Exam One Flashcards
simplified representation of the real world, shows how the economy works
model
theory not opinion
models are based in
other things equal/other facts are constant, holding other relevant factors constant/equal
ceteris paribus
theories and predictions hold
as long as assumptions hold
statistical analysis
how assumptions are tested
two goods case, shows options available for production of these two goods in different quantities
production possibilities model
given things in PPF
resources and technology
why PPF is concave
opportunity cost is not constant
endpoint of PPF
all resources are going to one production type
production efficiency and allocative efficiency, there is no way to make people better without others being worse, no missed opportunities
economic efficiency
combination along PPF line that is the best
production efficiency
picking the best combination for maximum satisfaction
allocative efficiency
who has the lower opportunity cost of production, could be different for each type of good, determines what people should trade and specialize in
comparative advantage
smaller trade off
best use of resources
direct exchange of goods and services
barter
not producing everything you consume
not self-sufficient
exchanges of resources, goods, and services, do it for the benefit of both parties, voluntary exchanges
trade
overall increased production of goods and services, more consumption possible
mutual gains
more consumption possible, increased satisfaction of wants, increased variety, lower prices for consumers
benefits of mutual gains
each concentrates on the tasks they are relatively better at, based on comparative advantage
specialization
output/labor
labor productivity
relative prices of traded goods, what people really gain in trade
terms of trade
when the terms of trade are greater than the opportunity cost
international trade continues
when the terms of trade are less than the opportunity cost
countries just produce their own goods
eliminating and restricting free trade
everyone goes down in satisfaction
ability to produce a good more efficiently than others, more output of a good per worker
absolute advantage
economics with judgement, not empirical, values a person has, can have disagreement about goals, based on ethical standards or norms, not testable
normative economics
economics with factual, empirical evidence, accepted relationships between variables, neither right or wrong, one correct answer, basis of economic analysis, testable
positive economics
representation of market system, flows of money, goods, and services, how they are channeled through the economy
circular flow diagram
households in circular flow diagram
act as consumers but also allocate resources
firms in circular flow diagram
provide goods and services, buy resources
price times quantity sold
income
mutual gains that individuals can achieve by specializing in doing different things and trading with one another
gains from trade
goods, services, labor, raw materials in circular flow diagram
flow of physical things
consumer spending, income, revenue, costs in circular flow diagram
flow of money
firms sell what they produce to households in circular flow diagram
markets for goods and services
firms buy resources they need to produce goods and services in circular flow diagram
factor markets
how the total income created in an economy is allocated between less skilled workers, highly skilled workers, and owners of land and capital
income distribution
description economy
positive economy
prescription economy
normative economy
simple prediction of the future
forecast
market that has many buyers and sellers of the same good, none can influence the price of the good
competitive market
model of how a competitive market behaves
supply and demand model
table showing how much of a good or service consumers will want to buy at different prices
demand schedule
actual amount of a good or service consumers are willing to buy at some specific price
quantity demanded
graphical representation of the demand schedule, shows relationship between quantity demanded and price
demand curve
a higher price for a good or service leads people to demand a smaller quantity of that good or service
law of demand
change in quantity demanded at any given price, denoted by a new demand curve
shift of the demand curve
change in the quantity demanded of a good’s arising from a change in the good’s price
movement along the demand curve
increase in demand
rightward shift, consumers demand larger quantity
decrease in demand
leftward shift, consumers demand smaller quantity
if a rise in the price of a good leads to an increase in the demand for another good
substitutes
if a rise in the price of a good leads to a decrease in the demand for another good, usually consumed together
complements
a good whose demand increases when consumer income rises
normal goods
a good whose demand decreases when consumer income rises
inferior good
relationship between quantity demanded and price for an individual consumer
individual demand curve
behavior of buyers
demand
what does demand show
quantities of goods consumers would be willing to buy at certain prices
what stays the same for demand
time period, quality
wanting to buy something is determined by your
willingness and ability
what does the change in the price of a good do to demand
nothing
sum of all the possible prices of an item, amount consumers would purchase at a specific price
quantity demanded
what is needed in order to find the quantity demanded
price of the good
shows direction of changes that are occuring
law of demand
what happens when the price goes up in the law of demand
quantity demanded goes down
what happens when the price goes down in the law of demand
quantity demanded goes up
demand factor, influences ability to purchase goods at the same price
change in income
demand factor, influences willingness to buy, can cause demand to go up or down
change in tastes/preferences
demand factor, one good’s value affects another good’s value
change in prices of related goods
demand factor, when the amount of people changes
change in the number of consumers
demand factor, prediction about what may happen
change in expectations about future income and prices
demand curve when demand goes up
shifts to the right
demand curve when demand goes down
shifts to the left
what is quantity demanded a function of
price
what type of consumer is demand referencing to
households
