Scarcity
limits to satisfy wants
Choice
to select one think over another
Utility
point of greatest happiness
Opportunity Cost
the value of the option not chosen
Factors of Production (Resources)
-land (natural resources)-labor-physical capacity-entrepreneurial ability
Total Utility
sum of an individual's happiness -extent to which an individual's needs are met
Marginal Utility
the increase in happiness one gains from a product
Law of Diminishing Utility
states that the more unit of a product one has, the less one needs.
Marginal Benefit
additional benefit
Marginal Cost
additional cost per unit
Marginal Analysis
most helpful in company decision making regarding production
Production Possibilities Curve (Frontier)
-determines if an individual, company, or nation is producing at its most efficient level and what product will likely make the highest profit-shows opportunity costs, economic efficiency, economic growth, and scarcity
Economic Growth
the frontier expands over time
how to calculate opportunity cost
the slope of the PPC
Law of Increasing Costs
opportunity costs increase as the quantity produced increases
allocative efficiency
measurement of the benefit a product provides to society
absolute advantage
a company or nation can produce a good more efficiently than all its competitors
specialization
when an individual, company, or nation focuses on producing one thing-usually because it has a comparative advantage-leads to increased profits and lower prices for the consumer
traditional economy
pre-industrialized economy guided by tradition and often using bartering over currency
pure command economy
communist societies-the government (not the market) determines all aspects of production.
pure market economy
capitalism-governed by the laws of supply and demand with no outside interference
mixed economy
governed by the market and the government-people decide what is produced by what they are willing to buy-government regulates different aspects of the economy with regards to safety -most modern economies
Principle of Private Property
market favors private ownership of most economic resources.-leads to innovation and investment --> growth-allows for tradeex: FedEx or UPS are more efficient than USPS because they are privately owned vs gov owned
Freedom of Choice
in a market economy, all individuals are free to acquire, use, and sell resources w/o restriction or regulation
Self-Interest
motivates people in a market economy
Competition
leads to lower prices and higher quality to attract buyers
Law of Demand
as price increases, demand decreases-only affected by the relative (real) price
Demand Curve
shows how demand changes as price increases-measures quantity demanded
determinants of demand
-consumer income-price of a substitute good-price of a complementary good-consumer preferences-consumer expectations about future pricing-number of buyers in the market
Law of Supply
as the price increases, quantity increases to meet demand
Increasing Marginal Costs
as suppliers increase the amount they are supplying, the marginal costs of production increase as well
supply curve
show the relationship between the cost to produce a product and the quantity to be produced
determinants of supply
-cost of an input-technology and productivity-taxes and subsidies-producer expectations about future prices-prices of alternative goods that could be produced-number of similar companies in the industry
eslasticity
the measure of sensitivity to change
price elasticity of demand
measure the extent to which changes in price alter demandex: indicates the extent to which people would stop buying bread if the price of bread went upVERTICLE LINEEd= (%of change in quantity demanded)/(%change in price)
price inelastic
when the change in price is greater than the change in demand (Ed<1)
perfectly elastic
change in price that leads to unlimited demandHORIZONTAL LINE
unit elastic
any changes in price do not effect the demand of the productex: life-saving drug will always be in demand regardless of price
factors that impact elasticity
-proportion of income-number of good substitutes-time
Supply Curve of Labor
The number of hours a laborer is willing to work at a given wage rate-opportunity costs play a large role- increase in wages = increase in hours worked-demand for leisure increases as income increases (income effect)
stock
shares of a given company that has "gone public
money market funds
short term investments that are considered safe and solid -treasury bonds
Public Goods
products that an individual can consume without reducing their availability to other individuals-television, plumbing, etc.
Firm
any organization that uses factors of production to produce a good or service.
Sole Proprietorship
a business belonging to a single individual
Partnership
joint venture between two individuals/business entities
Corporation
group of individuals or businesses working together to share the business risk and profit-newest, 19th century
short term
a period in which at least one production input is fixed
long term
a period in which all production inputs are changeable
Long Run Equilibrium
price = average total cost-zero economic profit
Total Product of Labor
the total amount of product at each quantity of labor
Marginal Product of Labor
change in amount of a product resulting from a change in labor
Average Product of Labor
(total product)/(amount of labor that give average productivity of market labor)
Fixed Costs
do not change-rent, wages, insurance costs
Average Costs
(total cost to produce)/(# items produced)
Perfect Competition
-many small independent buyers and sellers-everybody produces the same product-there are no barriers to the entry/exit of old firms-all firms must accept the price where it is and produce it as much as they want at that price (because they cannot change it)*no one business that controls the entire marketplace because none are big enough
Monopoly
when one corporation or business controls an entire area or product of a given market-lack of close substitutes for the product-barriers to entry for new firms-market power*function best in a new market where competition is too expensive or not possible due to legal roadblocks
Oliogopoly
when few businesses control one market-interdependent as a result-have barriers
Price Floor
the lowest price established by the government-used to aid producers in unfair markets w lowered prices-if above market price , SURPLUS-if below, ineffective
Price Ceiling
highest price allowed by the government-if below market price, SHORTAGE
Anti-Trust Laws
used to promote a competitive market environment by protecting consumers from unfair business practices
Trust
control over the entire industrial process
Progressive Taxes
tac the income of the wealthy more than other groups-in free market: adjusted for income losses therefore tax % differs between income levels
Proportional Taxes
all taxpayers are taxed at the same rate or the same proportion their incomes
Regressive Taxes
affect everyone at the same rate without a sliding proportional scale-makes life more expensive for the lower classes
Circular Flow Model
shows where money goes in any given economy-follows money as it enters the marketplace to be spent by consumers and invested by businesses-reveals places in the economy where money is being wasted
Closed Economy
1. households provide factors and production to firms2. firms turn factors into goods and services3. firms pay households competitive compensation for the factors offered4. households use that income to buy goods and services created by the firms
GDP
Gross Domestic Product-total value of domestic production : market value of all final goods and services produced within a nation in one year*only counts what is produced within the country, products made abroad count for the country it is made in, not the country it is being made for
Consumer Price Index
the measure of the health of an economy based on consumer spending-measures the prices of goods and services as they change over timeCPI= 100x(spending Current year/spending Base year)
Inflation
the percent change from year to year in spending
economic growth
the outward movement (right) of the PPC over time-results from an increase in productivity
Determinants of Productivity
-physical capital (tools of production)-human capital (knowledge/skill of laborers)-natural resources-technology (knowledge/ability to efficiently produce goods, also computers and other tech)
Aggregate Supply
relationship between the total domestic output and average price level-sum of all microeconomic supply curves
Long Run Aggregate Supply Curve
represents the output level at full employment
Federal Reserve (Fed)
acts as a central bank of the US and ensures the safety of the American monetary system-created to stabilize the US money supply and to moderate interest rates
equilibrium interest rates
occur only when interest rates and monetary supply are equivalent-regulated by the Fed
monetary stabilization
efforts to keep prices, unemployment, and the money supply stable
Fiscal Policy
an approach to economic management in which the government is deeply involved in managing the economy
expansionary fiscal policy
government increases spending or decreases taxes in an effort to INCREASE AD curve-counteract recession
contractionary fiscal policy
government spending is reduced and taxes are increased in an effort to DECREASE AD curve-counteract inflation
Tarriff
tax on imports and exports
surplus
when revenue exceeds spending
deficit
the gap between what the government has spent and what it has earned
Comparative Advantage
whichever producer has a SMALLER opportunity cost in the item being produced
Absolute Advantage
the producer that can make more of the product using LESS resources than their competitors
monetary vs fiscal policy
monetary= interest rates, total supply of money in circulation (GDP)fiscal: taxing and spending actions of the government
Substitute Effect
when the price of a good rises OR income falls, consumers will replace more expensive items with cheaper substitute goods.
Income Effect
Consumer demand changes with changes in consumer income.EX: not buying a coffee that is $4 because it used to be $2 and is now going to cut out too much of their income.
Relationship between Price and the Demand of the good and complementary goods.
Inverse.Increase in Price = decrease in demand for good and complementary good