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Economics
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The study of how people use their scarce resources to satisfy their unlimited wants.
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Resources
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The inputs, or factors of productions, used to produce the goods and services that people want; resources consist of labor, capital natural resources, and entrepreneurial ability.
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Labor
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The physical and mental effort used to produce goods and services. Ex. Human Capital
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Capital
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The buildings, equipment, and human skills used to produce goods and services.
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Natural resources
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All gifts of nature used to produce goods and services; includes renewable and exhaustible resources.
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Ex. renewables
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Water, paper, plastic, aluminum, clothes, shoes, socks,
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Non-renewables
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Oil, coal, gasoline
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Entrepreneurial Ability
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The imagination required to develop a new product or process, the skill needed to organize production, and the willingness to take the risk of profit. Bill Gates, Steve Jobs, Walt Disney. Ted Turner, Mark Zuckerberg.
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Entrepreneur
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A profit-seeking decision maker who starts with an idea, organizes an enterprise to bring that idea to life, and assumes the risk of the operation.
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Wages
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Payment to resource owners for their labor.
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Interest
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Payment to resource owners for the use of their capital. Ex. Loans
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Rent
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Payment to resource owners for the use of their natural resources. Ex. Long-term lease. PNC, McDonald's, restaurant that would give some of the profit to the landowner.
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Profit
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Reward for entrepreneurial ability; sales minus resource costs.
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Good
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A tangible product used to satisfy human wants. Ex. Sunglasses, computers, paper, pens.
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Service
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An activity, or intangible product, used to satisfy human wants. Ex. Accountants, lawyers, tax services.
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Scarcity
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Occurs when the amount of people desire exceeds the amount available at a zero price. Ex. Water
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Market
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A set of arrangements by buyers and sellers carry out exchange at mutually agreeable terms. Ex. Buying a car means bargaining. Rewards programs. Customer loyalty.
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Product Market
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A market in which a good or service is bought and sold. Ex. Louisville Slugger
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Resource Market
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A market in which a resource is bought and sold. Ex. Gas companies
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Circular-flow model
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A diagram that traces the flow of resources, products, income, and revenue among economic decision makers.
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Rational self-interest
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Each individual tries to maximize the expected benefit achieved with
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a given cost or to minimize the expected cost of achieving a given benefit. People should be careful when going out or shopping while upset, sad. They could spend more than they should.
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Marginal
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Incremental, additional, or extra; used to describe a change in an economic variable.
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Microeconomics
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The study of economic behavior in particular markets, such as that for computers or unskilled labor. Catalyst
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Macroeconomics
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The study of the economic behavior of entire economies, as measured, for example, by total production and employment. U.S., Canada economies. Worried about Car industry, Energy industry, Housing industry
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Economic Fluctuations
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The rise and fall of economic activity to the long-term growth trend of the economy; also called business cycles. Ups and Downs of certain markets.
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Economic Theory Model
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A simplification of reality used to make predictions about cause and effect in the real world.
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The Scientific Method
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Begin with a question in economics.
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Variable
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A measure, such as price or quantity, that can take on different values at different times.
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Other-things-constant assumption
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The assumption, when focusing on the relation among key economic variables, that other variables remain unchanged, in Latin, ceteris paribus. To check the economic variables. If sugar is the same, how is salt doing?
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Behavioral Assumption
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An assumption that describes the expected behavior of economic decision makers; what motivates them. What about this new product is going to be attractive?
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Hypothesis
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A theory about how key variables relate to one another.
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Positive Economic Statement
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A statement that can be proved or disproved by reference to facts.
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Normative Economic Statement
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A statement that reflects an opinion, which cannot be proved or disproved by reference to the facts.
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Association-is causation fallacy
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The incorrect idea that if two variables are associated in time, one must necessarily cause the other.
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Fallacy of composition
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The incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or the whole.
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Secondary effects
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Unintended consequences of economic actions that may develop slowly over time a people react to events.
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Opportunity Cost
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The value of the best alternative forgone when an item or activity is chosen.
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Opportunity Cost of going to college --> Cost:Spend money, study, less sleep. Benefit: Earn more money. Degree. More independent. More opportunities. Are you trainable? Chance for promotion.
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Sunk Cost
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A cost that has already been incurred in the past, cannot be recovered, and thus is irrelevant for the present and future economic decisions.
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Law of Comparative Advantage
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The individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good. David Ricardo- He bought Britain's allies when they were failing. He became rich. He was the Father of Modern International Trade. His model: He got country's laborers in low markets into their high markets. Countries become specialized in those markets. Countries trade those high market resources.
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Absolute Advantage
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The ability to produce something using fewer resources than other producers use. Adam Smith - The Wealth of Nations. 1776.
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Comparative Advantage
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The ability to produce something at a lower opportunity cost than other producers face. Wine and Cloth.
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Barter
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The direct exchange of one good for another using money. Ex. Russia and Brazil.
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Division of Labor
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Organizing production of a good into its separate tasks.
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Adam Smith
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"Invisible Hand Capitalism" will take care of supply and demand. Laissez-faire means hands off, or the government should stay away from the economy. Physiocrats stopped the French economy reform.
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Specialization of Labor
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Focusing work effort on a particular product or a single task.
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Production Possibilities Frontier (PPF)
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A curve showing the alternative combinations of goods that can be produced when available resources are used fully and efficiently; (a boundary between inefficient and unattainable combinations). England ran unattainably for 10 months.
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Efficiency
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The condition that exists when there is no way resources can be reallocated to increase the production of one good without the decreasing the production of another good.
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Law of Increasing Opportunity Cost
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To produce each additional increment of good, a successively larger increment of an alternative good must be sacrificed if the economy's resources are already being used efficiently.
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Economic Growth
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An increase in the economy's ability to produce goods and services; an upward shift of the production possibilities frontier. Examples: More resources, technology breakthrough, improvements in rules of the game.
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Pure Capitalism
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An economic system characterized by the private ownership of resources and the use of prices to coordinate economic activity in unregulated markets.
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Private Property of Rights
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An owner's right to use, rent, or sell resources or property.
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Mixed System
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An economic system characterized by the private ownership of some resources and the public ownership of other resources; some markets are unregulated and others are regulated. Private, public sectors working with government so they do not overproduced. Ex. Socialistic country- Scandinavia. Norway and Sweden.
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Pure Command System
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An economic system characterized by the public ownership of resources and centralized planning. The government decides what the companies make. Pure command- North Korea. Usually communist countries.
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Convergence Theory
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Belief that all the economies are moving towards a socialistic economy.
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Sole proprietorship
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A firm with a single owner who has the right to all profits and who bears unlimited liability for the firm's debts. 20% of companies
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Partnership
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A firm with multiple owners who share the firm's profits and bear unlimited liability for the firm's debts. The owner has different ideas about the firm's growth, future. Not everyone agreeing. One does more work than others. White-collar theft. Damages other's reputation.
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Corporation
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A legal entity by stockholders whose liability is limited to the value of their stock.
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80% of GDP in terms of sales.
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*A realized capital gain is any increase in the market value of a share that occurs between the time that the share is purchased and the time it is sold.
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*The sole proprietorship is the most important form in the sheer number of firms, but the corporation is the most important in terms of total sales.
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Cooperative
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An organization of people who pull their resources to buy and sell more efficiently than they could individually. French formed wine cooperatives to completed packaging them faster after competition picked up. Little House on the Prairie.
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Non-profit Institutions
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Groups that do not pursue profit as a goal; they engage in charitable, educational, humanitarian, cultural, professional, or other activities, often with a social purpose. YMCA, NCAA, Habitat for Humanity, The Clinton Foundation.
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Information Revolution
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Technological change spawned by the invention of the microchip and the Internet that enhanced the acquisition, analysis, and transmission of information.
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Market Failure
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A condition that arises when the unregulated operation of markets yields socially undesirable results. Monopoly, Oligopoly. Airlines are an example of possible market failure
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Antitrust Laws
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Prohibitions against price fixing and other anticompetitive practices.
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Monopoly
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A sole producer of a product for which there are no close substitutes.
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Natural Monopoly
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One firm that can serve the entire market at a lower per-unit cost than can two or more firms. Cable, utilities.
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Private Good
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A good that is both rival in consumption and exclusive, such as pizza.
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Public Good
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A good that, once produced, is available for all to consume, regardless of who pays and who doesn't such a good is nonrival and nonexclusive (such as national defense).
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Externality
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A cost or a benefit that falls on a third Party and is therefore ignored by the two parties to the market transaction. Positive: building more soccer fields. Negative: Pollution
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John Maynard Keynes
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The General Theory, 1936
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"Laissez-faire, as we know it, is dead. We need government intervention and lead the economy."
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Fiscal Policy
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The use of government purchases, transfer payments, taxes, and borrowing to influence economy-wide activity such as inflation, employment, and economic growth.
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Monetary Policy
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Regulation of the money supply to influence economy-wide activity such as inflation, employment, and economic growth. (The Fed)
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Ability-to-Pay Tax Principle
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Those with a greater ability to pay such as those with a higher income or those who own more property should pay more taxes.
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Benefits-Received Tax Principle
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Those who receive more benefits from the government program funded by a tax should pay more taxes. Middle-class pays the most taxes.
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Tax Incidence
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The distribution of tax burden among taxpayers; who ultimately pays the tax.
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Proportional Taxation
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The tax as a percentage of income remains constant as income increases; also called flat tax.
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Progressive Taxation
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The tax as a percentage of income increases as income intersects.
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Marginal Tax Rate
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The percentage of each additional dollar of income that goes to the tax.
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Regressive Taxation
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The tax as a percentage of income decreases as income increases.
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Merchandise Trade Balance
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The value of a country's exported goods minus the value of its imported goods during a given period.
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Balance of Payments
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A record of all economic transactions between residents of one country and residents of the rest of the world during a given period,
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Foreign Exchange
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Foreign money needed to carry out international transactions.
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Demand
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A relationship between the price of a good and the quantity that consumers are willing and able to buy during a given period.
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Law of Demand
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The quantity of a good demanded during a given period relates inversely to its price.
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Substitution Effect of a Price Change
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When the price of a good falls, that good becomes cheaper compared to other goods so consumers tend to substitute that good for other goods.
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Money income
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The number of dollars a person receives per period, such as $400 per week.
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Real income
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Income measured in terms of the goods and services it can buy.
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Income Effect of a Price Change
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A fall in the price of a good increases consumers' real income making consumers more able to purchase goods; for a normal good, the quantity demanded increases.
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Demand Curve
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A curve showing the relation between the price of a good and the quantity demanded during a given period, o.t.c.
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Quantity Demanded
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The amount demanded at a particular price, as reflected by a point on a given demand curve.
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Market Demand
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Sum of the individual demands of all consumers in the market.
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Normal Goods
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A good, such as new clothes, for which demand increases, or shifts rightward, as consumer incomes rise. Tide has a new detergent.
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Inferior Good
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A good, such as new clothes, for which demand decreases, or shifts leftward, as consumer income rise.
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Substitutes
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Goods, such as Coke and Pepsi, that are related in such a way that an increase in the price of one shifts the demand for the other rightward. Buying the cheaper soda.
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Complementes
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Goods, such as milk and cookies, that are related in such a way that an increase in the price of one shifts the demand for the other leftward.
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Tastes
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Consumer preferences; likes and dislikes in consumption; assumed to be constant along a given demand curve. Styles in clothing change.
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Movement Along the Demand Curve
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Change in quantity demanded resulting from a change in the price of the good, o.t.c.
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Shift of the Demand Curve
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Movement of a demand curve right or left resulting from a change in one of the determinants of demand other than the price of the good.
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Supply
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A relationship between the price of a good and the quantity that producers are willing and able to sell during a given period.
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Law of Supply
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The quantity of a good supplied during a given period is usually directly related to its price, o.t.c.
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Supply Curve
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A curve showing the relation between the price of a good and the quantity supplied during a given period, o.t.c.
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Quantity Supplied
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The amount offered for sale at a particular price, as reflected by a point on a given supply curve.
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Individual Supply
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The supply of an individual producer.
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Market Supply
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The sum of individual supplies of all producers in the market.
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Relevant Resources
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Resources used to produce the good in question.
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Alternative Goods
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Other goods that use some or all of the same resources as the good in question. Calzone, pizza sticks instead of pizza.
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Movement along a Supply Curve
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Change in quantity supplied resulting from a change in the price of a good, o.t.c.
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Shift of a Supply Curve
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Movement of a supply curve left or right resulting from a change in one of the determinants of supply other than the price of the good. Produce more or less.
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Transactions Cost
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The costs of time and information required to carry out market exchange. Farmers selling bushels of straw.
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Surplus
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At a given price, the amount by which quantity supplied exceeds quantity demanded; a surplus usually forces the price down.
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Shortage
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At a given price, the amount by which quantity demanded exceeds quantity supplied; a shortage usually forces the price up.
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Equilibrium
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The condition that exists in a market when the plans of buyers match those of sellers, so quantity demanded equals quantity supplied and markets clears.
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Disequilibrium
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The condition that exists in a market when the plans of the buyers don't match those of sellers; a temporary mismatch between quantity supplied and quantity demanded as the market seeks equilibrium.
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Price Floor
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A minimum legal price below which a good or service cannot be sold; to have an impact, a price floor must be set above the equilibrium price.
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Price Ceiling
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A maximum legal price above which a good or service cannot be sold; to have an impact, a price ceiling must be set below the equilibrium price.
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Price Elasticity (Responsive) of Demand
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Measures how responsive quantity demanded is to a price change; the percentage change in quantity demanded divided by the percentage change in price.
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Price Elasticity of Demand = Percentage change in quantity demanded/ Percentage change in price
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Price Elasticity Formula
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Percentage change in quantity demanded divided by the percentage change in price; the average quantity and average price are used as bases for computing percentage changes in quantity and in price.
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Price Elasticity Equation
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ED= (q / (q+q')/ 2) / (p / (p+p')/ 2)
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Inelastic (Unresponsive) Demand
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A change in price has relatively little effect on quantity demanded; the percentage change in demanded is less than the percentage change in price; the resulting price elasticity has an absolute value less than 1.0.
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Unit-Elastic (Non-Responsive) Demand
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The percentage change in quantity demanded equals the percentage change in price; the resulting price has an absolute value of 1.0.
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Elastic Demand
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A change in price has a relatively large effect on quantity demanded; the percentage change in quantity demanded exceeds the percentage change in price; the resulting price elasticity has an absolute value exceeding 1.0.
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Total Revenue
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Price multiplied by the quantity demanded at that price.
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Linear Demand Curve
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A straight-line curve; such as a demand curve has a constant slope but usually has a varying price elasticity.
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Perfectly Elastic Demand Curve
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A horizontal line reflecting a situation in which any price increases reduces quantity demanded to zero; the elasticity has an absolute value of infinity.
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Perfectly Inelastic Demand Curve
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A vertical line reflecting a situation in which any price change has no effect on the quantity demanded; the elasticity value equals zero. Ex. Roses
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Unit-elastic Demand Curve
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Everywhere along the demand curve, the percentage change in price causes an equal but offsetting percentage change in quantity demanded, so total revenue remains the same; the elasticity has an absolute value of 1.0.
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Constant-elasticity Demand Curve
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The type of demand that exists when price elasticity is the same everywhere along the curve; the elasticity value is constant.
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Young Smokers
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Produces bad effects: Lung Cancer, Emphysema, heart disease
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Inelastic products
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toothpaste, heart medication, clothing, short-term gas prices
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Inelastic Supply
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A change in price has relatively little effect on quantity supplied; the percentage change in quantity supplied is less than the percentage change in price; the price elasticity of supply has a value less than 1.0.
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Unit-Elastic Supply
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The percentage change in quantity supplied equals the percentage change in price; the resulting price elasticity of supply equals 1.0.
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Elastic Supply
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A change in price has a relatively large effect on quantity supplied; the percentage change in quantity supplied exceeds the percentage change in price; the resulting price elasticity of supply exceeds 1.0.
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Demand Becomes More Elastic Over Time. Why? After a price increase, the demand for that product decreases because less people will want that product.
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Perfectly Elastic Supply
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Change in price has a relatively large effect on quantity supplied; the percentage change in quantity supplied exceeds the percentage change in price; the resulting price elasticity of supply exceeds 1.0.
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Perfectly Elastic Supply Curve
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A horizontal line reflecting a situation in which any price decreases drops the quantity supplied to zero; the elasticity value is infinity.
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Perfectly Inelastic Supply Curve
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A vertical line reflecting a situation in which a price change has no effect on the quantity supplied; the elasticity value is zero.
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Unit-Elastic Supply Curve
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A percentage change in price causes in identical percentage change in quantity supplied; depicted by a supply curve that is a straight line from the origin; the elastic value equals 1.0.
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Income Elasticity of Demand
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The percentage change in demand divided by the percentage change in consumer income; the value is positive for normal goods and negative for inferior goods. Coke prices go up, people will buy Pepsi instead.
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Cross-Price Elasticity of Demand
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The percentage of change in the demand of one good divided by the percentage of change in the price of another good.
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