Vocab First Midterm Flashcards
Opportunity Cost
The highest valued alternative that must be given up to engage in an activity
(it isn’t the time that something takes up, it is what could’ve been done otherwise with that time)
Centrally Planned Economy
An economy in which the government decides how economic resources are allocated
Market Economy
An economy in which the decisions of households and firms interacting in the markets allocate economic resources
Mixed Economy
An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in allocation of resources
Productive efficiency
A situation in which a good or service is produced at the lowest possible cost
Allocative Efficiency
A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
Voluntary exchange
Both buyer and seller are made better by a transaction
Equity
A fair distribution of economic benefits
Positive Analysis
objective and based on facts / is economic theory
Normative Analysis
subjective and based on opinion
Marginal Benefit
gain from one additional unit
Marginal Cost
Cost of one additional unit
Percentage change Formula
(Value in 2nd period - Value in 1st period) / (Value in first period) x 100
Scarcity
Limited resources but Unlimited wants
Trade
Act of buying and selling
Absolute advantage
The ability of an individual, a firm, or a country to produce more of a good or service than other competitors, using the same amount of resources.
Comparative Advantage
The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
3 types of Factors of Production
1) Labor
2) Capital
3) Natural Resources
The law of demand
holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price rises, the quantity demanded will decrease
Substitution effect (explaining law of demand)
The change in the quantity demanded of a good that results from a change in price, making the food more or less expensive relative to other goods that are substitutes
The Income Effect (explaining the law of demand)
The change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumers’ purchasing power.
Normal good
A good for which the demand increases as income rises and decreases as income falls
Inferior Good
a good for which the demand increases as income falls, and decreases as income rises
Substitutes
a good or service that can be used for the same purpose (margarine or butter)
Complements
goods or services that are used together (toothbrush/toothpaste)
Quantity Demanded
The amount of a product that consumers are willing to purchase at a given price
Market Demand
Demand of all consumers of a good or service
5 Factors that change Demand
1) Income
2) Price of related goods (subs/complements)
3) Tastes
4) Populations and Demographics
5) Expected Future Prices
5 Factors that change Supply
1) Price of Inputs
2) Technological Change
3) Prices of related goods in production (substitutes/complements)
4) Numbers of Firms in the Market
5) Expected future prices
Price Ceiling
A legally determined maximum price that sellers may change
Price Floor
A legally determined minimum price that sellers may receive
Consumer Surplus
I the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays.
Marginal Benefit
The additional benefit to a consumer from consuming one more unit of a good or service
Producer Surplus
The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives
Marginal Cost
The additional cost to a firm of producing one more unit of a good or service.
Economic Surplus
The sum of consumer surplus and producer surplus
Deadweight loss
The reduction in economic surplus resulting from a market not being in competitive equilibrium
Economic Efficiency
A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumers surplus and producer surplus is at a maximum.
Black Market
A market in which buying and selling take place at prices that violate government and police regulations.
Tariff
A tax imposed by a government on imports
Imports
Goods and serviced bought domestically but produced in other countries
Exports
Goods and services produced domestically but sold in other countries
Autarky
A situation in which a country does not trade with other countries
Terms of Trade
The ratio at which a country can trade its exports for imports from other countries.
Free Trade
Trade between countries that is without government restriction
Quota
A numerical limit a government imposes on the quantity of a good that can be imported into the country.
Voluntary Export Restraint (VER)
An agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from the other country
Externalities
A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service
Private cost
The cost born by the producer of a good or service
Social cost
The total cost of producing a good or service, and it is equal to the private cost plus any external cost, such as the cost of polution
Coase Theorem
The argument that if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities
4 types of goods
1) private
2) public
3) quasi public goods
4) Common resource
Elasticity
A measure of how much one economic variable responds to changed in another economic variable
Price elasticity of demand
% change in quantity demanded/ % change in price
Elastic demand
price elasticity is > 1
Inelastic demand
Price elasticity <1
Unit Elastic demand
Price elasticity = 1
Midpoint formula
(Q2-Q1)/(Q1+Q2/2) / (P2-P1)/(P1+P2/2)
Perfectly Inelastic Demand
Price elasticity of demand = 0
Perfectly Elastic Demand
Price elasticity of demand = infinity
Private Benefit
received by the consumer
Social Benefit
Received by the producer and everyone else
Rivalry
One person’s consumption of a good means nobody else can consume it
Excludability
Anyone who does not pay for a good cannot consume it.
Price Elasticity Demand formula
(Percentage change in quantity demanded)/(Percentage change in price)
Cross Price Elasticity Demand formula
(Percentage change in Q demanded of one good)/(Percentage change on P of another good)
Income Elasticity Demand
(Percentage change in Q demanded)/(Percentage change in income)
Price elasticity of supply
(Percentage change in quantity supplied)/(Percentage change in price)
Cross Price elasticity of supply
Percentage change in Q supplied of 1 good / percentage change in P of another good
