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