Unit 2 - Economic Models Flashcards
What is a model used to represent events in the economy?
Diagrams
Diagrams help visualize economic processes and relationships.
What is an assumption?
Something taken for granted or accepted as true without proof
Assumptions are foundational in economic theories.
What does a Circular Flow Diagram show?
The movement of inputs and outputs and the flow of money between households and firms in a free market economy
It illustrates how money circulates in an economy.
Define interdependence in an economic context.
A mutual reliance between things
In economics, it refers to reliance on each other for goods and services.
What is the Production Possibility Frontier (PPF)?
A curve depicting the maximum feasible amounts of two commodities that a business can produce, given fixed resources
The PPF illustrates trade-offs and opportunity costs.
What is specialization?
Focusing on the production of a limited scope of goods to gain a greater degree of efficiency
It can lead to increased productivity.
What does absolute advantage refer to?
The ability to produce more of a good or service with the same amount of resources compared to others
It highlights a producer’s efficiency.
Define comparative advantage.
The ability to produce a good or service at a lower opportunity cost compared to others
This is crucial for trade between entities.
What is opportunity cost?
The loss of potential gain from other alternatives when one alternative is chosen
It emphasizes the cost of foregone alternatives.
What is a market?
A group of people who buy or sell a product
Markets can vary in structure and competition.
Define a competitive market.
A market with many sellers and buyers
This structure promotes fair pricing and competition.
What characterizes a perfectly competitive market?
Price is determined by everyone rather than one person or company
In such markets, no single entity has market power.
What is a price taker?
An entity that can buy or sell all they want at the market price
Price takers accept the market price as given.
Define a price setter.
An entity that can set the price to whatever they want
Price setters have market power and influence pricing.
What is a monopoly?
A market where a single seller dominates
Monopolies can restrict competition and manipulate prices.
What does the Law of Demand state?
The quantity of a good demanded falls as the price rises
This principle reflects consumer behavior.
What is a demand schedule?
A table that shows the quantity demanded at each price
It provides a clear view of demand at various price points.
What is a demand curve?
A graph showing the relationship between the price of a good and the quantity demanded
It visually represents demand trends.
What does quantity demanded refer to?
The amount of a good buyers are willing to purchase at a given price
It varies with price changes.
What does movement along the demand curve indicate?
Change in quantity demanded due to a change in price
This movement reflects changes in consumer purchasing behavior.
What causes shifts in the demand curve?
Changes in demand due to factors other than price
Factors include consumer preferences, income levels, and price of related goods.
Define a normal good.
A good for which demand increases as income rises
Normal goods contrast with inferior goods.
What is an inferior good?
A good for which demand decreases as income rises
These goods are typically lower-quality substitutes.
What are substitutes?
Products that can replace each other
The availability of substitutes affects price elasticity.
Define complements.
Products that are used together
The demand for one often influences the demand for the other.
What does supply refer to?
The amount of a product a person is willing to sell
Supply is influenced by production costs and market conditions.
What is the Law of Supply?
As the price of a good rises, the quantity supplied also rises
This law reflects producer behavior in response to price changes.
What is a supply curve?
A graph showing the relationship between the price of a good and the quantity supplied
It visually represents how supply changes with price.
What is a market supply curve?
The sum of all individual supply curves in a market
It represents total supply available to consumers.
Define equilibrium in an economic context.
The point where quantity supplied equals quantity demanded
Equilibrium indicates market stability.
What is another term for equilibrium price?
Market-Clearing Price
This price clears the market of excess supply or demand.
What is a surplus?
Excess supply when quantity supplied is greater than quantity demanded
Surpluses often lead to price reductions.
Define a shortage.
Excess demand when quantity demanded is greater than quantity supplied
Shortages can drive prices up.
What does the Law of Supply and Demand state?
The price of any good adjusts to bring the quantity supplied and quantity demanded into balance
This law is fundamental to market economies.
What is a movement along the supply curve?
Change in quantity supplied due to a change in price
It illustrates the direct relationship between price and supply.
What causes a shift of the supply curve?
Changes in supply due to factors other than price
Factors include production costs, technology, and number of sellers.
