Midterm Flashcards
Scarcity
The limited nature of society’s
resources.
Principle 1:
people face tradeoffs
Principle 2:
The cost of something is what you give up to get it
Principle 3:
Rational people think at the margin
Principle 4:
People repsong to incentives
Principle 5:
Trade can make everbody better off
Principle 6:
Markets are usually a good way to organize economic activity
Principle 7:
Governments can sometimes improve market outcomes
Principle 8:
A country’s standard of living depends on its ability to produce goods and services
Principle 9:
Prices rise when the government prints too much money
Principle 10:
Society faces a short-run tradeoff between inflation and unemployment
Oppurtunity cost:
Whatever must be given up to obtain some item.
Rational people:
People who systematically and purposefully do the best they can to achieve their objectives.
Marginal changes:
Small incremental adjustments to a plan of action.
Incentive:
Something that induces a person to act.
Property rights:
The ability of an individual to own and exercise control over scarce resources.
Market economy
An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
We need governments for two reasons:
1) To enforce property rights
2) Because the invisible hand is powerful, but it is
not omnipotent
Market failure:
A situation in which a market left on its own fails to allocate resources efficiently
Externality:
The impact of one person’s actions on the well-being of a bystander.
Productivity:
The quantity of goods and services produced from each hour of a worker’s time.
Productivity:
The quantity of goods and services produced from each hour of a worker’s time.
Inflation:
An increase in the overall level of prices in the
economy.
Buisness cycle:
The irregular and largely unpredictable fluctuations in economic activity, as measured by the production of goods and services or the number of people employed.
Normative statements:
Claims that attempt to prescribe how the world should be.
Positive statements:
Claims that attempt to describe the world as it is.
Absolute advantage:
The comparison among producers of a good according to their productivity.
Comparative advantage:
The comparison among producers of a good according to their opportunity cost.
Competitive Market
A market in which there are many buyers and many sellers so that each has a negligible impact on the market price.
Quantity demanded
The amount of a good that buyers are willing and able to purchase
Quantity demanded
The amount of a good that buyers are willing and able to purchase
Law of demand
The claim that, other things equal, the quantity demanded of a good falls when the price of the good rises.
Demand schedule
A table that shows the relationship between the price of a good and the quantity demanded.
Demand curve
A graph of the relationship between the price of a good and the quantity demanded.
Market demand
The sum of all the individual demands for a particular good or service.
Normal good
A good for which, other things equal, an increase in income leads to an increase in demand.
Inferior good:
A good for which, other things equal, an increase in income leads to a decrease in demand.
Factors that shift the demand curve
- Prices of related goods
- Tastes
- Expectations
- Number of buyers
Substitutes
Two goods for which an increase in the price of one leads to an increase in the demand for the other.
Complements
Two goods for which an increase in the price of one leads to a decrease in the demand for the other.
Quantity supplied:
The amount of a good that sellers are willing and able to sell.
Law of supply
The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises.
Factors that shift the supply curve
- Input prices
- Technology
- Expectations
- Number of sellers
Equilibrium
A situation in which the price has reached the level where quantity supplied equals quantity demanded
Equilibrium price
The price that balances quantity supplied and quantity demanded
Equilibrium quantity
The quantity supplied and the quantity demanded at the equilibrium price
Law of supply and demand
The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.
Willingness to pay
The maximum amount that a buyer will pay for a good.
Consumer surplus
A buyer’s willingness to pay minus the amount the buyer actually pays.
CS
- The area below the demand curve and above the price measures the consumer surplus in a market.
- The difference between this willingness to pay and
the market price is each buyer’s consumer surplus. - Thus, the total area below the demand curve and
above the price is the sum of the consumer surplus of
all buyers in the market for a good or service.
Producer surplus
The amount a seller is paid for a good minus the seller’s cost.
Measuring producer surplus
-The area above the supply curve and below the
price measures the producer surplus in a market.
- The logic is straightforward: The height of the supply
curve measures sellers’ costs, and the difference
between the price and the cost of production is
each seller’s producer surplus. - Thus, the total area is the sum of the producer surplus
of all sellers.
Total surplus
Value to buyers – Amount paid by buyers +
Amount received by sellers – Cost to sellers
Efficiency
The property of a resource allocation of maximizing the total surplus received by all members of society.
Equity
The fairness of the distribution of well-being among the members of society.
