Test 1 - Definitions Flashcards
What is the circular flow diagram?
A diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market
This diagram illustrates the flow of goods, services, and money in an economy.
Define command economy.
An economy where economic decisions are passed down from government authority and where the government owns the resources
In a command economy, the government controls all aspects of production and distribution.
What is division of labor?
The way in which different workers divide required tasks to produce a good or service
This concept helps increase productivity by allowing workers to specialize in specific tasks.
What does economics study?
The study of how humans make choices under conditions of scarcity
It examines how resources are allocated and the trade-offs involved in decision-making.
What are economies of scale?
When the average cost of producing each individual unit declines as total output increases
This phenomenon occurs because fixed costs are spread over a larger number of goods.
Define exports.
Products (goods and services) made domestically and sold abroad
Exports contribute to a country’s economic growth and trade balance.
What is fiscal policy?
Economic policies that involve government spending and taxes
Fiscal policy is used to influence economic conditions and promote economic stability.
Define globalization.
The trend in which buying and selling in markets have increasingly crossed national borders
Globalization affects trade, investment, and cultural exchange between countries.
What is the goods and services market?
A market in which firms are sellers of what they produce and households are buyers
This market facilitates the exchange of finished products between producers and consumers.
What does gross domestic product (GDP) measure?
The size of total production in an economy
GDP is a key indicator of economic health and growth.
Define imports.
Products (goods and services) made abroad and then sold domestically
Imports can affect a country’s trade balance and economy.
What is the labor market?
The market in which households sell their labor as workers to business firms or other employers
This market determines wages and employment levels.
What does macroeconomics focus on?
Broad issues such as growth, unemployment, inflation, and trade balance
Macroeconomics examines the economy as a whole rather than individual markets.
Define market.
Interaction between potential buyers and sellers; a combination of demand and supply
Markets can take various forms, including physical locations and online platforms.
What is a market economy?
An economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand
Market economies are characterized by competition and consumer choice.
What does microeconomics focus on?
Actions of particular agents within the economy, like households, workers, and business firms
Microeconomics analyzes individual economic behaviors and decisions.
What is a model in economics?
A representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation
Models are used to predict and analyze economic behavior.
Define monetary policy.
Policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing
Monetary policy is typically managed by a country’s central bank.
What is a private enterprise system?
Where private individuals or groups of private individuals own and operate the means of production (resources and businesses)
This system promotes competition and consumer choice.
Define scarcity.
When human wants for goods and services exceed the available supply
Scarcity is a fundamental concept in economics, driving the need for choices.
What is specialization?
When workers or firms focus on particular tasks for which they are well-suited within the overall production process
Specialization can lead to increased efficiency and productivity.
What is a traditional economy?
Typically an agricultural economy where things are done the same as they have always been done
Traditional economies rely on customs and historical practices.
Define underground economy.
A market where the buyers and sellers make transactions in violation of one or more government regulations
The underground economy can include illegal activities and unreported income.
What is allocative efficiency?
When the mix of goods produced represents the mix that society most desires
This concept emphasizes the optimal distribution of resources to meet consumer preferences.
Define budget constraint.
All possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set
This illustrates the trade-offs consumers face in their purchasing decisions.
What is comparative advantage?
When a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production
This principle explains how countries can benefit from trade by specializing in the production of goods they can produce most efficiently.
What does the term ‘invisible hand’ refer to?
Adam Smith’s concept that individuals’ self-interested behavior can lead to positive social outcomes
This idea suggests that personal gain can inadvertently benefit society as a whole.
What is the law of diminishing marginal utility?
As we consume more of a good or service, the utility we get from additional units of the good or service tends to become smaller than what we received from earlier units
This principle highlights the decreasing satisfaction experienced with each additional unit consumed.
Explain the law of diminishing returns.
As we add additional increments of resources to producing a good or service, the marginal benefit from those additional increments will decline
This concept is crucial in understanding production efficiency and resource allocation.
What is marginal analysis?
Examination of decisions on the margin, meaning a little more or a little less from the status quo
This approach helps in making informed decisions by evaluating the additional benefits and costs.
What is a normative statement?
Statement which describes how the world should be
Normative statements are subjective and based on personal beliefs or opinions.
Define opportunity cost.
Measures cost by what we give up/forfeit in exchange; measures the value of the forgone alternative
This concept is fundamental in economics for understanding trade-offs in decision-making.
What is an opportunity set?
All possible combinations of consumption that someone can afford given the prices of goods and the individual’s income
This set illustrates the choices available to consumers based on their budget.
What is a positive statement?
Statement which describes the world as it is
Positive statements are objective and can be tested or validated.
What is a production possibilities frontier (PPF)?
A diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available
The PPF illustrates trade-offs and opportunity costs in production.
Define productive efficiency.
When it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)
This concept is key to understanding the optimal use of resources in production.
What are sunk costs?
Costs that we make in the past that we cannot recover
Decision-making should ignore sunk costs as they do not affect future costs or benefits.
What does utility refer to?
Satisfaction, usefulness, or value one obtains from consuming goods and services
Utility is a central concept in economics, reflecting consumer preferences.
What is ceteris paribus?
other things being equal
What are complements?
goods that are often used together so that consumption of one good tends to enhance
consumption of the other
Define consumer surplus.
the extra benefit consumers receive from buying a good or service, measured by what the individuals would have been willing to pay minus the amount that they actually paid
What is deadweight loss?
the loss in social surplus that occurs when a market produces an inefficient quantity
Define demand.
the relationship between price and the quantity demanded of a certain good or service
What is a demand curve?
graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis
What is a demand schedule?
table that shows a range of prices for a certain good or service and the quantity demanded
at each price
What is an economic/social surplus?
the sum of consumer surplus and producer surplus
What is equalibrium?
the situation where quantity demanded is equal to the quantity supplied; the combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to change
Define equalibrium price.
the price where quantity demanded is equal to quantity supplied
Define equalibrium quantity.
the quantity at which quantity demanded and quantity supplied are equal for a certain price level
Define excess demand.
at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage
Define excess supply.
at the existing price, quantity supplies exceeds the quantity demanded; also called a surplus
Define factors of production.
the resources such as land, labor, capital, entreprenurial ability, and technology, that are used to produce goods and services; also called inputs!
What is an inferior good?
a good in which the quantity demanded falls as income rises, and quantity demanded rises as income falls
What is the law of demand?
the common relationship that a higher price leads to a lower quantity demanded of a certain good or service and a lower price leads to a higher quantity demanded, ceterus paribus.
What is the law of supply?
the common relationship that a higher price leads to a greater quantity supplied and a lower price leads to a lower quantity supplied, ceterus paribus.
Define normal good.
a good in which the quantity demanded rises as income rises and in which quantity demanded falls as income falls
What is a price ceiling?
legal maximum price
Leads to shortage. Common examples: rent
Define price control
government laws to regulate prices instead of letting market forces determine prices
i.e. price ceilings and floors. leads to shortages and surpluses.
What is a price floor?
a legal minimum price
Leads to surpluses. Common examples: minimum wage & agriculture
What is a producer surplus?
the extra benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to accept
Define quantity demanded.
the total number of units of a good or service consumers are willing to purchase at a given price
Define quantity supplied.
the total number of units of a good or service producers are willing to sell at a given price
What is a shift in demand?
when a change in some economic factor (OTHER THAN PRICE) causes a different quantity to be demanded AT EVERY PRICE
What is a shift in supply?
when a change in some economic factor (OTHER THAN PRICE) causes a different quantity to be supplied AT EVERY PRICE
Define shortage.
at the existing price, the quantity demanded exceeds the quantity supplied; also called excess demand
What is social/total surplus?
the sum of consumer surplus and producer surplus
Define substitute good.
a good that can replace another to some extent, so that greater consumption of one good can mean less of the other
Define supply.
the relationship between price and the quantity supplied of a certain good or service
What is a supply curve?
a line that shows the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis and price on the vertical axis
What is a supply schedule?
a table that shows a range of prices for a good or service and the quantity supplied at each price
Define surplus.
at the existing price, quantity supplied exceeds the quantity demanded; also called excess supply
