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economics
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the social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity
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scarcity
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the condition whereby the resources we use to produce g + s are limited relative to our wants for them
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scarce good (economic good)
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a good for which you can not get all you want at zero cost
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free good
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opposite of a scarce good, a consumer can get all he/she wants at zero cost
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price
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a signal that tells producers what and how much to produce; in a standard market transaction, it is paid by the consumer
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cost
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a sacrifice associated with making a choice; in a standard market transaction it is paid by the producer
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types of cost
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explicit cost, implicit/opportunity cost, economic cost
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explicit costs
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out of pocket costs, monetary payments
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implicit/opportunity costs
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most valued option forgone, "what you gave up"
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economic cost
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explicit + implicit costs
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resources
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the inputs/factors used in the production of outputs, products, g + s
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types of resources
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natural, labor, capital, entrepreneurship
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natural resources
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land, oil, lumber, etc.
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labor resources
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physical and mental talents used in production
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capital resources
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all manufactured goods used in production
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entrepreneurship resources
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ability to combine other resources into valuable outputs
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how do we make good choices?
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we try to maximize our utility by using marginal decision making
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utility
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satisfaction a consumer obtains from the consumption of a good or service
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marginal
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additional; the change that results from an additional unit
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economic principle
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relationship between variables, statements about economic behavior, or the economy that enables prediction of the probable effects of certain actions
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model
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a simplified representation of how something works
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market
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any institution that brings together producers and consumers of a particular good or service
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law of demand
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the price of a good and the quantity demanded are inversely related
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demand curve
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a line that shows the maximum consumers are willing to pay for any quantity
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factors that shift the demand curve
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income, price of related goods, expectations of future prices, number of buyers, tastes and preferences
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normal goods
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goods for which income and demand move together
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inferior goods
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goods for which income and demand move opposite
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substitutes
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goods that take the place of each other in consumption
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compliments
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goods that are used together in consumption
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law of supply
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price of a good and the quantity supplied are directly related
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change in quantity demanded
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a change in amount purchased caused by a change in. price; movement along the demand curve
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change in demand
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a shift of the entire demand curve to the left or right
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change in quantity supplied
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a change in the amount offered for sale caused by a change in price; a movement along the supply curve
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change in supply
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a shift of the entire supply curve to the left or right
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direction of increase
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right
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direction of decrease
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left
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5 factors that shift supply
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input/resource prices, technology, taxes, expectations, # of sellers
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equilibrium price (pe)
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price at which market clears (Qs=Qd)
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equilibrium
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no tendency to change
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surplus
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at prices above equilibrium price, Qs>Qd
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shortage
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at prices below equilibrium price, Qd>Qs
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_____ puts a downward pressure on price until ____ is eliminated
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surplus
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____ puts an upward pressure on prices until the ____ is eliminated
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shortages
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surplus equation
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Qs-Qd units
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shortage equation
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Qd-Qs units
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pe
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equilibrium price
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qe
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quantity equilibrium
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price rationing
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the allocation of goods among consumers using prices
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economists believe that _______ is the most efficient method of allocating goods and service
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price rationing
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