Test 1 Terms Flashcards
how people make decisions
1. People Face Trade-Offs
-to get something we like, we have to give up something we also like
2. The Cost of Something Is What You Give Up to Get It
-making decisions requires comparing the costs and benefits of alternative courses of action
*opportunity cost*- decision makers should be aware of the opportunity costs that accompany each possible action
3. Rational People Think at the Margin
- rational people systematically and purposefully do the best they can to achieve their objectives, given the available opportunities
4. People Respond to Incentives - incentives play a central role in economics
- because rational people make decisions comparing costs and benefits, they respond to incentives
how people interact
5. Trade Can Make Everyone Better Off
-trade between two countries can make each country better off
6. Markets Are Usually a Good Way to Organize Economic Activity
- market economy: the decisions of a central planner are replaced by the decisions of millions of firms and households
- households decide which firms to work for and what to buy with their incomes; these firms and households interact in a market place, where prices and self-interest guide their decisions
7. Governments Can Sometimes Improve Market Outcomes
- the invisible hand can work its magic only if the gov’t. enforced the rules and maintains the institutions that are key to a market economy
- market economies need institutions to enforce property rights so that individuals can own and control scarce resources.
- the invisible hand is powerful, but not omnipotent.
how the economy as a whole works
8. A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
- almost all variation in living standards is attributable to differences in countries productivity (the amount of goods and services produced by each unit of labor input)
- in nations where workers can produce a large quantity of goods and services per hour, most people can enjoy a high standard of living- and vice versa
9. Prices Rise When the Government Prints Too Much Money
-when gov’t. creates a large amount of money, the value of the money decreases= inflation
10. Society Faces a Short-Run Trade-off between Inflation and Unemployment
scarcity
the limited nature of society’s resources
economics
the study of how society manages its scarce resources
efficiency
the property of a resource allocation by maximizing the total surplus received by all members of society
equality
the property of distributing economic prosperity uniformly among the members of society
opportunity 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
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
incentive
something that induces a person to act
externality
the uncompensated impact of one person’s actions on the well-being of a bystander
property rights
the ability to an individual to own and exercise control over scarce resources
inflation
an increase in the overall level of prices in the economy
business cycle
fluctuations in economic activity, such as employment and production
productivity
the quantity of goods and services produced from each unit of labor input
macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
positive statements
claims that attempt to describe the world as it is
the scientific method
the dispassionate development and testing of theories about how the world works
-is as applicable to studying the nations economy as it is to studying the earth’s gravity or a species’ evolution
circular flow diagram
a visual model that shows how dollars flow through markets among households and firms
productions possible frontier (PPF)
a graph that shows the combinations of output that economy can possibly produce given the available factors of production and the available production technology
imports
goods and services that are produced abroad and sold domestically
exports
goods and services that are produced domestically and sold abroad
market
a group of buyers and sellers of a particular good or service
competitive market
a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
demand schedule
a table that shows the relationship between the price of a good and the quantity demanded
normal good
a good for which, other things being equal, an increase in income leads to an increase in demand
ex. Nike, Adidas– as you make more money you will likely move from off brand items to name brands
inferior good
a good for which, other things being equal, an increase in income leads to a decrease in demand
ex. off brand items– when you make lower income, you usually buy cheaper items. when your income increases, you decide to move to “better quality” items and they are more expensive
complements
two goods for which an increase in the price of one leads to a decrease in the demand for the other
ex. printer and ink cartridges
equillibrium
a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
-middle point
create demand curve
demand curve: the line relating price and quantity demanded
- graphs the demand schedule
- illustrates how the quantity demanded of the good changes as the price varies
shift demand curve
any change that increases the quantity demanded at every price shifts the demand curve to the right and is called an increase in demand
any change that reduces the quantity demanded at every price shifts the demand curve to the left and is called a decrease in demand
different variables can shift the demand curve
- income
- price of related goods
- tastes
- expectations
- number of buyers
create supply curve
supply curve: the curve relating price and quantity supplied
“the supply curve slopes upward because, other things being equal, a higher price means a greater quantity supplied”
shift supply curve
any change that raises quantity supplied at every price, such as a fall in the price of sugar, shifts the supply curve to the right and is called an increase in supply
any change that reduces the quantity supplied at every price shifts the supply curve to the left and is called a decrease in supply
equilibrium quantity/price
the quantity or price at the point of the equilibrium intersection
surplus
a situation in which quantity supplied is greater than quantity demanded
law of demand
the claim that, other things being equal, the quantity demanded of a good falls when the price of a good rises
law of supply
the claim that, other things being equal, the quantity supplied of a good falls when the price of a good rises
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
elasticity in general formula
Ep= *delta*Q/Q(lineontop) OVER *delta*P/P(lineontop)
(percentage change in some quantity)/ (percentage change in some factor)
midpoint method in general
LONG look on power point
elasticity
the measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants
price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good
computed as the percentage change in quantity demanded divided by the percentage change in price
income elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in consumers’ income
computed as the percentage change in quantity demanded by the percentage change in income
cross-price elasticity of demand
a measure of how much the quantity demanded of one good responds to a change in the price of another good
computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good
price-elasticity of supply
a measure of how much the quantity supplied of a good responds to a change in the price of that good
computed as the percentage change in quantity supplied divided by the percentage change in price
price ceiling
a legal maximum on the price at which a good can be sold
price floor
a legal minimum on price at which a good can be sold
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
producer surplus
the amount a seller is paid for a good minus the sellers cost of providing it
cost
the value of everything a seller must give up to produce a good
deadweight loss
the fall in total surplus that results from a market distortion, such as a tax
tax incidence
the manner in which the burden of a tax is shared among participants in a market
welfare economics
the study of how the allocation of resources affects economic well-being
willingness to pay
the maximum amount that a buyer will pay for that good
world price
the price of a good that prevails in the world market for that good
shape of elastic curves
an actual curve
demand is considered elastic when the elasticity is greater than 1, and the quantity moves proportionately more than the price
shape of inelastic curves
look like the letter I
inelastic- when the demand is less than one, which means the quantity moves more proportionately less than the price
total revenue
the amount paid by buyers and received by sellers of a good computed as he price of he good times the quantity sold
price ceiling
a legal maximum on a price which a good can be sold
effect of binding/nonbinding price ceiling
when the gov’t. imposes a binding price ceiling on a competitive market, a shortage of good arises, and sellers must ration the scarce goods among the large number of potential buyers
effect of binding price floor
a binding price floor causes surplus
effect of nonbinding price floor/ceiling
market forces naturally move the economy to the equilibrium and the price floor/ceiling has no effect
……??
taxes on buyers
ex. law passed requiring buyers of ice cream cones to send $0.50 to the gov’t for each ice cream cone they buy
STEP ONE: initial impact is on the demand for ice cream. the supply curve is not affected because, at any given price of ice cream, sellers have the same incentive to provide ice cream to the market. in contrast, buyers now have to pay a tax to the gov’t whenever they buy ice cream and the tax shifts the demand curve for ice cream.
STEP TWO: because the tax on buyers makes buying ice cream less attractive, buyers demand a smaller quantity of ice cream at every price. as a result, the demand curve shifts to the left (or equivalently, downward)
STEP THREE: now that we know how the curve shifts, we can determine the effect of the tax by comparing the initial equilibrium and the new equilibrium. the tax on ice cream reduces the size of the ice-cream market, and once again, buyers and sellers share the burden of the tax. sellers get a lower price for their product and buyers pay a lower price to sellers than they did previously
taxes on sellers
ex. gov’t passed law requiring sellers of ice cream to send $0.50 to them for every cone they sell
STEP ONE: the immediate impact of the tax is on the sellers. the tax on sellers makes the ice-cream business less profitable at any given price so it shifts the demand curve
STEP TWO: because the tax on sellers raises the cost of producing and selling ice cream, it reduces the quantity supplied at every price. the supply curve then shifts to the right (and inevitably, upward)
STEP THREE: because sellers sell less and buyers buy less in the new equilibrium, the tax reduces the size of the ice-cream market.
tax elasticity
a tax burden falls heavily on the side of the market that is less elastic
world price above domestic price
ex. economists compare the current Isolandian price of textiles to the price of textiles in other countries
If the world price of textiles is higher than the domestic price, then Isoland will export textiles once trade is permitted. Isolandian textile producers will be eager to recieve the higher prices available abroad and will start selling their textiles to buyers in other countries.
world price below domestic price
ex. economists compare the current Isolandian price of textiles to the price of textiles in other countries
if the world price of textiles is lower than the domestic price, then Isoland will import textiles. because foreign sellers offer a better price, Isolandian textile consumers will quickly start buying textiles from other countries
effects of a tariff
a tariff raises the price of imported textiles above the world price by the amout of the tariff. domestic suppliers of textiles, who compete with suppliers of imported textiles, can now sell their textiles for the world price plus the amount of the tariff.
the tariff reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade
marginal change
a small incremental adjustment to a plan of action
market failure
a situation in which a market is left on its own fails to allocate resources efficiently
market power
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
microeconomics
the study of how households and firms make decisions and how they interact in markets
normative statements
claims that attempt to prescribe how the world should be
absolute advantage
the ability to produce a good using fewer inputs than another producer
quantity demanded
the amount of a good that buyers are willing and able to purchase
demand curve
a graph of the relationship between the price of a good and the quantity demanded
substitutes
two goods for which an increase in the price of one leads to an increase in the demand for the other
ex. margarine and butter; beer and wine; coffee and tea
quantity supplied
the amount of a good that sellers are willing and able to sell
supply curve
a graph of the relationship between the price of a good and the quantity supplied
shortage
a situation in which quantity demanded is greater than quantity supplied
supply schedule
a table that shows the relationship between the price of a good and the quantity supplied
equilibrium price
the price that balances quantity supplied and quantity demanded
tariff
a tax on goods produced abroad and sold domestically
midpoint
midpoint method: obtains the same elasticity between two price points whether there is a price increase or decrease
formula:
*delta*Q/Q(lineontop)
OVER
*delta*P/P(lineontop)
ex of elastic goods
furniture, motor vehicles, professional services
generally have plenty of substitutes
when the quantity demanded changes a lot when prices change a little= elastic
ex. of inelastic goods
gas, electricity, water, drinks, clothing, food, tobacco, and oil
price changes and the demand doesnt change much
