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the limited nature of society's resources


the study of how society manages (allocates) its scarce resources

Mankiw's Principle 1

"People face trade-offs"
allocation of time
clean environment and income
efficiency and equality in designing govt. policies


the property of distributing economic prosperity uniformly among the members of society

Mankiw's Principle 2

The cost of something is what you give up to get it

Opportunity cost

whatever must be given up in a tradeoff

Mankiw's Principle 3

Rational people think at the margin


systematically and purposefully strive to achieve objectives based
on available information

Marginal analysis

comparing marginal benefits and marginal costs

Mankiw's Principle 4

People respond to incentives


something that induces a person to act, such as the prospect of a
punishment or reward

Mankiw's Principle 5

Trade can make everyone better off

Mankiw's Principle 6

Markets are usually a good way to organize economic activity

Mankiw's Principle 7

Governments can sometimes improve market outcomes

Economic Model

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

Positive analysis

concerned with what is.

Normative analysis

concerned with what ought to be (judgment)


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

Positive relationship

Variables move in the same direction. When one variable increases the other variable increases

Negative relationship

Variables move in opposite directions. When one variable increases the other variable decreases


As one variable increases or decreases, the other variable remains unchanged.


The relationship between the variables is constant (constant slope)


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

Feasible (attainable)

all points inside or on the PPF

Infeasible (unattainable)

all points outside of the PPF


all points on the PPF


all points inside the PPF

Increasing Marginal Opportunity Costs

As more units of a good are produced, the cost of each additional unit rises


the act of buying or selling (voluntary exchange for goods or services)

Absolute Advantage

when one individual is better than another at a particular activity

Comparative Advantage

when one individual is able to perform an activity at lower opportunity cost than another individual


concentration on the production of one type of good or service


Any place where people come together to buy and sell goods or services

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

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

Income Effect

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

Ceteris Parbus

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

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

Substitute Goods

Goods and services that can be used for the same purpose


Goods and services that are used together


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

Expected future prices

Consumers choose not only which products to buy but also when to buy them

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

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

Prices of Substitutes in Production

Alternative products that a firm could produce

Number of Firms in the Market

A change in the number of firms in the market will change supply

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

Market Equilibrium

when supply meets demand


A situation in which the quantity supplied is greater than the quantity demanded


A situation in which the quantity demanded is greater than the quantity supplied

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