Study Guide: Terms and Definitions
43 Cards in this Set
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Opportunity cost
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The real cost of an item, what you must give up in order to get it
and...
the value of the best alternative forgone in making any choice
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Marginal Decision
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a decision made at the "margin" of an activity to do a bit more or a bit less of an activity
Marginal Analysis is the choice to continue or stop something that you are ALREADY doing.
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Incentive
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anything that offers rewards to people who change their behavior
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Gains from Trade
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by dividing tasks and trading people can get more of what they want through trade then they could get if they tried to be self-sufficient
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Specialization
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each person specializes in the task that he or she is good at performing
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Equilibrium
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an economic situation in which no individual would be better off doing something different
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Efficient
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description of a market or economy that takes all opportunities to make some people better off without making others worse off
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Equity
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fairness; everyone gets his or her fair share.
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Scarce Resources
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cannot provide enough goods or services to satisfy all human material wants and needs
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Technological Improvements
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shift the production possibilities frontier outside
better technology reduces the cost of production and less money spent on inputs means the supply increases
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Efficient Production Points
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Those points that lie on the curve of the production possibilities frontier
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Inefficient Production Points
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Those points that lie INSIDE the curve of the production possibilities frontier
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Non-feasible Production Points
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Those points that lie OUTSIDE the curve of the production possibilities frontier
Accessible through trade and specialization, but not alone
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Circular Flow Diagram Markets
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Market for goods and services, and the market for factors,
other points on the Diagram are firms and household
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Normative Statement
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How the economy SHOULD work
most likely a general statement about how the economy could improve
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Positive Statement
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How the economy ACTUALLY works
most likely an IS statement, fact about the way things are
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Law of Demand
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as the price increases, QUANTITY demanded will decrease
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Substitutes
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when the price for one good goes up, the demand for its substitute increases
ex. hot dogs and hamburgers
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Compliments
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when the price for one good goes up, the demand for its compliment decreases
ex. hot dogs and hot dog buns
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Normal Good
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When incomes rise, the demand for a normal good increases
ex. Dine- in restaurant
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Inferior Good
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When incomes rise, the demand for an inferior good decreases
ex. Fast food restaurant
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Shift Demand Curve to the Right
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an increase in the QUANTITY demanded
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Surplus
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When a price temporarily exists ABOVE the equilibrium in the market
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Shortage
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When a price temporarily exists BELOW the equilibrium in the market
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Increase/Decrease in Consumer Surplus
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INCREASE in the price of a good will DECREASE consumer surplus
DECREASE in the price of a good will INCREASE consumer surplus
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Total Surplus
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Consumer Surplus + Producer surplus
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Producer Surplus
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Area of the triangle under the price, but above the supply curve
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Price Control
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a legal restriction on how high or low a price in a market may go
Price Floor- minimum price that can be charged for a g/s, only binding if it is above the equilibrium
Price Ceiling- maximum price that can be charged for a g/s, only binding if it is below the equilibrium
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Binding Price Floor
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causes SURPLUS
Price Floor- minimum price that can be charged for a g/s, only binding if it is above the equilibrium
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Binding Price Ceiling
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causes SHORTAGE
Price Ceiling- maximum price that can be charged for a g/s, only binding if it is below the equilibrium
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Black Market
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Goods bought and sold ILLEGALLY
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Quota Rent
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the difference between the price that is charged (point on the demand curve) and the supply price at a given quantity
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Cross- Price Elasticity of Demand > 0
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Goods are substitutes
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Cross-Price Elasticity of Demand < 0
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Goods are Complements
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Excise Tax
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Tax on each unit of a good or service,
usually the cost of the tax is split in some way between the consumer and the producer
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Price Elasticity of Demand
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>1 = Elastic,
<1 = Inelastic
(Q2-Q1)/Av Q
(P2-P1)/ Av P
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Tax Revenue on a Graph
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rectangle,
Quantity sold x (Demand Price-Supply Price)
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Deadweight loss on a Graph
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The triangle in between the Quantity Equilibrium and the new quantity,
(1/2) x (Demand Price-Supply Price) x (Q2- Equilibrium Q)
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Marginal Cost
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Additional cost incurred by producing one more unit of that good or service
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Largest Change in Quantity Transacted (Rental Market Question)
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Competitive Market in equilibrium
price ceiling imposed-
Largest change in quantity transacted will occur when the price elasticity of SUPPLY IS VERY ELASTIC
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Know the Short Run Costs Graph
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top curve = Average Total Costs
Middle Curve= Average Variable costs
Curve that Intersects ATC & AVC= Marginal Costs
Difference b/w ATC and AVC is Average Fixed Cost
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A Elasticity of B (General Formula)
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Midpoint Formula-
(B2-B1)/Av B
(A2-A1)/Av A
% change in B
% change in A
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Marginal Product of Labor
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the increase in output obtained by hiring an additional worker
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Study Guide: Terms and Definitions