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Scarcity
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the limited nature of society's resources
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Economics
answer
the study of how society manages its scarce resources
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Efficiency
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the property of society getting the most it can from its scarce resources
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Equality
answer
the property of distributing economic prosperity uniformly among the members of society
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Opportunity cost
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whatever must be given up to obtain some item
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Rational people
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people who systematically and purposefully do the best they can to achieve their objectives
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Marginal change
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a small incremental adjustment to a plan of action
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Incentive
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something that induces a person to act
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Market economy
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an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
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Property rights
answer
the ability of an individual to own and exercise control over scarce resources
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Market failure
answer
a situation in which a market left on its own fails to allocate resources efficiently
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Externality
answer
the impact of one person's actions on the well-being of a bystander
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Market power
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the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
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Productivity
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the quantity of goods and services produced from each unit of labor input
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Inflation
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an increase in the overall level of prices in the economy
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Business cycle
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fluctuations in economic activity, such as employment and production
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Circular-flow diagram
answer
a visual model of the economy that shows how dollars flow through markets among households and firms; missing the government and the world (imports)
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Production possibilities frontier
answer
a. Shows the combinations of goods + services an economy can produce
b. Usually bowed out
i. This implies opportunity costs are not constant
c. If there is a technological advancement in the production of the good/service, the curve pushed outward on the same axis
b. Usually bowed out
i. This implies opportunity costs are not constant
c. If there is a technological advancement in the production of the good/service, the curve pushed outward on the same axis
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Microeconomics
answer
the study of how households and firms make decisions and how they interact in markets
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Macroeconomics
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the study of economywide phenomena, including inflation, unemployment, and economic growth
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Positive statements
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claims that attempt to describe the world as it is
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Normative statements
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claims that attempt to prescribe how the world should be
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Circular-flow diagram (flow of $)
answer
Households -(Spending)-> Market for goods and services -(Revenue)-> Firms -(Wages, rent, profit)-> Markets for factors of production -(income)-> Households
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Circular-flow diagram (flow of goods + services)
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Households -(labor, land, capital)-> Markets for factors of production -(production inputs)-> Firms -(goods and services sold)-> Market for goods and services -(goods and services bought)-> Households
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Market
answer
a group of buyers and sellers of a particular good or service
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Competitive market
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a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
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Quantity demanded
answer
the amount of a good that buyers are willing and able to purchase
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Law of demand
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the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
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Demand schedule
answer
a table that shows the relationship between the price of a good and the quantity demanded
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Demand curve
answer
a graph of the relationship between the price of a good and the quantity demanded
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Normal good
answer
a good for which, other things equal, an increase in income leads to an increase in demand
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Inferior good
answer
a good for which, other things equal, an increase in income leads to a decrease in demand
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Substitutes
answer
two goods for which an increase in the price of one leads to an increase in the demand for the other
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Complements
answer
two goods for which an increase in the price of one leads to a decrease in the demand for the other
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Quantity supplied
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the amount of a good that sellers are willing and able to sell
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Law of supply
answer
the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
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Supply schedule
answer
a table that shows the relationship between the price of a good and the quantity supplied
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Supply curve
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a graph of the relationship between the price of a good and the quantity supplied
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Equilibrium
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a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
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Equilibrium price
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the price that balances quantity supplied and quantity demanded
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Equilibrium quantity
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the quantity supplied and the quantity demanded at the equilibrium price
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Surplus
answer
a situation in which quantity supplied is greater than quantity demanded
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Shortage
answer
a situation in which quantity demanded is greater than quantity supplied
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Law of supply and demand
answer
the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
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Elasticity
answer
a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants
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Price elasticity of demand
answer
a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
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Total revenue
answer
the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold
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Income elasticity of demand
answer
a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income
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Cross-price elasticity of demand
answer
a measure of how much the quantity demanded of one good responds to a 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
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Price elasticity of supply
answer
a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price
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price ceiling
answer
legal maximum on price at which a good can be sold (i.e. rent control)
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price floor
answer
legal minimum on price at which a good can be sold (i.e. minimum wage)
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not binding
answer
if price equilibrium is below ceiling, price ceiling is:
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binding constraint
answer
if price equilibrium is above ceiling, price ceiling is a:
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earned income tax credit
answer
government program that supplements incomes of low wage workers
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tax incidence
answer
manner in which the burden of a tax is shared among participants in a market
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rationing mechanisms
answer
1. long lines
2. discrimination according to seller's biases
2. discrimination according to seller's biases
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Welfare economics
answer
the study of how the allocation of resources affects economic well-being
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Willingness to pay
answer
the maximum amount that a buyer will pay for a good
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Consumer surplus
answer
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
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Cost
answer
the value of everything a seller must give up to produce a good
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Producer surplus
answer
the amount a seller is paid for a good minus the seller's cost of providing it
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Efficiency
answer
the property of a resource allocation of maximizing the total surplus received by all members of society
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Equality
answer
the property of distributing economic prosperity uniformly among the members of society
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10 Principles of Economics
answer
1)people face trade-offs
2) cost of something is what you give up to get it
3) rational people think at the margin
4)people respond to incentives
5) trade can make everyone better off
6) Markets are usually a good way to organize economic activity "invisible hand"
7)government can sometimes improve market outcome
8) a country's standard of living depends on its ability to produce goods and services
9) prices rise when government prints too much money
10) society faces a short run trade off between inflation and unemployment
2) cost of something is what you give up to get it
3) rational people think at the margin
4)people respond to incentives
5) trade can make everyone better off
6) Markets are usually a good way to organize economic activity "invisible hand"
7)government can sometimes improve market outcome
8) a country's standard of living depends on its ability to produce goods and services
9) prices rise when government prints too much money
10) society faces a short run trade off between inflation and unemployment
question
circular flow diagram
answer
A visual model of the economy that shows how dollars and inputs flow through markets among households and firms.
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