Chapter 1 2 1 2 3 3 Trade offs producing more of one good or service means producing less of another good or service Force society to make choices when answering the following 3 questions 1 What goods and services will be produced 2 How will the goods and services be produced 3 Who will receive the goods and services produced Opportunity cost producing a good or service that is the highest valued alternative that must be given up to engage in that activity Remember when calculating that if something is in both situations you want to subtract it Centrally planned economy government decides how economic resources will be distributed Market economy The decisions of households and firms interacting in markets distribute economic resources Mixed economy economic decisions result from the interaction of buyers and sellers in markets but the government plays a role in the distribution of resources Productive efficiency when a good or service is produced at the lowest possible cost Allocative efficiency when production is in agreement with consumer preferences Promote competition and facilitate voluntary exchange Voluntary exchange Both the buyer and seller of a product are made better off by the transaction Equity fair distribution of economic benefits Economic variable something measurable that can have different values Income of doctors Positive analysis Analysis concerned with what is Normative analysis Analysis concerned with what ought to be Microeconomics the study of how households and firms make choices how they interact in markets and how the government attempts to influence their choices Macroeconomics the study of the economy as a whole including topics such as inflation unemployment and economic growth Entrepreneur some who operates a business Innovation the practical application of an invention Technology the processes it uses to produce goods and services The skill of its managers the training of its workers the speed and efficiency of its machinery and equipment Firm company or business an organization that produces a good or service Goods tangible merchandise Books computers blue ray players Services activities done for others Revenue total amount received for selling a good or service Calculated by multiplying the price per unit by the number of units sold Profit the difference between its revenue and cost Household all persons occupying a home Factors of production economic resources use them to produce goods and services Capital stocks and bonds issued by firms OR manufactured goods that are used to produce other goods and services Human capital the accumulated training and skills that workers possess Economic growth the ability of the economy to increase the production of goods and services Trade act of buying and selling Absolute advantage ability of an individual firm or country to produce more of a good or service than competitors using the same amount of resources Comparative advantage ability of an individual firm or country to produce a good or service at a lower opportunity cost than competitors Market a group of buyers and sellers of a good or service and the arrangement by which they come together to trade Product market market for goods Computers medical treatments Factor markets a market for the factors of production Labor capital natural resources and entrepreneurial ability Factors of production the inputs used to make goods and services Property rights the rights individuals or firms have to the exclusive use of their property including the right to buy or sell it Perfectly competitive market meets these conditions 1 Many buyers and sellers 2 All firms selling identical products 3 No barriers to new firms entering the market Demand schedule a table that shows the relationship between the price of a product and the quantity of the product demanded Quantity demanded the amount of a good or service that a consumer is willing and able to purchase at a given price Demand curve a curve that shows the relationship between the prices of a product and the quantity of the product demanded Market demand the demand by all the consumers of a given good or service Law of demand holding everything else constant when the price of a product falls the quantity demanded of the product will increase and when the price of a product rises the quantity demanded of the product will decrease Substitution effect the change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes Income effect the change in the quantity demanded of a good that results from the effect of a change in the good s price of consumers purchasing power Normal good a good for which the demand increases as income rise and decrease as income falls Inferior good a good for which the demand increases as income falls and decreases as income rises Substitutes goods and series that can be used for the same purpose Complements goods and services that are used together Demographics the characteristics of a population with respect to age race and gender Quantity supplied the amount of a good or service that a firm is willing and able to supply at a given price Supply schedule a table that shows the relationship between the price of a product and the quantity of the product supplied Supply curve a curve that shows the relationship between the price of a product and the quantity of the product supplied Law of supply the rule that holding everything else constant increase in price causes increases in the quantity supplied and decreases in price causes decreases in the quantity supplied Price of inputs and technological change shift market supply Technological change a positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs Market equilibrium quantity demanded quantity supplied Competitive market equilibrium market equilibrium with many buyers and many sellers Surplus quantity supplied quantity demanded Shortage quantity supplied quantity demanded Demand curve unchanged Demand curve shifts to the right Demand curve shifts to the left Supply curve unchanged Q unchanged P unchanged Q increases P increases Supply curve shifts to the right Q increase P decreases Q increases P increase decreases Supply curve shifts to the left Q decreases P increases Q increases decreases P increases Q decreases P decreases Q increase decreases P decreases Q decreases P increases