Chapter 1 - INTRODUCTION TO MICROECONOMICS Flashcards
When the mix of goods produced represents the mix that society most desires
allocative efficiency
All possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set
budget constraint
Questions aimed at finding out whether a variable causes or affects one or more outcome variables
causal questions
Individuals making decisions, considering the costs and benefits of different alternatives
choice
A diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market
circular flow diagram
When a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production
comparative advantage
A comparison of two different economic outcomes, before and after a change in some underlying economic force; enables one to run a thought experiment by comparing two different economic outcomes
comparative statics
Thought experiments; the answer to a “what if…” question
counterfactual
A model is in equilibrium when everyone in the model is making the best decision they can, given the decisions of everyone else; called an equilibrium because no one wants to change what they are doing
equilibrium
A market in which firms are sellers of what they produce and households are buyers
goods and services market
The market in which households sell their labor as workers to business firms or other employers
labor market
As we consume more of a good or service, the utility we get from additional units of the good or service tends to become smaller than what we received from earlier units
law of diminishing marginal utility
As we add additional increments of resources to producing a good or service, the marginal benefit from those additional increments will decline
law of diminishing returns
Examination of decisions on the margin, meaning a little more or a little less from the status quo; examining the benefits and costs of choosing the next unit of a good or service
marginal analysis
An applied or empirical representation of an object or situation often used to test a theory; helps us make sense of and simplify complicated data; deliberate simplifications that enable economists to understand what causes what by ignoring extraneous details
model
Statement which describes how the world should be
normative statement
Measures cost by what we give up/forfeit in exchange; measures the value of the forgone alternative
opportunity cost
All possible combinations of consumption that someone can afford given the prices of goods and the individual’s income
opportunity set
Statement which describes the world as it is
positive statement
A diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available
production possibilities frontier (PPF)
When it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)
productive efficiency
Costs that we make in the past that we cannot recover; these costs should not affect decision-making because they cannot be recovered
sunk costs
The phenomenon in which we are pushed toward equilibrium when in surplus or shortage
the invisible hand of the market
A representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation
theory
Satisfaction, usefulness, or value one obtains from consuming goods and services
utility
The durable non-labor inputs used in production (buildings, software)
capital goods
An economy where economic decisions are passed down from government authority and where the government owns the resources; an economic system in which the government dictates what is produced and for whom goods and services are produced.
command economy
The way in which different workers divide required tasks to produce a good or service
division of labor
A way of organizing an economy that is distinctive in its basic institutions.
economic systems
A set of tools for studying the economy; the study of how humans make choices under conditions of scarcity
economics
When the average cost of producing each individual unit declines as total output increases
economies of scale
Products (goods and services) made domestically and sold abroad
exports
Economic organizations in which private owners of capital goods hire and direct labor to produce goods and services for sale on markets to make a profit
firms
Economic policies that involve government spending and taxes
fiscal policy
Total GDP divided by the population
GDP per capita
The trend in which buying and selling in markets have increasingly crossed national borders
globalization
The total market value of all goods and services, a measure of economic well being; measure of the size of total production in an economy
gross domestic product (GDP)
Change in value divided by initial value; often expressed as percentages and may be positive or negative
growth rate
Products (goods and services) made abroad and then sold domestically
imports
The laws and informal rules that regulate social interactions among people, and between people and the biosphere. Sometimes also termed “the rules of the game.”
institutions
The branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance
macroeconomics
Interaction between potential buyers and sellers; a combination of demand and supply; a way for people to exchange products and services for their mutual benefit
market
An economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand
market economy
The branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms
microeconomics
Policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing
monetary policy
When GDP is calculated using the prices at which goods are sold, unadjusted for inflation
nominal GDP
System where private individuals or groups of private individuals own and operate the means of production (resources and businesses)
private enterprise
Ownership rights over possessions (including capital goods)
private property
A way to compare the GDP across countries; the exchange rate of currency 1 to currency 2; the cost of goods and services in currency 1 divided by the cost of goods and services in currency 2
purchasing power parity (PPP)
Nominal GDP adjusted for inflation; the year that is used to compute the real GDP is called the base year
real GDP
When human wants for goods and services exceed the available supply
scarcity
When workers or firms focus on particular tasks for which they are well-suited within the overall production process
specialization
The process of using a set of materials and other inputs, like the work of people and machines, to produce an output
technology
A wave of technological advances starting in Britain in the 18th century, which transformed an agrarian and craft-based economy into a commercial and industrial economy
the industrial revolution
Typically an agricultural economy where things are done the same as they have always been done; economic affairs are organized based on customary practice
traditional economy
A market where the buyers and sellers make transactions in violation of one or more government regulations
underground economy
Explain the formula for Purchasing Power Parity
divide the cost of goods and services in currency 1, by the cost of goods and services in currency 2
List the 3 components of an economic model
equilibrium, choice and comparative statics
Explain the equation for Budget Constraint
Budget = P1 X Q1 + P2 X Q2
How do you find opportunity cost?
divide the two prices on the budget constraint graph. This number is also called the slope.
When a country can produce more of a good
absolute advantage
