Final Exam Flashcards
positive economics
involves scientific predictions about economic relationships and addresses “ what is “
normative economics
involves value judgement and addresses “ what should be “.
fallacy of false cause
because one event followed another, the first event must have caused the second event.
fallacy of composition
if something is true for a part, it must also be true for the whole.
fallacy of division
what is good for the whole must also be good for parts of the whole.
sunk cost fallacy
what has already disappeared can somehow be regained through further investment of money, time, or effort.
law of increasing opportunity cost
in order to produce more of a good during a given time period, society must sacrifice increasing amounts of the other good because resources typically are not equally well-suited to producing different goods.
comparative advantage
the ability to produce a good at a lower opportunity cost compared to other producers.
normal good
a good for which income and demand are positively related.
inferior good
a good for which income and demand are negatively related.
law of demand
there is a negative or inverse relationship between the price of a good and the quantity demanded of that goof, ceteris paribus.
substitutes
good for which there is a positive relationship between the price of a gapped and the demand for some related good.
complements
goods for which there is a negative relationship between the price of a good and the demand of some related good.
non-price determinants of supply
technology, resource costs, acts of nature, number of sellers, producer expectations.
determinants of price elasticity of demand
the availability of good substitutes ( the greater the number of substitutes, the more elastic demand is. reverse for less substitutes ).
determinants of a shift in demand
changes in tastes are preferences, a change in income, a change in the price of a related good or service, a change in the number of buyers in the market, a change in the expectations of buyers.
price elasticity of demand
a measure of the change in the demand for a product in relation to a change in its price
inelastic demand
when an increase in price causes a relatively small decrease in the quantity demanded, the percentage change in price is less than 1
elastic supply
when an increase in price causes a relatively large decrease in the quantity demanded, the percentage change in price is greater than 1.
unit elastic
the percentage change in quantity is equal to the percentage change in price (1).
cross elasticity of demand
how sensitive the demand for a product is to changes in the price of another product.
income elasticity of demand
the responsiveness of quantity demand to a change in income.
protectionist policies
place specific restrictions on international trade for the benefit of a domestic economy.
consumer surplus
the difference between the maximum price someone is willing to pay and the actual price they do pay.
producer surplus
the difference between the market price and the minimum price a seller is willing to accept.
marginal benefit
the additional benefit gained from consuming one more unit of a good ( demand ).
marginal cost
the additional cost of producing more unit of good ( supply ).
coase theorem
private bargaining brings about an efficient outcome as long as property rights are well defined and transaction costs are sufficiently low; furthermore, efficiency is achieved regardless of which party is granted property rights.
private benefits
a benefit derived by an individual or firm directly involved in a transaction as either buyer or seller.
social benefits
the total benefit to society from producing or consuming a good/service.
long-run average cost ( LRAC ) curve
costs per unit decrease as output increases and doubling inputs will more than double your output.
value of the marginal product ( VMP )
the additional revenue that is earned from hiring one more worker.
perfect ( first-degree ) price discrimination
charging customers the maximum price that they are willing to pay for a good or service.
price discrimination
a sales strategy of selling the same product or service to different customers for different prices.
perfectly competitive model
a market structure made up of many small firms producing identical products.
derived demand
the demand for a resource like labor depends on the demand for the product the resource helps to produce.
oligopoly characteristics
some barriers to entry, mutual interdependence, and highly concentrated concentration ratio.
marginal revenue ( MR )
the additional revenue earned from selling one more unit of output.
law of diminishing marginal product
a situation in which total output increases at a diminishing rate when more of the variable factor is combined with the fixed factors of production.
Nash equilibrium
the outcome reached by analyzing the payoff matrix to determine the best choice for each player assuming no collusion.
game theory model
assumes that firms anticipate rival firms’ decisions when they make their own decisions.
marginal product (MP)
the change in output as a result of one additional unit of input.
marginal product of labor (MPL)
the change in the level of output when a new employee is hired, ceteris paribus.
monopolistic competition
many companies are present in an industry, and they produce similar but differentiated products. zero barriers to entry, maximize profit by producing the quantity where MR = MC, so long as P > AVC.
free market conditions
centralized economic interventions by government either do not exist or are minimal.
