MT 1 Flashcards
Efficiency
property of society getting the most it can from scarce resources
Equity
property of distributing economic prosperity fairly among society members
Rational People
people who do the best they can to achieve their objectives
Marginal Changes
small incremental adjustments “around the edge” of a plan of action
Property Rights
ability of an individual to own and control scarce resources
Market Failure
when the market fails to allocate resources efficiently (usually when left on it’s own), requiring gov intervention
2 Causes of Market Failure
Externality & Market Power
Externality
one person’s actions impact well-being of a bystander
Market Power
one “actor” in market has substantial influence on market prices
Productivity
quantity of goods and services produced for each hour of a worker’s time
Business Cycle
unpredictable fluctuations economic activity, such as employment and production
More money in economy =
more employment, less unemployment (tradeoff between inflation and unemployment)
Positive Statement
describes the world as it is
Normative Statement
describes the world as it ought to be
Absolute Advantage
comparison among producers of a good according to their productivity
Comparative Advantage
comparison among producers of a good according to their opportunity cost
Law of Demand
P up = QD down, P down = QD up
Market Demand
sum of all individual demands for a good or service
Normal Good
income up = QD up
Inferior Good
income up = QD down
Shifts in the Demand Curve
Expectations, Tastes, Substitutes, Number of Buyers, Income
Law of Supply
P up = S up, P down = S down
Shifts in the Supply Curve
Input Prices, Technology, Expectations, Number of Sellers
Law of Supply and Demand
price of any good adjusts to bring QS and QD into balance (by the activities of many buyers and many sellers)
Price Elasticity of Demand
how much the QD of a good responds to a change in price
Factors Affecting PED
Close Substitutes, Necessities vs Luxuries, Definition of the Market, Time Horizon
Income Elasticity of Demand
measures how QD responds to changes in consumer’s income
Cross-Price Elasticity of Demand
measures how the increase in price of one good affects the QD of another. (positive if sub, negative if comp)
Price Elasticity of Supply
measure of how QS responds to changes in price
Consumer Surplus
difference between consumer WTP and what they actually do pay (measure the benefit buyers receive from the market)
= value to buyers - amount paid
Producer Surplus
difference between costs of production and what the good sells for (price)
measure the benefit sellers receive from the the market
= amount sold for - production cost
Total Surplus
CS + PS or value to buyers - cost to sellers
Welfare Economics
study of how allocation of resources affects economic well-being
