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economics
study of how scarce resources are allocated amount unlimited wants
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scarcity
condition of having to choose amoung alternatives
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scarce good
good for which the choice of one alternative requires that another be given up
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fallacy of false cause
incorrect assumption that one event causes another because the 2 events tend to occur together
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macroeconomics
studies the economy at the aggregate level, of the economy as a whole, total consumer behavior, total employment, total production, total sales, etc.
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microeconomics
studies the economy at the level of individual consumers, workers, firms, goods and markets
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normative - definition
statement that makes a value judgement can't be proven
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economics - 3 basic questions
- What should be produced?
- How should goods & services be produced?
- For whom should goods and services be produced?
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comparative advantage - application
- ability to produce a good or service at lower opportunity cost than someone else
- If opportunity cost is 2 for one firm but 1 for another then the firm that produce 1 per 1 is better than the one that produces 2 for 1.
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economic growth - definitional
Process through which an economy achieves an outward shift in its PPC (increase of quanity or quality of factors of production)
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opportunity cost - application
- value of highest value alternative that must be given up when choice is made (trade off)
- ex. go see u2 at $75 would pay $100 but free tickets to madonna opporunity cost is $25
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efficiency - definitional
When an economy or firm is producing on its PPC
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PPC - application
- production possibilities curve - how much given up to produce something else
- Q of item produced/Q of item given up
- skis to snowboard
- 100 skies or 50 snowboards
- means 2 skis per snowboard produced; .5 snowboard per ski produced
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factors of changing demand - knowledge of factors
number of buyers, price of related goods, expectations, demographics, tastes & preferences, consumer income
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law of demand - application
a higher price leads to a reduction in quntity demanded and lower price leads to increase in quantity demanded, negative slope on graph
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factors changing supply - knowledge of factors
resource prices, technology & productivity, expectations of buyers, number of producers, supply shocks
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demand vs quantity demand - application
- change in demand is a shift in the demand curve
- change in quantity demanded is a movement along the demand curve due to change in price
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normal vs inferior goods - application
- normal good is a good that will go up in demand when income increases and down in demand when income decreases
- inferior good is a good that will go down in demand when income increases and up in demand when income increases
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complement vs substitutes - application
- complements is a good that goes with another good and demand goes up when price of complement goes down but down when price of complement goes up
- substitute is a good that replaces another good and demand goes up when price of substitute goes up and demand goes down when price of substitute goes down
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shifts in demand & supply curve - application
- When there is a decrease in supply & demand equilibruim quantity goes down but equilibrium price is unknown
- When there is an increase is supply & demand equilibrium quantity goes up but equilibrium price is unknown
- When there is a decrease in demand & increase in supply equilibrium price goes down quantity unknown
- When there is a decrease in supply & increase in demand equilibrium price goes up quantity unknown
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supply vs quantity supplied - application
change in quantity supplied is a movement along the supply curve caused by change in price, an increase or decrease in supply causes a shift in the supply curve (the more or less there is to be supplied)
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shortages - application
- occurs when demand is greater than supply
- surplus occurs when supply is greater than demand
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price floor - examples
- price is not allowed to decrease below a certain level; minimum wage, agricultural price supports
- price is above the equilibrium price causing surplus because there is less of a demand then what the supply curve at same price gives
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price ceiling - application
- price ceiling is when price is not allowed to increase above a certain level; rent control
- causes shortage as equilibrium price is above the amount allowed to be charge, this is due to supply available is less than demand at the same price
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elasticity
- ratio of the % of change in a dependent variable to a % of change in an indpendent variable
- to get % of change difference in 2 points divided by average of the 2 points
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price elasticity of demand
% of change in quanity demanded of product divided by % of change in price of product
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arc elasticity/ price elasticity of demand
- measure of elasticity based on % of changes relative to the average value of each variable between 2 points
- Ed = (changeQ/average Q)/(change P/average P)
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inelastic
price elasticity is between zero and -1
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elastic
price elasticity is between neg 1 and neg infinity
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unit elastic
price elasticity is -1
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perfectly inelastic - demand
situtation in which the price elasticity of demand is zero - vertical (no matter the cost demand will never change)
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perfectly elastic - demand
price will always be the same no matter the quantity demanded - horizontal
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price/revenue test - application
- Price is elastic (higher price less demand) increase in price reduces revenue & reduction in price increases revenue - total revenue moves in direction of quanity change
- price is inelastic (lower price more demand) increse in price increases revenue & reduction in price reduces revenue - total revnue moves in direction of price change
- unit price elastic does not change total revenue
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income elasticity - application
% change in quantity demanded / % change in income
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cross price elasticity demand
- % change in quantity demanded good A / % change in price of good B
- substitute vs complement
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price elasticity of supply
- % of change in quantity supplied / % of change in price
- if 0 then perfectly inelastic - vertical
- if infinite then perfectly elastic - horizontal
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