Economy
How society manages it's scarce resources - or all it's resources
Scarcity
The limited nature of society's resources
Efficiency
The property of society getting the most it can from its scarce resources
Equality
The property of distributing economic prosperity uniformly among the members of society
Opportunity cost
Whatever must be given up to obtain some item
Rational people
People who systematically and purposefully do the best they can to achieve their objectives
Marginal change
A small incremental adjustment to a plan of action
Incentive
Something that induces a person to act
Market economy
An Economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
Property rights
The ability of an individual to own and exercise control over scarce resources
Market failure
A situation in which a market left on its own fails to allocate resources efficiently
Externality
The impact of one person's actions on the well-being of a bystander
Market power
The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.
Productivity
The quantity of goods and services produced from each unit of labor input
Inflation
An increase in the overall level of prices in the economy
Business cycle
Fluctuations in economic activity, such as employment and production
Circular flow diagram
A visual model of the economy that shows how dollars flow through markets among households and firms.
Production possibilities frontier
A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
Microeconomics
The study of how households and firms make decisions and how they interact in markets
Macroeconomics
The study of economywide phenomena, including inflation, unemployment, and economic growth
Positive statements
Claims that attempt to describe the world as it is
Normative statements
Describes the economic world as it should be
Absolute Advantage
The ability to produce a good using fewer inputs than another producer
Opportunity cost
Whatever must be given up to obtain some item
Comparative advantage
The ability to produce a good at a lower opportunity cost than another producer
Imports
Goods produced abroad and sold domestically
Exports
Goods produced domestically and sold abroad
Market
A group of buyers and sellers of a particular good or service
Competitive market
A market in which there are many buyers and many sellers so that each has a negligible impact on the market price
Quantity demanded
The amount of a good that buyers are willing and able to purchase
Law of demand
The claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
Demand schedule
The table that shows the relationship between the price of a good and the quantity demanded
Demand curve
A graph of the relationship between the price of a good and the quantity demanded
Normal goods
A good for which, other things equal, an increase in income leads to an increase in demand
Inferior goods
A good for which, other things equal, an increase in income leads to a decrease in demand
Substitutes
Two goods for which an increase in the price of one leads to an increase in the demand for the other
Complements
Two goods for which an increase in the price of one leads to a decrease in the demand for the other
Quantity supplied
The amount of a good that sellers are willing and able to sell
Law of supply
The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
Supply schedule
A table that shows the relationship between the price of a good and the quantity supplied
Supply curve
A graph of the relationship between the price of a good and the quantity supplied
Equilibrium
A situation in which the market price has reached the level at which quantity supplied equals quantity demanded
Equilibrium price
The price that balances quantity supplied and quantity demanded
Equilibrium quantity
The quantity supplied and the quantity demanded at the equilibrium price
Surplus
A situation in which quantity supplied is greater than quantity demanded
Shortage
A situation in which quantity demanded is greater than quantity supplied
Law of supply and demand
The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
Elasticity
A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants
Price elasticity of demand
A measure of how much the quantiy demanded of a good responds to change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
Total revenue
The amount paid by buyers and received by sellers of a good computed as the price of the good times the quantity sold
Income elasticity of demand
A measure of how much the quantity demanded of a good responds to change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income
Cross price elasticity of demand
A measure of how much the quantity demanded of one good responds to change in the price of another good. Computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good
Price elasticity of supply
A measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as a percentage change in quantity supplied divided by the percentage change in the price
Price ceiling
A legal maximum on the price at which a good can be sold.
Price floor
A legal minimum on the price at which good can be sold
Tax incidence
The manner in which the burden of a tax is shared among participants
Welfare economics
The study of how the allocation of resources affects economic well-being
Willingness to pay
The maximum amount that a buyer will pay for a good
Consumer surplus
The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
Cost
The value of everything a seller must give up to produce a good
Producer surplus
The amount a seller is paid for a good minus the sellers cost of providing it
Efficiency
The property of a resource allocation or maximizing the total surplus received by all members of society
Equality
The property of distributing economic prosperity uniformly among the members of socienty
Deadwieght loss
The fall in total surplus that results from a market distortion, such as a tax
World Price
The price of a good that prevails in the world market for that good
tariff
A tax on goods produced abroad and sold domestically
Microeconomics
The study of how households and firms make decisions and how they interact in markets
Macroeconomics
The study of economy-wide phenomena, including inflation, unemployment, and economic growth
Gross domestic product
The market value of all final goods and services produced within a country in a given period of time
Consumption
Spending by households on goods and services, with the exception of purchases of new housing
Investment
Spending on capital equipment, inventories, and structures, including household purchases of new housing
Government purchases
Spending on goods and services by local, state , and federal governments
Net exports
Spending on domestically produces goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
Nominal GDP
The production of goods and services values at current prices
Real GDP
The production of goods and services valued at constant prices
GDP deflator
A measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
domestic trade ratio
The opportunity cost in your own country
Competitive market
- price takers: buyers & sellers in multitudes such that each has negligible impact on prices.
- homogenous product ( generic)
- ease of exit and entry
- Perfect knowledge
Elasticity
-[(Q2-Q1)/[(Q2+Q1)/2]/(P2-P1)/[(P2+P1)/2]]
Binding
Price cannot reach equilibrium for a product. Can be price ceiling or price floor.
Non-parametric value
Value that is not represented on the axis of the graph. Taxes, taste.
Loss of sales
dead weight loss
Competitive market
- Price takers - large enough volume of participants that any single person has a negligible impact on price
- Homogenous product (generic)
- Ease of Exit and Entry
- Perfect knowledge (no one has an advantage over another)
Market power
Ability or maintain prices in the face of falling demand.