 | Term | Definition |
| |
trade-off |
producing more of one good or service means producing less of another good or service |
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opportunity cost |
value of the next best alternative |
| |
centrally planned economy |
economy where the government decides how economic resources will be allocated |
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market economy |
economy where the decisions of households and firms interacting in markets allocate economic resources |
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mixed economy |
economy where most economic decisions are made by buyer/sellers, but the government playes a significant role too |
| |
productive efficiency |
when a good/service is produced at the lowest possible cost |
| |
allocative efficiency |
when the last unit produced costs the same as the benefit recieved by consumers |
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voluntary exchange |
when both the buyer and seller are made better off by the transaction |
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equity |
fair distribution of economic benefits |
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scarcity |
the situation in which unlimited wants exceed the limited resources available to fulfill those wants |
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economics |
study of the choices people make to achieve their goals, given their scarce resources |
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eonomic model |
a simplified version of reality used to analyze real world economic situations |
| |
market |
group of buyer/sellers and the place/arrangement where they come to trade |
| |
4 Assumptions |
1.) People are rational 2.) People respond to incentives 3.) People face trade-offs 4.) Optimal decisions are made at the margin |
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marginal |
extra or additional benefit (MB) or cost (MC) of a decision |
| |
marginal analysis |
comparing MC and MB |
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positive analysis |
concerned with what IS |
| |
normative analysis |
concerned with what SHOULD be |
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production possibility frontier (PPF) |
a curve showing the maximum attainable combinations of two products |
| |
economic growth |
the ability of the economy to produce increasing quantities of goods and services |
| |
absolute advantage |
producing a good with the loswest resource cost |
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comparative advantage |
producing a good with the lowest opportunity cost |
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FORMULA: op cost x (outputs) |
get of y / give up of x |
| |
FORMULA: op cost x (inputs) |
give up of x / get of y |
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utility |
measurement of satisfaction that you get from consuming |
| |
bundles |
groups of goods |
| |
marginal utility |
the additional utility you recieve from consuming one more unit |
| |
law of diminishing marginal utility |
for each additional unit, it adds less utility than the previous |
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indifference curve |
shows all combinations of bundles which give the same utility |
| |
substitutable |
completely indifferent |
| |
complementary |
consume one with the other |
| |
marginal rate of substitution |
rate at which a consumer will trade goods in order to keep utility (MUx / MUy) |
| |
budget constraint |
shows combination of goods that are affordable given price and income |
| |
optimal consumption bundle |
where BC and IC are tangent |
| |
normal |
if income increases, then you buy more |
| |
inferior |
if income increases, then you buy less |
| |
income effect |
??? |
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substitution effect |
if price decreases you substitue towards the cheaper goods |
| |
giffen goods |
when price of a good decreases and you buy less |
| |
quantity demanded |
the amount of a good/service that is consumed at a given price |
| |
demand curve |
a curve that shows the quality demanded at every price |
| |
demand schedule |
list of prices and corresponding quality deamanded's |
| |
law of demand |
people consume more when price decreases (opp = true too) |
| |
market demand curve |
demand of all consumers of a good or service |
| |
quantitiy supplied |
amount of a good or service that a firm is willing to sell for a give price |
| |
supply curve |
shows the relationship between price and quantity supplied |
| |
law of supply |
as price increases so does quantity supplied & vice versa |
| |
market equlibrium |
price and quantity such that at the price P*, Qd*=Qs* |
| |
surplus |
measure of welfare |
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consumer surplus |
difference between what consumers are willing to pay and what they actually pay |
| |
producer surplus |
difference between what price a firm receives and the price they're willing to recieve |
| |
dead weight loss (DWL) |
lost surplus when an economy is NOT in equllibrium |
| |
total surplus |
CS+PS |
| |
effective price controls |
price control that does move the market away from the equilibrium |
| |
price ceiling |
MAX price that a firm can charge |
| |
price floor |
MIN price that a firm can charge |
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