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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
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Law of Supply:
the claim that the quantity supplied of a good rises when the price of the good rises, other things equal
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Scarcity:
the limited nature of society's resources
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Econonomics:
the study of how society manages its scarce resources
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Efficiency (societal):
the property of society getting the most it can from its scarce resources
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Equality:
the property of distributing economic prosperity uniformly among the members of society
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Opportunity cost:
whatever must be given up to obtain something
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Rational people:
people who systematically and purposefully do the best they can to achieve their objectives
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Marginal change:
a small incremental adjustment to a plan of action
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Incentive:
something that induces a person to act
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Market Economy:
an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
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Property rights:
the ability of an individual to own and exercise control over scarce resources
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Market failure:
a situation in which a market left on its own fails to allocate resources efficiently
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Market power:
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
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Productivity:
the quantity of goods and services produced from each unit of labor input
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Inflation:
an increase in the overall level of prices in the economy
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Business cycle:
fluctuations in economic activity, such as employment and production
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Externality:
the uncompensated impact of one person's actions on the well-being of a bystander
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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
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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
- -B=firm
- -S=household
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In a circular flow model, what does the firm do?
- -produce and sell goods and services
- -hire and use factors of production
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In a circular flow model, what does the household do?
- -Buy and consume goods and services
- -own and sell factors of production
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What are the factors of production and who owns it?
- Owned by the households
- Labor
- Land
- Capital (buildings and machines)
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Circular-flow diagram:
a visual model of the economy that shows how dollars flow through markets among households and firms
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Factors of production:
the resources the economy uses to produce goods & services
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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
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Why would a PPF be a straight line?
the opportunity cost stays constant
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Why would the PPF be bow shaped?
the opportunity cost rises as the economy produces more of the good
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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
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What causes a PPF to shift?
improvements in technology or additional resources
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Microeconomics:
the study of how households and firms make decisions and how they interact in markets
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Macroeconomics:
is the study of economy-wide phenomena, including inflation, unemployment, and economic growth
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Positive thinking:
describe the world as it is
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Normative thinking:
describe how the world should be
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What do economists as scientists do?
attempt to describe the world as it is
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What do economists as policy advisors do?
attempt to drescribe how the world should be
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Difference between positive and normative statements?
Positive statements can be confirmed or refuted, normative statements cannot
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Absolute advantage:
the ability to produce a good using fewer inputs than another producer
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Comparative advantage:
the ability to produce a good at a lower opportunity cost than another producer
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Market:
a group of buyers and sellers of a particular product
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Competetive Market:
is one with many buyers and sellers, each has a negligible effect on price
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Perfectly Competetive market:
all goods are exactly the same and there are too many buyers and sellers to affect the market price
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Quantity demanded:
amount of the good that buyers are willing and able to purchase
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Demand schedule:
a table that shows the relationship between the price of a good and the quantity demanded
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Normal good:
positively related to income
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Inferior good:
negatively related to income
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substitutes:
between two goods, if an increase in the price of one causes an increase in demand for the other
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Quantity supplied:
amount that sellers are willing and able to sell
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Supply Schedule:
A table that shows the relationship between the price of a good and the quantity supplied
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Equilibrium price:
the price that equates quantity supplied with quantity demanded
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Surplus:
when quantity supplied is greater than quantity demanded
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How to find equilibrium in a graph:
where the demand and supply lines intersect
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Shortage:
when quantity demanded is greater than quantity supplied
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Change in supply:
a shift in the S curve occurs when a non-price determinant of supply changes (like technology or costs)
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Change in quantity supplied:
a movement along a fixed S curve
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Change in demand:
a shift in the D curve occurs when a non-price determinant of demand changes (like income or # of buyers)
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Change in the quantity demanded:
a movement along a fixed D curve occurs when P changes
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What causes a shift in supply curve?
cost of production is lowered
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Equilibrium quantity:
the quantity supplied and quantity demanded at the equilibrium price
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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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