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Economics
The study of the choices people make and the actions they take in order to make the best use of scarce resources in meeting their wants and needs
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Micro-economics
The study of the choices and actions of individual households, firms, consumers, etc
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Macro-economics
The study of the behaviour of the economy as a whole, including issues like the unemployment, inflation and changes in the level of national income.
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Judging Economic Allocation
- 1. Efficiency- allocative efficiency is present when society's resources are so organized that it is impossible to make someone better off by any reallocation without hurting someone else
- 2. Equity - distributing goods and services in a manner considered by society to be fair
- 3. Moral and Political Consequences - any science without ethics is bad science; have to pay attention to these consequences
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Positive Economics
Involves statements about what is and can be tested by checking the statement against the observed facts.
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Normative economics
Involves statements about what ought to be; depends upon values and beliefs and cannot be tested.
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Economics as a science
Economics is a social science that seeks to explain how people act. Like any science, it uses models, theories and assumptions to descrive how people behave.
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Model
Is a simplified description of the way things work. Models and theories are meant to provide an understanding and explanation. They also should be useful to predict behaviours.
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Correlation Fallacy
An error in reasoning that correlation implies causation.
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Post Hoc Fallacy
From the latin phrase that means after this therefore because of this... An error of reasoning that a first event causes a secon event because the first occured before the second.
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Fallacy of Composition
Incorrect belief that what is good for the individual is good for the group
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Production and Possibility Frontier
Graph that show all of the possible combinations of two goods that a society can produce given its factors of production and its level of technology
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Opportunity Costs
Benefits foregone by NOT using the resources in the best alternative way
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Law of Increasing Costs
In order to produce extra amounts of one good, society must give ever increasing amounts of the other good
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Rationality Assumption
Individuals do not intentionally make decisions that will leave them worse off.
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Main characteristics of a Market economy
- 1. Self interest; people will pursue their own best interest
- 2. incentives: people respond to incentives (change in price)
- 3. Market prices and quantities are determined in an open market: established by the economy, not the government
- 4. Institutions: to ensure basic property rights are upheld (to protect consumers and producers)
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The Law of Demand
- As a product's relative price (to other products) increases, its quantity demanded decreases; as a product's relative price decreases, its quantity demanded increases; all other things held equal
- Also called the law of downward sloping demand curves as it describes the shape of the demand curve.
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Price of substitutes
Variable taht affects demand; two goods are substitutes if, for the consumers, these goods satisfy the same needs and desires. If the prices of a substitute increases, the demand for the original commodity shifts out which corresponds to an increase in demand
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Price of complements
Variable affecting demand; complements are products that tend to be used jointly. If the price of a complement increases the demand curve for the original commodity shifts in which corresponds to a decrease in demand
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Number of Buyers
Variable affecting demand; when the number of buyers increases, demand increases
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Preferences
Variable affecting demand; as preference change, demand changes
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Expectation
Variable affecting demand; the consumer's expectation of what will happen to the price of a good in the future may cause the demand curve to shift. For example, if the price of a product is expected to increase in the future, consumers may try to stock up on the commodity today.
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Income
Variable affecting demand; Normal good: as disposable income increases, demand for good increases. Inferior good: as disposalbe income increases, demand for inferior good decreases
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Law of supply
As the relative prices of a commodity increases, the quantity supplied increases, ceteris paribus. As the relative price of a commodity decreases, the quantity supplied decreases, ceteris paribus
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Costs of inputs
Variables affecting supply; as costs increase, the supply curve for the commodity shifts in which corresponds to a decrease in supply
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Technology and Productivity
Variable affecting supply; a better, cheaper production technology allows the producer to supply more of the product at every price level, thus increasing supply
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Number of Firms
Variable affecting supply; if the number of firms increase, supply increases.
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Taxes and Subsidies
Variable affecting supply; taxes are effectively an addition to production costs and result in decreases supply. Subsidies work in the opposite fashion, decreasing production costs and increasing supply
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Expectations
Variable affecting supply; the producer's view of the future may change the supply
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Prices of Substitutes in Production
Variable in supply; substitutes in production are goods that can be produced using the same inputs. If the price of a substitute in production for good X increases, the supply of good X decreases.
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Prices of Complements in Production
Variable in supply; complements in production are products, which be the nature of production, are produced together. When the price of a complement in production for good X increases, the supply of good X increases. (ie, beef hides)
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Changes in Nature
Variable in supply; natural events such as hurricanes, frost, and floods can have significant impacts upon the supply of a product. Good weather can also change the supply of a product.
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Equilibrium price
Occurs at the point where quantity demanded equals quantity supplied
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Invisible Hand
The market works like this to guide economic forces to coordinate individual actions and allocate scarce resources.
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Invisible Handshake
The social and historical forces, forces of trandition, cultural forces, ect.
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Invisible Foot
Political and legal forces; legal rules in society.
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Invisible Elbow
Sometimes markets fail, often done accidently
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Price floor
The government sets the minimum price that can be charged for a good or service
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Price Ceiling
The government sets the maximum price that can be charged for a good or service
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Quotas
The government sets the maximum quantity for a commodity
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Elasticity of Demand
Measures the responsiveness of quantity demanded to a change in the price
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