[MICRO] 01 - Introduction & The Economic Problem Flashcards
Definition: Microeconomics
Microeconomics studies economics of the individual and tries to apply it to the general public/a larger set of people
Definition: Macroeconomics
Macroeconomics studies the actors in an economy (households, firms and the government)
3 Basic Questions to understand an economic system
1) What gets produced?
2) How is it produced?
3) Who gets what is produced?
Definition: Capital
Things that are themselves produced and that are then used in the production of other goods and services
Definition: Factors of Productio
The inputs into the process of production: Land, Labour Capital
Definition: Production
The process that transforms scarce resources into useful goods and services
Definition: Inputs or Resources
Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants
Definition: Outputs
The result of production: usable products but not necessarily a final consumption good
Definition: Opportunity Cost
The best alternative that we give up, when we make a choice or decision
Definition: Absolute Advantage
A producer has absolute advantage over another in the production of a good or service if it can produce that product using fewer resources.
Definition: Comparative Advantage
A producer has a comparative advantage over another in the production of a good or service if it can produce that product at a lower opportunity cost.
Definition: Consumer Goods
Goods produced for present consumption (within 1 year)
Definition: Investment
The process of using resources to produce new capital
Definition: Production Possibility Frontier (PPF)
A graph that shows all the combinations of goods and services that can be produced if all of society’s resources are used efficiently
Definition: Command Economy
Every question is answered by the government in this type of economy
Definition: Free Market Economy
Free markets are opposite to command economies, a free market economy (laissez-faire) allows actors to do as they please with complete lack of government interference in the economy.
Definition: Mixed Systems
More realistic as there are no pure systems. Government involvement is limited to some government enterprises, taxes, social welfare expenditures, whilst a large private sector still exists.
Definition: Households
The consuming units in an economy
Markets of a closed, laissez faire economy (4)
1) Goods and services Market
2) Labor Market
3) Capital Market
4) Land Market
- Factors of production (also called factors market)
Definition: Goods and Services Market
Market in which final and intermediate goods are transacted.
Definition: Labour Market
The factor market in which households supply work for wages to firms that demand labour
Definition: Capital Market
The factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.
Definition: Land Market
The factor market in which households supply land or other real property in exchange for rent.
Definition: Quantity Demanded
The number of units of a product that a household would buy in a given period if it could bjuy all it wanted at the current market price.
Factors influencing quantity demanded (6)
1) Price
2) Income
3) Accumulated wealth
4) Prices of other products
5) Tastes and Preferences
6) Expectations about future income, wealth and prices.
- But for the demand curve we assume ceteris paribus
Definition: Demand Schedule
A table showing how much of a given product a household would be willing to buy at different prices.
Definition: Demand Curve
A (Price-Quantity) graph showing a households demand at different prices
Definition: Law of Demand
Inverse relationship between price and quantity demanded.
Definition: Substitution effect
Consumer purchasing more of the commodity whose price has fallen
Definition: Income effect
Due to price reductions, the consumer has increased income and more purchasing power.
Definition: Income
Sum of all of a household’s wages, salaries, profits, interest payments, rents and other forms of earnings in a given period of time.
Definition: Wealth or net worth
Total value of what a household owns minus what it owes.
Definition: Normal Goods
Goods for which demand goes up when income is higher and vice versa.
Definition: Inferior Goods
Goods for which the demand goes up when income is lower and vice versa (rice, potatoes).
Definition: Giffen Goods
Special type of good that does not obey the law of demand.
Definition: Substitute Goods
Goods that can serve as a replacement for one another: when the price of one increases, demand for the other goes up.
Definition: Perfect Substitute Goods
Identical products
Definition: Complementary Goods
Goods that go together well. A decrease in the price of one results in an increase in demand for the other and vice versa. (Tea and Sugar)
Types of Goods (6)
1) Normal Goods
2) Inferior Goods
3) Giffen Goods
4) Substitute Goods
5) Perfect Substitute Goods
6) Complementary Goods
Definition: Shift of a demand curve
The change in a demand curve when there is a change in demand. This is a result of one of the factors (variables) affecting quantity demanded changing
Definition: Movenment along a demand curve
Represents a change in quantity demanded
Definition: Market Demand
The sum of all quantites of a good or service demanded per period by all the households buying in the market for that good or service
Definition: Quantity Supplied
The maximum amount of a particular product that a firm will be willing and able to offer for sale at a particular price during a given time period.
Definition: Supply Schedule
A table showing how much of a product firms will sell at different prices
Definition: Law of Supply
Positive relationship between price and quantity of a good supplied.
Definition: Supply Curve
A graph plotting quantity vs. Price and illustrating how much of a product a firm will sell at different prices.
Definition: Cost of Production
Regardless of the price that a firm can command for its product, revenue must exceed the cost of producing the output for the firm to make a profit
Definition: Movement along a Supply Curve
The change in quantity supplied
Definition: Shift of a Supply Curve
The change in a supply curve, when there is a change in supply . This is a result of one of the factors (variables) affecting quantity supplied changing
Definition: Equilibrium Price/Quantity
The condition that exists when quantity supplie and quantity demanded are equal. At equilibrium, there is no tendency for price to change.
Definition: Shortage
The condition that exists when quantity demanded exceeds quantity supplied at the current price.
Definition: Surplus
The condition that exists when quantity supplied exceeds quantity demanded at the current price
