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111 terms

Econ Unit 1

Econ Unit 1
STUDY
PLAY
Economics
The study of scarcity and choice
Economy
A system for coordinating a society's productive nd consumptive activities
Resource
Anything that can be used to produce something else, includes land, labor, capital and entrepreneurship
Lands
All resourcse that come from nature
Labor
The effort of workers
Capital
Manufactured goods used to make other goods and services
Entrepreneurship
Describes the efforts of entrepreneurs in organizing resources for production, taking risks to create new enterprises, and innovating to develop new products and production processes
Opportunity Cost
What you must give up in order to get an item
Positive Economics
The branch of economic analysis that describes the way the economy actually works
Normative Economics
Makes prescriptions about the way the economy should work
Microeconomics
The study of how people make decisions and how those decisions interact
Macroeconomics
Concerned with teh overall ups and downs of the economy
Trade-Off
When you give up something in order to have something else
Efficient
When there is no way to make anyone better off without making at least one person worse off
Efficient in Production
When an economy is producing at a point on its production possibility frontier
Inefficient
When an economy is missing the opportunity to produce more of both goods
Efficient in Allocation
The economy allocates its resources so that consumers are as well off as possible
Economic Growth
An expansion of the economy's production possibilities, the economy can produce more of everything
Sources of Economic Growth
An increase in the resources used to produce goods and services, and progress in technology
Competitive Market
A market in which there are many buyers and sellers of the same good or service, none of whom can influene the price at which the good or service is sold
Law of Demand
Says that a higher price for a good or service, all other things being equal, leads people to demand a smaller quatity of that good or service
Change in Demand
A shift in the demand curve, which changes teh quantity demanded at any given price
Movement along the Demand Curve
A change in the quantity demanded of a good that is the result of a change in that good's price
Shifts of the Demand Curve
Changes in the prices of related goods or services, changes in income, changes in tastes, changes in expectations and changes in the number of consumers
Substitute
A rise in the price of one good leads to an increase in the demand for the other good
Complement
A rise in the price of one good leads to a decrease in the demand for the other good
Normal Good
When a rise in income increases the demand for a good it is a(n) ____
Inferior Good
When a rise in income decreases the demand for a good, it is a(n) ______
Quantity Supplied
The actual amount of a good or service producers are willing to sell at some specific price
Law of Supply
The price and quantity supplied of a good are positively related
Change in Supply
A shift of the supply curve, which changes teh quantity supplied at any given price
Movement Along the Supply Curve
A change in the quantity supplied of a good that is the result of a change in that good's price
Shifts of the Supply Curve
Changes in input prices, changes in the pries of related goods or services, changes in technology, changes in expectations, changes in the number of producers
Input
Anything that is used to produce a good or service
Equilibrium
When no individual would be better off doing something different
Market-Clearing Price
When the quantity supplied matches the quantity demanded, also known as the equilibrium price
Surplus
When the quantity supplied exceeds the quantity demanded, occur when the price is above its equilibrium level, results in fall in price
Shortage
When the quantity demanded exceeds the quantity supplied, occur when the price is below its equilibrium level, results in increase in price
Increases
When demand for a good or service _____, the equilibrium price and the equilibrium quantity of the good or service both rise
Decreases
When demand for a good or service _____, the equilibrium price and the equilibrium quantity of the good or service both fall
Decreases
When supply of a good or service ____, the equilibrium price of the good or service rises and the equilibrium quantity of the good or service falls
Increases
When teh supply of a good or service ____, the equilibrium price of teh good or service falls and the equilibrium quantity fo the good or service rises
Rises
When demand increases and supply decreases, teh equilibrium price ____ but the change in the equilibrium quantity is ambiguous
Falls
When demand decreases and supply increases, the equilibriuum price ____ but the change in the equilibrium quantity is ambiguous
Increases
When both demand and supply increase, the equilibrium quantity _____ but the change in equilibrium price is ambiguous
Decreases
When both demand and supply decrease, the equilibrium quantity _____ but the change in equilibrium price is ambiguous
Price Controls
Legal restrictions on how high or low a market price may go
Price Ceiling
A maximum price sellers are allowed to charge for a good of service
Price Floor
A minimum price buyers are required to pay for a good or service
Inefficient Allocation to Consumers
People who want the good badly and are willing to pay a high price don't get it, and those who care relatively little about the good and are only wiling to pay a relatively low price do get it, one form of inefficiency caused by price ceiling
Wasted Resources
People expend money, effort, adn time to cope with the shortages caused by the price ceiling, one form of inefficiency caused by price ceiling
Ineffienctly Low Quality
Sellers offer low quality goods at a low price even though buyers would prefer a higher quality at a higher price, one form of ineffiency caused by prie ceiling
Black Market
A market in which goods or services are bought and sold illegally - either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling
Inefficient Allocation of Sales Among Sellers
Those who would be willing to sell the good at the lowest price are not always those who manage to sell it, one form of inefficiency caused by price floor
Ineffieciently High Quality
Sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price, one form of inefficiency caused by price floor
Price Floor Inefficiencies
Inefficiently low quality, inefficient allocation of sales among sellers, wasted resources, inefficiently high quality, illegal activity
Price Ceiling Inefficiencies
Inefficient allocation to consumers, wasted resources, inefficiently low quality, black markets
Substitution Effect
The change in the quantity demanded as the good that has become relatively cheaper is subtituted for the good that has become relatively more expensive
Real Income
When income is adjusted to reflect its true purchasing power
Money Income (Nominal Income)
When income has not been adjusted
Income Effect
A change in the price of a good is the change in the quantity of that good demanded that results from a change in the consumer's purchasing power when the price of the good changes
Normal Goods
Reduction in income leads to a reduction in the quantity demanded and reinforces the substiuttion effect
Inferior Goods
The income and subtitution effects work in opposite directions
Price Elasticity of Demand
Measures the responsiveness of quantity demanded to changes in price, percent change in quantity demanded to the percent changes in price
Elastic Demand
When consumers change their quantity demanded by a large percentage compared with the percent change in the price, price elasticity of demand is greater than 1
Inelastic Demand
When the quantity demanded will fall by a relatively small amount when price rises, price elasticity of demand is less than 1
Midpoint Method
A technique for calculating the percent change, calculate changes in a variable compared with the average of the initial and final values
Perfectly Inelastic Demand
When the quantity demanded does not resppond at all to change in the price, the demand curve is a vertical line
Perfectly Elastic Demand
When any price increase will cause the quantity demanded to drop to zero, the demand curve is a horizontal line
Unit-Elastic
Where the price elasticity of demand is exactly 1
Total Revenue
The total value of sales of a good or service, it is equal to the price multiplied by the quantity sold
Price Effect
After a price increase, each unit sold sells at a higher price, which tends to raise revenu
Quantity Effect
After a price increase, fewer units are sold, which tends to lower revenue
Unit-Elastic
If demand for a good is ____, an increase in price does not chanage total revenue
Inelastic
If demand for a good is ____, a higher price increases total revenue
Elastic
If demand for a good is ______, an increase in price reduces total revenue
Unit Elastic
When demand is ______, price effect and quantity effect exactly balance each other out so a fall in price has no effect on total revenue
Inelastic
When demand is ______, the price effect dominates the quantity effect; so a fall in price reduces total revenue
Elastic
When demand is _____, the quantity effect dominates the price effect; so a fall in price increases total revenue
Determinents of Price Elasticity of Demand
Whether close substitutes are available, whether the good is a necessity or a luxury, share of income spent on the good, time
High
Price elasticity of demand tends to be ____ if there are other goods that consumers regard as similar and would be willing to consume instead
Low
The price elasticity of demand tends to be ____ if a good is something you must have
Low
The price elasticity of demand tends to be ____ when spending on a good accounts for a small share of a consumer's income
Increase
The price elasticity of demand tends to _______ as consumers have more time to adjust to a price change
Cross-Price Elasticity of Demand
Measures the effect of the change in one good's price on the quantity demanded of the other good. It is equal to the percent change in the quantity demanded of one good divided by the percent change in the other good's price
Positive
When two goods are substiutes, the cross-price elasticity of demand is ______
Large
If the two goods are CLOSE substitutes, the cross-price elasticity of demand will be positive and ______
Negative
When two goods are complements, the cross-price elasticity of demand is __
Income Elasticity of Demand
The percent change in the quantity of a good demanded when a consumer's income changes divided by the percent change in the consumer's income
Positive
When the income elasticity of demand is ____, the good is a normal good - that is, the quantity demanded at any given prie increases as income increases
Negative
When the income elasticity of demand is _____, the good is an inferior good - that is, the quantity demanded at any given price decreases as income increases
Income-Elastic
When income rises, teh demand for income-elastic goods rises faster than income, income elasticity of demand is greater than 1
Income-Inelastic
When income rises, the demand for income-inelastic goods rises, but more slowly than income, income elasticity of demand is less than 1
Price Elasticity of Supply
A measure of the responsivenss of the quantity of a good supplied to the price of that good, it is the ratio of the percent change in the quantity supplied to the percent change in the price as we move along the supply curve
Perfectly Inelastic Supply
When the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied, supply curve is a vertical line
Perfectly Elastic Supply
If the quantity supplied is zero below some price and infinite above that price, supply curve is a horizontal line
Determinants of Price Elasticity of Supply
Availability of Inputs, Time
Large
The price elasticity of supply tends to be ____ when inputs are readily available and can be shifted into and out of production at a relatively low cost
Increase
The price elasticity of supply tends to _____ as producers have more time to respond to a price change
Individual Consumer Surplus
The net gain to an individual buyer from the purchase of a good, it is equal to the difference between the buyer's willingness to pay and the price paid
Cost
The lowest price at which a seller is willing to sell a good
Total Surplus
The total net gain to consumers and producers from trading in a market
Reduces
Reallocating the good among consumers always means taking a book away from a student who values it more and giving it to one who values it less, this necessarily _____ total consumer surplus
Reduces
Reallocating sales among sellers necessarily increases total cost and ____ total producer surplus
Reduces
Preventing any sale that would have occurred in the market equilibrium necessarily ____ total surplus
Excise Tax
A tax on sales of a particular good or service
Consumers
When the price elasticity of demand is low and the price elasticity of supply is high, the burden of an excise tax falls on the ______
Tax Incidence
The distribution of the tax burden
Producers
When the price elasticity of demand is high and the price elasticity of supply is low, the burden of an excise tax falls mainly on the _____
Deadweight Loss
The decrease in total surplus resulting from the tax, minus the tax revenues generated
Administrative Costs
A tax are the resources used by government to collect the tax, and by taxpayers to pay (or to evade) it, over and above the amount collected