Exam 1 Flashcards
People and the choices they make in a world of scarce resources
Economics
How people make decisions given scarcity
Economics
A world of ____ resources with _____ wants
limited
unlimited
The study of the economy at small scale level
Microeconomics
The study of the economy at large scale level
Macroeconomics
___ looks at the whole forest while __ looks at individual trees
Macro
Micro
Micro or Macro
The effect of higher cigarette taxes on the quantity of cigarettes sold
Macro
The effect of higher income taxes on the total amount of consumer spending
Macro
The reasons for the economies of East Asian countries growing faster than the economies of sub-Saharan African countries
Macro
Any item (whether it is found in nature, something already produced, or any human effort) that is used to produce a good or service
Anything used to make something else
Resource
The foundation of all productive activity
Resources
Four types of resources
Land
Labor
Capital
Entrepreneurial ability
Any/all natural resource that we use in production
Ex. Trees, water, sand, minerals, oil, animals
Land
Any physical or mental activity devoted to produce goods or services
Ex. People
Labor
Ex. tools, machine, factories, knowledge
Capital
Tangible items
Ex. tools, machines, buildings
Physical Capital
Intangible items
Ex. education, skills
Human Capital
The talent or ability to be able to combine the other resources in order to produce something
Entrepreneurial ability
The value of your next best alternative or the value you give up in order to get something you want
Opportunity Cost
There is no such thing as a free lunch means?
There is no such thing without an opportunity cost and there will always be resources used
Additional benefit associated with one more unit of activity
Marginal benefit
Additional costs associated with one more unit of activity
Marginal Cost
The more production you have, the less…
resources you have to create a good or service (price goes up)
MB: As our quantity goes up…
each additional unit brings us less benefit of a price
MB: If price goes up..
quantity goes down
MC: As quantity goes up…
price or cost also rices
MC: Each additional unit becomes…
more costly
Where the two curves of MB and MC cross
Optimal level
The stable point where people don’t want to change
Equilibrium
Production Possibilities Frontier Line meanings:
On the right of the line is:
On the line is:
On the left of the line is:
Right: impossible production
On the line: possible and efficient
Left: possible but inefficient
All points of production on the frontier that opportunity cost is the same
Constant Opportunity Cost
Calculating opportunity cost
Option 1 - option 3 where one column of each is zero
The ability to produce a good or service at a lower relative opportunity cost than someone else
Comparative Advantage
To tell us how goods, resource, services flow back into the economy
Circular Flow Model
Any place or mechanism where buyers and sellers are brought together to trade goods, services, and resources
Market
Who sets prices
The market
What slope is a demand curve
downward-sloping
3 reasons demand slopes down
Income effect
Diminishing Marginal Utility
Substitution Effect
As the price of something goes down, the purchasing power goes up
Income effect
The amount of benefit decreases
Diminishing Marginal Utility
If the price of something increases, you can buy something cheaper
Substitution Effect
All the buyers added together
Market Demand
How does quantity demand change
if the price changes
How does a change in demand happen
When a non-price variable changes
Parallel shift to the right
Increase in demand
Parallel shift to the left
Decrease in demand
Determinants of Demand
- Taste and Preferences
- Number of Buyers
- Expectations
Any good, service, or resource that is viewed as a replacement for another
Substitutes
Goods that are used or consumed together
Complements
Good that has a direct relationship between income and demand
Normal good
Good that has indirect relationship
Inferior good
A payment made to the government that is a result of some economic activity
Tax
A payment made by the government that doesn’t require any economic activity
Subsidy
A maximum legal price at which a good, service, or resource can be sold
Price Ceiling
Binding Price Ceiling means
Price is below equilibrium and shortage will occur
Non-binding Price Ceiling means
Price is above equilibrium but will most likely go to equilibrium
A minimum legal price at which a good, service, or resource can be sold
Price Floor
Quantity demanded comes from
Businesses
Quantity supplied comes from
Workers
Tax Revenue =
Tax amount * Qt
The difference between the maximum price consumers are willing and able to pay for a good or service and the price they actually pay
Consumer Surplus
The difference between the price producers receive for a good or service and the minimum price they are willing and able to accept
Producer Surplus
Everything below the demand curve and above the price
Consumer Surplus
Distance between the minimum they are willing to accept and the price of the good
Everything above the supply curve and below the price
Producer Surplus
The sum of the consumer and producer surplus
Economic Surplus
The value of economic surplus that is forgone when a market is not allowed to adjust to its competitive equilibrium
Deadweight Loss
A market in which the demand and supply curves represent the benefits and cost to the consumers and producers in the market
Private Market
The cost to the producer of an additional unit of a good or service
Private Marginal Cost
The benefits to the consumer of an additional unit of a good or service
Private Marginal Benefit
The cost of an additional unit of a good or service that is imposed on people other than the producer
External Marginal Cost
The cost to society in producing an additional unit of a good or service
Social Marginal Cost
The benefit of an additional unit of a good or service that is enjoyed by people other than the direct consumer of the good or service
External Marginal Benefit
The benefit to society of consuming an additional unit of a good or service
Social Marginal Benefit
Demand curve that only considers the private benefits of this consumption
Private Demand
Demand that looks at both the private and external benefits of consumption
Social Demand Curve
The supply that affects only the private cost of this production
Private Supply
The supply that affects both private and external costs
Social Supply
Any good or service that is both nonrival and nonexcludable
Public Good
The characteristic of some goods or services whereby the consumption of the good or service by one person does not diminish the amount available to someone else
Nonrival
Ex. Internet
A characteristic of some goods or services whereby people cannot easily be prevented from consuming the good or service, even if they don’t pay for it
Nonexcludable
Ex. Fireworks
