scarcity
a situation in which unlimited wants exceed the limited resources available to fulfill those wants
economics
the study of the choices people make to attain their goals, given the scarce resources
3 fundamental question that any economist must answer:
1) what goods and services will be produced?
2) how will those goods and services be produced?
3) who will receive the goods and services produced?
economic model
a simplified version of reality used to analyze real-world economic situations
market
a group of buyers, and sellers of a good or service and the institution or arrangement by which they come together to trade
economists assume that people in firms:
are rational, respond to economic incentives and optimal decisions are made at the margin
marginal analysis
analysis that involves comparing marginal benefits and marginal costs
marginal benefit
the additional or extra benefit associated with an action (the word marginal means additional) Marginal benefits should equal marginal costs
marginal cost
the increase or decrease in costs as a result of one more or one less unit of output (ex: you watch an extra hour of TV then the marginal cost is the lower grade you relieve on your test from studying less)
trade-offs
all the alternatives that we give up whenever we choose one course of action over another
centrally planned economy
economic system in which the central government makes all decisions on the production and consumption of goods and services
market economy
an economy that relies chiefly on market forces to allocate goods and resources and to determine prices
mixed economy
market-based economic system with limited government involvement
productive efficiency
a good or service is produced at the lowest possible cost
allocative efficiency
when the last unit produced costs the same as the benefit received by consumers (marginal benefit = marginal cost)
voluntary exchange
both the buyer and the seller of a product are made better of by the transaction
positive analysis
analysis concerned with what is
normative analysis
analysis concerned with what ought to be
microeconomics
the branch of economics that studies the economy of consumers or households or individual firms
macroeconomics
the study of the economy as a whole, including topics such as inflation, unemployment and economic growth
difference between macroeconomics and microeconomics
macroeconomics examine the economy as a whole and microeconomics examines individual markets
production possibility frontier (PPF)
illustrates the trade-offs facing an economy that produces only two goods; shows the maximum quantity of one good that can be produced for any given quantity produced of the other
opportunity cost
the most desirable alternative given up as the result of a decision
trade
the act of buying and selling
absolute advantage
the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
product markets
markets where producers offer goods and services for sale
factor markets
Markets for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability
factors of production
resources necessary to produce goods and services
free market
an economic system in which prices and wages are determined by unrestricted competition between businesses, without government regulation or fear of monopolies.
property rights
the rights individuals or firms have to the exclusive use of their property including the right to buy or sell it
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
demand
the relationship between the price of a good and the quantity of it the consumers are willing to buy at that price
demand curve
a graphical representation of the law of demand. It slopes downward (for most goods) because , all else constant, the quantity demand rises (falls) as the price falls (rises)
market demand
the demand by all the consumers of a given good or service
law of demand
the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
income effect
a change in price affects overall purchase power
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
ceteris paribus condition
The requirement that when analyzing the relationship between two variables�such as price and quantity demanded�other variables must be held constant (ceteris paribus is latin for "all else equal")
top 5 variables that influence the market demand:
1) income
2) price of goods
3) tastes
4) population and demographics
5) expected future prices
normal goods
when income rises, demand increases. Most goods are normal
inferior goods
when income rises, demand decreases, because better goods can be afforded (ex: Generic-labeled food)
complements
goods and services that are used together such as hot dog and hot dog buns
demographics
the characteristics of a population with respect to age, race, and gender.
supply
the relationship between the price of a good and the quantity of it that firms are willing to produce at that price
law of supply
the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
top 5 variables that shift the market supply:
1) prices of inputs
2) technological change
3) prices of substitutes in production
4) number of firms in the market
5) expected future prices
supply curve
a graphical representation of the law of supply. It slopes upward because quantity supplied rises as price rises, with other things constant
technological change
a positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs
market equilibrium
a situation in which the quantity demanded equals quantity supplied
competitive market equilibrium
a market equilibrium with many buyers and many sellers
surplus
a quantity much larger than is needed
shortage
a quantity much less than is needed
price ceiling
a maximum price that can be legally charged for a good or service
price floor
floor below which prices are not allowed to fall
consumer surplus
the difference between the highest price a consumer is willing to pay for a good or service and the price the consumer actually pays
marginal benefit
the additional benefit to a consumer from consuming one more unit of a good or service
marginal cost
the additional cost to a firm of producing one more unit of a good or service
producer surplus
the difference between the lowest price a firm would be willing to accept and the price it actually receives
economic loss
the sum of consumer surplus and producer surplus
dead-weight loss
the reduction in economic surplus resulting from a market not being in competitive equilibrium
economic efficiency
a market outcome in which marginal benefit to consumers of the last unit produced is equal to it's marginal cost of production and in which the sum of consumer surplus and producer surplus is at maximum