ECON 1202: EXAM 1
43 Cards in this Set
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Scarcity
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a situation in which unlimited wants exceed limited resources (economics is the study of these choices)
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3 economic ideas
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1. people are rational: using all available info to achieve your goals
2. people respond to incentives: changes in prices
3. optimal decisions are made at the margin: the additional cost or benefit associated with a small amount extra of some action
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opportunity cost
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the highest valued alternative given up in order to engage in some activity
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centrally planned economies
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when the governments decide what to produce, how to produce it, and who receives the goods and services
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market economies
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when the decisions of the households and firms determine what is produced, how it is produced, and who receives the goods and services
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market
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a group of buyers and sellers of a good or service
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mixed economies
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have features of centrally planned and market
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market economies promote...
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productive efficiency (goods are produced at lowest possible cost) and allocative efficiency (production is consistent with consumer preferences: MB=MC)
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positive analysis
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the study of "what it is"
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normative analysis
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the study of what it should be
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microeconomics
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-how households and firms make choices
-how they interact in markets
-how gov't attempts to influence their choices
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macroeconomics
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the study of the economy as a whole, including: inflation, unemployment, and economic growth
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technology
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the process a firm uses for turning inputs into outputs of goods and services
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capital
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manufactured goods that are used to produce other goods and services
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PPF
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a curve showing the maximum attainable combinations of 2 products that may be purchased with available resources and technology
-efficient- on the line
-inefficient- below the line
-unattainable- above the line
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Is PPF a positive or normative tool?
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positive, because it shows "what it is"
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economic growth
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-shift in PPF
-the ability of the economy to increase the production of goods and services
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comparative advantage
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the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than its competitors
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absolute advantage
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the ability of an individual, a firm, or a country to produce more of a good or service than its competitors using the same amount of resources
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the basis for trade is...
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comparative advantage!
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2 key groups in the modern economy
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1. households- individuals who provide factors of production: labor, capital, natural, resources, and entrepreneurial
2. firms- supply goods and services to product markets; households buy these products from the firms
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circular flow diagram
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households provide factors of production to firms --> firms provide goods and services to households --> firms pay money to households for the factors of production --> households pay money to firms for the goods and services
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free market
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a market with few gov't restrictions on how a good or service can be produced or sold, or on how a factor of production can be employed
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protection of private property
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-when criminals can take your wages or profits, households and firms have little incentive to work hard
-property rights, including property, are key
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enforcement of contracts and property rights
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important for transactions across time to occur
-an independent court system is critical here
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demand schedule
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-table showing how many of a product will be purchased at various prices
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law of demand
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as price changes, quantity demanded changes in the opposite direction
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ceteris paribus
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"all else equal"
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shift in right of demand curve
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increase in demand
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shift in left of demand curve
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decrease in demand
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normal good
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increase in income causes an increase in demand
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inferior good
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increase in income causes a decrease in demand
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subsitutes
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goods and services that can be used for same purpose (big mac and whopper)
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complements
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goods and services that are consumed together (hot dogs and hot dog buns)
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changes (shifts) in demand caused by...
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tastes and preferences, demographics, expected future prices
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change in demand vs. change in quantity demanded
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-change in quantity demanded: a change in the price causes a movement along the demand curve
-change in demand: causes the demand curve to shift
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supply schedule
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table showing how many of a product will be available for purchase at various prices
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law of supply
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as price changes, quantity supplied changes in the same direction: ceteris paribus
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a shift to the right in the supply curve
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an increase in supply
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a shift in the left of the supply curve
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a decrease in supply
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what causes a shift in supply
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price of inputs, technology, prices of substitutions, number of firms in market, expected future prices
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inputs
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-an increase in the price of a unit causes a decrease in supply
-a decrease in the price of an input causes an increase in supply
-firms can't just raise the price of the good if the price of the input goes up!!!!
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change in supply vs. change in quantity supplied
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-change in quantity supplied: movement along the curve
-change in supply: causes supply curve to shift
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ECON 1202: EXAM 1