Chapter 2 Thinking Like an Economist Flashcards
Basic Competitive Model
Consumers behave rationally; firms seek profit maximization; markets are competitive
competition
rivalry between producers for customers or between consumers for goods and services
rational choice
people weigh the costs and benefits of each possibility whenever they make a choice
perfect competition
firm charges more than going price means ALL sales are lost
price taker
has no influence upon market price
price system
insures that goods go to those individuals and firms that are most willing and able to pay for them
private property
firms and individuals are able to own and use factories, land and buildings
tragedy of the commons
deletion of a common resource when individual fail to take into account the impact of their actions on the resource
rationing systems
individuals get less of a good than they would like at the offered price
lotteries
goods allocated by random process
coupons
can buy only so much at market price, inefficient and provides incentive for black market
queues
goods given to those most willing to wait in line
opportunity set
group of available options
budget constraints
imposed by money on opportunity set
time constraints
prescribed by time on opportunity set
production possibilities
amount of goods a firm or society can produce, given a fixed amount of land, labor, and other inputs
production possibilities frontier
boundary of the opportunity set in production decisions
diminishing returns
adding successive units of any input increases the output by less and less
costs
trade offs within opportunity sets
relative price
the ratio of prices in the trade off
opportunity cost
opportunities forgone in favor of something else (next best alternative)
absolute advantage
one country can produce a good more efficiently (fewer inputs) than another
comparative advantage
one country has a higher relative efficiency than another
sunk cost
an expenditure that has already been made and cannot be recovered no matter what choice is made
