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3 Fundamental Concepts of Economics
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ECON 102
| Term | Definition |
|---|---|
| Economics | study of how individuals and societies CHOOSE to use the scarce resources that nature and previous generations have provided |
| 3 Fundamental Concepts of Economics | opportunity cost, marginalism, and working of efficient markets |
| Opportunity Cost | The best alternative is that we give up (forgo) when we make a choice or decision |
| Marginalism | Process of analyzing the additional or incremental costs or benefits arising from a choice or decision |
| Efficient Market | a market in which profit opportunities are eliminated almost instantaneously |
| Profit Opportunities | good deals, risk free |
| Microeconomics | branch of economics that examines the functioning of INDIVIDUAL INDUSTRIES and the behavior of individual decision-making units i,e firms and HOUSEHOLDS |
| Macroeconomics | branch of economics that examines the economic behavior of aggregates i.e income, employment, output, etc. on a NATIONAL SCALE |
| Macro and Micro tree analysis | Micro= looks at individual, examines the tree Macro= looks at whole, examines the forest |
| Positive Economics | an approach to economics that seeks to understand behavior and the operation of systems WITHOUT MAKING JUDGEMENTS. I t describes what exists and how it works |
| Normative Economics | an approach to economics that analyzes outcomes of economic behavior, EVALUATES THEM AS GOOD OR BAD and may prescribe courses of action, also called policy economics |
| Model | FORMAL STATEMENT OF A THEORY, usually a mathematical statement of a presumed relationship b/t two or more variables |
| Variable | a measure that can change from time to time or from observation to observation i.e income |
| Ockham's razor | The principle that irrelevant detail should be cut away i.e on a map, don't show street signs when need to show highway routes |
| Ceteris Paribus | ALL ELSE EQUAL, device used to analyze the relationship between 2 variables while the values of other variables are held unchanged |
| Post hoc, ergo propter hoc | translated "after this (in time), therefore because of this" A common error made in thinking about causation "If event A happens before event B, it is not necessarily true that A caused B" |
| Empirical Economics | the collection and use of data to test economic theories |
| Criteria for judging economic outcomes | efficiency, equity, growth, and stability |
| Efficiency | ALLOCATIVE EFFICIENCY. An efficient economy is one that produces what people want at the least possible cost i.e volunteer your time in exchange for product |
| Equity | Fairness- lies in the eye of the beholder: to some, a more equal distribution of income and wealth |
| Economic growth | an increase in the total output of an economy |
| Stability | condition in which national output is growing steadily, with LOW inflations and FULL employment of resources |
| Resources | includes those provide by nature as well as those tha tprevious generations have provided |
| CHOICE | key aspect to economics |
| Marginal Cost | not increase profit |
| Marginal Benefit | increase profit |
| Descriptive Economics | entails putting together data that describe economic phenomena (ie overall unemployment rate, average salary of MLB player, pace of growth of the economy) |
| Economic Theory | consists of a statement or group of related statements that focus on cause and effect, and frequently ask the question, "if a particular action is taken, what will be the reaction?" |
| Sunk Cost | cannot be avoided because these costs have already been incurred (irrelevant to decisions about the future) |
| Human wants | unlimited |
| Resources are | limited |
| Capital | things that are produced and then used in the production of other goods and services |
| Factors of Production | The inputs into the process of production, another term for resources |
| Production | The process that transforms scarce resources into useful goods and services |
| Inputs/Resources | anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants |
| Outputs | goods and services of values to households |
| Ricardo Theory of Comparative Advantage | specialization and free trade will benefit all trading parties, even those that may be "absolutely" more efficient producers- members of society BENEFIT BY SPECIALIZING in what they do best" |
| Absolute Advantage | a producer has an absolute advantage over another in the production of a good or service if he or she can produce that product using fewer resources |
| Comparative Advantage | a producer has a comparative advantage over another in the production of a good or service if he or she can produce that product at a lower opportunity cost |
| Consumer Goods | goods produced for present consumption |
| Investment | the process of using resources to produce new capital |
| Production Possibility Frontier (PPF) | a graph that shows all the combinations of goods and services that can be produced if all of society's resources are used efficiently |
| Marginal Rate of Transformation (MRT) | The slope of the production possibility frontier |
| Economic Growth | an increase in the TOTAL OUTPUT OF AN ECONOMY. Growth occurs when a society acquires new resources or when it learns to produce more using existing resources |
| Capital goods are produced at a sacrifice for | consumer goods |
| Command Economy | an economy in which a central government either DIRECTLY or indirectly SETS OUTPUT targets, incomes, and prices i.e Soviet Union |
| Laissez-Faire Economics | "allow [them] to do" AN economy in which individual people and firms pursue their own self interest WITHOUT ANY GOV. direction or regulation |
| Market | the institution through which buyers and sellers interest and engage in exchange |
| Consumer Sovereignty | The idea that consumers ultimately dictate what will be produced (or not produced), by choosing what to purchase (and what not to purchase |
| Law of increasing opportunity cost | As you increase the production of one good, the oppurtunity cost to produce the additional good will increase |
| Marginal Rate of Transformation | amount of one good a country must give up in order to produce an extra unit of another good |
| Firm | an organization that transforms resources (inputs) into products (outputs). Firms are the priority producing units in a market economy |
| Firms makes decisions | to maximize profit |
| Entreprenaur | a person who organizes, manages, and assumes the risks of a firm, taking a NEW IDEA OR A NEW PRODUCT AND TURNING IT INTO A SUCCESSFUL BUSINESS |
| Households | The consuming units in an economy |
| All households have | ultimately limited incomes |
| Households and firms interact through | Product (output) and Input (Factor) markets |
| (Product) Output markets | the markets in which goods and services are exchanged |
| (Factor) Input markets | the market in which the resources used to produce goods and services are exchanged |
| Labor Market | the input/factor market in which households supply work for wages to firms that demand labor |
| Capital Market | the input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capitol goods |
| Land market | the input/factor market in which households supply land or other real property in exchange for rent |
| Factors of production | the inputs into the production process are 3 factors: Land, Labor, Capitol |
| Supply of inputs and their prices ultimately | determine household income |
| 6 factors that affect decision on what to buy and how much | -PRICE OF THE PRODUCT in question -INCOME AVAILABLE to household -household AMOUNT OF ACCUMULATED WEALTH - PRICES OF OTHER PRODUCTS available to household - household TASTE AND PREFERENCES - household EXPECTATIONS about future income, wealth,& price |
| Quantity demanded | the amount (number of units) of a product that a household would buy in a given period IF IT COULD BUY ALL IT WANTED AT THE CURRENT MARKET PRICE |
| Most important relationship in individual market | Market price and quantity demanded |
| Demand Schedule | shows how much of a given product a household would be willing to buy at different prices for a given time period |
| Demand Curve | a graph illustrating how much of a given product a household would be willing to buy at different prices |
| Demand curve is a _______ relationship | Negative; negative slope (one rises while other decreases) |
| Law of Demand | THE NEGATIVE RELATIONSHIP BETWEEN PRICE AND QUANTITY DEMANDED: Ceteris paribus, as price rises, quantity demanded decreases and vice versa, all other things remaining constant |
| Demand curve is a tool that | helps us explain economic behavior and predict reactions to possible price changes |
| Concept of utility | we consume goods and services because they give us utility or satisfaction. As we consume more of a product within a given period of time, it is likely that each additional unit consumed will yield successively less satisfaction |
| Law of Diminishing Marginal Utility | if each successive unit of a good is worth less to you, you are not going to be willing to pay as much for it- thus it is reasonable to expect a downward slope in the demand curve for that good |
| It is reasonable to expect QUANTITY DEMANDED TO FALL when | price rises |
| it is reasonable to expect QUANTITY DEMANDED TO RISE WHEN | price decreases |
| Income | the sum of all a household's wages, salaries, profits, interest payments, rents, and other forms of earnings IN A GIVEN PERIOD OF TIME. It is a flow measure |
| Wealth/Net Worth | The TOTAL VALUE of what a household owns minus what it owes. It is a stock measure |
| If in a given period, you spend less than your income, you save; | the amount you save is added to your wealth |
| Normal goods | goods for which demand goes up when income is higher and for which demand goes down when income is lower i.e movie tickets, going out to eat |
| Inferior Goods | goods for which demand tends to fall when income rises i.e get a raise, stop buying clothes from walmart |
| Substitutes | goods that can SERVE AS REPLACEMENTS FOR ONE ANOTHER; when the price of one increases, demand for the other increases |
| Perfect substitutes | identical products i.e chinese cars and american cars |
| Complements, Complementary Goods | goods that "go together"; a decrease in the price of one results in an increase in demand for the other and vice versa |
| What determines the combinations of goods and services that a household is able to buy | 1. income 2. wealth 3. price |
| Shift of a demand curve | the change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of the good. THE SHIFT IS BROUGHT ABOUT BY A CHANGE IN THE OG CONDITIONS |
| Demand schedules and demand curves show the relationship between | price of good/service and the quantity demanded per period, ceteris paribus |
| Movement along a demand curve | the change in a quantity demanded brought about by a change in price |
| change in PRICE of good or service leads to | change in QUANTITY DEMANDED (movement along demand curve) |
| change in INCOME, PREFERENCES, or PRICES of other goods or services leads to | change in DEMAND (shift of a demand curve) |
| Market Demand | The sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service, at the price |
| Profit | the difference between revenues and costs |
| Quantity supplied | the amount of a particular product that a firm would be willing and be able to offer for sale at a particular price during a given time period |
| Supply schedule | shows how much of a product firms will sell at alternative prices |
| Law of Supply | the positive relationship between price and quantity of a good supplied: An INCREASE IN MARKET PRICE ceteris paribus, will lead to an INCREASE IN QUANTITY SUPPLIED, and vice versa |
| Supply curve | a graph illustrating how much of a product a firm will sell at different prices |
| Supply slope is | POSITIVE |
| Assuming that its objective is to maximize profit a firm's decision about what quantity of output, or product, to supply depends on | 1. The price of the good or service 2. the cost of producing the product, which in turn depends on -the price of required inputs (labor, capitol, land) and -the technologies that can be used to produce the product 3. the prices of related products |
| Movements along a supply curve | the change in quantity supplied brought about by a change in price |
| Shift of a supply curve | the change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of the good. The shift is brought by a change in the og conditions |
| When the price of a product changes | we move ALONG the supply curve for that product and the quantity supplied rises or falls |
| When any other factors besides price affects supply change | the supply curve shifts |
| Market supply | the SUM OF ALL that is supplied each period by all producers of a single product |
| Excess Demand is also known as | SHORTAGE |
| Excess Supply is also known as | SURPLUS |
| Excess Demand | the quantity demanded exceeds the quantity supplied at the current price- prices tend to rise |
| Excess Supply | the quantity supplied exceeds the quantity demanded at the current price- prices tend to fall |
| Equilibrium | when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change |
| When QUANTITY SUPPLIED EXCEEDS quantity demanded at the current price | PRICES tend to FALL |
| Invisible hand | self-regulation of markets |
| Price Ceiling | a MAXIMUM PRICE set by the government that sellers can charge for a good or service |
| A price ceiling set BELOW equilibrium price will cause a | SHORTAGE |
| A price ceiling set ABOVE equilibrium price will cause | no economic impact |
| Price floor | a MINIMUM SET by the government that buyers must pay for a good or service. |
| A price floor set ABOVE equilibrium will cause a | SURPLUS |
| A price floor set BELOW equilibrium price will cause | no economic impact |
| Markets exist in | all societies |
| Price Rationing | the process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied |
| Market System | Price System |
| Idea of "willingness to pay" | central distribution of available supply- willingness depends on both: desires and income/wealth |
| The adjustment of price is the rationing mechanism in free markets | price rationing means that whenever there is a need to ration a good, when a shortage exists, in a free market, the prices of the good will rise until quantity supplied equals quantity demanded |
| Demand- determined | the price is determined solely and exclusively by the amount that the highest bidder or highest bidders are willing to pay |
| Queuing | waiting in line as a means of distributing goods and services a non price rationing mechanism |
| Favored customers | those who receive special treatment from dealers during situations of a excess demand; nonprice rationing device |
| Ration coupons | tickets or coupons that entitle individuals to purchase a certain amount of a given product per month |
| black market | a market in which illegal trading takes place at marker-determine prices |
| consumer surplus | the difference between the maximum amount a person is willing to pay for a good and its current price |
| Producer surplus | the difference between the current market price and the cost of production for the firm |
| consumers surplus is based off | demand |
| producers surplus is based off | supply |
| deadweight loss | the total loss of producer and consumer surplus from underproduction or overproduction |
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