da Flashcards
scarcity
means that resources are limited while human wants are endless. Because of scarcity, people and societies must make choices about how to use their resources, which leads to the need for efficient use to meet different needs and wants.
trade offs
happen when you choose one option over another due to limited resources. For example, if apple prices go up, you might choose to buy fewer apples, reflecting the trade-off you make when deciding how to spend your money.
economics
is the study of how people react to incentives and make decisions based on the costs and benefits involved. It highlights the importance of understanding these incentives to analyze how markets work and how resources are distributed.
opportunity cost
is the value of the next best option you give up when you make a choice. For example, if you decide to drive a fuel-efficient car because of high gas prices, the opportunity cost is the benefits you would have gained from the other vehicle you could have chosen.
marginal decision making
People make decisions based on comparing the additional benefits (marginal benefits) to the additional costs (marginal costs).
adams smiths ‘invisible hand”
concept that describes how individuals acting in their own self-interest can unintentionally create benefits for society
efficiency
is about maximizing resources to create the most wealth without wasting anything. However, while markets can operate efficiently, they don’t always ensure fair distribution of wealth.
equality
how the market rewards people based on their production and what others are willing to pay, which can lead to big differences in income and wealth.
Production Possibility Frontier
The PPF is a graph that shows the different amounts of two goods that an
economy can produce, given the resources and technology available.
Inefficient and Unattainable Outcomes
Points inside the PPF show inefficient outcomes, meaning the economy
isn’t using all its resources effectively. Points outside the PPF are unattainable, meaning the economy can’t produce
that amount of goods with the resources it has.
Slope of the PPF as Opportunity Cost
The slope of the PPF indicates the opportunity cost – how much of one
good you must give up to produce more of the other goods. It shows the trade-off between the two goods.
Opportunity Cost of Two Goods
If you have two goods (let’s call them X and Y), the opportunity cost of making
more of good X is how much of good Y you have to give up, and vice versa. More of one good means less of the other.
When the PPF Is Bowed Outward or Straight
The PPF is usually bowed outward because as you make more of
one good, you give up larger amounts of the other goods. It would be straight if the opportunity costs were the same,
meaning you give up the same amount of one good to make the other good.
Absolute Advantage
This means being able to make more of something using the same resources. Ruby is better
at making both meat and potatoes than Frank.
Comparative Advantage
This means being able to make something at a lower cost compared to someone else.
Frank is better at making potatoes for less, while Ruby is better at making meat for less.
Comparative and Absolute Advantages
You tell who has absolute advantage by seeing who uses less time to make
something. You tell who has comparative advantage by checking who gives up less of another good
Relationship Between Comparative Advantage and Opportunity Cost
Comparative advantage is about having
a lower opportunity cost. If you give up less of one good to make another, you have a comparative advantage in that good.
Relationship Between Comparative Advantage, Specialization, and Gains from Trade
When people focus on
what they do best (specialization), they can produce more. This leads to trade, where both sides can get more of what
they want.
A competitive market
Many sellers and buyers; no single buyer or seller can influence the market price.
A demand schedule
is a table (or graph) that shows the quantity demanded at different prices.
Demand vs. quantity demanded
Demand refers to the overall relationship between price and quantity desired: Quantity demanded is the specific amount purchased at a given price.
What are the things that shift the demand curve left or right?
Things that shift the demand curve left or right include changes in income, prices of related goods, tastes, expectations, and the number of buyers.
Prices of substitute goods
If the price of one substitute goes down, demand for the other may decrease; complementary goods: If the price of one drops, demand for the other may increase.
What is a supply schedule (or curve)?
A supply schedule (or curve) is a table (or graph) that shows the quantity supplied at different prices.
Supply vs. quantity supplied
Supply refers to the overall relationship between price and quantity sellers are willing to sell; quantity supplied refers to the specific amount sold at a given price.
What are the things that shift a supply curve left or right?
Things that can shift a supply curve left or right include changes in input prices, technology, expectations, and the number of sellers.
Identify the equilibrium (or “market clearing”) price and quantity in a supply/demand graph.
The equilibrium price and quantity are identified at the intersection of the supply and demand curves.
Calculate the size of the “surplus” that occurs if prices are set above their equilibrium level; calculate the size of the “shortage” that occurs when prices are set below their equilibrium level:
A surplus occurs when prices are above equilibrium, leading to excess supply; a shortage occurs when prices are below equilibrium, leading to excess demand.
Be able to describe the forces that drive the market price toward its equilibrium level
The forces driving market price toward equilibrium include the responses of buyers and sellers to surpluses (prices decrease) and shortages (prices increase).
