Econ. 050-Exam 1
Terms in this set (46)
the study of how societies use scarce resources to produce goods and distribute them among different people.
a good which is in limited supply.
the study of the behavior of individual decision makers.
the study of the behavior of the economy as a whole.
type of economics which focuses on studying facts which can be
verified or disproved. Positive economics investigates "the way things are".
type of economics which makes value judgments. Normative
economics investigates "the way things ought to be".
The main factors of production
land (or natural resources), labor, and capital.
durable goods that are used to make other goods.
Production possibilities frontier
the curve which shows the maximum amounts of production possible, given the state of technology and the quantity of inputs.
when the economy cannot produce more of one good without producing less of another good; it implies that the economy is on its PPF.
the value of the forgone opportunity; what one has to give up in order to take a specific option. (Be able to calculate this from a table.)
The invisible hand
the idea that individual pursuit of self-interest leads to positive outcomes for society as a whole, through markets.
Perfectly competitive market
a market where no one agent or small group of agents is large enough to affect the price of the good.
an uncompensated cost or benefit of an action; for example, a positive or negative side effect of producing a good, which is not incorporated into the price
of the good.
goods whose benefits are spread among the entire community. These goods are generally non-exclusionary. Public goods tend to be provided by the government because allowing the quantity and price to be determined in a market would lead to levels of provision which are lower than the socially optimal level.
goods where no one can be excluded from consumption of that good, regardless of whether they have paid for it or not.
Law of demand
the quantity demanded decreases as the good's price rises.
goods that compete with one another. Raising the price of one increases demand for the other.
goods that go together. Raising the price of one decreases demand for the other.
Law of supply
the quantity supplied increases as the good's price rises.
Price elasticity of demand
A measure of the sensitivity of the quantity demanded to changes in price. Specifically, the absolute value of (% change in quantity
demanded / % change in price).
Price elasticity of supply
A measure of the sensitivity of the quantity supplied to changes in price. Specifically, the absolute value of (% change in quantity supplied / % change in price).
demand or supply is considered elastic if the elasticity is greater than 1.
the elasticity is less than 1.
*Know that if demand for good x is relatively price-inelastic (elastic) and supply of
good x is relatively price elastic (inelastic), the incidence of a tax on good x will fall
primarily on the consumers (producers).
the ultimate effect of a tax on the real incomes of producers or
consumers, which depends on the price elasticities of supply and demand.
the satisfaction derived from consumption of goods and services.
the change in total utility due to a change in the consumption of a good.
MU = ΔUtility / ΔQx.
Law of diminishing marginal utility
as the amount of the good consumed increases, the extra utility from each additional unit consumed tends to diminish.
Utility Maximizing Rule
total utility is maximized when the marginal utility per dollar of each good is equalized across all goods; that is, MUx/Pricex = MUy/Pricey for all goods.
goods for which demand tends to fall as income rises.
goods for which demand goes up when income rises.
Consumer surplus (CS)
The difference between the amount that consumers would be willing to pay for a commodity and the amount actually paid, summed across all units that are bought. This is calculated as the area of the triangle between the demand curve and the price line, or (1⁄2
Market value (MV)
The amount that was paid for all the units that were bought. This is calculated as the area of the rectangle defined by MV = Price * Quantity.
the sum of the market value and consumer surplus. TU = CS + MV.
shows the number of units of output that can be produced as a function of units of inputs.
the extra output that can be produced for an additional unit of an input, holding all other inputs constant.
MP = Δ Total Product / Δ Qinput.
Law of diminishing returns
After a point, marginal product declines as the quantity of an input increases, if all other inputs are held constant.
Increasing returns to scale
if you increase all inputs proportionally, you see an increase in output that is greater than proportional. Also known as "economies of scale."
Decreasing returns to scale
if you increase all inputs proportionally, you see an increase in output that is less than proportional. Also known as "diseconomies of scale."
Constant returns to scale
if you increase all inputs proportionally, you see an increase in output that is exactly proportional.
Fixed costs (FC)
costs that do not vary, regardless of the quantity produced.
Variable costs (VC)
costs that vary depending on the quantity produced.
Total cost (TC)
the total cost of producing a given quantity of a good. TC=FC + VC.
the cost of producing an additional unit of output. MC = ΔTC / ΔQoutput.
the average cost per unit produced. AC=TC / Quantity.
Least cost rule
firms can minimize costs by selecting amounts of each input such that the marginal product per dollar of input is equalized for all inputs; MPLabor/PLabor = MPLand/PLand = MPCapital/PCapital =...
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