Principles of Microeconomics: Vocab 1-11

Scarcity
Limited resources and unlimited wants
Economics
Study of how society manages its scarce resources
Efficiency
The property of society getting the most from its scarce resources
Equality
The property of distributing economic prosperity uniformly among society’s members
Rational
Systematically and purposefully doing the best you can to achieve your objectives
Opportunity Cost
Whatever is given up to get something else
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Marginal Change
An incremental adjustment to an existing plan
Incentive
Something that induces a person to act
Market Economy
An economic system where interaction of households and firms in markets determines the allocation of resources
Property Rights
The ability of an individual to own and exercise control over scarce resources
“Invisible Hand”
The principle that self-interested market participants may unknowingly maximize the welfare of society as a whole
Market Failure
A situation in which the market fails to allocate resources efficiently
Externality
When one person’s actions have an impact on a bystander
Market Power
The ability of an individual or group to substantially influence market prices
Monopoly
A market with only one seller
Productivity
The amount of goods and services produced from each unit of labor input
Inflation
An increase in the overall level of prices
Business Cycle
Fluctuations in economic activity
Scientific Method
Objective development and testing of theories
Economic Models
Simplifications of reality based on assumptions
Circular-Flow Diagram
A diagram of the economy that shows the flow of goods and services, factors of production, and monetary payments between households and firms
Factors of Production
Inputs such as land, labor, and capital
Production Possibilities Frontier
A graph that shows the combinations of output the economy can possibly produce given the available factors of production and the available production technology
Microeconomics
The study of how households and firms make decisions and how they interact in markets
Macroeconomics
The study of economy-wide phenomena
Positive Statements
Descriptions of the world as it is
Normative Statements
Prescription for how the world ought to be
Absolute Advantage
The ability to produce a good using FEWER INPUTS than another producer
Comparative Advantage
The ability to produce a good at a LOWER OPPORTUNITY COST than another producer
Gains from Trade
The increase in total production due to specialization allowed by trade
Imports
Good produced abroad and sold domestically
Exports
Goods produced domestically and sold abroad
Market
A group of buyers and sellers of a particular good or service
Competitive Market
A market in which there are many buyers and sellers so that each had a negligible impact on the market
Quantity Demanded
The amount of a good that buyers are willing and able to purchase
Law of Demand
The claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
Demand Schedule
A table that shows the relationship between the price of a good and the quantity demanded
Demand Curve
A graph of the relationship between the price of a good and the quantity demanded
Normal Good
A good for which, other things equal, and increase in income leads to an increase in demand
Inferior Good
A good for which, other things equal, an increase in income leads to a decrease in demand
Substitutes
Two goods for which an increase in the price of one leads to an increase in the demand for the other
Complements
Two good for which an increase in the price of one leads to a decrease in the demand for the other
Quantity Supplied
The amount of a good that sellers are willing and able to sell
Law of Supply
The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
Supply Schedule
A table that shows the relationship between the price of a good and the quantity supplied
Supply Curve
A graph of the relationship between the price of a good and the quantity supplied
Equilibrium
A situation in which the price had reached the level where quantity supplied equals quantity demanded
Equilibrium Price
The price that balances quantity supplied and quantity demanded
Equilibrium Quantity
The quantity supplied and the quantity demanded at the equilibrium price
Surplus
A situation in which quantity supplied is greater than quantity supplied
Shortage
A situation in which quantity demanded is greater than quantity supplied
Law of Supply and Demand
The claim that the price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance
Elasticity
A measure of the responsiveness of the quantity demanded or quantity supplied to a change in one of its determinants
Price Elasticity of Demand
A measure of how much the quantity demanded of one good responds to a change in the price of another good
Elastic
When the quantity demanded or supplied responds substantially to a change in one of its determinants
Inelastic
When the quantity demanded or supplied responds only slightly to a change in one of its determinants
Total Revenue
The amount paid by buyers and received by sellers of a good computed as P x Q
Income Elasticity of Demand
A measure of how much the quantity demanded of a good responds to a change in consumers’ income
Cross-Price Elasticity of Demand
A measure of how much the quantity demanded of one good responds to a change in the price of another good
Price Elasticity of Supply
A measure of how much the quantity supplied of a good responds to a change in the price of that good
Normal Good Elasticity
Positive Income Elasticty
Inferior Good Elasticity
Negative Income Elasticty
Price Ceiling
A legal maximum on the price at which a good can be sold
Price Floor
A legal minimum on the price at which a good can be sold
Tax Incidence
The manner in which the burden of a tax is shared among participants in a market
Tax Wedge
The difference between what the buyer pays and the seller receives after a tax has been imposed
Variables that Influence Buyers
1. Price of good- movement along demand curve
2. Income- shifts the demand curve
3. Prices of related goods- shifts the demand curve
4. Tastes- shift the demand curve
5. Expectations- shifts the demand curve
6. Number of buyers- shifts the demand curve
Variables that Influence Sellers
1. Price of good itself- movement along supply curve
2. Input prices- shifts supply curve
3. technology- shifts supply curve
4. expectations- shifts supply curve
5. number of sellers- shifts supply curve
Ten Principles of Economics- How People Interact
5. Trade Can Make Everyone Better Off
6. Markets Are Usually a Good Way to Organize Economic Activity
7. Governments Can Sometimes Improve Market Outcomes
Ten Principles of Economics- How the Economy as a Whole Works
8. A country’s standard of living depends on its ability to produce goods and services
9. prices rise when the government prints too much money
10. society faces a short-run trade-off between inflation and unemployment
Ten Principles of Economics- How People Make Decisions
1. People Face Trade-offs
2. The Cost of Something is What you Give up to get it
3. Rational People Think at the Margin
4. People Respond to Incentives