Ch. 1-4 Key Terms Flashcards
Scarcity
How much we want outweighs how much there actually is in reality
Economics
The study of the change in human action under varying degrees of scarcity
First Principle of Economics
life is about trade offs
Second Principle of Economics
because there are trade offs, there is an opportunity cost associated with every transaction
opportunity cost
the highest valued alternative that must be given up to engage in an activity
Third Principle of Economics
reasonable people think at the margin
marginal thinking
the evaluation of whether the benefit of acquired one more unit of something is greater than its cost
Fourth Principle of Economics
incentives matter
Incentives
something that induces a person to act (e.g. grades, prices, legal sanctions, regulations, promotions, tips, reputation, etc)
Fifth Principle of Economics
trade is beneficial
The Invisible Hand
Position by Adam Smith that when everyone is motivated by self-interest, they act as if guided and the results are always what is best for the economy as a whole
Sixth Principle of Economics
markets are often best at organizing economic activity
Utility functions
the amount of pleasure or satisfaction a consumer gains from consuming a good
Seventh Principle of Economics
legal institutions can improve market outcomes
property law
the branch of law which offers you remedy when your property rights have been violated (the basis of all markets)
market failure
A situation in which the market outcome appears suboptimal, which may be improved upon by government intervention
Types of market failure
Monopolies and market power;
Externalities;
Public Goods;
Informational Asymmetry
government failure
A situation where government interference in the market to solve an apparent market failure creates a worse outcome
The Scientific Method
Observation > question > hypothesis > gather data > test hypothesis > reject (and start a new hypothesis) OR fail to reject (hypothesis becomes theory)
positive statement
A statement of fact which describes how the world is and can be scientifically tested (falsifiable)
normative statement
A value judgement which describes how the world ought to be and cannot be tested
microeconomics
the study of how individuals, households, and firms make decisions and how they interact in markets
macroeconomics
the study of economy-wide phenomena
a model
a simple representation of some aspect of the world; can be graphical, theoretical, or mathematical
a signal
a pattern underlying a set of data
a noise
a random fluctuation in data with no underlying meaning
Production Possibilities Frontier (PPF)
A graphical representation of the maximum amount of any two products that can be produced from a fixed set of resources
Why is the PPF bowed out?
Increasing opportunity cost; not all resources are equally productive in all cases (Law of Increasing Opportunity Cost)
When is the PPF not bowed out?
when the resources are perfectly substitutable (equally productive)
indifference point
when the total costs for both options are exactly equal; you could flip a coin to decide
shifting the PPF
the only shifters are the factors of production; keep an eye out for things that only shift one side of the PPF
factors of production
land, labor, capital, and entrepreneurship
capital goods
goods used to produce other goods (not the finished product)
consumer goods
used in the present to achieve some satisfaction (finished goods)
comparative advantage
you can gain by specializing in producing what you do well and exchanging that production for something that you would have trouble making
how to divide goods from specialization and trade
split the excess, not the total; divide what each party would’ve had without specialization and then take the extra gained from specialization and split it in half
excess surplus
any unexpended and unencumbered amount of goods or resources
absolute advantage
the ability to produce a good using fewer inputs than another producer
absolute equality
everyone is equal in their ability to produce a good; i.e. they all use the same number of inputs to produce the same number of outputs
personal valuation
the worth that an individual places on an asset, good, or service
a market is…
a group of buyers and sellers of a particular good or service
competition is…
the method used under social cooperation to improve one’s own welfare
The Law of Demand
ceteris paribus, there is an inverse relationship between the price of a good or service and the quantity that people are willing to buy of that good or service
ceteris paribus
holding everything else constant
Diminishing Marginal Utility
each additional unit of a product has less and less value
Determinants of Demand
- change in income
- change in taste or preference
- change in the price of related goods (substitutes or complements)
- change in the number of buyers
- change in expectations
normal goods
normal, usual, typical goods that you buy when you have enough money for it
inferior goods
worse versions of normal goods that you buy when you cannot afford normal goods
substitute goods
goods that compete with each other and can be exchanged for one another
complementary goods
goods typically used or bought together
Law of Supply
ceteris paribus, there is a direct relationship between the price of a good or service and the quantity that people are willing to supply of that good or service
reservation price
a limiting price; the highest a buyer is willing to pay or the lowest a seller is willing to accept
Determinants of Supply
- change in input costs
- change in technology
- change in government policy
- change in the number of sellers
- change in expectations
Equilibrium
the quantity demanded and the quantity provided are exactly equal; the price that buyers are willing to pay and the price that sellers are willing to take is exactly equal
shock
a change in equilibrium; something happens to the market to shake it up
how to analyze changes in equilibrium?
- decide which curve shifts (supply, demand, or both)
- determine the direction of the shift
- use the diagram to determine what happens to the equilibrium price/quantity
shortage
when demand outstrips supply
surplus
when supply outstrips demand
how to deal with supply and demand as equations
- solve each for one variable (y)
- set the equations equal to each other and solve for the remaining variable (x)
- plug x back into one of the original equations to get y
price ceilings
the government artifically sets the price below equilibrium
price floors
the government artificially sets the price above equilibrium
