Term
|
Definition
| the study of how people, institutions, and society make choices under conditions of scarcity |
|
|
Term
| The economic way of thinking takes the following into consideration |
|
Definition
nScarcity and Choice
nPurposeful Behavior
nMarginal Analysis: Benefits and Costs |
|
|
Term
|
Definition
| The alternative given up for the choice made |
|
|
Term
|
Definition
| the pleasure, happiness, or satisfaction obtained from consuming a good or service. |
|
|
Term
|
Definition
| the comparison of “additional” benefits to the “additional” costs |
|
|
Term
| Individuals make rational decisions such that the marginal benefit |
|
Definition
| exceeds (or equals) the marginal cost. |
|
|
Term
|
Definition
| evolves from a hypothesis that accumulates favorable results after continued testing against the facts |
|
|
Term
| Economic laws and principles |
|
Definition
| theories about economic behavior or the economy that enable prediction of the probable effects of certain actions |
|
|
Term
|
Definition
| simplified representation of how something works using a combination of laws or principles |
|
|
Term
|
Definition
focuses on a specific economic unit,
nAn individual household, firm, or industry |
|
|
Term
|
Definition
| looks at the economy as a whole or its major components of the economy |
|
|
Term
|
Definition
Theoretical economics; what is
nDescription of the way things are
nFocus on facts and cause-and-effect relationships |
|
|
Term
| universal ecnoomic problem |
|
Definition
| limited income; unlimited wants |
|
|
Term
|
Definition
policy economics; what ought to be
nIncorporates values
nFocuses on desirability of actions |
|
|
Term
| budget line or budget constraint |
|
Definition
| what combinations of two products can you afford with a specific income, given the products’ prices |
|
|
Term
|
Definition
land,
labor,
capital and
entrepreneurial ability |
|
|
Term
| Production Possibilities Curve |
|
Definition
| Defines the relationship between the amounts of different goods that can be produced in a fully employed society (all resources used) |
|
|
Term
Production Possibilities Model
Assumptions |
|
Definition
nFixed amount resources
nFixed technology
nOnly two goods are produced
nFull employment of all resources |
|
|
Term
| What will cause a shift of the PPC outward |
|
Definition
nThere is an increase in resource supplies
nAdvances in technology arise |
|
|
Term
|
Definition
economic system;socialism/communism;
nGovernment owns most property resources
nA central planning board determines production goals and how resources will be allocated.
|
|
|
Term
|
Definition
free enterprise; economic system;Property resources are privately owned ;
nParticipants act in their own self-interest resulting in competition among independent buyers and sellers of each product and resource. |
|
|
Term
|
Definition
| individuals and firms own and control land, capital, and other property |
|
|
Term
|
Definition
| freedom of firms to obtain economic resources, to use those resources to produce products of the firms’ own choosing, and to sell their products in markets of their choice |
|
|
Term
|
Definition
| independent buyers and sellers vying with one another, and the freedom of buyers and sellers to have a market |
|
|
Term
|
Definition
| an institution or mechanism that brings buyers and sellers together |
|
|
Term
| Technology and capital goods |
|
Definition
| promote efficiency and the ability to produce more goods and services |
|
|
Term
|
Definition
| the use of resources of an individual, region, or nation to produce one or a few goods and services rather than the entire range of products |
|
|
Term
|
Definition
| determines what goods and services that will be produced with the economy’s scarce resources |
|
|
Term
|
Definition
| The goods and services created at a continuing profit will be produced. Those producing at a continuing loss will not |
|
|
Term
| How Will They Be Produced |
|
Definition
| In the most efficient, cost effective manner |
|
|
Term
|
Definition
nConsumers’ ability and willingness to pay the price charged
nAmount of income that consumers have (budget constraint), compared with prices, and preferences, determines what is purchased. |
|
|
Term
| How to accommodate Change? |
|
Definition
nMarkets are dynamic - what’s hot today is not tomorrow
nIncreased demand for a product leads to higher prices; less demand results in lower prices
nProfits let more firms enter market; losses means companies close down |
|
|
Term
|
Definition
ntechnological improvements
ncapital accumulation |
|
|
Term
|
Definition
Describes how goods/services and income flows in a Market System
Two major components:
n Resource Market
n Product Market
|
|
|
Term
|
Definition
| shows the various amounts of a product that consumers are able and willing to buy at each of a series of possible prices during a specific period |
|
|
Term
|
Definition
the sum of all the individual demands
|
|
|
Term
|
Definition
| states that, all else equal, as price falls, the quantity demanded rises, and as price increases, quantity demanded declines |
|
|
Term
Other things equal, as price falls quantity demanded rises.
Why? |
|
Definition
nDiminishing marginal utility - less satisfaction
n Income effect - increased purchasing power from lower price
n Substitution effect - as price increases, willing to buy other goods instead |
|
|
Term
|
Definition
nTaste
nIncome
nNormal Goods
nInferior Goods
nPrice of Other Goods
nComplement
nSubstitute
nPopulation of Potential Buyers
nExpected Price |
|
|
Term
|
Definition
| one that can be used in place of another good |
|
|
Term
|
Definition
| one that is used together with another good |
|
|
Term
|
Definition
| the amount of a product that producers will make available for sale at each of a series of possible prices during a specific period |
|
|
Term
|
Definition
| states that, all else equal, as price rises, the quantity supplied rises, and vice versa |
|
|
Term
The Determinants of Supply |
|
Definition
nPrice of Inputs
nTechnology
nPrice of Other Potential Output
nNumber of Sellers
nExpected Future Price |
|
|
Term
|
Definition
Too many for sale, price is too high |
|
|
Term
|
Definition
Too few for sale, price is too low |
|
|
Term
|
Definition
| market-clearing price, is the price at which the intentions of buyers and sellers match |
|
|
Term
|
Definition
| the quantity demanded and quantity supplied that occurs at the equilibrium price in a competitive market |
|
|
Term
|
Definition
legal maximum price a seller may charge for a product - usually below the equilibrium price
, it also creates a shortage of the good |
|
|
Term
|
Definition
minimum fixed price that sellers can charge - usually above the equilibrium price
surplus of the good is created |
|
|
Term
| Government’s Economic Role |
|
Definition
nProvide the legal structure
nSet the laws we live by
nMaintain competition
nMonopoly and antitrust laws
nRedistribute income
nTransfer payments
nMarket intervention
nTaxation |
|
|
Term
|
Definition
| those that people individually buy and consume and that private firms can profitably provide because they keep people who do not pay from receiving the benefits |
|
|
Term
|
Definition
| those that everyone can simultaneously consume and from which no one can be excluded, even if they do not pay |
|
|
Term
|
Definition
| when some of the costs or the benefits of a good are passed on to or “spill over to” someone other than the immediate buyer or seller |
|
|
Term
|
Definition
spillover costs, are production or consumption costs that affect a third party without compensation; supply
nThe equilibrium output is greater than the optimal output; resources are overallocated to the production of this commodity. |
|
|
Term
|
Definition
Positive externalities are spillover production or consumption benefits conferred on third parties without payment from them; demand
ndemand is too high and the market demand curve lies to the left of the full-benefits demand curve.
The equilibrium output is less than the optimal output; the market fails to produce enough of the good |
|
|
Term
| For negative externalities |
|
Definition
| direct controls (pass legislation limiting an activity) and specific taxes can be used to counter the spillover costs |
|
|
Term
| free-rider problem for Public Goods |
|
Definition
| once a producer has provided a public good, everyone including nonpayers can obtain the benefit |
|
|
Term
| For positive externalities, government can provide |
|
Definition
| subsidies to buyers or sellers |
|
|
Term
|
Definition
| consumers are highly responsive to price changes; more horizontal |
|
|
Term
|
Definition
| consumers’ responsiveness is only slight, or in rare cases non-existent; more vertical |
|
|
Term
|
Definition
| the condition of demand when the percentage change in quantity is larger than the percentage change in price - Ed > 1 |
|
|
Term
|
Definition
| the condition of demand when the percentage change in quantity is smaller than the percentage change in price - Ed < 1 |
|
|
Term
|
Definition
| the condition of demand when the percentage change in quantity is equal to the percentage change in price - Ed = 1 |
|
|
Term
|
Definition
nP and TR change in same direction |
|
|
Term
|
Definition
nP and TR change in opposite direction |
|
|
Term
| Price elasticity of demand is greater |
|
Definition
nthe larger the number of substitute goods that are available
nthe higher the price of a product relative to one’s income
nthe more that a good is considered to be a “luxury” rather than a “necessity”
nthe longer the time period under consideration |
|
|
Term
| Price Elasticity of Supply; short run |
|
Definition
nPeriod is too short to change plant capacity but long enough to use fixed plant more or less intensively; supply of a product is more elastic than the market period. |
|
|
Term
| Price Elasticity of Supply; long run |
|
Definition
| Period is long enough for firms to adjust their plant sizes and for new firms to enter (or existing firms to exit) the industry and supply of a product is more elastic |
|
|
Term
| Price Elasticity of Demand |
|
Definition
| measures how much more (or less) will consumers buy |
|
|
Term
|
Definition
| will have an income elasticity of demand that is positive. More of them are demanded as income increases. Ei > 0 |
|
|
Term
|
Definition
| have a negative income elasticity of demand. As income rises, the demand for them falls. Ei < 0 |
|
|
Term
nThree characteristics;
nSatisfaction obtained from consumption
|
|
Definition
nDiffers from usefulness
nSubjective
nDifficult to quantify
|
|
|
Term
|
Definition
| Total satisfaction from a specific quantity |
|
|
Term
|
Definition
| Extra satisfaction from an additional unit |
|
|
Term
nLaw of diminishing marginal utility |
|
Definition
nExplains downward sloping demand |
|
|
Term
|
Definition
| Money income is allocated so that the last dollar spent on each product yields the same extra or marginal utility |
|
|
Term
|
Definition
nAllocate income
nLast dollar spent on each good yields same marginal utility
nMarginal utility per dollar determines how much consumers buy |
|
|
Term
|
Definition
| the payment it must make to attract the resources it needs away from alternative production opportunities. opportunity cost |
|
|
Term
|
Definition
| monetary payments a firm must make to an outsider to obtain a resource. fuel, transportation services, labor services |
|
|
Term
|
Definition
| the monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market |
|
|
Term
|
Definition
| payment that must be made by a firm to obtain and retain entrepreneurial ability. It is an implicit cost |
|
|
Term
|
Definition
| explicit + implicit costs |
|
|
Term
|
Definition
| total output of a good or service produced by a firm |
|
|
Term
|
Definition
| the extra output or added product associated with adding a unit of a variable resource to the production process |
|
|
Term
|
Definition
| is output per unit of input |
|
|
Term
| law of diminishing returns states |
|
Definition
nas successive units of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decline.
assumes that technology is fixed and thus the way you produce does not change |
|
|
Term
| When a firm adds more labor to the production process with a fixed amount of capital equipment |
|
Definition
nthe marginal product of labor first increases and eventually declines.
Total product eventually will rise at a diminishing rate, then reach a maximum, and finally decline |
|
|
Term
|
Definition
| do not change in total when the firm changes its output |
|
|
Term
|
Definition
| increase or decrease with a firm’s output |
|
|
Term
|
Definition
| the sum of fixed cost and variable cost |
|
|
Term
|
Definition
| firm’s total fixed cost divided by output |
|
|
Term
| Average variable cost (AVC) |
|
Definition
a firm’s total variable cost divided by output
Average fixed cost decline as output increases. This is because the total fixed cost is spread over a larger and larger output |
|
|
Term
|
Definition
firm’s total cost divided by output
As added variable resources increase output, average variable cost declines initially, reaches a minimum, and then increases again. As a result, AVC is U-shaped |
|
|
Term
| When the amount added to total cost is less than the current average total cost |
|
Definition
| ATC will fall, and vice versa |
|
|
Term
| As long as MC lies below ATC |
|
Definition
|
|
Term
| whenever MC lies above ATC |
|
Definition
|
|
