Final 1 2 4 5 6 7 8 9 10 11 12 13 14 15 17 18 20 21 22 Scarcity Economics Principle s o The limited nature of society s resources o The study of how society manages its scarce resources o People face trade offs resources Efficiency the property of society getting the most it can from its scarce Equality the property of distributing economic prosperity uniformly among the members of society o The cost of something is what you give up to get it Opportunity cost whatever must be given up to obtain some item o Rational people think at the margin Rational people people who systematically and purposefully do the best they can to achieve their objectives Marginal change a small incremental adjustment to plan of action o People respond to incentives Something that induces a person to act o Trade can make everyone better off o Markets are usually a good way to organize economic activity Market economy an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services o Government can sometimes improve market outcomes Property rights the ability of an individual to own and exercise control Market failure a situation in which a market left on its own fails to Externality the impact of one person s actions on the well being of a over scarce resources allocate resources efficiently bystander Market power the ability of a single economic actor to have a substantial Circular flow diagram influence on market prices among households and firms Production possibilities frontier o A visual model of the economy that shows how dollars flow through markets o A graph that shows the combo of output that the economy can possibly produce given the available factors of production and the available production technology Positive statements Normative statements Market o Claims that attempt to describe the world as it is o Claims that attempt to prescribe how the world should be o A group of buyers and sellers of a particular good or service Competitive market o A market in which there are many buyers and sellers so that each has a negligible impact on the market price o Perfectly competitive 1 The goods offered for sale are all exactly the same 2 The buyers and sellers are so numerous that no single buyer or seller has any influence over the market price o The amount of the good that buyers are willing and able to purchase o When the price of a good rises the quantity demanded of the good falls and when the price falls the quantity demanded rises o A table that shows the relationship between the price of a good and the quantity Quantity demanded Law of demand Demand schedule demanded Income o Normal good o Inferior good Prices of Related goods o Substitutes o Compliments Quantity supplied Law of supply Supply curve Equilibrium o Surplus o Shortage Elasticity Increase in income leads to an increase in demand If the demand for a good rises when an income increases When a fall in the price of one good reduces the demand for another good When a fall in the price of one good raises the demand for another good o The amount that sellers are willing and able to sell o When the price of a good rises the quantity supplied of the good also rises and when the price falls the quantity supplied falls as well o Curve relating to price and quantity supplied The quantity of the good supplied exceeds the quantity demanded Suppliers are unable to sell all the want at the going price A situation in which quantity demanded is greater than quantity supplied o A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants o Price elasticity of demand o Perfectly inelastic Measures how much the quantity demanded responds to a change in price No matter the price people will always buy the good necessities o Perfectly elastic If you change the price there will be a drastic change in quantity demanded luxuries o Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good o Necessities tend to have inelastic whereas luxuries have elastic demands o Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly defined goods o Goods tend to have more elastic demand over long time horizons o Computing the price Price elasticity of demand change in quantity demanded change in price o Total revenue Price x quantity When demand is inelastic 1 price and total revenue move in the same direction directions When demand is elastic 1 price and total revenue move in opposite When demand is unit elastic 1 price and total revenue remains constant when the price changes o Income elasticity of demand Measures how the quantity demanded changes as consumer income changes Income elasticity of demand change in quantity demand change in income Inferior goods higher income lowers the quantity demanded Normal goods higher income raises the quantity demanded o Cross price elasticity of demand price of another good Measures how the quantity demanded of one good responds to a change in Cross price elasticity of demand change in quantity demand of good 1 change in quantity demand of good 2 o Price elasticity of supply Measures how much the quantity supplied responds to changes in the price Price elasticity of supply change in quantity supplied change in price o The legislative max the price of a good is not allowed to rise above this level o If the equilibrium price is below the ceiling the price ceiling is not binding o If the equilibrium price is about the ceiling the ceiling is a binding constraint o Legislation minimum because the price cannot fall below this level o If the equilibrium price is above the floor it is not binding Price ceiling Price floor o If the equilibrium price is below the for it is a binding constraint o A binding price floor causes a surplus Taxes o Tax incidence How the burden of a tax is distributed among the various people who make up the economy o How taxes on sellers effect market outcomes 1 If the tax is not levied on buyers the demand at any price is the same so the demand curve stays the same but for sellers the good becomes less profitable so it shifts the supply curve 2 Because the tax raises the cost of producing and selling it reduces the quantity supplied at every price therefore shifting the supply curve left 3 After determining the shift in the
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