Econ Exam 1
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Law of Demand:
the claim that the quantity demanded of a good falls when the price of the good rises, other things equal
Law of Supply:
the claim that the quantity supplied of a good rises when the price of the good rises, other things equal
the limited nature of society's resources
the study of how society manages its scarce resources
the property of society getting the most it can from its scarce resources
the property of distributing economic prosperity uniformly among the members of society
whatever must be given up to obtain something
people who systematically and purposefully do the best they can to achieve their objectives
a small incremental adjustment to a plan of action
something that induces a person to act
an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
the ability of an individual to own and exercise control over scarce resources
a situation in which a market left on its own fails to allocate resources efficiently
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
the quantity of goods and services produced from each unit of labor input
an increase in the overall level of prices in the economy
fluctuations in economic activity, such as employment and production
the uncompensated impact of one person's actions on the well-being of a bystander
10 principles of economics:
- -people face trade-offs
- -the cost of something is what you give up to get it
- -rational people think at the margin
- -people respond to incentives
- -trade can make everyone better off
- -markets are usually a good way to organize economic activity
- -governments can sometimes improve market outcomes
- -a country's standard of living depends on its ability to produce goods and services
- -prices rise when governement prints too much money
- -society faces a short-run trade-off between inflation and unemployment
What are the two markets in a circular flow model? Who are the buyers and sellers in each market?
- Goods and services
- -B= household
- -S= firm
- Factors of production
In a circular flow model, what does the firm do?
- -produce and sell goods and services
- -hire and use factors of production
In a circular flow model, what does the household do?
- -Buy and consume goods and services
- -own and sell factors of production
What are the factors of production and who owns it?
- Owned by the households
- Capital (buildings and machines)
a visual model of the economy that shows how dollars flow through markets among households and firms
Factors of production:
the resources the economy uses to produce goods & services
Production Possibilites Frontier
a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology
Why would a PPF be a straight line?
the opportunity cost stays constant
Why would the PPF be bow shaped?
the opportunity cost rises as the economy produces more of the good
What if a point is:
-below the PPF line
-on the PPF line
-above the PPF line
- Below: possibly, but not efficient
- On: possible and efficient
- Above: impossible
What causes a PPF to shift?
improvements in technology or additional resources
the study of how households and firms make decisions and how they interact in markets
is the study of economy-wide phenomena, including inflation, unemployment, and economic growth
describe the world as it is
describe how the world should be
What do economists as scientists do?
attempt to describe the world as it is
What do economists as policy advisors do?
attempt to drescribe how the world should be
Difference between positive and normative statements?
Positive statements can be confirmed or refuted, normative statements cannot
the ability to produce a good using fewer inputs than another producer
the ability to produce a good at a lower opportunity cost than another producer
a group of buyers and sellers of a particular product
is one with many buyers and sellers, each has a negligible effect on price
Perfectly Competetive market:
all goods are exactly the same and there are too many buyers and sellers to affect the market price
amount of the good that buyers are willing and able to purchase
a table that shows the relationship between the price of a good and the quantity demanded
positively related to income
negatively related to income
between two goods, if an increase in the price of one causes an increase in demand for the other
amount that sellers are willing and able to sell
A table that shows the relationship between the price of a good and the quantity supplied
the price that equates quantity supplied with quantity demanded
when quantity supplied is greater than quantity demanded
How to find equilibrium in a graph:
where the demand and supply lines intersect
when quantity demanded is greater than quantity supplied
Change in supply:
a shift in the S curve occurs when a non-price determinant of supply changes (like technology or costs)
Change in quantity supplied:
a movement along a fixed S curve
Change in demand:
a shift in the D curve occurs when a non-price determinant of demand changes (like income or # of buyers)
Change in the quantity demanded:
a movement along a fixed D curve occurs when P changes
What causes a shift in supply curve?
cost of production is lowered
the quantity supplied and quantity demanded at the equilibrium price
3 steps to analyzing changes in equilibrium:
- 1. Decide whether event shifts S curve, D curve, or both.
- 2. Decide in which direction curve shifts.
- 3. Use supply—demand diagram to see how the shift changes eq’m P and Q.
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