EXAM 1 Flashcards
What is economics?
study how how society manages its limited resources to satisfy unlimited wants
scarcity
limited nature of resources
resources
land, labor, capital, time, entrepreneurship
microeconomics
household, firms, day to day
macroeconomics
economy-wide phenomena like inflation, unemployment, economic growth
rational behavior
taking action if the benefit outweighs the cost
opportunity cost
the forgone value of the next highest-valued alternative
marginal change
incremental adjustment
incentives
rewards and penalties that motivate behavior
how does trade make everyone better off?
allows for variety of goods, for each person to specialize in what she’s good at, enjoy a variety of services at a lower cost
self-interest
making choices in your own best interest
social interest
choices that benefit everyone
normal good
demand increases when income increases
inferior good
demand decreases when income increases
compliment goods
things that go together (hot dogs and buns), decrease in price of one increases demand for the other
substitute goods
goods that are similar, decrease in the price of one good increases demand for the other
Determinants of demand (TRIBE)
tastes, related goods, income, buyers, expectations
determinants of supply (ROTTEN)
resource costs, opportunity costs, technological innovation, taxes/subsidies, expectations, number of sellers
LAW OF DEMAND
when the price increases, the demand decreases
LAW OF SUPPLY
when the price increases, the quantity supplied increases
surplus
when the quantity supplied is greater than the quantity demanded
shortage
when the quantity demanded is greater than the quantity supplied
determinants of price elasticity: LESS ELASTIC
less substitutes, short run, broadly defined goods, necessities
determinants of price elasticity: MORE ELASTIC
more substitutes, long run, specific goods, luxuries
elasticity greater than 1
elastic (price, and revenue move in opposite directions)
elasticity less than 1
inelastic, price and revenue move together
elasticity equal to 1
unit elastic, price changes but revenue stays the same
budget constraint
shows the possible combinations of goods you can buy given your income and the price of goods
indifference curves
shows consumption bundles that give consumer the same level of satisfaction
marginal rate of substitution
the rate at which a consumer is willing to trade one good for another
optimum
the point where the budget constraint touches the highest possible indifference curve
income effect
a decrease in the price of one good boosts your purchasing power and allows you to buy more of both goods
substitution effect
a decrease in the price of good A makes good B seem more expensive so you buy more of good A and more of good B
Giffen good
as the price rises, we demand/consume more
