts the demand curve to the right |
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Definition
| any change that decreases the quantity demanded at every price shifts the demand curve to the left |
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| demand falls when income falls |
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Definition
| demand rises when income falls |
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| goods which when the fall in price of one good reduces the demand for the other |
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| goods which when the fall in price of one good raises the demand for the other |
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| the amount that sellers are willing and able to sell |
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Definition
| other things equal, when the price of a good rises, the quantity suppled of the good also rises and when the price of a good falls, the quantity supplied of the good also falls |
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Definition
| table that shows the relationship between the price of a good and the quantity supplied, holding constant all other factors |
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Definition
| curve relating price and quantity supplied |
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Definition
| any change that raises quantity supplied at every price shifts the supply curve to the right |
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Definition
| any change that reduces the quantity supplied at every prices shifts the supply curve to the left |
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Definition
| one point at which the supply and demand curves intersect |
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Definition
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| quantity at equilibrium (quantity demanded = quantity supplied) |
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Definition
| excess supply; suppliers are unable to sell all they want to at the going price |
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Definition
| excess demand; demanders are unable to buy all they want at the going price |
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Definition
| the price of any good adjusts to bring the quantity supplied and the quantity demanded into equilibrium |
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Definition
| signals that guide allocation of resources |
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Definition
1) buyers (demanders)
2) sellers (suppliers)
3) prices
4) output
5) homogeneous product
6) one point in time |
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Definition
- private property
- households acting in own interests
- firms trying to maximize profits
- no individual or entity has taken control of price or output |
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Definition
1) taste/preference
2) income
3) price of related goods (supplements & complements)
4) price expectations
5) number of buyers |
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Definition
1) price of inputs
2) price expectations
3) technology (doing more with less)
4) number of sellers
5) price of related goods (supplements & complements) |
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Definition
| measures how much consumers respond to changes in variables |
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Term
| price elasticity of demand |
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Definition
- measures how much the quantity demanded responds to a change in price
- %ΔQd / %ΔP |
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Term
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Definition
| if quantity demanded responds substantially changes in price |
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Definition
| if the quantity demanded responds only slightly to changes in price |
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Term
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Definition
| (Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/[(P2+P1)/2] |
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Term
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Definition
| demand curve is vertical; quantity demanded stays the same when price changes |
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Definition
| demand curve becomes horizontal; small changes in price lead to huge changes in quantity demanded |
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Term
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Definition
amount paid by buyers and received by sellers of a good
TR = Q x P |
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Term
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Definition
- inelastic demand: price and total revenue move in same direction
-elastic demand: price and total revenue move in opposite directions
-unit elastic: total revenue remains constant when price changes |
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Term
| income elasticity of demand |
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Definition
- measures how quantity demanded changes as consumer income changes
- %ΔQd / %ΔP
- normal goods positive
- inferior goods negative |
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Term
| cross-price elasticity of demand |
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Definition
- measures how the quantity demanded of one good responds to a change in the price of another good
- positive for substitutes
- negative for complements |
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Term
| price elasticity of supply |
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Definition
| measures how much the quantity supplied responds to the changes in price |
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Term
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Definition
| if quantity supplied responds substantially to changes in price |
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Term
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Definition
| if the quantity supplied responds only slightly to changes in price |
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Term
| determinants of elasticity of demand |
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Definition
1) necessity (inelastic) vs. luxury (elastic)
2) availability of close substitutes (more substitutes = more elastic)
3) time to adjust (more time = more elastic)
4) how narrowly defined the market is (more narrow = more elastic)
5) percentage of your budge commodity takes up (larger percentage = more elastic) |
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| Determinants of Elasticity of Supply |
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Definition
- resources- short run
- time- long run |
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Definition
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Term
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Definition
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Term
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Definition
| price ceiling above equilibrium or price floor below equilibrium |
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Definition
price floor above equilibrium-- surplus
or
price ceiling below equilibrium-- shortage |
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Definition
| how the burden of a tax is distributed among the various people who make up the economy |
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Term
| indifference curve analysis assumptions |
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Definition
1) ordinal utility
2) non-satiation (better off with more than less)
3) consumers are rational (try to max satisfaction)
4) diminishing marginal rate of substitution |
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Term
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Definition
| locus set of points where a consumer would be indifferent to certain commodities |
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Term
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Definition
| rate at which the market is willing to trade one good for another |
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Term
| marginal rate of substitution |
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Definition
| rate at which the consumer is willing to trade one good for the other |
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Term
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Definition
| relative price = marginal rate of substitution |
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