Productive Efficiency Flashcards
Vocab
Allocative efficiency
A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
Centrally planned economy
An economy in which the government decides how economic resources will be allocated
Economic Model
A simplified version of reality used to analyze real-world economic situations
Economic Variable
Something measurable that can have different values, such as the number of people employed in manufacturing
Economics
The study of the choices people make to attain their goals, given their scarce resources
Equity
The fair distribution of economic benefits
Macroeconomics
The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth
Marginal Analysis
Analysis that involves comparing marginal benefits and marginal costs
Market
A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
Market Economy
An economy in which the decisions of households and firms interacting in markets allocate economic resources
Microeconomics
The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices
Mixed economy
An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources
Normative Analysis
Analysis concerned with what ought to be
Opportunity cost
The highest-valued alternative that must be given up to engage in an activity
Positive Analysis
Analysis concerned with what is
Productive Efficiency
A situation in which a good or service is produced at the lowest possible cost
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants
Trade-off
The idea that, because of scarcity, producing more of one good or service means producing less of another good or service
Voluntary Exchange
A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction
Absolute Advantage
The ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources
Circular-flow diagram
A model that illustrates how participants in markets are linked
Comparative Advantage
The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors
Economic growth
The ability of an economy to produce increasing quantities of goods and services
Entrepreneur
Someone who operates a business, bringing together the factors of production- labor, capital, and natural resources- to produce goods and services
Factor market
A market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability
Factors of production
Labor, capital, natural resources, and other inputs used to make goods and services
Free Market
A market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed
Product market
A market for goods- such as computers-or services-such as medical treatment
Production possibilities frontier (PPF)
A curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology
Property rights
The rights of individuals or businesses have to the exclusive use of their property, including the right to buy or sell it
Trade
The act of buying and selling
Centers paribus (“all else equal”) condition
The requirement that when analyzing the relationship between two variable - such as price and quantity demanded - other variables must be held constant
Competitive Market Equilibrium
A market equilibrium with many buyers and sellers
Complements
Goods and services that are used together
Demand Curve
A curve that shows the relationship between the price of a product and the quantity of the product demanded
Demand schedule
A table that shows the relationship between the price of a product and the quantity of the product demanded
Demographics
The characteristics of a population with respect to age, race, and gender
Income effect
The change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding all other factors constant
Inferior good
A good for which the demand increases as income falls and decreases as income rises
Law of demand
A rule that states that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease
Law of supply
A rule that states, that holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied
Market demand
The demand by all the consumers of a given good or service
Market Equilibrium
A situation in which quantity demanded equals quantity supplied
Normal good
A good for which the demand increases as income rises and decreases as income falls
Perfectly competitive market
A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3)no barriers to new firms entering the market
Quantity demanded
The amount of a good or service that a consumer is willing able able to purchase at a given price
Quantity supplied
The amount of a good or service that a firm is willing and able to supply at a given price
Shortage
A situation in which the quantity demanded is greater than the quantity supplied
Substitutes
Goods and services that can be used for the same purpose
Substitution effect
The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power
Supply curve
A curve that the relationship between the price of a product and the quantity of the product supplied
Supply schedule
A table that shows the relationship between the price of a product and the quantity of the product supplied
Surplus
A situation in which the quantity supplied is greater the quantity demanded
Technological change
A change in the quantity of output a firm can produce using a given quantity of inputs
Black Market
A market in which buying and selling take place at prices that violate government price regulations
Consumer Surplus
The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays
Marginal benefit
The additional benefit to a consumer from consuming one more unit of a good or service
Marginal cost
The change in a farm’s total cost from producing one more unit of a good or service
Producer surplus
The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives
Deadweight loss
The reduction in economic surplus resulting from a market not being in competitive equilibrium
Economic efficiency
A market outcome in which the marginal benefit to consumer of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum
Economic surplus
The sum of consumer surplus and producer surplus
Price ceiling
A legally determined maximum price that sellers may charge
Price floor
A legally determined minimum price that sellers may receive
Tax incidence
The actual division of the burden of a tax between buyers and sellers in a market
