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Econ Unit 1

Economics

The study of scarcity and choice

Economy

A system for coordinating a society's productive nd consumptive activities

Resource

Anything that can be used to produce something else, includes land, labor, capital and entrepreneurship

Lands

All resourcse that come from nature

Labor

The effort of workers

Capital

Manufactured goods used to make other goods and services

Entrepreneurship

Describes the efforts of entrepreneurs in organizing resources for production, taking risks to create new enterprises, and innovating to develop new products and production processes

Opportunity Cost

What you must give up in order to get an item

Positive Economics

The branch of economic analysis that describes the way the economy actually works

Normative Economics

Makes prescriptions about the way the economy should work

Microeconomics

The study of how people make decisions and how those decisions interact

Macroeconomics

Concerned with teh overall ups and downs of the economy

Trade-Off

When you give up something in order to have something else

Efficient

When there is no way to make anyone better off without making at least one person worse off

Efficient in Production

When an economy is producing at a point on its production possibility frontier

Inefficient

When an economy is missing the opportunity to produce more of both goods

Efficient in Allocation

The economy allocates its resources so that consumers are as well off as possible

Economic Growth

An expansion of the economy's production possibilities, the economy can produce more of everything

Sources of Economic Growth

An increase in the resources used to produce goods and services, and progress in technology

Competitive Market

A market in which there are many buyers and sellers of the same good or service, none of whom can influene the price at which the good or service is sold

Law of Demand

Says that a higher price for a good or service, all other things being equal, leads people to demand a smaller quatity of that good or service

Change in Demand

A shift in the demand curve, which changes teh quantity demanded at any given price

Movement along the Demand Curve

A change in the quantity demanded of a good that is the result of a change in that good's price

Shifts of the Demand Curve

Changes in the prices of related goods or services, changes in income, changes in tastes, changes in expectations and changes in the number of consumers

Substitute

A rise in the price of one good leads to an increase in the demand for the other good

Complement

A rise in the price of one good leads to a decrease in the demand for the other good

Normal Good

When a rise in income increases the demand for a good it is a(n) ____

Inferior Good

When a rise in income decreases the demand for a good, it is a(n) ______

Quantity Supplied

The actual amount of a good or service producers are willing to sell at some specific price

Law of Supply

The price and quantity supplied of a good are positively related

Change in Supply

A shift of the supply curve, which changes teh quantity supplied at any given price

Movement Along the Supply Curve

A change in the quantity supplied of a good that is the result of a change in that good's price

Shifts of the Supply Curve

Changes in input prices, changes in the pries of related goods or services, changes in technology, changes in expectations, changes in the number of producers

Input

Anything that is used to produce a good or service

Equilibrium

When no individual would be better off doing something different

Market-Clearing Price

When the quantity supplied matches the quantity demanded, also known as the equilibrium price

Surplus

When the quantity supplied exceeds the quantity demanded, occur when the price is above its equilibrium level, results in fall in price

Shortage

When the quantity demanded exceeds the quantity supplied, occur when the price is below its equilibrium level, results in increase in price

Increases

When demand for a good or service _____, the equilibrium price and the equilibrium quantity of the good or service both rise

Decreases

When demand for a good or service _____, the equilibrium price and the equilibrium quantity of the good or service both fall

Decreases

When supply of a good or service ____, the equilibrium price of the good or service rises and the equilibrium quantity of the good or service falls

Increases

When teh supply of a good or service ____, the equilibrium price of teh good or service falls and the equilibrium quantity fo the good or service rises

Rises

When demand increases and supply decreases, teh equilibrium price ____ but the change in the equilibrium quantity is ambiguous

Falls

When demand decreases and supply increases, the equilibriuum price ____ but the change in the equilibrium quantity is ambiguous

Increases

When both demand and supply increase, the equilibrium quantity _____ but the change in equilibrium price is ambiguous

Decreases

When both demand and supply decrease, the equilibrium quantity _____ but the change in equilibrium price is ambiguous

Price Controls

Legal restrictions on how high or low a market price may go

Price Ceiling

A maximum price sellers are allowed to charge for a good of service

Price Floor

A minimum price buyers are required to pay for a good or service

Inefficient Allocation to Consumers

People who want the good badly and are willing to pay a high price don't get it, and those who care relatively little about the good and are only wiling to pay a relatively low price do get it, one form of inefficiency caused by price ceiling

Wasted Resources

People expend money, effort, adn time to cope with the shortages caused by the price ceiling, one form of inefficiency caused by price ceiling

Ineffienctly Low Quality

Sellers offer low quality goods at a low price even though buyers would prefer a higher quality at a higher price, one form of ineffiency caused by prie ceiling

Black Market

A market in which goods or services are bought and sold illegally - either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling

Inefficient Allocation of Sales Among Sellers

Those who would be willing to sell the good at the lowest price are not always those who manage to sell it, one form of inefficiency caused by price floor

Ineffieciently High Quality

Sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price, one form of inefficiency caused by price floor

Price Floor Inefficiencies

Inefficiently low quality, inefficient allocation of sales among sellers, wasted resources, inefficiently high quality, illegal activity

Price Ceiling Inefficiencies

Inefficient allocation to consumers, wasted resources, inefficiently low quality, black markets

Substitution Effect

The change in the quantity demanded as the good that has become relatively cheaper is subtituted for the good that has become relatively more expensive

Real Income

When income is adjusted to reflect its true purchasing power

Money Income (Nominal Income)

When income has not been adjusted

Income Effect

A change in the price of a good is the change in the quantity of that good demanded that results from a change in the consumer's purchasing power when the price of the good changes

Normal Goods

Reduction in income leads to a reduction in the quantity demanded and reinforces the substiuttion effect

Inferior Goods

The income and subtitution effects work in opposite directions

Price Elasticity of Demand

Measures the responsiveness of quantity demanded to changes in price, percent change in quantity demanded to the percent changes in price

Elastic Demand

When consumers change their quantity demanded by a large percentage compared with the percent change in the price, price elasticity of demand is greater than 1

Inelastic Demand

When the quantity demanded will fall by a relatively small amount when price rises, price elasticity of demand is less than 1

Midpoint Method

A technique for calculating the percent change, calculate changes in a variable compared with the average of the initial and final values

Perfectly Inelastic Demand

When the quantity demanded does not resppond at all to change in the price, the demand curve is a vertical line

Perfectly Elastic Demand

When any price increase will cause the quantity demanded to drop to zero, the demand curve is a horizontal line

Unit-Elastic

Where the price elasticity of demand is exactly 1

Total Revenue

The total value of sales of a good or service, it is equal to the price multiplied by the quantity sold

Price Effect

After a price increase, each unit sold sells at a higher price, which tends to raise revenu

Quantity Effect

After a price increase, fewer units are sold, which tends to lower revenue

Unit-Elastic

If demand for a good is ____, an increase in price does not chanage total revenue

Inelastic

If demand for a good is ____, a higher price increases total revenue

Elastic

If demand for a good is ______, an increase in price reduces total revenue

Unit Elastic

When demand is ______, price effect and quantity effect exactly balance each other out so a fall in price has no effect on total revenue

Inelastic

When demand is ______, the price effect dominates the quantity effect; so a fall in price reduces total revenue

Elastic

When demand is _____, the quantity effect dominates the price effect; so a fall in price increases total revenue

Determinents of Price Elasticity of Demand

Whether close substitutes are available, whether the good is a necessity or a luxury, share of income spent on the good, time

High

Price elasticity of demand tends to be ____ if there are other goods that consumers regard as similar and would be willing to consume instead

Low

The price elasticity of demand tends to be ____ if a good is something you must have

Low

The price elasticity of demand tends to be ____ when spending on a good accounts for a small share of a consumer's income

Increase

The price elasticity of demand tends to _______ as consumers have more time to adjust to a price change

Cross-Price Elasticity of Demand

Measures the effect of the change in one good's price on the quantity demanded of the other good. It is equal to the percent change in the quantity demanded of one good divided by the percent change in the other good's price

Positive

When two goods are substiutes, the cross-price elasticity of demand is ______

Large

If the two goods are CLOSE substitutes, the cross-price elasticity of demand will be positive and ______

Negative

When two goods are complements, the cross-price elasticity of demand is __

Income Elasticity of Demand

The percent change in the quantity of a good demanded when a consumer's income changes divided by the percent change in the consumer's income

Positive

When the income elasticity of demand is ____, the good is a normal good - that is, the quantity demanded at any given prie increases as income increases

Negative

When the income elasticity of demand is _____, the good is an inferior good - that is, the quantity demanded at any given price decreases as income increases

Income-Elastic

When income rises, teh demand for income-elastic goods rises faster than income, income elasticity of demand is greater than 1

Income-Inelastic

When income rises, the demand for income-inelastic goods rises, but more slowly than income, income elasticity of demand is less than 1

Price Elasticity of Supply

A measure of the responsivenss of the quantity of a good supplied to the price of that good, it is the ratio of the percent change in the quantity supplied to the percent change in the price as we move along the supply curve

Perfectly Inelastic Supply

When the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied, supply curve is a vertical line

Perfectly Elastic Supply

If the quantity supplied is zero below some price and infinite above that price, supply curve is a horizontal line

Determinants of Price Elasticity of Supply

Availability of Inputs, Time

Large

The price elasticity of supply tends to be ____ when inputs are readily available and can be shifted into and out of production at a relatively low cost

Increase

The price elasticity of supply tends to _____ as producers have more time to respond to a price change

Individual Consumer Surplus

The net gain to an individual buyer from the purchase of a good, it is equal to the difference between the buyer's willingness to pay and the price paid

Cost

The lowest price at which a seller is willing to sell a good

Total Surplus

The total net gain to consumers and producers from trading in a market

Reduces

Reallocating the good among consumers always means taking a book away from a student who values it more and giving it to one who values it less, this necessarily _____ total consumer surplus

Reduces

Reallocating sales among sellers necessarily increases total cost and ____ total producer surplus

Reduces

Preventing any sale that would have occurred in the market equilibrium necessarily ____ total surplus

Excise Tax

A tax on sales of a particular good or service

Consumers

When the price elasticity of demand is low and the price elasticity of supply is high, the burden of an excise tax falls on the ______

Tax Incidence

The distribution of the tax burden

Producers

When the price elasticity of demand is high and the price elasticity of supply is low, the burden of an excise tax falls mainly on the _____

Deadweight Loss

The decrease in total surplus resulting from the tax, minus the tax revenues generated

Administrative Costs

A tax are the resources used by government to collect the tax, and by taxpayers to pay (or to evade) it, over and above the amount collected

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