ECONOM 1051: EXAM 1
106 Cards in this Set
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Economics
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Social science concerned with how individuals, institutions, and society make choices under conditions of scarcity. We want to exceed our resources.
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Economic Perspective
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Economic way of thinking.
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Opportunity costs
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To obtain more of one thing, society forgoes the opportunity of getting the next best thing. "There's no free lunch."
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Marginal Benefit
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The additional satisfaction or utility that a person receives from consuming an additional good or service. It's the maximum amount they are willing to pay to consume that additional product of service.
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Micro
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Individual units.
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Macro
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Aggregate
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Economic systems
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Set of institutional arrangements. Differences in systems exist by who owns the factors of production.
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Command System
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Known as socialism or communism. Government ownership. Decisions made by a central planning board. North Korea and Cuba are last remaining examples of largely centrally planned economies.
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The Market System
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Known as capitalism. Private ownership of resources. Private property. Freedom of enterprise and choice. Self-interest. Competition. Markets and prices.
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Marginal analysis
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Comparisons of marginal benefits and costs. "marginal"=extra.
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Scientific method
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Observing real-world behavior and outcomes. Has a hypothesis.
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Generalization
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Economic behavior or the economy itself.
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Other-Things-Equal-Assumption
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Used to make theories. Assume that all variables except those under immediate consideration are held constant for a particular analysis.
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Microeconomics
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Concerned with decision making by individual consumers, households, and business firms.
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Macroeconomics-
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Examines either the economy as a whole or its basic subdivisions or aggregates.
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Economic problem
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People need to make choices because economic wants are unlimited, but the mean for satisfying those wants are limited.
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Budget Line
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Schedule or curve that shows various combinations of 2 products a consumer can purchase with a specific money income.
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Constant opportunity cost
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opportunity cost that remains the same as consumers switch purchases from one product to another along a straight-line budget line.
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Economic resources
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natural, human, and manufactured resources that go into the production of goods and services.
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Resource categories
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Land- all natural resources. Labor- people. Capital- all manufactured resources.
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Investment
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Spending that pays for the production and accumulation of capital goods.
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Entrepreneurial ability
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Takes initiative, makes strategic business decisions, innovative, bears risk.
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Factors of production
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Economic resources
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Consumer goods
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products/services that directly satisfy consumer wants
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Capital goods
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Items that are used to produce other goods and don't directly satisfy consumer wants.
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Production possibilities curve
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shows different combinations of goods and services that can be produced in a fully employed economy.
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Law of increasing opportunity costs
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as the production of a good increases, the opportunity cost of producing an additional unit rises
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Optimal allocation
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occurs at MC=MB (the optimal amount of activity)
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Economic system
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set of institutional arrangements and a coordinating mechanism for making goods and services
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Private property
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right of people and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property.
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Freedom of enterprise
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freedom of firms to obtain economic resources, to use the resources to produce products
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Freedom of choice
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freedom of owners of resources to employ or dispose of their resources as they see fit
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Self interest
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most advantageous outcome as viewed by each firm, property owner, worker, or consumer.
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division of labor
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separation of the work required to produce a product into a number of different tasks performed by different workers
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Medium of exchange
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items sellers generally accept and buyers generally use to pay for goods and services.
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Barter
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Direct exchange of goods
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Consumer sovereignty
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determination of consumers of the types and quantities of goods/services that will be produced with the economy's scare resources.
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dollar votes
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consumers spend their income on the goods they are most willing and able to buy
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creative destruction
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idea that creation of new products and production methods may simultaneously destroy the market power of existing firms.
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Circular flow diagram
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flow of resources from households to firms and of products from firms to households
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resource market
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households sell and firms buy economic resources
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Specialization
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Division of labor. Differences in ability. Learning by doing. Time saving.
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Use of money
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Makes trade easier. Alternative barter trade is inefficient.
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Active, but not limited government
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Increases effectiveness of the market system.
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Capital accumulation
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Financial system that channels funds
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3 categories of business
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Sole proprietorship.Partnership. Corporation.
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Interaction between buyers and sellers
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Price is discovered in interactions between buyers and sellers.
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Law of Demand
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Price goes up, quantity demanded goes down; price goes down, quantity demanded goes up
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Changes in Demand
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Change in consumer taste and preferences. Change in number of buyers. Change in income.
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Changes in prices of related goods
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-complements (DVD discs+DVD players, hotdogs+buns)
-substitutes (Pepsi and coke, Ford Trucks and GM Trucks
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Changes in consumers expectations
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future prices and income
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Supply
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Schedule of curve. The amount producers produce
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Law of Supply
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other things equal, as the price rises, and the quantity supplied rises, and as the price falls, the quantity supplied falls. Reason- Price acts as incentive to producers. At some point, costs will rise
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Determinants of Supply
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Change in resource prices. Change in technology. Change in the number of sellers. Change in tax and subsidies. Change in prices of other goods. Change in producer expectations.
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Price floors
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Prices are set above market price. Chronic surpluses.
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Sometimes the law of supply and demand just doesn't work.
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Market must be competitive. Competition among buyers and sellers is what creates equality between demand price and supply price. Must not have any benefits or costs external to the market.
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Externalities
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cost or benefit occurring to a third party external to the transaction.
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Positive externality
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Too little produced.
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Private goods
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Produced by firms, not governments. Has competition.
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Public goods
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Provided by government. No competition. No one can be excluded. Some people can get it for free without paying taxes (free riders)
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Government intervention
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Connect negative externalities. Connect positive externalities. Can have role in correcting externalities.
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Elastic
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If a small change in price is accompanied by a large change in quantity demanded.
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Inelastic
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Large change in price is accompanied by a small amount of change in quantity demanded.
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Demand
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schedule or a curve that shows the various amounts of a product that consumers will purchase at each of several possible prices during a specified period of time.
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Determinants of Demand
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factors other than price that determine the quantities demanded of a good or service
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Supply
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schedule showing the amounts of a good or service that sellers will offer at various prices during some period.
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Law of Supply
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an increase in the price of a product will increase the quantity of it supplied, and conversely for a price decrease.
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Price ceiling
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legally established maximum price for a good or service.
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Price floor
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minimum price fixed by the government
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Price elasticity of demand
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the ratio of the percentage change in quantity demanded of a product or resource to the percentage change in its price; a measure of the responsiveness of buyers to a change in the price of a product or resource.
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Unit elasticity
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Demand or supply for which the elasticity coefficient is equal to 1; means that the percentage change in the quantity demanded or supplied is equal to the percentage change in price.
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Perfectly inelastic
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Product or resource demand in which price can be of any amount at a particular quantity of the product or resource demanded; quantity demanded does not respond to a change in price; graphs as a vertical demand curve.
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Perfectly elastic
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Product or resource demand in which quantity demanded can be of any amount at a particular product price; graphs as a horizontal demand curve.
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Total Revenue
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The total number of dollars received by a firm (or firms) from the sale of a product;
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Total-revenue test
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A test to determine elasticity of demand between any two prices: Demand is elastic if total revenue moves in the opposite direction from price; it is inelastic when it moves in the same direction as price; and it is of unitary elasticity when it does not change when price changes.
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Market period
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A period in which producers of a product are unable to change the quantity produced in response to a change in its price and in which there is a perfectly inelastic supply.
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cross-elasticity of demand
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The ratio of the percentage change in quantity demanded of one good to the percentage change in the price of some other good. A positive coefficient indicates the two products are substitute goods; a negative coefficient indicates they are complementary goods.
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demand-side market failure
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Underallocations of resources that occur when private demand curves understate consumers' full willingness to pay for a good or service.
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supply-side market failures
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overallocation of resources that occur when private supply curves understate the full cost of producing a good or service.
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allocative efficiency
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The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers);
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negative externalities
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Spillover production or consumption costs imposed on third parties without compensation to them.
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positive externalities
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Spillover production or consumption benefits conferred on third parties without compensation from them.
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quasi-public goods
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good or service to which excludability could apply but that has such a large spillover benefit that government sponsors its production to prevent an underallocation of resources.
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optimal reduction of an externality
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The reduction of a negative externality such as pollution to a level at which the marginal benefit and marginal cost of reduction are equal.
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benefits received principle
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The idea that those who receive the benefits of goods and services provided by government should pay the taxes required to finance them.
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ability to pay principle
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The idea that those who have greater inco(or wealth) should pay a greater proportion of it as taxes than those who have less incom- (or wealth).
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Stock
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An ownership share in a corporation.
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Bond
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A financial device through which a borrower (a firm or government) is obligated to pay the principal and interest on a loan at a specific date in the future.
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limited liability
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Restriction of the maximum loss to a predetermined amount for the owners (stockholders) of a corporation. The maximum loss is the amount they paid for their shares of stock.
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Principal-agent problem
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A conflict of interest that occurs when agents (workers or managers) pursue their own objectives to the detriment of the principals' (stockholders') goals.
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accounting profit
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The total revenue of a firm less its explicit costs.
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normal profit
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The payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm.
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Economic profit
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The total revenue of a firm less its economic costs (which include both explicit costs and implicit costs)
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Total product (TP)
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The total output of a particular good or service produced by a firm (or a group of firms or the entire economy).
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Marginal product (MP)
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The additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant)
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Average product (AP)
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The total output produced per unit of a resource employed (total product divided by the quantity of that employed resource). TP/Units of labor= AP
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Law of diminishing returns
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The principle that as successive increments of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease.
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Total cost (TC)
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TC=TFC+TVC
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Average Fixed cost (AFC)
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AFC=TFC/Q
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AVC
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AVC= TVC/Q
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Average total cost (ATC)
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TC/Q
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Marginal cost (MC)
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change in TC/ change in Q
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economies of scale
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Reductions in the average total cost of producing a product as the firm expands the size of plant (its output) in the long run;
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diseconomies of scale
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Increases in the average total cost of producing a product as the firm expands the size of its plant (its output) in the long run.
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constant returns to scale
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No changes in the average total cost of producing a product as the firm expands the size of its operations (output) in the long run.
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minimum efficient scale
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The lowest level of output at which a firm can minimize long-run average total cost.
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ECONOM 1051: EXAM 1