Combo with Microeconomics 2nd set and 4 others

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245 terms · Combined set for Microeconomics

If good B is complement to good A, then the decrease in the price of B

increases the demand for A.

If demand decreases, then quantity supplied will

increase.

If the supply of a product increases, then

producers are willing to accept a lower price for each unit sold.

An increase in supply will cause equilibrium price to decrease and

equilibrium quantity to increase.

The income effect of an increase in the price of an inferior good is

an increase in the quantity demanded of inferior good.

As the baby boom ended, fewer families had young children and, as a consequence, the

demand curve for preschool services shifted inward.

An increase in the number of producers of a good will

increase the market supply because market supply in the sum of all individual supply curves.

If demand decreases and supply increases, price will

always decrease.

economics

the study of how people you use their scarce resources to satisfy unlimited wants.

resources

the inputs, or factors of production, used to produce the goods and services that people want; resources consist of labor, capital, natural resources, and entrepreneurial ability

labor

the physical and mental effort used to produce goods and services

capital

the buildings, equipment and human skills used to produce goods and services

natural resources

all goods of nature used to produce goods and services; includes renewable and exhaustible resources

entrepreneurial ability

the imagination required to develop a new product or process, the skill needed to organize production, and the willingness to take risk of profit or loss

wages

payment to resource owners for their labor

interest

payment to resource owners for the use of their capital

rent

payment to resource owners for the use of their natural resource

profit

reward for entrepreneurial ability; sales revenue minus resource cost

good

a tangible product used to satisfy human wants

service

an activity, or intangible product, used to satisfy human wants

scarcity

occurs when the amount people desire exceeds the amount available at zero price

market

a set of arrangements by which buyers and sellers carry out exchange at mutually agreeable terms

product market

a market in which a good or service is bought an sold

resource market

a market in which a resource is bought and sold

circular-flow model

a diagram that traces the flow of resources, products, income, and revenue among economic decision makers

rational self-interest

each individual tries to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit

marginal

incremental, additional, or extra; used to describe a change in an economic variable

microeconomics

the study of economic behavior in particular markets, such as that for computers or unskilled labor

macroeconomics

the study of economic behavior of entire economies, as measured, for example, by total production and employment

economic fluctuations

the rise and fall of economic activity relative to the long-term growth trend of the economy; also called business cycles

economic model

also known as economic theory; a simplification of reality used to make predictions about cause and effect of the real world

ceteris paribus

also known as: all things being equal

behavioral assumption

an assumption that describes the expected behavior of economic decision makers, what motivates them

positive economic statement

a statement that can be proved or disproved by reference to facts

normative economic statement

a statement that reflects an opinion, which cannot be proved or disproved by reference to the facts

association is causation fallacy

the incorrect idea that if two variables are associated in time, one must necessarily cause the other

fallacy of composition

the incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or the whole

secondary effects

unintended consequences of economic actions that may develop slowly over time as people react to events

slope

equals change in the vertical distance / increase in the horizontal distance

opportunity cost

the value of the best alternative forgone when an item or activity is chose

sunk cost

a cost that has already been incurred, cannot be recovered, and thus is irrelevant for present and future economic decisions

law of comparative advantage

the individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good

absolute advantage

the ability to make something using fewer resources than other producers use

comparative advantage

the ability to make something at a lower opportunity cost than other producers make

division of labor

breaking down the production of goods into separate tasks

specialization of labor

focusing work effort on a particular product or a single task

production possibilities fronties(PPF)

a curve showing alternative combinations of goods that can be produced when available resources are use efficiently; a boundary line between inefficient and unattainable combinations

efficiency

the condition that exists when there is no way resources can be reallocated to increase the production of one good without decreasing the production of another; getting the most from available resources

law of increasing opportunity cost

to produce more of one good, a successively larger amount of the other good must be sacrificed

economic growth

an increase in the economy's ability to produce goods and service; reflected by an outward shift of the economy's production possibilities frontier

economic system

the set of mechanisms and institutions that resolve the what, how, and for whom questions

utility

the satisfaction received from consumption; sense of well-being

transfer payments

cash or in-kind benefits given to individuals as outright grants from the government

sole proprietorship

a firm with a single owner who has the right to all profits but who also bears unlimited liability for the firm's losses and debts

firms

economic units formed by profit-seeking entrepreneurs who employ resources to produce goods and services for sale

partnership

a firm with multiple owners who share the profits and bear unlimited liability for firm's losses and debts

corporation

a legal entity owned by stockholders whose liability is limited to the value of their stock ownership

market failure

a condition that arises when the unregulated operation of markets yields socially undesirable results

monopoly

a sole supplier of a product with no close substitutes

natural monopoly

one firm that can supply the entire market at a lower per-unit cost than could two or more firms

externality

a cost or a benefit that affects neither the buyer nor seller, but instead affects people not involved in the market transaction

fiscal policy

the use of government purchases, transfer payments, taxes, and borrowing to influence economy-wide variable such as inflation, employment and economic growth

monetary policy

regulation of the money supply to influence economy-wide variables such as inflation, employment, and economic growth

proportional taxation

also known as flat tax; the tax as a percentage of income remains constant as income increases

progressive taxation

the tax as a percentage of income increases as income increases

marginal tax rate

the percentage of each additional dollar of income that foes to the tax

regressive taxation

the tax as a percentage of income decreases as income increases

merchandise trade balance

the value during a given period of a country's exported goods minus the value of its imported goods

balance of payments

a record of all economic transactions during a given period between residents of one country and residents of the rest of the world

foreign exchange

foreign money needed to carry out international transactions

demand

relation between the price of good and the quantity that consumers are willing and able to buy per period other things being constant

law of demand

the quantity of a good that consumers are willing and able to buy per period relates inversely, or negatively, to the price, other things being constant

substitution effect of a price change

when the price of a good falls, that good becomes cheaper compared to other goods so consumers tend to substitute that good for other goods

real income

income measured in terms of the goods and services it can buy; real income changes when the price changes

demand curve

a curve showing the relation between the price of a good and the quantity consumers are willing and able to buy per period, other things being constant

quantity demand

the amount of a good consumers are willing and able to buy per period at a particular price, as reflected by a point on a demand curve

movement along a demand curve

change in quantity demanded resulting from a change in the price of the good, other things being constant

shift of a demand curve

movement of a demand curve right or left resulting from a change in one of the determinants of demand other than the price of the good

supply

a relation between the price of a good and the quantity that producers are willing and able to sell per period, other things being constant

law of supply

the amount of a good that producers are willing and able to sell per period is usually directly related to its price, other things constant

supply curve

a curve showing the relation between price of a good and quantity producers are willing and able to sell per period, other things being constant

quantity supplied

the amount offered for sale per period at a particular price, as reflected by a point on a given supply curve

market supply

the relation between the price of a good and the quantity all producers are willing and able to sell per period

movement along a supply curve

change in quantity supplied resulting from a change in the price of the good

shift of a supply curve

movement of a supply curve left or right resulting from a change in one of the determinants of supply other than the price of the good

transaction cost

the cost of time and information required to carry market exchange

surplus

at a given price, the amount by which quantity supplied exceeds the quantity demanded;

shortage

at a given price, the amount by which quantity demanded exceeds quantity supplied

equilibrium

the condition that exists in a market when the plan of buyers match those of sellers, so quantity demanded equals quantity supplied and the market clears

scarcity

a situation in which unlimited wants exceed the limited resources available to fulfill those wants

economics

the study of the choices people make to attain their goals, given the scarce resources

3 fundamental question that any economist must answer:

1) what goods and services will be produced?
2) how will those goods and services be produced?
3) who will receive the goods and services produced?

economic model

a simplified version of reality used to analyze real-world economic situations

market

a group of buyers, and sellers of a good or service and the institution or arrangement by which they come together to trade

economists assume that people in firms:

are rational, respond to economic incentives and optimal decisions are made at the margin

marginal analysis

analysis that involves comparing marginal benefits and marginal costs

marginal benefit

the additional or extra benefit associated with an action (the word marginal means additional) Marginal benefits should equal marginal costs

marginal cost

the increase or decrease in costs as a result of one more or one less unit of output (ex: you watch an extra hour of TV then the marginal cost is the lower grade you relieve on your test from studying less)

trade-offs

all the alternatives that we give up whenever we choose one course of action over another

centrally planned economy

economic system in which the central government makes all decisions on the production and consumption of goods and services

market economy

an economy that relies chiefly on market forces to allocate goods and resources and to determine prices

mixed economy

market-based economic system with limited government involvement

productive efficiency

a good or service is produced at the lowest possible cost

allocative efficiency

when the last unit produced costs the same as the benefit received by consumers (marginal benefit = marginal cost)

voluntary exchange

both the buyer and the seller of a product are made better of by the transaction

positive analysis

analysis concerned with what is

normative analysis

analysis concerned with what ought to be

microeconomics

the branch of economics that studies the economy of consumers or households or individual firms

macroeconomics

the study of the economy as a whole, including topics such as inflation, unemployment and economic growth

difference between macroeconomics and microeconomics

macroeconomics examine the economy as a whole and microeconomics examines individual markets

production possibility frontier (PPF)

illustrates the trade-offs facing an economy that produces only two goods; shows the maximum quantity of one good that can be produced for any given quantity produced of the other

opportunity cost

the most desirable alternative given up as the result of a decision

trade

the 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 competitors, using the same amount of resources

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

product markets

markets where producers offer goods and services for sale

factor markets

Markets for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability

factors of production

resources necessary to produce goods and services

free market

an economic system in which prices and wages are determined by unrestricted competition between businesses, without government regulation or fear of monopolies.

property rights

the rights individuals or firms have to the exclusive use of their property including the right to buy or sell it

perfectly competitive market

A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market

demand

the relationship between the price of a good and the quantity of it the consumers are willing to buy at that price

demand curve

a graphical representation of the law of demand. It slopes downward (for most goods) because , all else constant, the quantity demand rises (falls) as the price falls (rises)

market demand

the demand by all the consumers of a given good or service

law of demand

the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises

income effect

a change in price affects overall purchase power

substitution effect

the change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes

ceteris paribus condition

The requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant (ceteris paribus is latin for "all else equal")

top 5 variables that influence the market demand:

1) income
2) price of goods
3) tastes
4) population and demographics
5) expected future prices

normal goods

when income rises, demand increases. Most goods are normal

inferior goods

when income rises, demand decreases, because better goods can be afforded (ex: Generic-labeled food)

complements

goods and services that are used together such as hot dog and hot dog buns

demographics

the characteristics of a population with respect to age, race, and gender.

supply

the relationship between the price of a good and the quantity of it that firms are willing to produce at that price

law of supply

the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises

top 5 variables that shift the market supply:

1) prices of inputs
2) technological change
3) prices of substitutes in production
4) number of firms in the market
5) expected future prices

supply curve

a graphical representation of the law of supply. It slopes upward because quantity supplied rises as price rises, with other things constant

technological change

a positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs

market equilibrium

a situation in which the quantity demanded equals quantity supplied

competitive market equilibrium

a market equilibrium with many buyers and many sellers

surplus

a quantity much larger than is needed

shortage

a quantity much less than is needed

price ceiling

a maximum price that can be legally charged for a good or service

price floor

floor below which prices are not allowed to fall

consumer surplus

the difference between the highest price a consumer is willing to pay for a good or service and the price the consumer actually pays

marginal benefit

the additional benefit to a consumer from consuming one more unit of a good or service

marginal cost

the additional cost to a firm of producing one more unit of a good or service

producer surplus

the difference between the lowest price a firm would be willing to accept and the price it actually receives

economic loss

the sum of consumer surplus and producer surplus

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