Economics

Equitydistributing resources uniformly among the members of societyPrinciple #2The cost of something is what you give up to get itOpportunity Costwhatever must be given up to obtain one itemOpportunity Cost= explicit cost (requires outlays of money) + implicit cost (with no cash outlays)Principle #3Rational people think at the marginRational Peoplepurposefully and systematically do the best they can to achieve their objectivesMarginal Changessmall incremental adjustments to a plan of actionMarginal Benefitadditional benefitMarginal costadditional costCost- Benefit PrincipleRational people take an action only if: marginal benefit is greater than marginal costOpportunity cost= explicit cost + implicit costPrinciple #4people respond to incentivesIncentivesomething that induces a person to actPrinciple #5trade can make everyone better offPrinciple #6markets are usually a good way to organize economic activityMarket Economyallocates resources through decentralized decisions of many firms and households as they interact in markets for goods and services"Invisible Hand"Term first coined by Adam Smith in the Wealth of Nations (1776); individuals in the market who intend only to pursue their own interest act as if "led by an invisible hand" and end up promoting the society's welfare which is no part of their intention- works through the price channelPrinciple #7Governments can sometimes improve market outcomesMarket Failuresituation in which the market on its own fails to produce an efficient allocation of resourcesExternality Non-market competition Public goodList 3 causes of market failure: 1. ______________ 2. ______________ 3. ______________Externalitythe costs or benefits of economic activities "spill over" onto a third partySocial Cost= private cost + external costMarket Powerability of a single economic actor (or a small group of actors) to have a substantial influence on market pricesPublic Goodonce is made available for one person, there is no way to prevent others from consuming itPrinciple #8A company's standard of living depends on its ability to produce goods and servicesGDP per capitaWhat is the measure of standard of living of a country?Principle #9prices rise when the Federal Government prints too much moneyInflationan increase in the overall level of prices in the economyInflationCause for large, persistent __________ is the growth in quantity of money.UnemploymentValue of money falls as the Fed brings in more money to stimulate the economy, ________________ goes down.UnemploymentAn intricate relationship between ______________ and inflation has been observed historically.Principle #10Society faces a short-run trade-off between inflation and unemploymentThe Philips Curvecaptures the inverse relationship between unemployment and inflationLower inflation rate Lower unemployment rateWhat are two of the Federal government's objectives: 1. ______________________ 2. ______________________MarketA group of buyers and sellers of a particular good or serviceHouseholds (buyers)Form the demand force for the productFirms (sellers)Form the supply force of the productSupply and DemandWhat two entities are known as the twin forces of market?Underlying Assumptionthese are all competitive marketsCompetitive Marketmarket in which there are many buyers and many sellersCompetitive Marketmarket in which there are many buyers and many sellersQuantity Demandedamount of a good that a buyer is willing and able to purchase at a given priceLaw of Demandwhen the price of a good rises, quantity demanded of the good falls, holding other things equalDemand Schedulea table that shows the relationship between the price of a good and the quantity demanded by a buyer or by the entire marketDemand Curvea graph that shows the relationship between the price of a good and the quantity demandedMarket Demand ScheduleAdd the quantities demanded by each buyer at each priceMarket Demand CurveAdd the individual demand curves horizontallyPriceMovement along the demand curve is caused by a _______ change- the only cause of a movement along the demand curveIncrease in DemandIncrease in the quantity demanded at each price- demand curve shifts to the rightDecrease in DemandDecrease in the quantity demanded at each price- demand curve shifts to the leftQuantity____________ demanded refers to a point on the demand curve.Demand___________ refers to the entire demanded curveNumber of buyers Income Price of related goods Tastes ExpectationsList typical variables that can shift the demand curve 1. ______________ 2. ______________ 3. ______________ 4. ______________ 5. ______________Market Demand ScheduleAdd the quantities demanded by each buyer at each priceMarket Demand CurveAdd the individual demand curves horizontallyprice increase quantity right decrease quantity leftMovement along the demand curve vs a shift in the demand curve - Movement is caused by a ________ change o Shifts are caused by ________ in demand • Increase in the _______ demanded at each price • Demand curve shifts to the _______ o ________ in demand • Decrease in the ________ demanded at each price • Demand curve shifts to the _____Quantity Demanded________________ refers to a point on the demand curveDemand__________ refers to the entire demand curveNumber of buyers Income Price of related goods Tastes ExpectationsList 5 typical variables that can shift the demand curve: 1. _________________ 2. _________________ 3. _________________ 4. _________________ 5. _________________Normal Goodan increase in income leads to an increase in demand, holding other things constantInferior Goodan increase in income leads to a decrease in demand, holding other things constantSubstitutes____________: two goods; an increase in the price of one leads to an increase in the demand for the otherCoke and PepsiGive an example of substitutes.Complements____________: two goods; an increase in the price of one leads to a decrease in the demand for the other- price of a complement increases - demand shifts to the left (decreases)Bagels and Cream CheeseGive an example of complements.TastesIncrease in preference leads to an increase in demandexpectations futureIncrease in current demand- expect an increase in income is an example of _________ about the _________.Quantity Suppliedamount of a good sellers are willing and able to sell at a given priceLaw of Supplywhen the price of the good rises, quantity supplied of a good rises, holding other things equal; supply schedule/curveMarket Supply Scheduleadd the quantities supplied by each seller at each priceMarket Supply Curveadd the individual supply curves horizontallyPriceMovement along the supply curve is caused by a _______ change.quantity rightShifts in supply - Increase in supply - Any factor that increases the __________ supplied at each price - Supply curve shifts to the ________quantity leftShifts in supply- Decrease in supply - Any factor that decreases the _________ supplied at each price - Supply curve shifts to the ________Number of sellers Input prices Technology Expectations about futureList 4 variables that can shift the supply curve: 1. ______________ 2. ______________ 3. ______________ 4. ______________Input PricesCost of production; supply - negatively related to prices of inputsTechnologyAdvance in technology - same effect as fall in input pricesEquilibriuma situation in which the twin forces of the market are balanced; quantity demanded = quantity suppliedEquilibrium PriceBalances quantity supplied and quantity demanded - market clearing priceEquilibrium Quantityquantity supplied and quantity demanded at the equilibrium priceSurpluswhen quantity supplied > quantity demanded; excess supplyDownward____________ pressure on price • Movements along the demand and supply curve • Increase in quantity demanded • Decrease in quantity supplied • The market reaches equilibrium eventuallyShortagewhen quantity demanded > quantity supplied; excess demandUpward__________ pressure on price • Movements along the demand and supply curves • Decrease in quantity demanded • Increase in quantity supplied • The market reaches equilibrium eventuallyBalanceThe price of a good can adjust to bring the quantity supplied and the quantity demanded for that good into __________.TemporaryIn competitive markets surpluses and shortages are ___________.EquilibriumThree Steps for Analyzing Changes in ____________: 1. Decide whether the even shifts the supply or demand curve 2. Decide in which direction the curve shifts 3. Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity