Microeconomics Ch. 1-4, McEachern 9e Flashcards

Terms Definitions
economics
The study of how people use their scarce resources to satisfy their unlimited wants
resources
The inputs, or factors of production, used to produce the goods and services that people want; resources consist of labor, capital, natural resources, and entrepreneurial ability
labor
The physical and mental effort used to produce goods and services
capital
The buildings, equipment, and human skills used to produce goods and services
natural resources
All gifts of nature used to produce goods and services; includes renewable and exhaustible resources
entrepreneurial ability
The imagination required to develop a new product or process, the skill needed to organize production, and the willingness to take the risk of profit or loss
entrepreneur
A profit-seeking decision maker who starts with an idea, organizes an enterprise to bring that idea to life, and assumes the risk of the operation
wages
Payment to resource owners for their labor
interest
Payment to resource owners for the use of their capital
rent
Payment to resource owners for the use of their natural resources
profit
Reward for entrepreneurial ability; sales revenue minus resource cost
good
A tangible product used to satisfy human wants
service
An activity, or intangible product, used to satisfy human wants
scarcity
Occurs when the amount people desire exceeds the amount available at a zero price
market
A set of arrangements by which buyers and sellers carry out exchange at mutually agreeable terms
product market
A market in which a good or service is bought and sold
resource market
A market in which a resource is bought and sold
circular-flow model
A diagram that traces the flow of resources, products, income, and revenue among economic decision makers
rational self-interest
Each individual tries to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit
marginal
Incremental, additional, or extra; used to describe a change in an economic variable
microeconomics
The study of the economic behavior in particular markets, such as that for computers or unskilled labor
macroeconomics
The study of the economic behavior of entire economies, as measured, for example, by total production and employment
economic fluctuations
The rise and fall of economic activity relative to the long-term growth trend of the economy; also called business cycles
economic theory, or economic model
A simplification of reality used to make predictions about cause and effect in the real world
variable
A measure, such as price or quantity, that can take on different values at different times
other-things-constant assumption
The assumption, when focusing on the relation among key economic variables, that other variables remain unchanged; in Latin, ceteris paribus
behavioral assumption
An assumption that describes the expected behavior of economic decision makers, what motivates them
hypothesis
A theory about how key variables relate
positive economic statement
A statement that can be proved or disproved by reference to facts
normative economic statement
A statement that reflects an opinion, which cannot be proved or disproved by reference to the facts
association-is-causation fallacy
The incorrect idea that if two variables are associated in time, one must necessarily cause the other
fallacy of composition
The incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or the whole
secondary effects
Unintended consequences of economic actions that may develop slowly over time as people react to events
opportunity cost
The value of the best alternative foregone when an item or activity is chosen
sunk cost
A cost that has already been incurred, cannot be recovered, and thus is irrelevant for present and future economic decisions
law of comparative advantage
The individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good
absolute advantage
The ability to make something using fewer resources than other producers use
comparative advantage
The ability to make something at a lower opportunity cost than other producers face
barter
The direct exchange of one product for another without using money
division of labor
Breaking down the production of a good into separate tasks
specialization of labor
Focusing work effort on a particular product or a single task
production possibilities frontier (PPF)
A curve showing alternative combinations of goods that can be produced when available resources are used efficiently; a boundary line between inefficient and unattainable combinations
efficiency
The condition that exists when there is no way resources can be reallocated to increase the production of one good without decreasing the production of another; getting the most from available resources
law of increasing opportunity cost
To produce more of one good, a successively larger amount of the other good must be sacrificed
economic growth
An increase in the economy's ability to produce goods and services; reflected by an outward shift of the economy's production possibilities frontier
economic system
The set of mechanisms and institutions that resolve the what, how, and for whom questions
pure capitalism
An economic system characterized by the private ownership of resources and the use of prices to coordinate economic activity in unregulated markets
private property rights
An owner's right to use, rent, or sell resources or property.
pure command system
An economic system characterized by the public ownership of resources and centralized planning
mixed system
An economic system characterized by the private ownership of some resources and the public ownership of other resources; some markets are regulated by government
utility
The satisfaction received from consumption; sense of well-being
transfer payments
Cash or in-kind benefits given to individuals as outright grants from the government
Industrial Revolution
Development of large-scale factory production that began in Great Britain around 1750 and spread to the rest of Europe, North America, and Australia
firms
Economic units formed by profit-seeking entrepreneurs who employ resources to produce goods and services for sale
sole proprietorship
A firm with a single owner who has the right to all profits but who also bears unlimited liability for the firm's losses and debts
partnership
A firm with multiple owners who share the profits and bear unlimited liability for the firm's losses and debts
corporation
A legal entity owned by stockholders whose liability is limited to the value of their stock ownership
cooperation
An organization consisting of people who pool their resources to buy and sell more efficiently than they could individually
not-for-profit organizations
Groups that do not pursue profit as a goal; they engage in charitable, educational, humanitarian, cultural, professional, or other activities, often with a social purpose
Information Revolution
Technological change spawned by the microchip and the Internet that enhanced the acquisition, analysis, and transmission of information
market failure
A condition that arises when the unregulated operation of markets yields socially undesirable results
monopoly
A sole supplier of a product with no close substitutes
natural monopoly
One firm that can supply the entire market at a lower per-unit cost than could two or more firms
private good
A good, such as pizza, that is both rival in consumption and exclusive
public good
A good that, once produced, is available for all to consume, regardless of who pays and who doesn't; such a good is nonrival and nonexclusive, such as a safer community
externality
A cost or a benefit that affects neither the buyer nor seller, but instead affects people not involved in the market transaction
fiscal policy
The use of government purchases, transfer payments, taxes, and borrowing to influence economy-wide variables such as inflation, employment, and economic growth
monetary policy
Regulation of the money supply to influence economy-wide variables such as inflation, employment, and economic growth
ability-to-pay tax principle
Those with a greater ability to pay, such as those earning higher incomes or those owning more property, should pay more taxes
benefits-received tax principle
Those who get more benefits from the government program should pay more taxes
tax incidence
The distribution of tax burden among taxpayers; who ultimately pays the tax
proportional taxation
The tax as a percentage of income remains constant as income increases; also called a flat tax
progressive taxation
The tax as a percentage of income increases as income increases
marginal tax rate
The percentage of each additional dollar of income that goes to the tax
regressive taxation
The tax as a percentage of income decreases as income increases
merchandise trade balance
The value during a given period of a country's exported goods minus the value of its imported goods
balance of payments
A record of all economic transactions during a given period between residents of one country and residents of the rest of the world
foreign exchange
Foreign money needed to carry out international transactions
tariff
A tax on imports
quota
A legal limit on the quantity of a particular product that can be imported or exported
demand
A relation between the price of a good and the quantity that consumers are willing and able to buy per period, other things constant
law of demand
The quantity of a good that consumers are willing and able to buy per period relates inversely, or negatively, to the price, other things constant
substitution effect of a price change
When the price of a good falls, that good becomes cheaper compared to other goods so consumers tend to substitute that good for other goods
money income
The number of dollars a person receives per period, such as $400 per week
real income
Income measured in terms of the goods and services it can buy; real income changes when the price changes
income effect of a price change
A fall in the price of a good increases consumers' real income, making consumers more able to purchase goods; for a normal good, the quantity demanded increases
demand curve
A curve showing the relation between the price of a good and the quantity consumers are willing and able to buy per period, other things constant
quantity demanded
The amount of a good consumers are willing and able to buy per period at a particular price, as reflected by a point on a demand curve
individual demand
The relation between the price of a good and the quantity purchased by an individual consumer per period, other things constant
market demand
The relation between the price of a good and the quantity purchased by all consumers in the market during a given period, other things constant; sum of the individual demands in the market
normal good
A good, such as new clothes, for which demand increases, or shifts rightward, as consumer income rises
inferior good
A good, such as used clothes, for which demand decreases, or shifts leftward, as consumer income rises
substitutes
Goods, such as Coke and Pepsi, that relate in such a way that an increase in the price of one shifts the demand for the other rightward
complements
Goods, such as milk and cookies, that relate in such a way that an increase in the price of one shifts the demand for the other leftward
tastes
Consumer preferences; likes and dislikes in consumption; assumed to remain constant along a given demand curve
movement along a demand curve
Change in quantity demanded resulting from a change in the price of the good, other things constant
shift of a demand curve
Movement of a demand curve right or left resulting from a change in one of the determinants of demand other than the price of the good
supply
A relation between the price of a good and the quantity that producers are willing and able to sell per period, other things constant
law of supply
The amount of a good that producers are willing and able to sell per period is usually directly related to its price, other things constant
supply curve
A curve showing the relation between price of a good and the quantity producers are willing and able to sell per period, other things constant
quantity supplied
The amount offered for sale per period at a particular price, as reflected by a point on a given supply curve
individual supply
The relation between the price of a good and the quantity an individual producer is willing and able to sell per period, other things constant
market supply
The relation between the price of a good and the quantity all producers are willing and able to sell per period, other things constant
movement along a supply curve
Change in quantity supplied resulting from a change in the price of the good, other things constant
shift of a supply curve
Movement of a supply curve left or right resulting from a change in one of the determinants of supply other than the price of the good
transaction costs
The costs of time and information required to carry out market exchange
surplus
At a given price, the amount by which quantity supplied exceeds quantity demanded; a surplus usually forces the price down
shortage
At a given price, the amount by which quantity demanded exceeds quantity supplied; a shortage usually forces the price up
equilibrium
The condition that exists in a market when the plans of buyers match those of sellers, so quantity demanded equals quantity supplied and the market clears
disequilibrium
The condition that exists in a market when the plans of buyers do not match those of sellers; a temporary mismatch between quality supplied and quantity demanded as the market seeks equilibrium
price floor
A minimum legal price below which a product cannot be sold; to have an impact, a price floor must be set above the equilibrium price
price ceiling
A maximum legal price above which a product cannot be sold; to have an impact, a price ceiling must be set below the equilibrium price
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