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ECON 2106: Exam 1
Allocative Efficiency
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A state of the economy in which production is in accordance with consumer preferences... every good is produced up to the point where the last unit provides a marginal benefit that equals marginal cost.
Occurs: when the combination of competition among firms and voluntary exchange results in firms producing the x of goods that consumers prefer most
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Centrally Planned Economy
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An economy in which the government decides how economic resources will be allocated.
Soviet Union: standard of living decreased. does not satisfy consumers, political dictatorships
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Economic Model
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A simplified version of reality used to analyze real-world economic situations.
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Economic Variable
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Something measurable that can have different values, such as wages of software programmers.
... firm could outsource ...
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Economics
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The study of the choices people make to attain their goals, given their scarce resources.
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Equity
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Just because the economic outcomes are fair, it doesn't mean that its desirable.
The fair distribution of economic benefits.
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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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Marginal analysis
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Analysis that involves comparing marginal benefits and marginal costs.
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Market
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A group of buyers and sellers of a good and the arrangement in which they come together to trade.
In a market, buyers are demanders and sellers are suppliers
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Market Economy
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An economy in which the decisions of households and firms interacting in markets allocate economic resources.
Firms must produce goods that meet the consumers wants, firms compete to offer the highest-quality goods at the lowest price--> ultimately consumers decide what goods are produced, markets reward hard work.
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Microeconomics
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The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
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Mixed Economy
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An economy in which most economic decisions result from interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.
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Normative analysis
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Analysis concerned with WHAT OUGHT TO BE.
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Opportunity Cost
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The highest-valued alternative that must be given up to engage in an activity.
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Positive analysis
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Analysis concerned with WHAT IS
Economics is positive, which measures the costs and benefits of different courses of actions.
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Productive Efficiency
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The situation in which a good is produced at the lowest possible cost.
Occurs: competition among the firms forces firms to produce and sell at the lowest cost.
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Scarcity
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The situation in which unlimited wants exceed the limited resources available to fulfill those wants.
Scarcity requires tradeoffs.
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Trade-off
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The idea that because of scarcity, producing more of one good means producing less of another good.
1. What goods will be produced? Consumer preferences 2. How will the goods be produced? Firms choose HOW to produce goods. More workers vs more machines 3. Who will receive the goods produced? Depends on how income is distributed.
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Voluntary Exchange
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The situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction.
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People are Rational
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Rational individuals weigh the benefits and costs of each action, and they choose an action ONLY if the benefits outweigh the costs.
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People respond to incentives
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humans act from different varieties of motives.
Refer to the bank robbery example.
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Optimal decisions are made at the margins
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Marginal: an extra benefit or cost of a decision
Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals marginal cost. MB = MC
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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 than competitors, using the same amount of resources.
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Comparative Advantage
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The ability of an individual, a firm, or a country to produce a good at a lower opportunity cost than competitors.
The basis for trade is comparative advantage, not absolute.
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Economic Growth
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The ability of the economy to produce increasing quantities of goods.
Shifts in PPF show economic growth.
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Factor Markets
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markets for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability.
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Factors of Production
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Labor: all types of work from part-time to full-time workers
capital: physical machines used in production natural resources: land, water, oil, iron ore that are used in producing goods entrepreneur: ability to bring together factors of production to successfully production goods.
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Free Market
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A market with few government restrictions on how a good can be produced or sold or on how factors of production can be employed.
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Product Markets
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markets for goods
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Production Possibilities Frontier
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A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.
A point outside of the PPF is unattainable A point under the PPF is inefficient in using its resources A point ON the PPF is efficient
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Trade
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The act of buying are selling.
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Increasing Marginal opportunity Cost
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The more resources already devoted to any activity, the smaller the payoff to devoting additional resources to that activity.
As the economy moves DOWN the PPF, it experiences INCREASING marginal opportunity costs. Some workers, machines, and other resources are better suited to one use than the other.
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Competitive market equilibrium
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A market equilibrium with many buyers and many sellers.
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Complements
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goods that are used together
A decrease in the price of a complement causes the demand curve for the other good to shift to the right.
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Demand Curve
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A curve that shows the relationship between the price and the quantity of the produced demanded.
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Income Effect
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The change in the QD of a good that results from the effect of a change in the goods' price on consumers' purchasing power.
PURCHASING POWER: the amount of goods a consumer can buy on a fixed income. When price falls, purchasing power goes up--> consumers buy larger quantities of that good.
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Inferior good
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a good for which the demand increases as income falls and decrease as income rises.
Example: if income rises, you buy less ramen noodles.
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Law of Demand
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The rule that when the price of a product falls, the QD of the product will increase, and visa versa.
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Law of Supply
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The rule that increases in price cause increases in the QS, and decreases in price cause decreases in the QS.
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Market demand
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The demand by all the consumers of a given good.
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Market equilibrium
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A situation in which QD = QS
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Normal Good
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a good for which the demand increases as income rises and decreases as income falls.
Example: if income rises, you buy less spam and more steak
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Perfectly competitive market
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A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market
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Quantity Demanded
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The amount of a good that a consumer is WILLING and ABLE to purchase at a given price.
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Quantity Supplied
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The amount of a good that a firm is willing and able to supply at a given price
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Shortage
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QD > QS
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Substitutes
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Goods that can be used for the same purpose.
A decrease in the price of a substitute causes the demand for another good to shift left. An increase in the price of a substitute causes the demand of another good to shift right.
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Substitution Effect
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The change in the QD of a good that results from a change in PRICE, making the good more or less expensive relative to the other goods that are substitutes.
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Supply Curve
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a curve that shows the relationship between the price and the QS of a product.
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Surplus
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QS > QD
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Technological Change
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A positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs.
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Variables that SHIFT Market Demand
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income
prices of related goods tastes population and demographics expected future prices
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Change in Quantity versus Change in Quantity Demanded
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∆ in demand: a shift of the demand curve
occurs if there is a change in one of the variables, OTHER THAN PRICE, that affects the willingness of consumers. ∆ in QD: movement along the demand curve occurs b/c of a change in the product's PRICE.
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Variables that SHIFT Supply
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Prices of inputs
technological change prices of substitutes in production number of firms in the market expected future prices
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Consumer Surplus
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the difference between the highest price a consumer is willing to pay and the price the consumer actually pays
Below demand curve and above price
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Deadweight Loss
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The reduction in ES resulting from a market not being in competitive equilibrium.
Occurs when a tax is imposes, ceilings or floors
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Economic efficiency
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A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production. When the sum of CS and PS is at its maximum
MB = MC
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Economic surplus
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The sum of consumer surplus and producer surplus
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Marginal benefit
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The additional benefit to a consumer from consuming one more unit of a good.
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Marginal cost
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The additional cost to a firm of producing one more unit of a good
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Price Ceiling
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A price ceiling is a government-imposed limit on how low a price can be charged on a product.
charge above the price ceiling
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Price Floor
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A price floor is a government- or group-imposed limit on how high a price can be charged for a product.
charge below price floor
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Producer Surplus
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The difference between the lowest price a firm would be wiling to accept and the price it actually receives.
below price but above supply curve
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Taxes
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A tax is efficient if it imposes a small excess burden relative to as the tax revenue it raises.
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Complement versus Substitute goods
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