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60 terms

Microeconomics Test 1

STUDY
PLAY
Scarcity
the limited nature of society's resources
Economics
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
Equality
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
Rational
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
Incentive
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)
Microeconomics
study of how households and firms make choices, how they interact in markets, and how they are influenced by govt. decisions
Macroeconomics
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
Unrelated
As one variable increases or decreases, the other variable remains unchanged.
Linear
The relationship between the variables is constant (constant slope)
Nonlinear
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
Efficient
all points on the PPF
Inefficient
all points inside the PPF
Increasing Marginal Opportunity Costs
As more units of a good are produced, the cost of each additional unit rises
Trade
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
Specialization
concentration on the production of one type of good or service
Market
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
Complements
Goods and services that are used together
Tastes
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
surplus
A situation in which the quantity supplied is greater than the quantity demanded
shortage
A situation in which the quantity demanded is greater than the quantity supplied