ECON 102
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| Economics | study of how individuals and societies CHOOSE to use the scarce resources that nature and previous generations have provided
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| 3 Fundamental Concepts of Economics | opportunity cost, marginalism, and working of efficient markets
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| Opportunity Cost | The best alternative is that we give up (forgo) when we make a choice or decision
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| Marginalism | Process of analyzing the additional or incremental costs or benefits arising from a choice or decision
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| Efficient Market | a market in which profit opportunities are eliminated almost instantaneously
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| Profit Opportunities | good deals, risk free
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| Microeconomics | branch of economics that examines the functioning of INDIVIDUAL INDUSTRIES and the behavior of individual decision-making units i,e firms and HOUSEHOLDS
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| Macroeconomics | branch of economics that examines the economic behavior of aggregates i.e income, employment, output, etc. on a NATIONAL SCALE
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| Macro and Micro tree analysis | Micro= looks at individual, examines the tree
Macro= looks at whole, examines the forest
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| 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
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| 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
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| Model | FORMAL STATEMENT OF A THEORY, usually a mathematical statement of a presumed relationship b/t two or more variables
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| Variable | a measure that can change from time to time or from observation to observation i.e income
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| 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
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| Ceteris Paribus | ALL ELSE EQUAL, device used to analyze the relationship between 2 variables while the values of other variables are held unchanged
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| 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"
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| Empirical Economics | the collection and use of data to test economic theories
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| Criteria for judging economic outcomes | efficiency, equity, growth, and stability
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| 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
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| Equity | Fairness- lies in the eye of the beholder: to some, a more equal distribution of income and wealth
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| Economic growth | an increase in the total output of an economy
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| Stability | condition in which national output is growing steadily, with LOW inflations and FULL employment of resources
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| Resources | includes those provide by nature as well as those tha tprevious generations have provided
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| CHOICE | key aspect to economics
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| Marginal Cost | not increase profit
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| Marginal Benefit | increase profit
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| 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)
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| 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?"
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| Sunk Cost | cannot be avoided because these costs have already been incurred (irrelevant to decisions about the future)
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| Human wants | unlimited
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| Resources are | limited
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| Capital | things that are produced and then used in the production of other goods and services
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| Factors of Production | The inputs into the process of production, another term for resources
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| Production | The process that transforms scarce resources into useful goods and services
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| Inputs/Resources | anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants
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| Outputs | goods and services of values to households
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| 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"
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| 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
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| 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
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| Consumer Goods | goods produced for present consumption
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| Investment | the process of using resources to produce new capital
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| 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
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| Marginal Rate of Transformation (MRT) | The slope of the production possibility frontier
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| 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
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| Capital goods are produced at a sacrifice for | consumer goods
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| Command Economy | an economy in which a central government either DIRECTLY or indirectly SETS OUTPUT targets, incomes, and prices i.e Soviet Union
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| 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
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| Market | the institution through which buyers and sellers interest and engage in exchange
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| 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
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| Law of increasing opportunity cost | As you increase the production of one good, the oppurtunity cost to produce the additional good will increase
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| Marginal Rate of Transformation | amount of one good a country must give up in order to produce an extra unit of another good
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| Firm | an organization that transforms resources (inputs) into products (outputs). Firms are the priority producing units in a market economy
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| Firms makes decisions | to maximize profit
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| 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
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| Households | The consuming units in an economy
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| All households have | ultimately limited incomes
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| Households and firms interact through | Product (output) and Input (Factor) markets
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| (Product) Output markets | the markets in which goods and services are exchanged
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| (Factor) Input markets | the market in which the resources used to produce goods and services are exchanged
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| Labor Market | the input/factor market in which households supply work for wages to firms that demand labor
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| 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
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| Land market | the input/factor market in which households supply land or other real property in exchange for rent
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| Factors of production | the inputs into the production process are 3 factors: Land, Labor, Capitol
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| Supply of inputs and their prices ultimately | determine household income
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| 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
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| 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
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| Most important relationship in individual market | Market price and quantity demanded
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| Demand Schedule | shows how much of a given product a household would be willing to buy at different prices for a given time period
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| Demand Curve | a graph illustrating how much of a given product a household would be willing to buy at different prices
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| Demand curve is a _______ relationship | Negative; negative slope (one rises while other decreases)
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| 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
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| Demand curve is a tool that | helps us explain economic behavior and predict reactions to possible price changes
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| 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
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| 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
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| It is reasonable to expect QUANTITY DEMANDED TO FALL when | price rises
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| it is reasonable to expect QUANTITY DEMANDED TO RISE WHEN | price decreases
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| 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
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| Wealth/Net Worth | The TOTAL VALUE of what a household owns minus what it owes. It is a stock measure
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| If in a given period, you spend less than your income, you save; | the amount you save is added to your wealth
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| 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
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| Inferior Goods | goods for which demand tends to fall when income rises i.e get a raise, stop buying clothes from walmart
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| Substitutes | goods that can SERVE AS REPLACEMENTS FOR ONE ANOTHER; when the price of one increases, demand for the other increases
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| Perfect substitutes | identical products i.e chinese cars and american cars
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| 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
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| What determines the combinations of goods and services that a household is able to buy | 1. income
2. wealth
3. price
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| 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
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| Demand schedules and demand curves show the relationship between | price of good/service and the quantity demanded per period, ceteris paribus
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| Movement along a demand curve | the change in a quantity demanded brought about by a change in price
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| change in PRICE of good or service leads to | change in QUANTITY DEMANDED (movement along demand curve)
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| change in INCOME, PREFERENCES, or PRICES of other goods or services leads to | change in DEMAND (shift of a demand curve)
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| 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
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| Profit | the difference between revenues and costs
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| 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
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| Supply schedule | shows how much of a product firms will sell at alternative prices
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| 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
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| Supply curve | a graph illustrating how much of a product a firm will sell at different prices
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| Supply slope is | POSITIVE
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| 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
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| Movements along a supply curve | the change in quantity supplied brought about by a change in price
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| 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
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| When the price of a product changes | we move ALONG the supply curve for that product and the quantity supplied rises or falls
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| When any other factors besides price affects supply change | the supply curve shifts
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| Market supply | the SUM OF ALL that is supplied each period by all producers of a single product
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| Excess Demand is also known as | SHORTAGE
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| Excess Supply is also known as | SURPLUS
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| Excess Demand | the quantity demanded exceeds the quantity supplied at the current price- prices tend to rise
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| Excess Supply | the quantity supplied exceeds the quantity demanded at the current price- prices tend to fall
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| Equilibrium | when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change
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| When QUANTITY SUPPLIED EXCEEDS quantity demanded at the current price | PRICES tend to FALL
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| Invisible hand | self-regulation of markets
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| Price Ceiling | a MAXIMUM PRICE set by the government that sellers can charge for a good or service
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| A price ceiling set BELOW equilibrium price will cause a | SHORTAGE
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| A price ceiling set ABOVE equilibrium price will cause | no economic impact
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| Price floor | a MINIMUM SET by the government that buyers must pay for a good or service.
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| A price floor set ABOVE equilibrium will cause a | SURPLUS
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| A price floor set BELOW equilibrium price will cause | no economic impact
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| Markets exist in | all societies
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| Price Rationing | the process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied
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| Market System | Price System
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| Idea of "willingness to pay" | central distribution of available supply- willingness depends on both: desires and income/wealth
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| 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
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| Demand- determined | the price is determined solely and exclusively by the amount that the highest bidder or highest bidders are willing to pay
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| Queuing | waiting in line as a means of distributing goods and services a non price rationing mechanism
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| Favored customers | those who receive special treatment from dealers during situations of a excess demand; nonprice rationing device
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| Ration coupons | tickets or coupons that entitle individuals to purchase a certain amount of a given product per month
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| black market | a market in which illegal trading takes place at marker-determine prices
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| consumer surplus | the difference between the maximum amount a person is willing to pay for a good and its current price
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| Producer surplus | the difference between the current market price and the cost of production for the firm
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| consumers surplus is based off | demand
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| producers surplus is based off | supply
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| deadweight loss | the total loss of producer and consumer surplus from underproduction or overproduction
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