Econ Midterm 1 (Phil Graves) Flashcards

Terms Definitions
economics
the study of choices we make among our many wants and desires given our limited resources
resources
inputs used to produce goods and services
scarcity
exists when human wants (materialand nonmaterial) exceed available resources
the economic problem
scarcity forces us to choose, and choices are costly because we must give up other opportunities that we value
rational behavior
people do the best they can, based on their values and information, under current and anticipated future circumstances
hypothesis
a testable proposition
empirical analysis
the use of data to test a hypothesis
theory
statement or proposition used to explain and predict behavior in the real world
ceteris paribus
holding all other things constant
microeconomics
the study of household and firm behavior and how they interact in the marketplace
macroeconomics
the study of the whole economy, including the topics of inflation, unemployment, and economic growth
aggregate
the total amount - such as the aggregate level of output
correlation
when two events occur together
causation
when one event brings about another event
fallacy of composition
the incorrect view that what is true for the individual is always true for the group
positive statement
an objective, testable statement that describes what happens and why it happens
normative statement
a subjective, contestable statement that attempts to describe what should be done
negative relationship
when two variables change in opposite directions
positive relationship
when two variables change in the same direction
labor
the physical and human effort used in the production of goods and services
land
the natural resources used in the production of goods and services
capital
the equiptment and structures used to produce goods and services
human capital
the productive knowledge and skill people receive from education, on the job training, health, and other factors that increase productivity
entrepreneurship
the process of combining labor, land , and capital to produce goods and services
economic goods
scarce goods created from scarce resources - goods that are desirable but limited in supply
Bads
Items that we do not desire or want, where less is preffered to more, like terrorism or smog
Opportunity Cost
the value of the best forgone alternative that was not chosen
Marginal Thinking
focusing on the additional, or marginal choices; marginal choices involve the effects of the current situation, the small or large incremental changes to a plan of action
Rule of Rational Choice
individuals on the additional, or activity if the expected marginal benefits are greater than the expected marginal costs
Net Benefit
the difference between the expected marginal benefits and the expected marginal costs
Positive Incentive
an incentive that either reduces costs or increases benefits, resulting in an increase in an activity or behavior
Negative Incentive
an incentive that either increases costs or reduces benefits, resulting in a decrease in the activity or behavior
Specializing
concentrating in the production of one, or a few goods
Comparative Advantage
occurs when a person or country can produce a good or service at a lower opportunity cost than others
Efficiency
When an economy gets the most out of its scarce resources
Price Controls
government mandated minimum or maximum prices
Market Failure
when the economy fails to allocate resources efficiently on its own
Consumer Sovereignty
Consumers vote with their dollars in a market economy; this accounts for what is produced
Command Economy
economy in which the government uses central planning to coordinate most economic activities
Market Economy
an economy that allocates goods and services through the private decisions of consumers, input suppliers, and firms
Mixed Economy
an economy where the government and the private sectors determine the allocation of resources
Labor Intensive
production that uses a large amount of labor
Capital Intensive
production that uses a large amount of capital
Product Markets
markets where households are buyers and firms are sellers of goods and services
Factor (or Input) Markets
markets where households sell the use of their inputs (capital, land, labor, and entrepreneurship) to firms
Simple Circular Flow Model
an illustration of the continuous flow of goods, services, inputs, and payments between firms and households
production possibilitiesn curve
the potential total output combination of any two goods for an economy
increasing opportunity cost
the opportunity cost of producing additional units of a good rises as society produces more of that good
market
the process of buyers and sellers exchanging goods and services
competative market
s market where the many buyers and sellers have little market power- each buyers or sellers effect on the economy is negligible
individual demand schedule
a schedule that shows the relationship between price and quantity demanded
Individual Demand Curve
a graphical representation that shows the inverse relationship between price and quantity demanded
Market Demand Curve
The horizontal summation of individual demand curves
Law of Demand
the quantity of a good or service demanded varies inversely (negatively) with its price
Change in quantity demanded
a change in a good's own price leads to a change in quantity demanded, a move ALONG a given demand curve
Change in Demand
the prices of related goods, income, number of buyers, tastes, and expectations (PYNTE) can change the demand for a good; that is, a ching in one of these factors shifts the ENTIRE demand curve
Substitutes
An increase (decrease) in the price of one good causes the demand curve for another good to shift to the right or left
Complements
an increase or decrease in the price of one good shifts the demand curve for another good to the right or left
Normal Good
If income increases, the demand for a good increases; if income drops, the demand for the good decreases
Inferior Good
if income increases, the demand for a good decreases; if income decreases, the demand for a good increases
Law of Supply
the higher (lower) the price of the good, the greater (smaller) the quantity supplied
Market Supply Curve
a graphical representation of the amount of goods and services that suppliers are willing and able to supply at various prices
Market Equilibrium
the point at which the market supply and market demand curves intersect
Equilibrium Price
the price at the intersection of the market supply and demand curves; at this price, the quantity demanded equals the quantity supplied
Equilibrium Quantity
the quantity at the intersection of the market supply and demand curves; at the equilibrium quantity, the quantity demanded equals the quantity supplied
Surplus
a situation where quantity supplied exceeds quantity demanded
shortage
a situation where quantity demanded exceeds quantity supplied
Price Ceiling
a legally established maximum price
Price Floor
a legally established minimum price
Price Elasticity of Demand
the measure of the responsiveness of quantity demanded to a change in price
Price Elasticity of Demand
the measure of the responsiveness of quantity demanded to a change in pricePrice Elasticity=Percentage change in quantity demenaded/ percentage change in price
Elastic
when the quantity demanded is greater than the percentage in price
Inelastic
when the quantity demanded is less than the percentage change in price
Consumer Surplus
the monetary difference between the amount a consumer is willing to pay for an additional unit of a good and what the consumer actually pays- the market price. Consumer surplus for the whole market is the sum of all the individual consumer surpluses fo those consumers who have purchased the good
Marginal willingness to pay
the general fact that if the consumer is a buyer of SEVERAL units of a good, the earlier units will have greater marginal value and therefore create more consumer surplus. This falls as greater quantities are consumed in any period
Increase (increase) in supply and a lower (higher) price
increase (decrease) consumer surplus for each unit you were already consumer.
Producer Surplus
the difference between what a producer is paid for a good and the cost of producing one more unit of that good. Measure of how much sellers gain from trading in the market
Marginal Cost
the cost of producing one more unit of a good
Total Welfare Gains
the sum of consumer and producer surpluses
Deadweight Loss
net loss of total surplus that results from an action that alters a market equiliubrium
Market Efficiency
when we have maximized the sum of consumer and producer surplus
Welfare Effects
the gains and losses associated with government intervention in markets
Tax Revenue Collected
measure by multiplying the amount of the tax times the quantity of the good sold after the tax is imposed T x Q2
Problem with taxes
Distort market incentives- price to buyers is higher than before tax, so they consume less. price to sellers is lower than before the tax so they produce less
Supply and/or demand curves more elastic (taxes)
the deadweight loss becomes larger because a given tax reduces the quantity exchanged by a greater amount
externality
a benefit or cost from consumption or production that spills over onto those who are not consuming or producing the good
Positive Externality
occurs when benefits spill over to an outside party who is not involved in producing/consuming the goodUNDERPRODUCED
negative externality
occurs when costs spill over to an outside party who is not involved in producing or consuming the goodOVERPRODUCED
Public Good
a good that is nonrivalrous in consumption and nonexcludable
Private Good
a good with rivalrous consumption and excludability
Tragedy of the Commons
when a good is not owned by anyone, individuals feel little incentive to conserve or use the resource efficiently
Common resource
a rival good that is nonexcludable; that is nonpayers cannot easily be excluded from consuming the good and when one unit is consumed by one person, it means that it cannot be consumed by another
Asymmetric Information
occurs when the available information is initially distributed in favor of one party relative to another exchange-sellers are at an information advantage over potential buyers when selling a car because they have more information about the product than the potential buyer
Adverse selection
a situation where an informed party benefits in an exchange by taking advantage of knowing more than another party
Evidence of Quality
Reputation and standardization
Signals
example would be a warranty
Moral Hazard
taking additional risks because you are insured
Winner's Curse
a situation that arises in certain auctions where teh winner is worse off than the loser because of an overly optimistic value placed on the good
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