Unit 1 Flashcards
Def: individual choice
decisions by individuals about what to do and not do
Def: economy
a system for coordinating a society’s productive and consumptive activities
Def: market economy
the decisions of individual producers and consumers determine the 3 economic questions (what, how, for who to produce) – little government interventions
**Private property rights!!*
Def: command economy
industry is publicly owned, central authority makes production decisions
Def: property rights
establish ownership & gives individuals the right to trade goods and services with each other
Def: marginal analysis
the study of the costs and benefits of doing a little bit more of an activity (vs a little bit less)
what is a resource
anything that can be used to produce something else (factors of production)
Def: opportunity cost
the value of the next best alternative that you must give up in order to get the item
Def: microeconomics
the study of how individuals, households, and firms make decisions and how they interact
Def: economic aggregates
economic measures that summarize data across man different markers (employment + inflation rates, GDP, etc)
Def: Positive economics
branch of economic analysis that describe the way the economy actually works
Def: Normative economics
makes statements about the way the economy should work
land
all resources that come from nature (minerals, water, cotton, etc)
labour
the effort of workers
entrepreneurship
risk taking, innovation, organization for the resources for production
capital
manufactured goods used to make other goods and services (machinery, buildings, tools, etc)
What does the production possibilities curve represent?
the trade-offs in an economy that produces only two goods - max quantity of one good that can be produced for each possible quantity of the other good
When is an economy considered efficient?
when there is no way to make anyone better off without making at least one person worse off
when will an economy achieve productive efficiency?
if it produces at a point on the PPC
what is allocative efficiency?
if an economy produces at the point along its PPC that makes consumers as well off as possible
what does a PPC look like with an increasing opportunity cost
bowed out
what does a PPC look like with an decreasing opportunity cost
bowed in
Def: comparative advantage
opportunity cost of producing the good is lower then another persons opportunity cost
Def: absolute advantage
a person can make more of a good in a given amount of time
terms of trade
indicate the rate at which one good can be exchanged for another
Def: utility
a measure of personal satisfaction
Def: marginal utility
the added utlity
Def: total utility
overall satisfaction that a consumer has from the consumption of a particular good/service
what does the marginal utility curve show
how marginal utility depends on the quantity of a good/service consumed
what is the principle of diminishing marginal utility
each additional unit of a good or service consumed adds less to the total utility then the previous unit
Def: budget constraint
limits the cost of a consumers consumption bundle
what are a consumers consumption possibilities
the set of all consumption bundles that are affordable
Def: marginal utility per dollar
additional utility form spending one more dollar on a good or service
how do you determine marginal utility/dollar spent on a good
marginal utility of one unit / price of one unit
what is the optimal consumption rule
in order to maximize utility, the marginal utility per dollar spent on each good is the same for the consumer (MU_a/MP_a = MU_b=MP_b)
capital vs consumer goods
capital: man-made products used to make other consumer or capital goods (indirect)
consumer: products used by consumers (direct)
Scarcity
resources are limited, wants are unlimited
3 economic questions
What to produce
How to produce it
Who to produce it for
explicit costs
the money you spend because of the choice you made
implicit costs
money lost (opportunity costs)
true opportunity cost
explicit + implicit cost
EG: take a day off work (could have made $80), spent $20 at movie
$20 is explicit cost
$80 is implicit (lost revenue)
$100 total opportunity cost
What does a PPC represent
Maximum combinations of the production of 2 goods that can be produced with fixed resources
when will the PPC change?
when there is a change in either the quality or quantity of resources
Def: price
amount buyer pays for good/service
def: cost
amount seller pays
productivity
a measure of efficiency that shows the number of outputs per unit of inputs
def: economic system
method used by society to produce and distribute goods and services
def: Ceteris Paribus
all other conditions remain the same
what is the rule for specialization and trade
specialize in the good that is cheaper to produce (lower opportunity cost)
what is cost-benefit analysis
process to measure the benefits of a decision (cost associated with making that decision)
def: marginal analysis
making decisions based on incremements
what is the utility maximizing rule
money should be spent so that MU/$ of each good equals each other
allocative efficiency
optimal distribution of g/s to consumers & optimal distribution of financial capital to firms
productive efficiency
market optimized to produce the max output from fixed resources
what 3 things will shift the PPC
- change in quantity or quality of resources
- change in technology
- change in trade
what is the role of property rights
creates incentives in market economies – establishes ownership and grants people the right to trade goods/services for mutual gain44
