AP Econ - Ch. 1, 2, 4 Flashcards
Scarcity
Limited goods and choices; all goods are privately or collectively owned by members of society, and all members bear the cost.
opportunity cost
To obtain more of one thing, society forgoes the opportunity of getting the next best thing.
utility
the pleasure or satisfaction obtained from consuming a good or service
economic decisions are __________
economic decisions are purposeful or rational, not random or chaotic
marginal analysis
comparison of marginal benefits and marginal costs (additional), benefit should always outweigh cost.
ceteris paribus
other-things-equal assumption-the assumption that factors other than those being considered did not change
microeconomics
decision making of individuals, workers, households, and business firms.
macroeconomics
examines the economy as a whole or its basic subdivisions or aggregates, such as the government, household, and business sectors. Seeks to obtain an overview.
positive economics
focuses on facts and cause-and-effect relationships. based on theory and theory testing. establishes scientific statements about economic behavior; “What is”
normative economics
incorporates value judgements about what the economy should be like or what particular policy actions should be recommended to achieve the desired goal; “What ought to be”
economizing problem
need to make choices because economic wants exceeds economic means.
income is _______
limited and finite
wants are ______
unlimited
budget line
schedule or curve that shows various combinations of two products a consumer can purchase with a specific income.
resource categories
land, labor, capital (manufactured goods), entrepreneurial ability.
production possibilities model
lists the different combinations of two products that can be produced with a specific set of resources, assuming full employment
production possibilities curve
maximum combinations of goods attainable with fixed resources, in a fully employed economy, and fixed technology.
law of increasing opportunity costs
As the production of a particular good increases, the opportunity cost of producing an additional unit rises.
Outward shifts in the production possibilities curve (to the right) are caused by ________
Economic growth (increase in the number of resources, better resources, Increase in resource supplies (population, education, etc), advances in technology, and international trade.
economics
social science concerned with making optimal choices under conditions of scarcity or uncertainty.
marginal analysis
Any decision made should weigh the marginal benefit and marginal costs and the benefit should always outweigh the cost.
Another name for economic resources
factors of production
“There is no free lunch”
Means that there is always a cost for a product, even if it is not evident. In economics, the cost is the loss of resources.
economics
the study of the efficient use of scarce productive resources
money
What is considered to be an economic resource (factor of production)?
Fallacy of Composition
The false notion that what is true for one individual or part of a whole is necessarily true for a group of individuals or the whole.
Post hoc fallacy
The false belief that when one event precedes another, the first event must have caused the second event.
Economic System
A particular set of institutional arrangements and a coordinating mechanism for solving the economizing problem; a method of organizing an economy, of which the market system and the command system are the two general types.
Command System
A method of organizing an economy in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities; command economy; communism.
Market System
All the product and resource markets of a market economy and the relationships among them; a method that allows the prices determined in those markets to allocate the economy’s scarce resources and to communicate and coordinate the decisions made by consumers, firms, and resource suppliers.
Private Property
The right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property.
Freedom of Enterprise
The freedom of firms to obtain economic resources, to use those resources to produce products of the firm’s own choosing, and to sell their products in markets of their choice.
Freedom of Choice
The freedom of owners of property resources to employ or dispose of them as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in a manner that they think is appropriate.
Self-Interest
That which each firm, property owner, worker, and consumer believes is best for itself and seeks to obtain.
Competition
The regulatory mechanism of the market system.
Market
Any institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of a particular good or service.
Specialization
The use of the resources of an individual, a firm, a region, or a nation to concentrate production on one or a small number of goods and services.
Division of Labor
The separation of the work required to produce a product into a number of different tasks that are performed by different workers; specialization of workers.
Medium of Exchange
Any item sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter.
Barter
The exchange of one good or service for another good or service.
Money
Any item that is generally acceptable to sellers in exchange for goods and services.
Consumer Sovereignty
Determination by consumers of the types and quantities of goods and services that will be produced with the scarce resources of the economy; consumers’ direction of production through their dollar votes.
Dollar Votes
The “votes” that consumers and entrepreneurs cast for the production of consumer and capital goods, respectively, when they purchase those goods in product and resource markets.
Creative Destruction
The hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies.
“Invisible Hand”
The tendency of firms and resource suppliers that seek to further their own self-interests in competitive markets to also promote the interests of society.
Circular Flow Diagram
An illustration showing the flow of resources from households to firms and of products from firms to households. These flows are accompanied by reverse flows of money from firms to households and from households to firms.
Households
Economic entities (of one or more persons occupying a housing unit) that provide resources to the economy and use the income received to purchase goods and services that satisfy economic wants.
Businesses
Economic entities (firms) that purchase resources and provide goods and services to the economy.
Sole Proprietorship
An unincorporated firm owned and operated by one person.
Partnership
An unincorporated firm owned and operated by two or more persons.
Corporation
A legal entity (“person”) chartered by a state or the Federal government that is distinct and separate from the individuals who own it.
Product Market
A market in which products are sold by firms and bought by households.
Resource Market
A market in which households sell and firms buy resources or the services of resources.
“Who will get the goods and services?”
“Those willing and able to pay for them.”
Coincidence of Wants
For exchange to occur each seller must have a product that some buyer wants.
“How will the system accommodate change?”
“Through the guiding function of prices and the incentive function of profits.”
“Laissez-faire”
“Let it be”
“How will the goods and services be produced?”
“Using the least-cost production techniques.”
“What goods and services will be produced?”
Goods and services that are profitable.”
“How will the system promote progress?”
“Through the profit potential that encourages development of new technology.”
Markets and Prices
The organizing mechanism of the Market.
Characteristics of the market system
private property, freedom of enterprise, competition
Specialization–the division of labor–enhances productivity and efficiency what ways?
allowing workers to take advantage of existing differences in their abilities and skills; avoiding the time loss involved in shifting from one production task to another.; and allowing workers to develop skills by working on one, or a limited number, of tasks.
Invisible Hand
notion that, under competition, decisions motivated by self-interest promote the social interest.
price elasticity of demand
a measure of the responsiveness of buyers to a change in the price of a product or resource.
midpoint formula
A method for calculating price elasticity of demand or price elasticity of supply that averages the two prices and two quantities as the reference points for computing percentages.
elastic demand
Product or resource demand whose price elasticity is greater than 1. This means the resulting change in quantity demanded is greater than the percentage change in price.
inelastic demand
Product or resource demand for which the elasticity coefficient for price is less than 1. This means the resulting percentage change in quantity demanded is less than the percentage change in price.
unit elasticity
Demand or supply for which the elasticity coefficient is equal to 1; means that the percentage change in the quantity demanded or supplied is equal to the percentage change in price.
perfectly inelastic demand
Product or resource demand in which price can be of any amount at a particular quantity of the product or resource demanded; quantity demanded does not respond to a change in price; graphs as a vertical demand curve.
perfectly elastic demand
Product or resource demand in which quantity demanded can be of any amount at a particular product price; graphs as a horizontal demand curve.
total revenue (TR)
The total number of dollars received by a firm (or firms) from the sale of a product; equal to the total expenditures for the product produced by the firm (or firms); equal to the quantity sold (demanded) multiplied by the price at which it is sold.
total-revenue test
A test to determine elasticity of demand between any two prices: Demand is elastic if total revenue moves in the opposite direction from price; it is inelastic when it moves in the same direction as price; and it is of unitary elasticity when it does not change when price changes.
price elasticity of supply
The ratio of the percentage change in quantity supplied of a product or resource to the percentage change in its price; a measure of the responsiveness of producers to a change in the price of a product or resource.
market period
A period in which producers of a product are unable to change the quantity produced in response to a change in its price and in which there is a perfectly inelastic supply.
short run
a period of time in which producers are able to change the quantities of some but not all of the resources they employ; a period in which some resources (usually plant) are fixed and some are variable.
long run
a period of time long enough to enable producers of a product to change the quantities of all the resources they employ; period in which all resources and costs are variable and no resources or costs are fixed.
cross elasticity of demand
The ratio of the percentage change in quantity demanded of one good to the percentage change in the price of some other good.
income elasticity of demand
The ratio of the percentage change in the quantity demanded of a good to a percentage change in consumer income
