Principles of Microeconomics Chapters 1-4

A device used to analyze the relationship between two variables while the values of other variables are held unchanged.

Why Study Economics

All societies must answer three basic questions. These three questions make up the economic problem.

An increase in the total output of an economy.

The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided. _________ is a behavioral, or social, science. In large measure, it is the study of how people make choices.

Four specific criteria used most often in economics are

In economics, allocative ____________. An ___________ economy is one that produces what people want at the least possible cost.

A market in which profit opportunities are eliminated almost instantaneously.

The collection and use of data to test economic theories.

Fairness.

The erroneous belief that what is true for a part is necessarily true for the whole.

The period in England during the late eighteenth and early nineteenth centuries in which new manufacturing technologies and improved transportation gave rise to the modern factory system and a massive movement of the population from the countryside to the cities.

The branch of economics that examines the economic behavior of aggregates- income, employment, output, and so on-on a national scale.

The process of analyzing the additional or incremental costs or benefits arising from a choice or decision.

The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units - that is, firms and households.

A formal statement of a theory, usually a mathematical statement of a presumed relationship between two or more variables.

An approach to economics that analyzes outcomes or economic behavior, evaluates them as good or bad, and may prescribe courses of action. Also called policy economics.

The principal that irrelevant detail should be cut away.

The best alternative that we forgo, or give up, when we make a choice or a decision.

An approach to economics that seeks to understand behavior and the operation of systems without making judgements. It describes what exists and how it works.

Literally, "after this (in time), therefore because of this." A common error made in thinking about causation. If Event A happens before Event B, it is not necessarily true that A caused B.

Limited

A condition in which national output is growing steadily, with low inflation and full employment of resources.

A measure that can change from time to time or from observation to observation.

An organization that transforms resources (inputs) into products (outputs). They are the primary producing units in a market economy.

A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.

The consuming units in an economy.

The markets in which goods and services are exchanged.

The markets in which the resources used to produce goods and services are exchanged.

The input/factor market in which households supply work for wages to firms that demand labor.

The input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.

The input/factor market in which households supply land or other real property in exchange for rent.

Three Factors of Production

The amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.

Shows how much of a given product a household would be willing to buy at different prices for a given time period.

A graph illustrating how much of a given product a household would be willing to buy at different prices.

The negative relationship between price and quantity demanded: ceteris paribus, as price rises, quantity demanded decreases, as price falls, quantity demanded increases.

The sum of all a household's wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure.

The total value of what a household owns minus what it owes. It is a stock measure.

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

Goods for which demand tends to fall when income rises.

Goods that can serve as replacements for one another; when the price of one increases, demand for the other increases.

Identical products.

Goods that "go together"; a decrease in the price of one results in an increase in demand for the other and vice versa.

The change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The ________ is brought about by a change in the original conditions.

The change in quantity demanded brought about by a change in price.

The sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

The difference between revenues and costs.

A minimum price below which exchange is not permitted. Most common example is minimum wage. Whenever a ____ _____ is set about equilibrium, there will be an excess supply.

The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.

The difference between the current market price and the cost of production for the firm.

Waiting in line as a means of distributing goods and services: a nonporous rationing mechanism.

Tickets or coupons that entitle individuals to purchase a certain amount of a give product per month.

The positive relationship between price and quantity of a good supplied: An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied.

A graph illustrating how much of a product a firm will sell at different prices.

The condition that exists when quantity supplied and quantity demanded are equal. At __________, there is no tendency for price to change.

They choose the quantities and character of outputs produced, the types and quantities of inputs demanded, and the technologies used in production.

They choose the types and quantities of products demanded and the types and quantities of inputs supplied.

6 things that the quantity demanded of an individual product by an individual household depends on:

The condition that exists when quantity demanded exceeds quantity supplied at the current price.

The condition that exists when quantity supplied exceeds quantity demanded at the current price.

The sum of all that is supplied each period by all producers of a single product.

The change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The ________ is brought about by a change in the original conditions.

The change in quantity supplied brought about by a change in price.

Examples of non price rationing systems include:
(The most common rationale for such policies is "fairness.")

Shows how much of a product firms will sell at alternative prices.

The total loss of producer and consumer surplus from underproduction or overproduction.

The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.

A maximum price that sellers may charge for a good, usually set by the government.

Those who receive special treatment from dealers during situations of excess demand.

A price floor set for the price of labor.

The difference between the maximum amount a person is willing to pay for a good and its current market price.

Literally from the French: "allow (them) to do." An economy in which individual people and firms pursue their own self-interest without any central direction or regulation.

PPF illustrates a number of important economic concepts:

A market in which illegal trading takes place at market-determined prices.

When a society consists of more than one person, questions of _______, ________, and ________ arise.

Goods and services of value to households.

In a market economy, the ____ ______ serves two functions:1) determines the allocation of resources among producers and the final mix of outputs
2) distributes goods and services on the basis of willingness and ability to pay

Supply and demand curves can also be used to illustrate the idea of ........ 😉

A graph that shows all of the combinations of goods and services that can be produced if all of society's resources are used efficiently.

Ricardo's theory that specialization and free trade will benefit all trading parties, even those that may be "absolutely" more efficient producers.

The institution through which buyers and sellers interact and engage in exchange.

The process that transforms scarce resources into useful goods and services.

The slope of the production possibility frontier.

The process of using resources to produce new capital.

Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants.

The freedom of individuals to start and operate private businesses in search of profits.

The inputs into the process of production. Another term for resources. Three key factors of production are land, labor, and capital.

An increase in the total output of an economy. ___________ occurs when a society acquires new resources or when it learns to produce more using existing resources.

A producer has an ________ _________ over another in the production of a good or service if he or she can produce that product using fewer resources (a lower absolute cost per unit).

Goods produced for present consumption.

The idea that consumers ultimately dictate that will be produced (or not produced) by choosing what to purchase (and what not to purchase).

A producer has a __________________ over another in the production of a good or service if he or she can produce that product at a lower opportunity cost.

An economy in which a central government either directly or indirectly sets output targets, incomes, and prices.

Things that are produced and then used in the production of other goods and services.

Goods that pass through the production process.

We have more want than what we have, we always want more resources that can be produced.

What you give up divided by what you get.

PPF is ______________ because if you are producing more of one thing, you must be producing less of another.

The _____________ of a PPF illustrates the law of increasing opportunity cost because the steepness of the slope (opportunity cost) gradually increases.

The more of a good produced, the higher the opportunity cost. Ex: the more tennis you play, the less you study.

If a point on the PPF is _________ the curve, resources are not being used efficiently/not all resources are being used.

If a point on the PPF is __________ the curve, resources are being used efficiently.

If a point on the PPF is _________ the curve, resources are being used unsustainably.

What is on the price tag. Ex: $4

Price of something in terms of something else. Ex: coffee is $4, muffin is $2, cost of coffee=2 muffins

Need both _________________ in order to have demand.

_________ is the only thing that changes quantity demanded.

A curve illustrates _____________ when it is read from the left, and _______________ when it is read from below.

5 Determinants of Supply

What could I make instead of this. Ex: instead of apple pie, I could make cherry pie. If the price of apple pie increases, the supply of cherry pie will decrease.

Things that are made along with something else, byproducts. Ex: donuts and donut holes. If the price of donuts goes up, the supply of donut holes will go up.

At _________________, everyone that wants to consume the good or service at the equilibrium price will be able to do so. It occurs without government intervention, just consumers and suppliers acting in their own self-interest.

The highest price that a consumer is willing to pay for a good.

The lowest price that a supplier is willing to sell a good at.

A change in supply causes a change in __________, not demand.

I am getting as much out of my resources as I can.

I have allocated my resources between the different things I am producing to maximize my benefit. Only one point on the PPF will be _____________.

If resources are equally useful, opportunity cost is _________ and there is no slope on the PPF.

_________ on the PPF occurs when there is an increase/decrease in resources or government regulation. Ex: gold mine found, new software created, retirement age

_________ on the PPF occurs when we move from one point of production to another. Ex: decrease in employment moves point inward because there are still people who CAN work, they just aren't able to find jobs