Rational
Using all available information to achieve your goals
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants
- one of the basic facts of life is that people must make choices as they try to attain their goals this unavoidable fact comes from a reality an economist
Marginal Analysis
Comparing marginal cost and marginal benefit
Centrally planned economies
Result when government decide what to produce, how to produce it, and who received the goods and services (government decides what and how much)
Market economies
Result when the decisions of households & firms determine what is produced, how it is produced, and who receives the goods and services
Market
type of economy: a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade (consumers and producers working together without knowing)
Mixed economies
type of economy: have features of both market and centrally planned economies, most economic decisions result from the interactions of buyers and sellers, but government plays a significant role in the allocation of resources
Productive efficiency
promoted by market economies where goods or services are produced at the lowest possible cost
Allocative efficiency
promoted by market economies where the production is consistent with consumer preference: the marginal benefit of production is equal to its marginal cost
-every good or service is produced up to the point where marginal benefit is equal to marginal cost
Voluntary exchange
transactions that make both the buyer and seller better off
Economic model
economists develop these models to analyze real world issues
1. decide on assumptions
2. hypothesis (casual relationship)
3. use data to test hypothesis
4. revise model if it fails to explain economic data well
5. retain the revised model to help answer f
Economic variables
something measurable that can have different values, such as the incomes of doctors
Positive analysis
the study of "what is?"
What economists generally perform
Normative analysis
the study of "what ought to be?
Macroeconomics
The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth
Microeconomics
The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices
Production possibilities frontier
a curve showing the maximum attainable combinations of two products that may be purchased with available resources and current technology
Opportunity cost
the highest valued alternative that must be given up to engage in a activity
Economic growth
the ability of the economy to increase the production of goods and services
Technology
how we can combine our resources (inputs) to produce an output, A firm's processes to produce goods and services are called
Technological change
same inputs and getting more outputs
Capital
manufactured goods that are used to produce other goods and services
Economics
the study of the choices people make to attain their goals, given their scarce resources
Demand schedule
a table that shows the relationship between the price of a product and the quantity of the product demanded
Quantity demand
the amount of a good or service that a consumer is willing and able to purchase at a given price
Demand curve
a curve that shows the relationship between the price of the product and the quantity of the product demanded
Market demand
the demand by all the consumers of a given good or service
Ceteris Paribus
all else equal" The requirement that when analyzing the relationship between two variables - such as price and quantity demanded- other variables must be held constant
The law of demand
as price decreases the quantity demand of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease
-There is a inverse relationship between price and quantity demanded
Giffen goods
goods that violate the law of demand
(is a inferior good where income effect is greater than the substitution effect)
Substitution effect
the change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes
ex: if coke were to go down in price more people will buy coke
Income effect
the change in the quantity demanded of a good that results from the effect of a change in the goods price on consumers purchasing power
ex: if coke is cheaper, buyers will save money they now have greater purchasing power because they now can purchase mor
Normal good
buy more when our incomes goes up
ex: a nice steak
Inferior good
buy less when your incomes goes up
ex: ramen noodles
Substitutes
goods and services that can be used for the same purpose
Complements
Goods and services that are used together
Supply schedule
a table that shows the relationship between the prices of a produce and the quantity of the product supplied
Quantity supplied
the amount of a good or service that a firm is willing and able to supply at a given price
Supply curve
a curve that shows the relationship between the price of a product and the quantity of the product supplied
Market equilibrium
putting demand and supply together, a situation in which quantity demanded equals quantity supplied
Surplus
something that remains above what is used or needed
Consumer surplus
difference between what you are willing to pay and the price set
Producer surplus
difference in the price received and the marginal cost (difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives)
Total surplus
area below demand curve, above supply curve up to the quantity sold
Marginal cost
the additional cost to a firm of producing one more unit of a good or service
Economic surplus
the sum of consumer surplus and producer surplus
Equity
the fair distribution of economic benefits
Perfectly competitive market
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
Demographics
the characteristics of a population with respect to age, race, and gender
Law of supply
The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied
-- There is a positive relationship between price and quantity supplied, and as t
Competitive market equalibrium
A market equilibrium with many buyers and sellers
Shortage
A situation in which the quantity demanded is greater than the quantity supplied
Marginal benefit
The additional benefit to a consumer from consuming one more unit of a good or service
Deadweight loss
the reduction in economic surplus resulting from a market not being in competitive equalibrium
Economic efficiency
A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum
Black market
a market in which buying and selling take place at prices that violate government price regulations
Price floor
A market price that cannot go lower
Price ceilings
A price that cannot be exceeded in a market
Tax incidence
The actual division of the burden of a tax between buyers and sellers in a market
Marginal opportunity costs
Increasing the production of a good requires larger and larger decreases in the production of another good.
Consumer surplus differs from the total benefit consumers receive from purchasing products because it measures ____
the total benefit of participation less then the amount paid to acquire the products and only the net benefit to consumers from participating in the market
Consumer and producer surplus measure the ___ benefit rather than the ___ benefit
1) net
2) total
A PPF with a bowed outward shape indicates___
increasing opportunity costs as more and more of one good is produced
Economic surplus is maximized when ___
the marginal benefit of consumption is equal to the marginal costs of production
Consumers and firms choosing which goods and services to buy or produce
The decision about what goods and services will be produced made in a market economy is made by...
A products equilibrium price
The products demand curve crosses the products supply curve
Economic ideas
1. people are rational 2. people respond to economic incentives 3. optimal decisions are made at the margin ("all or nothing")
% change
new-old/old x 100
Change in quantity demand
movement along the demand curve due to a change in price
Change in demand
shift of the demand curve due to a change other than price
Change in quantity supplied
movement along the supply curve as a result of a change in price
Change in supply
shift of supply curve due to a change other than price
Three fundamental questions
1. What goods and services will be produced?
2. How ill the goods and services be produced?
3. Who will receive the goods and services produced?
Invention
the development of a new good or a new process for making a good
Physical capital
The stock of computers, factory buildings, and machine tools used to produce goods better
Human capital
the accumulated training and skills that workers possess.
optimal decision
marginal benefit equals marginal cost