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Terms in this set (68)
A situation in which unlimited wants exceed the limited resources available to fulfill those wants.
is the study of the choices people make to attain their goals, given their scarce resources.
a simplified version of reality used to analyze real-world economic situations
A group of buyers and sellers of a good or service and
the institution or arrangement by which they come together to
In analyzing markets, we generally assume:
1. People are rational- weigh benefits and costs to each action
2. People respond to economic incentives- cheaper food
3. Optimal decisions are made at the margin
Comparing MC and MB
The idea that, because of scarcity, producing more of one good or service means producing less of another good or service.
The highest-valued alternative given up in order to engage in
some activity is known as the
centrally planned economy
An economy in which the government decides how economic resources will be allocated.
An economy in which the decisions of
households and firms interacting in markets allocate economic resources
An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.
a situation in which a good or service is produced at the lowest possible cost
a state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.
A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction.
the fair distribution of economic benefits.
An important trade-off for a government is that between efficiency and equity.Example: If we tax income, people might work less or open fewer businesses, but those tax receipts can fund programs that aid the poor.
something measurable that can have different values, such as the number of people employed in manufacturing.
Economists develop economic models to analyze real-world issues.Building an economic model often follows these steps:
1. Decide on the assumptions to use.
2. Formulate a testable hypothesis.
3. Use economic data to test the hypothesis.
4. Revise the model if it fails to explain the economic data well.
5. Retain the revised model to help answer similar economic questions in the future.
analysis concerned with what is
analysis concerned with what ought to be
Microeconomics is the study of
•how households and firms make choices
•how they interact in markets, and •how the government attempts to influence their choices.
is the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.
production possibilities frontier (PPF)
is a curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology.
Is the PPF a positive or normative tool?
Positive; it shows "what is", not "what should be".
The ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources.
The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
factors of production
labor: all types of work, from the part-time labor of teenagers working at McDonald's to the work of senior managers in large corporations.
capital: physical capital, such as computers, office buildings, and machine tools, used to produce other goods
natural resources: land, water, oil, iron ore, and other raw materials (or "gifts of nature") that are used in producing goods
An entrepreneur is someone who operates a business. Entrepreneurial ability is the ability to bring together the other factors of production to successfully produce and sell goods and services.
Households receive payments for factors of production by selling them to firms in
Firms supply goods and services to product markets
households buy these products from the firms
Circular-flow diagram: A model that illustrates how participants in markets are linked.
-Households provide factors of production to firms.
-Firms provide goods and services to households.
-Firms pay money to households for the factors of production.
-Households pay money to firms for the goods and services.
a free market
is one with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed
perfectly competitive market
a market with:
(1) many buyers and sellers,
(2) all firms selling identical products, and
(3) no barriers to new firms entering the market.
the demand by all the consumers of a given good or service.
The requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant.
Law of demand
A rule that states 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.
when does demand shift?
when theres a change in something other than price
The change in the quantity demanded of a good that results from the effect of a change in the good's price on a consumers' purchasing power.
Changes in expectations about future prices
Future products are substitutes for current products
An expected increase in the price tomorrow increases demand today.
An expected decrease in the price tomorrow decreases demand today.
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.
factors influencing market demand
-Income: Increase in income increases demand if product is normal, decreases demand if product is inferior.
-Prices of related goods: Increase in price of related good increases demand if products are substitutes, decreases demand if products are complements.
Tastes: If consumers' tastes change, they may buy more or less of the product. or eating healthier
Population and demographics
Expected future prices: ex, An increase in the elderly population increases the demand for medical care.
What Factors Influence Market Supply
-Prices of inputs: An increase in the price of an input decreases the profitability of selling the good, causing a decrease in supply. Vice versa
-Technological change: A new, more productive variety of wheat would increase the supply of wheat. Governmental restrictions on land use for agriculture might decrease the supply of wheat.
-Prices of substitutes in production:
-Number of firms in the market: fewer firms= supply decreases, trying to raise price
-Expected future prices
is a situation in which quantity demanded equals quantity supplied.
Alternating periods of economic expansion and economic recession.
The period of a business cycle during which the total production and total employment are increasing
The period of a business cycle during which total production and total employment are decreasing.
The ability of an economy to produce increasing quantities of goods and services.
The percentage increase in the price level from one year to the next.
Gross Domestic Product (GDP)
the market value of all final goods and services produced in a country during a period of time, typically one year.
GDP can be expressed as the sum of these:
Y = C + I + G + NX
(consumption)(investment)(government purchases)(net exports)
is spending by households on goods and services, not including spending on new houses (which are counted instead in investment).
-Services, such as medical care, education, and haircuts
-Nondurable goods, such as food and clothing, and
-Durable goods, such as automobiles and furniture
is spending by firms on new factories, office buildings, machinery, and additions to inventories, plus spending by households and firms on new houses.
are the value of exports minus the value of imports.
This difference might be positive or negative; in recent years, this has been negative in the United States.
Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations, or because the goods and services are illegal.
This may be 10 percent or more of the economy in America and substantially more in low-income countries.
GDP does not show
-The value of leisure
-Pollution and other negative effects of production
-Crime and other social problems
-The distribution of income
Example: Lower crime would allow lower spending on police, prisons, and private security. This would decrease GDP, but surely result in improvements in economic well-being.
the value of final goods and services evaluated at current-year prices
the value of final goods and services evaluated at base-year prices.
Nominal GDP/Real GDP x 100
a measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100:
unemployment rate formula
number of unemployed/labor force x 100
labor force participation rate formula
labor force/working age population x 100
employment population ratio
(employment/working age population) x 100
Short-term unemployment that arises from the process of matching workers with jobs.
ex. looking for a new job or having a seasonal job
Unemployment that arises from a persistent mismatch between the skills or attributes of workers and the requirements of jobs.
Example: In the film and TV animation industry, jobs in hand-drawn 2-D illustration have fallen, and jobs in computer-assisted 3-D animation have risen. Even workers with the best hand-drawing skills may find themselves structurally unemployed
Unemployment causes by a business cycle recession.
An above-market wage that a firm pays to increase workers' productivity. Pay workers a lot so they are motivated
Consumer Price Index (CPI)
is a measure of the average of the prices a typical urban family of four pays for the goods and services they purchase
(expenditures in the current year/expenditures in the base year) x 100,,, then find inflation rate by (First CPI-Second CPI)/(Second CPI) x 100
producer price index
is an average of the prices received by producers of goods and services at all stages of the production process.
nominal interest rate
the stated interest rate on a loan
real interest rate
equal to the nominal interest rate minus the inflation rate.
Recommended textbook explanations
Principles of Economics
N. Gregory Mankiw
Economics: Principles in Action
Arthur O'Sullivan, Steven M. Sheffrin
Economics: Concepts and Choices
Economics: Concepts and Choices (Florida)
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