Midterm 1 Flashcards
What is economics
Economics is the study of how individuals, businesses, governments, and the entire society make choices. These choices are influenced by resource scarcity and incentives.
Scarcity
society has limited resources, and cannot produce all goods and services people wish to have.
incentive
is a reward or a penalty that induces an action.
factors of production
Land Labour Capital (Entrepreneurship) How to produce
Labour
input is the work time and work effort that people devote to producing goods
and services.
The quality of labour depends on human capital—the knowledge and skill that people obtain from education, on-the-job training, and work experience
Efficiency
that society gets the maximum benefits out of scarce resources.
Equity
“justice according to natural law or right, specifically: freedom from bias or favoritism”,
Six key ideas/principles define the way of thinking in economics
A choice is a trade off.
People make rational choices by comparing benefits and costs.
Benefit is what you gain from something.
Cost is what you must give up to get something.
Most choices are “how-much” choices made at the margin.
Choices respond to incentives.
marginal benefit
The additional benefit from pursuing an incremental increase in an activity
If the marginal benefit from an incremental increase in an activity exceeds its marginal cost, your rational choice is to do more of that activity.
For now, marginal benefit can be measured by the amount that a person is willing to pay for an additional unit of a good or service.
marginal cost
The opportunity cost of pursuing an incremental increase in an activity
The marginal cost of a good or service is the opportunity cost of producing one more unit of it
Normative analysis
prescriptive statements on what the world `ought to be
Positive analysis
descriptive model of what the world `is’
Production possibilities frontier (PPF)
is a graph showing the various combinations of output that the economy can possibly produce (at most), given the available factors of production and the available production technology that firms can turn those factors into output.
highlights some basic ideas in economics: scarcity, efficiency, opportunity cost, trade-offs, economic growth
Production efficiency
achieved if the economy cannot produce more of one good without producing less of some other good.
Economic growth
the expansion of production possibilities—an increase in the standard of living.
Two key factors influence economic growth:
- Technological change
- Capital accumulation
A Market
an arrangement with which buyers and sellers get information and trade with each other a particular good or service.
Perfectly competitive Market
exists if no single buyer or seller has any influence on the market price.
We often require that the good or service being sold in a perfectly
competitive market is the same across all sellers
money price of a good
the amount of money needed to buy it.
The relative price of a good
the ratio of its money price to the money price
of the next best alternate good—is its opportunity cost.
quantity demanded
the amount of the good that buyers are willing to and able to purchase, given a particular price.
Demand
describes how the quantity demanded when the price of
the good changes.
The law of demand.
when the price of a good rises, the quantity demanded of the good falls
when the good’s price
falls, the quantity demanded rises.
quantity supplied
the amount that producers are willing and able to sell.
The law of supply
the higher the price of
a good, the greater is the quantity supplied
the lower the price of a good, the smaller is the quantity supplied.
