Midterm 1 Flashcards
Opportunity Cost
is what we give up when we choose one thing over another
Consumer Surplus
the net gain to an individual buyer from the
purchase of a good. It is equal to the difference between the buyer’s willingness to pay and the price paid
Producer Surplus
the value to producers of their sales above their cost of production
PPF
Production Possibilities Frontier
A model that illustrates the tradeoffs facing an economy that produces only two goods
Comparative Advantage
when a country can produce a good at a lower cost in terms of other goods (lower opportunity cost)
Given up/Gained
Absolute Advantage
produce a greater quantity of a good with same quantity of inputs per unit of time
normal good
good or service whose demand increases when a consumer’s income increases and demand decreases when income decreases
inferior good
good or service whose demand decreases when a consumer’s income increases and demand increases when income decreases
complements
goods or services that are used together because the use of one enhances the use of the other
subtitutes
goods or services that can be used in place of one another
fiscal policy
economic policies that involve government spending and taxes
monetary policy
policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing
sunk costs
costs that are made in the past and cannot be recovered
law of diminishing returns
as additional increments of resources are devoted to a certain purpose, the marginal benefit from those additional increments will decline
allocative efficiency
when the mix of goods being produced represents the mix that society most desires
productive efficiency
given the available inputs and technology, it’s impossible to produce more of one good without decreasing the quantity of another good that’s produced
law of demand:
a higher price leads to a lower quantity demanded of a certain good or service and a lower price leads to a higher quantity demanded, while all other variables are held constant
law of supply:
the common relationship that a higher price leads to a higher quantity supplied of a certain good or service and a lower price leads to a lower quantity supplied, while all other variables are held constant
law of diminishing marginal utility:
as we consume more of a good or service, the utility we get from additional units of the good or service tend to become smaller than what we received from earlier units
deadweight loss:
the loss in social surplus that occurs when a market produces an inefficient quantity
unitary elastic:
when a given percent price change in price leads to an equal percentage change in quantity demanded
cross-price elasticity of demand:
the percentage change in the quantity of good A that is demanded as a result of a percentage change in good B
wage elasticity of labor supply:
the percentage change in hours worked divided by the percentage change in wages
elastic demand:
a high responsiveness of quantity demanded or supplied to changes in price
interest elasticity of savings:
the percentage change in the quantity of savings divided by the percentage change in interest rates
elastic supply:
when the calculated elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
The law of diminishing marginal returns
states that adding an additional factor of production results in smaller increases in output.
The law of increasing opportunity cost:
As you increase the production of one good, the opportunity cost to produce the additional good will increase.
