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econ_review - Chapter 1 Scarcity A situation in which...

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Chapter 1 Scarcity : A situation in which unlimited wants exceed the limited resources available to fulfill those wants Economics : The study of the choices people make to attain their goals, given their scarce resources; Economics Model : A simplified version of reality used to analyze real-world economic situations Market: A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade Marginal analysis : Analysis that involves comparing marginal benefits and marginal costs Continue any activity up to the point where the marginal benefit equals the marginal cost, MB=MC Example: Apple’s marginal benefit is the additional revenue it receives from selling more iphones and the marginal cost is the additional cost it spends to make them (workers/supplies) Trade-off: The idea that because of scarcity, producing more of one good or service means producing less of another good or service Opportunity cost : The highest-valued alternative that must be given up to engage in an activity Centrally planned economy : As economy in which the government decides how economic resources will be allocated Have not been successful, i.e Soviet Union, standard of living in this economy tends to be low Market economy : An economy in which the decision of households and firms interacting in markets allocate economic resources Firms must produce goods and services that meet the wants of the consumers, i.e USA Mixed economy : An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources, some argue this is USA now Productive efficiency : A situation in which a good or service is produced at the lowest possible cost Achieved when competition among firms in markets forces the firms to produce goods and services at the lower cost
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Allocative efficiency : A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it Achieved when the combination of competition among firms and voluntary exchange between firms and consumers results in firms producing the mix of goods and services that consumers prefer most. Voluntary exchange : A situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction Governments sometimes interfere and reduce efficiency Economic variable : Something measurable that can have different values, such as wages of software programmers A hypothesis in an economic model is a statement that may be either correct or incorrect about an economic variable They change over time which makes it difficult to predict Positive analysis : Analysis concerned with what is, this is what economics is about,
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