Basic Definitions Flashcards
What is economics?
The study of how people make decisions and how they deal with scarcity. Insights and limitations of Economics: Economics seeks to explain why entities make the decisions that they do. Many basic models in economics assume that every individual’s goal is to maximize his or her utility (happiness). To do that, one has to spend each dollar of their budget on the good that offers the highest marginal utility for that dollar. People spend their money in whatever way they think will make them most happy, which usually means buying a variety of goods and services due to the fact that most goods produce decreasing marginal utility.
What is macroeconomics?
The performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes and government spending to regulate an economy’s growth and stability. It focuses primarily on decisions made by governments and trends in economic sectors in aggregate (housing, manufacturing, etc.) and the impacts of those decisions and trends on the overall national or global economy.
What is microeconomics?
The behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. It focuses on the decisions made by individual people, families, and businesses. It includes the examination of “markets,” which are places, either physical or online, where goods are exchanged between buyers and sellers. Market study includes the questions of “How much of a given good will consumers purchase? At what price(s)? How are those quantities and processes affected by other factors?
What is utility?
A person’s overall happiness or satisfaction. Economics assumes that each person’s goals when allocating his or her resources is to make decisions to maximize his or her utility (achieve maximum happiness). Utility includes the happiness, sense of fulfillment, or anticipated spiritual rewards that come from charitable acts.
What is marginal utility?
It refers to how much additional utility is derived from consumption of one additional unit of a particular good (the most additional happiness per dollar). To maximize utility, you must spend each dollar of your budget on the good that offers you the highest marginal utility for that dollar.
What is decreasing marginal utility?
When a good’s initial impact offers high utility, then the second offering does not make you as happy and is even lower as of the third. At some point, more of it will bring you negative utility, meaning that you would actually be happier as a result of not having said good. Most goods have a decreasing marginal utility, meaning that each unit consumed brings less additional happiness than the prior unit.
What is opportunity cost?
When making a choice, it is the value of the best alternative that you must forgo in order to make that choice. You must also consider how much utility you would get from spending your resources – those dollars and that time you’d spend on say a movie – in another way. The opportunity cost of going to a movie is the forgone utility from the next most enjoyable activity you could have done. Optimal decision making requires consideration of opportunity costs.
What are the factors of production?
The inputs used to create finished goods (actual products that we buy). These are the scarce resources that we, as a society, must choose how to allocate. These include: Land – including land, water, forests, fossil fuels, weather, etc. Labor – the human work necessary to produce and deliver goods. Capital – man made goods used to produce other goods – factories, machinery, highways, electrical grids, etc. Human Capital – the knowledge and skills that make workers productive.
How should a society allocate its factors of production?
To use all resources to their fullest capacity, or to use the fewest possible resources for any given level of output, which describes productive efficiency. The factors of production are also used to make the quantities and types of goods that society most highly values, which describes allocative efficiency.
What is the production possibilities frontier?
Conveys the various choices that an economic entity could make when choosing what to produce given the constraint imposed by its limited factors of production. The frontier line and what it means to have points within the shaded area and outside the area. If a point is on the line, it is productively efficient. It is below the line (frontier), it is not productively efficient. If it is above the frontier, it is impossible for a single producer to reach and they must specialize and trade. When companies specialize and trade, they are left with more products than they would have if they tried to produce all on their own. Without trade, the entity cannot obtain (or consume) more than the quantities that lie on its production possibilities frontier.
What is absolute advantage?
When it takes you fewer units of input to make a given product than it takes your neighbor to make the same product. However, an entity can specialize and gain from trade even if they do not have an absolute advantage in anything.
What is comparative advantage?
When your opportunity cost for producing that thing is lower than that of other potential producers. It makes more sense to specialize in something when there is comparative advantage.
What is demand?
Demand for a good is simply how much of that good consumers would buy at various prices. Demand is illustrated using a graph known as a demand curve.
What is market demand?
Market demand for a good is the aggregate (or sum) of every individual consumer’s demand for that good.
What is elasticity of demand?
Elasticity of demand: demand curves naturally trend downward sloping, indicating that the higher the price of the good, the less of it people will buy. The steepness of a demand curve illustrates how sensitive consumers are to changes in the price of the good. If a demand curve is relatively flat, then consumers are highly price sensitive. Goods of this nature are said to have very “elastic demand.” If a good has a horizontal demand curve, its demand is said to be “perfectly elastic.” Elasticity is the percentage change in quantity demanded, divided by the percentage change in price. When price is $0, quantity demanded is basically infinite. Some goods have very steep demand curves, indicating that consumers are not very sensitive to changes in the price of goods. Meaning that when the price goes up or down significantly, they only slightly decrease or increase the quantity they purchase. Goods of this nature are said to have “inelastic demand.” If a good’s demand curve is vertical, its demand is said to be “perfectly inelastic.” Multiple factors that affect the elasticity of demand for a good: Availability of substitutes Whether the good is a necessity or a luxury Whether the good is a small or large part of buyers overall budget Time When there are many acceptable substitutes for a good, demand for that good tends to be highly elastic. In economics, goods are often classified as either luxury goods or necessities. All else being equal, a luxury good (jewelry) would have a higher elasticity of demand than a necessity (life-saving drug). The more of one’s budget a good requires, the more sensitive one would be to changes in its price, and the more elastic demand there would be. The elastic demand of a good is higher over a long period of time than over a short period of time.
What happens when there is a change in quantity demanded?
When the price of a good changes, the resulting change in how much of the good people want to buy.
What happens when there is a change in demand?
The shift of the demand curve, caused by changes in factors other than the good’s price. A decrease in demand is a shift of the demand curve to the left, meaning that at any given price, consumers would demand less of the good than they demanded at the price previously. An increase in demand is a shift of the demand curve to the right, meaning that at any given price, consumers would demand more of the good than they would have demanded at that price in the past.
What can cause a shift in demand?
Changes in consumer preferences: when a new product comes into style, when a new product makes an old one obsolete, when a certain food is now good for you, all show that demand will increase for that product. Changes in consumer income: when consumer income levels increase, demand for goods increase. Goods of this nature are said to be “normal goods.” If the demand for a good decreases when income increases that good is said to be an “inferior good.” Changes in the prices of other goods: Ex: Pepsi and Coke are substitute goods, so when the price for one decreases, demand for the substitute good decreases, and when the price for one increases, demand for the substitute good increases. When PS goes up, then DS goes up; and when PS goes down then DS goes down. However, complementary goods are the opposite; when the price for one increases, demand for the other would decrease. When Pc goes up, then Dc goes down; and when Pc goes down then Dc goes up. Changes in consumer expectations: if consumers expect the price of a good to go up in the near future, they stock up on it, which increases demand now. However, if a consumer expects the price to go down in the near future, then they will delay their purchases and demand decreases. Changes in the number of consumers in the market: when the number of buyers in the market changes. Ex: If enrollment goes up dramatically at a university, demand for rental housing in the nearby area will increase.
What is supply?
Supply of a good is how much of that good producers would produce at various prices. Like demand, supply is often illustrated with a graph known as a supply curve. In addition to showing how much suppliers would produce at a given price, supply curves show how much producers must be paid (per unit) to produce a given quantity.
What is upward sloping supply?
When a business requires a higher price per unit in order to produce a higher level of outputs.
What is the marginal cost of production?
The additional cost that must be incurred in order to produce one more unit of a good. The supply curves for most goods are upward sloping because most industries face “increasing marginal costs of production.”
What is the elasticity of supply?
Elasticity of supply refers to how sensitive producers are to changes in price.
If a slight increase in price draws many new producers into the market, then supply for that good is said to be elastic. If a good has a horizontal supply curve, it is said to be perfectly elastic.
If the change in price only results in a very slight change in the quantity that producers are willing to supply, the good is said to have inelastic supply. If a good has a vertical supply curve, then it is said to be perfectly inelastic.
The elasticity of supply for a good is determined by how easy it is for producers to change their level of output in response to changes in price. Elasticity of supply tends to be greater in the long run than in the short run because producers have an easier time adjusting output levels when given more time to do so.
What are the difference between changes in supply vs changes in quantity supplied?
When the price of a good changes, the resulting change in how much of it producers want to produce is said to be a change in quantity supplied. This moves along the good’s supply curve. Changes in supply is a shift of the supply curve, caused by changes in factors other than the good’s price. A shift to the right indicates an increase in supply. However, a shift to the left indicates a decrease in supply. Decrease in cost of production results in an increase in supply of that good. An increase in the cost of production results in a decrease of supply. The supply of a good can also be affected by the change in opportunity cost. If the profit margin for producing a good increases, then the supply of that good would fall. The opportunity cost of producing a good increases when the profitability of producing that good increases. A change in the supply can be a result of a change in the number of suppliers, and the supply curve would shift to the right. Another way to say it is if the minimum price necessary to get producers to supply a given amount of a good would be lower than the price that would have been necessary before the influx of new suppliers. P↑S↓ and P↓S↑ thus OC↑Pr↑ then S↓ and Suppliers↑Pr↓
What is the equilibrium price?
The quantity of the good that producers are willing to supply is equal to the quantity of the good that consumers are willing to buy.
What is the equilibrium point?
The point at which quantity supplied and quantity demanded are equal. On the graph it is the center of the X shape.
What is market equilibrium?
When everybody who wants to buy the good at its current price is able to find somebody to sell it to them, and everybody who wants to supply the good at its current price is able to find somebody to buy their product. This is also referred to as the market clearing outcome.
What is a free market?
A market where buyers and sellers are permitted to act without constraint and their actions drive the price and quantity of a good toward market equilibrium.
