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Economics
A Social Science that examines how people chose among the alternatives available to them
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Scarcity
The condition of having to choose among alternatives
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Scarce Good
A good for which the choice of one alternative requires that another be given up
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Free good
A good for which the choice of one use does not require that another be given up
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Opportunity Cost
The value of the best alternative forgone in making any choice
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Margin
The current level of an activity
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Choice at the margin
A decision to do a little more or a little less of something
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Microeconomics
The branch of economics that focuses on the choices made by consumers and firms and impacts those choices have on individual markets
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Macroeconomics
The branch of economics that focuses on the impact of choices on the total, or aggregate, level of economic activity
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Variable
something whose value can change
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Constant
Something whose value does not change
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Scientific method
A systematic set of procedures through which knowledge is created
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Hypothesis
An assertion of a relationship between two or more variables that could be proven to be false
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Theory
A hypothesis that has not been rejected after widespread testing and that wins general acceptance
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Law
A theory that has been subjected to even more testing and that has won virtually universal acceptance
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Model
A set of simplifying assumptions about some aspect of the real world
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Ceteris Paribus
A Latin Phrase that means "all other things unchanged"
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Dependent variable
A variable that responds to change
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Independent variable
A variable that induces a change
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Fallacy of false cause
The incorrect assumption that one event causes another because the two events tend to occur together
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Positive statment
A statement of fact or a hypothesis
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Normative statement
A statement that makes a value judgment
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Production Possibilities model
A model that shows the goods and services that an economy is capable of producing- its opportunities given the factors of production and the technology it has available
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Economic system
The set of rules that define how an economy's resources are to be owned and how decisions about their use are to be made
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Factors of production
The resources available to the economy for the production of goods and services
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Utility
The value, or satisfaction people derive from the goods and services they consume and the activities they pursue
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Labor
The human effort that can be applied to the production of goods and services
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Capital
A factor of production that has been produced for use in the production of other goods and services
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Natural resources
The resources of nature that can be used for the production of goods and services
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Human capital
The skills a worker has as the result of education, training or experience that can be used in production
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Financial capital
Includes money and other"paper" assets (such as stocks and bonds) that represent claims on future payments
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Technology
The knowledge that can be applied to teh production of goods and services
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Entrepeneur
A person who, operating within the context of a market economy, seeks to earn profit by finding new ways to organize factors of production
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Production possibilities curve (PPC)
A graphical representation of the alternative combinations of goods and services an economy can produce
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Comparative advantage
In producing a good or service, the situation that occurs if the opportunity cost of producing that good or service is lower for that economy than for any other
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Law of increasing opportunity cost
As an economy move along its PPC in the direction of producing more of a particular good, the opportunity cost of additional units of that good will increase
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Full employment
Situation in which all the factors of production that are available for use under current market conditions are being utilized
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Efficient Production
When an economy is operating on its PPC
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Inefficient production
Situation in which the economy is using the same quantities of factors of production but is operating inside its PPC
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Specialization
Situation in which an economy is producing the goods and services it has a comparative advantage in
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Economic growth
The process through which an economy achieves an outward shift in its PPC
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Market capitalist economy
Economy in which resources are generally owned private individuals who have the power to make decisions about their use
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Command Socialist economy
Economy in which government is the primary owner of capital and natural resources and has broad power to allocate the use of factors of production
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Mixed economies
Economy that combines elements of market capitalist and command socialist economic systems
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Markets
The institutions that bring together buyers and sellers
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Quantity demanded
The quantity buyers are willing and able to buy of a good or service at a particular price during a particular period, all other things unchanged
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Demand schedule
A table that shows the quantities of a good or service demanded at different prices during a particular period, ceteris paribus
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Demand curve
A graphical representation of a demand schedule
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Change in quantity demanded
A movement along a demand curve that results from a change in price
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Law of demand
For virtually all goods and services, a higher price leads to a reduction in quantity demanded and a lower price leads to an increase in quantity demanded
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Change in demand
A shift in a demand curve
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Demand shifter
A variable that can change the quantity of a good or service demanded at each price
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Complements
Two goods for which an increase in price of one reduces demand for the other
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Substitutes
Two goods for which an increase in the price of one increases the demand for the other
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Normal good
A good for which demand increases when income increases
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Inferior good
A good for which demand decreases a when income increases
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Quantity supplied
The quantity sellers are willing to sell of a good or service at a particular price during a particular period, ceteris paribus
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Supply schedule
A table that shows quantities supplied at different prices during a particular period, ceteris paribus
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Supply curve
A graphical representation of a supply schedule
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Change in quantity supplied
Movement along the supply curve caused by a change in price
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Change in supply
A shift in the supply curve
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Supply shifter
A variable that can change the quantity of a good or service supplied at each price
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Model of demand and supply
Model that uses demand and supply curves to explain determination of price and quantity in the market
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Equilibrium price
The price at which quantity demanded equals quantity supplied
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Equilibrium quantity
The quantity demanded and supplied at the equilibrium price
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Surplus
The amount by which the quantity supplied exceeds the quantity demanded at the current price
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Shortage
The amount by which the quantity demanded exceeds the quantity supplied at the current price
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Circular flow model
Model that provides a look at how markets work and how they are related to each other
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Product markets
Markets in which firms supply goods and services demanded by households
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Factor markets
Markets in which households supply factors of production- labor, capital, and natural resources-demanded by firms
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Retained earnings
Profits kept by a company
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Dividends
Profits distributed to shareholders
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Price floor
A minimum allowable price set above the equilibrium price
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Price ceiling
A maximum allowable price
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Third party payer
An agent other than the seller or the buyer who pays part of the price of a good or service
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Elasticity
The ratio of the % change in a dependent variable to a % change in an independent variable
e of y,x= %^y/%^x
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Price elasticity of demand
The % change in quantity demanded of a particular good or service divided by the % change in the price of that good or service, ceteris paribus
e of D= %^ in quantity demanded/ %^ in price
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Arc elasticity
Measure of elasticity based on % changes relative to the average value of each variable between two points
e of D= ^Q/(Q) / ^P/(P)
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Total revenue
A firms output multiplied by the price at which it sells that output
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Price elastic
Situation in which the absolute value of the price elasticity of demand is greater than 1
An increase in price reduces total revenue
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Unit price elastic
Situation in which the absolute value of the price elasticity of demand is equal to one
An increase in price no change in revenue
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Price inelastic
Situation in which the absolute value of the price elasticity of demand is less than 1
An increase in price increases total revenue
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Perfectly inelastic
Situation in which the price elasticity of demand is 0
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Perfectly elastic
Situation in which the price elasticity of demand is infinite
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Income elasticity of demand
The % change in quantity demanded at a specific price divided by % change in income taht produced the demand change, ceteris paribus
e of Y= %^ in quantity demanded/ %^ in income
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Cross price elasticity of demand
the % change in the quantity demanded of one good or service at a specific price divided by the % change in the price of a related good or service
e of A,B= %^ in quantity demanded of A/ %^ in price of B
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Price elasticity of supply
The ratio of the % change in quantity supplied of a good or service to the % change in its price, ceteris paribus
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*Economic profit
The difference between total revenue and total cost
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*Net benefit
The total benefit of an activity minus its opportunity costs
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*Marginal benefit
The amount by which an additional unit of an activity increases its total benefit
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*Marginal cost
The amount by which an additional unit of activity increases its total cost
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*Marginal benefit rule
If the marginal benefit of an additional unit of an activity exceeds the marginal cost, the quantity if the activity should be increased, if not it should be decreased
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*Constraint
A boundary that limits the range of choices that can be made
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*Deadweight loss
The loss in net benefits resulting from a failure to carry out an activity at the most efficient level
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*Efficient
The allocation of resources when the net benefits of all economic activities are maximized
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*Property rights
A set of rules that specify the ways in which an owner can use a resource
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*Exclusive property rights
A property right that allows its owner to prevent others from using the resource
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*Transferable property right
A property right that allows the owner of a resource to sell or lease it to someone else
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* Efficiency condition
A situation that requires a competitive market with well defined and transferable property rights
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*Consumer surplus
The amount by which the total benefits to consumers from consuming a good exceed their total expenditures of that good
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*Producer surplus
The difference between the total revenue received by sellers and their total cost
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*Market failure
The failure of private decisions in the marketplace to achieve an efficient allocation of scarce resources
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*Public good
A good for which the cost of exclusion is prohibitive and the marginal cost of an additional user is zero
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*Private good
A good for which exclusion is possible and for which the marginal cost of another user is positive
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*Free riders
People or firms that consume a public good without paying for it
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*External cost
A cost imposed on others outside of any market exchange
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*External benefit
An action take by a person or firm that creates benefits for others in the absence of any market agreement
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*Common property resource
Resources for which no property rights have been defined
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*Total utility
The number of units of utility that a consumer gains from consuming a given quantity of a good, service, or activity during a particular time period
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*Marginal Utility
The amount by which total utility rises with consumption of an additional unit of a good, service, or activity, ceteris paribus
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*Law of diminishing marginal utility
The tendency of marginal utility to decline beyond some level of consumption during a period
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*Budget constraint
A restriction that total spending cannot exceed the budget available
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*Utility maximizing condition
Utility is maximized when total outlays equal the budget available and when the ratios of marginal utilities to prices are equal for all goods and services
MU of A/P of A = MU of B/P of B = ...=MU of N/P of N
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*Budget Line
Graphically shows the combination of two goods a consumer can buy with a given budget
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*Indifference curve
Graph that shows combinations of two goods that yield equal levels of utility
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*Marginal rate of substitution
The maximum amount of one good a consumer would be willing to give up in order to obtain an additional unit of another
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*Short run
A planning period over which the managers of a firm must consider one or more of their factors of production as fixed in quantity
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*Fixed factor of production
A factor of production whose quantity cannot be changed during a particular period
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*Variable factor of production
A factor of production whose quantity can be changed during a particular period
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*Long run
The planning period over which a firm can consider all factors of production as variable
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*Production function
The relationship between factors of production and the output of a firm
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*Total product curve
Graph that shows the quantities of output that can be obtained from different amounts of a variable factor of production, assuming other factors of production are fixed
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