Unit 1: Introduction to Economics (ch.1-4) Flashcards
Economics
the study of how society manages its scarce resources
scarcity
society has limited resources and therefore cannot produce all the goods and services people wish to have
Principle #1: People Face Tradeoffs
To get one thing we like we usually have to give up another thing that we like
(E.g.: efficiency vs. equity)
rational people
systematically and purposefully do the best they can to achieve their objectives, given the opportunities they have.
efficiency
society is getting the maximum benefit from its scarce resources
equity
benefits from resources are distributed fairly among society’s members
Principle #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
(e.g. lost time)
opportunity cost
what you give up to get that item
Principle #3: Rational people think at the margin
rational people know that decisions in life are rarely black and white but usually involve shades of grey and make decisions by comparing marginal benefits and marginal costs
(e.g. airline selling seats for lower prices last minute)
marginal changes
small incremental adjustments to an existing plan of action
Principle #4: People respond to incentives
People are rational and will try to get the best deal by comparing costs and benefits and thus are affected by incentives.
e.g. if prices go up, people will not buy the product; if prices are lowered, people will buy the product
e.g. if you forget how policy affects incentives then something like this may happen: seat belt law encouraged people to drive faster since they felt safer wearing a seatbelt but unfortunately this made the road less safe for pedestrians
So remember that people will respond to incentives when you make changes otherwise you may not get the intended result.
Principle #5: Trade can make everyone better off
It is challenging to grow all your own food, make your own clothes and build your own home since the training required and the tools required costs money and time; but you can do some of the work and give that away in exchange for someone else doing something you don’t have the tools or techniques or time to do yourself.
Principle #6: markets are usually a good way to organize economic activity
Instead of having a central planner and communism, have the people decide what to charge and pay since it works better. They vote with their money. Then you will only make things that are actually needed and that are selling.
market economy
the decisions of a central planner are replaced by the decisions of millions of firms and households
Principle #7: Governments can sometimes improve market outcomes
government can help to enforce rules and maintain institutions that allow for a market economy (such as enforcing property rights so that people have a space to sell and make products)
- can promote efficiency and equity
property rights
allows an individual to own and control scarce resources
market failure
the market on its own fails to produce an efficient allocation of resources
externality
the impact of one person’s actions on the well-being of a bystander
market power
the ability of a single person or firm to unduly influence market prices
Principle #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
productivity
the amount of goods and services produced from each unit of labour input
Principle #9: prices rise when the government prints too much money
Inflation causes issues; inflation is caused by a growth in the quantity of money which lowers the value of the money
inflation
an increase in the overall level of prices in the economy
Principle #10: society faces a short-run tradeoff between inflation and unemployment
When money quantity is increased, higher prices occur over the long run. But short-term it is more complicated.
- increasing the amount of money increases spending and demand for goods and services
- with higher demand over time, firms will raise their prices but they will also increase productivity and hire more workers
So inflation may occur which is not good but this increases employment which is good.
business cycle
the irregular and largely unpredictable fluctuations in economic activity as measured by the production of goods and services or the number of people employed
incentive
something that induces a person to act
rational people
those who systematically and purposefully do the best they can to achieve their objectives
circular-flow diagram
a visual model of the economy that shows how dollars flow through markets
production possibilities frontier
a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
microeconomics
the study of how households and firms make decisions and how they interact in markets
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
normative statements
claims that attempt to prescribe how the world should be
linear demand curve
linear equation
Price is on the y axis
Demand is on the x axis
It is standard to isolate for x in the equation instead of the usual isolating for y!
QD = a - bP
a and b are the parameters of the function and represent positive numbers
P = price
QD = quantity demanded at that price
QD = 56 - 4P for example
The D is supposed to be superscript
So sometimes P = f(QD) in some graphs when the business is looking at demand to set a price, but is QD=f(P) when they are setting a price and then trying to map what the quantity demanded would be. For example, a decrease in price increases the quantity of cones demanded shows that QD is a function of P. But they still put price on the y axis and quantity of cones on the x axis.
WHEN THEY ASK FOR SLOPE THEY ARE ASKING FOR IT ASSUMING THAT P = f(QD) with price on the y-axis and so slope is the number in front of Q not P and you may have to isolate for P to find that slope.
absolute advantage
the comparison among producers of a good according to their productivity
comparative advantage
the comparison among producers of a good according to their opportunity cost
exports
goods and services produced domestically and sold abroad
imports
goods and services produced abroad and sold domestically
market
a group of buyers and sellers of a particular good or service
competitive market
a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
quantity demanded
the amount of a good that buyers are willing and able to purchase
A lower price increases the quantity demanded
law of demand
the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
demand schedule
a table that shows the relationship between the price of a good and the quantity demanded
demand curve
a graph of the relationship between the price of a good and the quantity demanded
market demand
the sum of all the individual demands for a particular good or service
market demand curve
shows how the total quantity demanded of a good varies as the price of the good varies, while all other factors that affect how much consumers want to buy are held constant
increase in demand while price is held constant as seen on a graph
shifts the negatively sloped line (as one variable increases the other decreases, for example, as the independent variable demand decreases, the dependant price variable increases, or alternatively as the price drops the demand increases) to the right parallel to the last line
For the same price you have more demand so price on the y axis is the same but the demand is higher therefore that point shifts right. If you do this for every point the line will shift right.
normal good
a good for which, other things equal, an increase in income leads to an increase in demand
inferior good
a good for which, other things equal, an increase in income leads to a decrease in demand
substitutes
two goods for which an increase in the price of one leads to an increase in the demand for the other
complements
two goods for which an increase in the price of one leads to a decrease in the demand for the other
- often pairs of goods that are used together such as gas and vehicles
quantity supplied
the amount of a good that sellers are willing and able to sell
supply schedule
a table that shows the relationship between the price of a good and the quantity supplied
supply curve
a graph of the relationship between the price of a good and the quantity supplied
equilibrium price
the price that balances quantity supplied and quantity demanded
equilibrium
a situation in which the price has reached the level where quantity supplied equals quantity demanded
equilibrium quantity
the quantity supplied and the quantity demanded at the equilibrium price
surplus
a situation in which quantity supplied is greater than quantity demanded
shortage
a situation in which quantity demanded is greater than quantity supplied
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
