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Definition of Economics
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The study of how individuals and societies choose among alternate scarce economic resources to produce goods and services to satisfy human wants.
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Resources
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Factors of production for goods
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Investment
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the accumulation of more capital
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Scarcity
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limited resources vs unlimited wants
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Opportunity Cost
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The value of the next best alternative forgone
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Economic Resources
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Land, Labor, Capital, and Entrepreneurship
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Absolute Advantage
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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
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comparative advantage
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the ability to produce a good at a lower opportunity cost than another producer
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Income vs Wages
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What you receive as an individual vs cost of production for labor
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Production Possibilities Frontier (PPF)
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A representation of an economy that shows various combinations of maximum output that can be produced using resources fully and efficiently (Ceteris Paribus)
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Aspects of a PPF graph
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Concave down, More Capital=Less comsumption, a rightward shift in PPF (increase in resources) = an expansion in the potential for production
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Definition of Production Efficiency
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The condition in which the maximum output is produced with the given resources and technology
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Simple Circular Flow Model (Open mixed Economy)
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Output Market: HH= Demand; Bus= Supply, Input Market: HH= Supply; Bus= Demand
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Goals for an open mixed Economy
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Economic Growth, Stability, Equity, Efficiency
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Exports
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goods produced domestically and sold abroad
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Imports
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goods produced abroad and sold domestically
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Law of Demand
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Ceteris Paribus, there will be larger quantities demanded at lower prices than at higher prices and vice versa
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Factor that Shift Demand (Determinants of Demand)
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Tastes and preferences; Income (normal goods (+), inferior goods (-)); Price of related goods (complement goods (-), substitute goods (+)); Price Expectations (+); Number of Consumers (-)
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Graph of Demand
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A demand curve shows an inverse relationship between Price and Quantity, A change in Demand is a shift of the line, a greater demand means that larger quantities will be demanded at any prices
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Law of Supply
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Ceteris Paribus, there will be larger quantities supplied at higher prices than at lower prices and vice versa
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Factors that Shift Supply (Determinants of Supply)
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Cost of Inputs (Resources) (-); Technology (+); Price Expectations (-); Price of related goods in production (-); Taxes and/or subsidies (+); Number of firms (+)
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Graph of Supply
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A supply curve shows a positive relationship between Price and Quantity, A change in Supply is a shift of the line,
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Market Shortage
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Quantity Demanded > Quantity Supplied, Price is wrong
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Market Surplus
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Quantity Demanded < Quantity Supplied, Price is wrong
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Market Equilibrium
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Quantity Demanded = Quantity Supplied, Price is right
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Definition of Consumer Surplus
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Paying less for a good than they were willing to pay (the difference between the price the consumer is willing and able to pay for a good and the price that is actually paid)
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Definition of Producer Surplus
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The difference between the price received and the price that the producer is willing and able to receive for the quantities of goods produced
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Price Ceiling
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An imposed price control to limit how high the price of a good can be, must be placed below equilibrium to be effective, results in a shortage, favors consumer
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Price Floor
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An imposed price control to limit how low the price of a good can be, must be place above equilibrium to be effective, results in a surplus, favor business
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