Allocation Systems determine who gets goods and services and who does not Association is not Causation Correlation is NOT Causation The mistaken assumption that because two events occur together one must cause the other Bartering Trade without money Bounded Rationality people compare costs and bene ts to make a decision Ceteris Paribus Latin for all else equal Comparative Advantage the ability to produce a good or service at a lower opportunity cost than someone else Compliments an increase in the price of one leads to a decrease in the demand for the other Consumer Sovereignty is the assertion that consumer preferences determine the production of goods and services Creative Destruction describes the way in which capitalist economic development arises out of the destruction of some prior economic order Demand is the amount of a product that people are willing and able to purchase at each possible price during a given period of time everything else but price held constant It is a relationship between prices and quantities Demand Supply Schedule A list of prices and corresponding quantities demanded supplied of a particular good or service Demand Supply Curve A graph of the demand supply schedule with price on the vertical axis and quantity demanded supplied on the horizontal axis Economics is the study of how scarce resources are allocated among unlimited wants is a social science a form of applied logic reasoning study of unintended consequences the study of how people choose to use their resources in attempts to satisfy their unlimited wants Economic Bad anything you want to rid of Economic Good anything with a price on it includes goods and services Elasticity the responsiveness of quantity demanded or quantity supplied to a change in one of the determinants of demand and or supply Equilibrium is the price and quantity at which quantity demanded and quantity supplied are equal Fallacy of Composition The mistaken assumption that what is true of a part is also true of the whole Free Good good for which there is no scarcity Law of comparative advantage proposition that the joint output of trading partners will be greatest when each good is produced by the low opportunity cost producer Law of Demand Price Rises Demand Falls Law of Supply Price Falls Demand Rises Macroeconomics Studies the economy at the aggregate level at the level of the economy as a whole Examines total consumer behavior total employment total production total sales etc Market a place or service that enables buyers and sellers to exchange goods and services said to be in disequilibrium at all points at which the quantities demanded and supplied are not equal Marginal bene ts and costs the bene ts and opportunity costs associated with one additional unit of the good Microeconomics Studies the economy at the level of individual consumers workers rms goods and markets Monetary exchange involve exchanging money for goods and services Normative Statement what should be makes ethical judgements Opportunity Cost What you give up to get the highest valued alternative that must be forgone when a choice is made Poverty occurs when the goods are scarce and those who need them do not have the income to obtain them poverty is a problem of income Positive Statement what is Analyzes actual measurable outcomes Price Ceiling price is not allowed to increase above a certain level Supply Demand Shortage Price Floor price is not allowed to decrease below a certain level Supply Demand Surplus Productions Possibility Curve PPC Shows maximum quantity of goods and services it is bowed outward because of increasing marginal opportunity cost Quantity demanded is the amount of a product that people are willing and able to purchase at one speci c price Rational Self Interest People choose options that give them the greatest satisfaction Resources include Land Labor and Capital the elements needed to produce goods Also called Factors of production or Inputs Scarcity not enough is available for free Shortage occurs when not enough is available at the current price it is a problem of price Substitutes an increase in the price of one good leads to an increase in demand for the other good A country can gain from trade by Comparative Advantage 4 Allocation Systems Government Determined First come rst served Lottery system random Market system USA more incentive income earners buy goods and services 5 Determinants of Demand Taste Preferences Consumer Income Number of Buyers Expectations Price of Related Goods 5 Factors of Supply Resource Prices Technology and Productivity Expectations of Producers Number of producers Prices of related goods and services
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