Prelim 1 Content Flashcards
comparative advantage
ability to do a task at a lower opportunity cost
absolute advantage
the ability to do a task using fewer resources
law of demand
as price decreases quantity demanded increases
change in price –>
movement along the demand curve
demand curve shift –>
determinants: income, preferences, price of related goods, expectations, network affects, buyer demographics
congestion effect
when a good becomes less valuable because other people also use it
network effect
when a good becomes more useful because other people use it
law of supply
quantity supplied will be higher when price is higher
conditions of perfect competition
businesses are selling identical goods, many sellers and many buyers, firms are price-takers
diminishing marginal product
the increase in output that arises from an additional unit of input declines as you add more input
shift of supply curve –>
input prices, productivity, technology, expectations, price of related goods, type/number of sellers
complements in production
goods that are produced together
substitutes in production
goods where producing one requires you produce less of another
planned economies
centralized decisions are made about what and how goods and services are produced/allocated
market economies
individual markets make their own production and consumption decisions
shortage
when quantity demanded exceeds quantity supplied (price rises)
surplus
when quantity supplied exceeds quantity demanded (prices fall)
symptoms of market disequilibrium
queueing, bundling of extras, secondary markets
positive economics
statements that describe what will happen
normative economics
analysis that accesses what should happen
economic surplus
marginal benefit - marginal cost
market efficiency
minimizes costs, maximizes benefit
deadweight loss
economic surplus at efficient equilibrium quantity - actual surplus
GDP
market value of all final goods and services produced in a country in a year
intermediate goods
goods/services used as inputs of the production of other products
GDP total spending
= Consumption + Investment + Gov. Spending - Net Exports (exports-imports)
GDP total output
sum of value added at each stage of production - value added = total sales - cost of intermediate inputs
GDP total income
sum of total wages and total profits
Limitations of GDP
nonmarket activities aren’t included, shadow economy is missing, environmental degradation isn’t counted, leisure isn’t considered, ignores equity
real GDP
% change in nominal GDP - % change in prices
rule of 70
years it takes to double = 70/annual growth rate
inflation
generalized rise in the overall level of prices
consumer price index
tracks average price consumers pay for a representative “basket” of goods and services
inflation rate
(price level this year - price level last year)/(price level last year )
GDP deflator
nominal GDP/Real GDP x100
money illusion
mistaken tendency to focus on nominal dollar amounts instead of inflation adjusted amounts
functions of money
medium of exchange, unit of account, store of value
menu costs
the marginal cost of adjusting prices (inflation effect on sellers)
shoe-leather costs
costs incurred trying to avoid holding money (inflation effect on buyers)
inflation fallacy
mistaken belief that inflation destroys purchasing power
