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Mankiw's Principle 1
"People face trade-offs"
allocation of time
clean environment and income
efficiency and equality in designing govt. policies
systematically and purposefully strive to achieve objectives based
on available information
a simplified version of reality used to analyze real-world economic situations.
1)Decide on assumptions
2)Formulate testable hypothesis
3)Test hypothesis using data
4)Revise model if it fails to organize data
5)Tentatively "accept" (fail to reject) and use the model
study of how households and firms make choices, how they interact in markets, and how they are influenced by govt. decisions
study of the economy as a whole, including topics such as inflation, unemployment, and economic growth
Variables move in the same direction. When one variable increases the other variable increases
Variables move in opposite directions. When one variable increases the other variable decreases
The relationship between the variables changes as one of the variables changes (changing slope).
Production Possibilities Frontier (PPF)
a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology
Increasing Marginal Opportunity Costs
As more units of a good are produced, the cost of each additional unit rises
when one individual is able to perform an activity at lower opportunity cost than another individual
Assumptions of perfect competition
A market that meets the conditions of many buyers and sellers, all firms selling the same product and no barriers to new firms entering the market
Law of Demand
The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease
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
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
The requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant
Demand Shift Factors
Income, Prices of related goods, tastes, populations and dempgraphics, expected future prices
Subjective elements, such as ad campaigns or trends, can enter into a consumer's decision to buy a product
Population and Demographics
The characteristics of a population with respect to age, race, and gender
Change in quantity demanded vs. change in demand
movement along the demand curve as a result of the change in a products price vs. shift in the demand curve
Law of Supply
The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied
Supply Shift Factors
Prices of inputs, technological change, prices of substitutes in productions, number of firms in the market, expected future prices
Price of inputs
A change in the price of an input—anything used in the production of a good or service—is the most likely factor to cause the supply curve for a product to shift
A positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs
Expected Future Prices
If a firm expects that the price of its product will be higher in the future than it is today, it has an incentive to decrease supply now and increase it in the futurechaNG
change in supply vs. change in quantity supplied
shift in the supply curve vs. movement along the supply curve as a result of a change in the products price
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