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ECON 201:Midterm #1
Economics
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The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.
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Opportunity Cost
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The best alternative that we forgo, or give up, when we make a choice or a decision.
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scarcity
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Anything that is limited.
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Marginalism
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The process of analyzing the additional or incremental costs or benefits arising from a choice or decision.
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Marginal Benefit
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The maximum price a consumer will be willing to pay for an additional unit of a product. It is the dollar value of the consumer's marginal utility from the additional unit, and therefore it falls as consumption increases.
MU(1)/P(1) < or > MU(2)/P(2)
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Sunk costs
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Costs that cannot be avoided because they have already been incurred.
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Efficient Market
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A market in which profit opportunities are eliminated almost instantaneously.
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Macroeconomics
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Deals with the economy as a whole. macroeconomics focuses on the determinants of total national income, deals with aggregates such as aggregate consumption and investment, and looks at the overall level of prices instead of individual prices.
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Positive Economics
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Attempts to answer questions such as; what determines prices, why are certain goods produced, and why are some people unemployed, what causes of inflation. (Dealing with what/why)
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Normative Economics
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The part of economics involving value judgments about what the economy should be like; concerned with which economic goals and policies should be implemented.
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Descriptive Economics
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The compilation of data that describe phenomena and facts.
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Economic Theory
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A statement or set of related statements about cause and effect, action and reaction.
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Model
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A formal statement of a theory, usually a mathematical statement of a presumed relationship between two or more variables.
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Variable
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A measure that can change from time to time or from observation to observation.
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Ockham's Razor
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The principle that irrelevant detail should be cut away.
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Ceteris Paribus
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(All else equal). A device used to analyze the relationship between two variables while the values of other variables are held unchanged.
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Post hoc, ergo propter hoc
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Literally, "after this (in time), therefore because of this". A common error made in thinking about causation. If Event A happens before Event B, it is not necessarily true that A caused B.
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Fallacy of Composition
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The erroneous belief that what is true for a part is necessarily true for the whole.
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Empirical Economics
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The collection and use of data to test economic theories.
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Efficiency
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Allocative efficiency. An efficient economy is one that produces what people want at the least possible cost.
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Equity
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Fairness; contributed capital and retained earnings
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Stability
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A condition in which national output is growing steadily, with low inflation and full employment of resources.
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Capital
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Things that are produced and then used in production of other goods and services.
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Factors of production (or factors)
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The inputs into the process of production. Another term for "resources". Three key factors : land, labor & capital
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Production
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The process that transforms scarce resources into useful goods and services. Ex: private airlines in the US use land (runways), labor (pilots), & capital (airplanes).
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Inputs or resources
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Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants.
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Outputs
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Goods and services of value to households.
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Comparative Advantage
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Ricardo's theory that specialization and free trade will benefit all trading parties, even those that may be "absolutely" more efficient producers.
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Absolute Advantage
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A product has an absolute advantage over another in the production of a good or service if he or she can produce that product using fewer resources.
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Consumer Goods
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Goods produced for present consumption.
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Investment
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The process of using resources to produce new capital.
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Production Possibility Frontier (PPF)
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A graph that shows all the combinations of goods and services that can be produced if all of society's resources are used efficiently.
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Production Efficiency
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A state in which a given mix of outputs is produced at the least cost.
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Production Possibility Frontier (PPF)
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A graph that shows all the combinations of goods and services that can be produced if all of societies resources are used efficiently.
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Economic Growth
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An increase in the total output of the economy. It occurs when a society acquires new resources or when it learns to produce more using existing resources.
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Command Economy
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Is comparable to a monopoly in the sense that the organization, in this case the government has explicit control over the price and supply of a good or service.
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Laissez-Faire economy
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Hands off stance of the government in regard to the market, advocated by Adam Smith in "Wealth of Nations", also known as the "invisible hand". The behavior between buyers and sellers in this type of economy determines what gets produced, how it is produced & who gets it.
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Consumer Sovereignty
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The idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase ( and what not to purchase).
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Product (Output Markets)
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The markets in which goods and services are exchanged.
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Input (Factor Markets)
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The markets in which the resources used to produce goods and services are exchanged.
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Demand Schedule
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a table that shoes the relationship between the price of a good and the quantity demanded.
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Law of Demand
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The negative relationship between price and quantity demanded. As price rises, quantity demanded decreases; as price falls, quantity demanded increases.
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Normal Goods
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Goods for which demand goes up when income is higher and for which demand goes down when income is lower.
Ed > 0
ex: new cars, ipods, houses, shoes
(Created needs that society tells you to have)
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Inferior Goods
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Goods for which demand tends to fall when income rises. Needs that you have to have to survive.
ex: apartments, generic food labels
(water, Shelter, food, love, sex)
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Substitutes
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Goods that take the place of each other in consumption. Price of one good and demand of other move together
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Complimentary goods
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Goods and services that are used together.
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Shift of A Demand Curve
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The change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought about by a change in the original conditions.
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Movement along a demand curve
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The change in quantity demanded brought about by a change in price.
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Market Demand
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The sum of all the quantities of a good or service demanded per price by all the households buying in the market for that good or service.
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Quantity Supplied
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The amount that A supplier is willing and able to supply at a specific price
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Supply Schedule
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a table that shoes the relationship between the price of a good and the quantity supplied.
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Law of Supply
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The economic principle that says the higher the price of a good, the larger the quantity firms want to produce.
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Supply Curve
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A graph illustrating how much of a product a firm will sell at different prices.
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Shift of a supply curve
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The change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions.
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Market Supply
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the sum of individual supplies of all producers in the market
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Excess Demand/ Shortage
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The condition that exists when quantity demanded exceeds quantity supplied at the current price.
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Excess Supply/ Surplus
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The condition that exists when quantity supplied exceeds quantity demanded at the current price.
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Incentives
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factors that motivate you to act or to exert effort
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Positive Incentives
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Incentives that encourage an action
Ex: End of the year bonuses motivate employees to work hard through out the year
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Negative Incentives
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Also encourage an action
Fear of receiving a speeding ticket keeps motorists from driving too fast
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Direct Incentives
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Incentives that directly cause an action, these incentives are usually easy to pick out and understand
Ex: lower prices = more people
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Indirect Incentives
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incentives that indirectly cause an action
ex: lowering gas prices causes people to drive more and use up more gas to come buy more gas
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5 foundations of economics
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1.) Incentives
2.) Tradeoffs
3.) Opportunity cost
4.) Marginal thinking
5.) Trade creates value
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Trade Offs
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Alternative choices when making a decisions.
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Capital Goods
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Items that are used to produce other goods and therefore do not directly satisfy consumer wants
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Consumer Goods
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Consumer Goods
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Luxury Goods
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Goods that you don't need but you want.
ex: designer goods
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Inelastic
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raise prices.
habits to not change as much.
# < 1
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raise prices.
habits to not change as much.
# < 1
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Ed= max total revenue
- the price elasticity of demand is exactly 1
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Elastic
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the circumstance when the percentage change in quantity is larger than the percentage change in price
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the circumstance when the percentage change in quantity is larger than the percentage change in price
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Thinking of the margin : what are the benefits & non-benefits
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Law of Increasing Relative Cost
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When society takes more resource and applies them to a production of any specific good. The opportunity cost of a good that rises as you produce more of it.
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Investment
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spending on capital equipment, inventories, and structures, including household purchases of new housing
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Market Economics
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Economies where resources are allocated among households and firms with little to no government intervention.
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Planned Economies
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socialist regimes take part in this; supply and demand really doesn't exist because the government controls everything (Ex: cuba, North Korea)
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Competitive Market
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a market composed of many buyers and sellers acting independently, none of whom has any ability to influence the price of the product
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Imperfect Market
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Market where the buyer or the seller has the ability to influence market price
Ex: Utilization of health care is driven by need, not demand. Quantity of health care produced is usually higher than in competitive markets.
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Monopoly
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One seller and many buyers
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Oligopoly
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few sellers, each seller produces a large portion of all products sold
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Supply Curve
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a graph that sows the different amounts of a product supplied over a range of possible prices
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Demand Curve
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A curve that shows the number of units the market will buy in a given time period, at different prices that might be charged
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Subsidy
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grant of money from the government to a person or a company for an action intended to benefit the public
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Dead Weight Loss
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The loss of consumer and producer surplus due to under-allocationg of resources
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Slope vs Elasticity
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Slope= P/Q (in units)
Elasticity= Q/P (in percentages)
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Price Elasticity of Demand
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% change in QD/ % change in P
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Price Elasticity of Supply
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% change in quantity supplied/ % change in P
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Revenue
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term used to indicate the dollars taken in by the business in a defined period of time. often referred to as sales.
(Price x Quantity Sold)
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Marginal Benefit
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the benefit of doing a little bit more of something. in general it is the additional benefit from producing one more unit
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Law of Diminishing Return
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Idea that if you increase input, it will lead to a lot of output and eventually lead to economic success.
- Government created policy that made people save money, which made banks rich.
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Quota
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A limit on the quantity of a particular product that can be imported or exported within a given period.
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Positive Externalities
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Spillover benefits, the free market equilibrium is likely to correspond to a level of output that is lower than the socially efficient quantity;
the marginal social benefit exceeds the marginal private benefit.
Ex: getting vaccinated, getting educated, research and development
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Negative Externalites
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consumption
cigarets
hurts the person because they consumed it
production
pollution
hurts because a cost is required to produce the product
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Marginal Cost
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the increase in cost required to raise the output of some good or service by one unit
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