Principles of Economics Module 1
circular flow model
A diagram that traces the flow of resources, products, income, and revenue among economic decision makers
Shortage
A situation in which quantity demanded is greater than quantity supplied
opportunity cost
Cost of the next best alternative use of money, time, or resources when one choice is made rather than another
Division of labor
Division of work into a number of separate tasks to be performed by different workers
The term shift in demand refers to a line that shows the relationship between price and quantity demanded of a certain good or service on a graph, with quantity on the horizontal axis and the price on the vertical axis.
False
Price controls
Government restrictions on the minimum and/or maximum prices of certain products
Supply and demand curves
Is a graph that includes both a supply curve and a demand curve. It shows the relationship between price and the quantity of a product or service that is supplied and demanded.
Macroeconomic goals
Steady growth, stable prices, low rates of unemployment, a balance of imports and exports
Allocative efficiency is when the mix of goods being produced represents the allocation that society most desires.
True
Supply and demand model
a model of how a competitive market works
Ceteris Paribus
all other things held constant
Command economy
an economy in which production, investment, prices, and incomes are determined centrally by a government.
law of demand
consumers buy more of a good when its price decreases and less when its price increases
Demand shifts left
decrease in demand
Supply and demand
determines price
Model
A pattern, plan, representation, or description designed to show the structure or workings of an object, system, or concept
Surplus
A situation in which quantity supplied is greater than quantity demanded
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants
Economy
A system for producing and distributing goods, and services to fulfill people's wants
Utility
Ability or capacity of a good or service to be useful and give satisfaction to someone.
Globalization
Actions or processes that involve the entire world and result in making something worldwide in scope.
Economic models
Aggregate demand-aggregate supply, Keynsian, neoclassical
Market-oriented economy
An economy in which most economic decisions are made by buyers and sellers, who may be individuals or firms.
People face three main categories of tradeoffs
Consumption Labor/leisure Intertemporal
Allocative efficiency is another name for the budget constraint.
False
Black market is the market in which households sell their labor as workers to businesses or other employers.
False
Demand is a relationship between price and the quantity supplied of a certain good or service.
False
Division of labor means goods and services that are produced domestically and sold in another country.
False
Excess demand is the common relationship that a higher price is associated with a greater quantity supplied.
False
Exports are the social arrangements that determine what is produced, how it is produced, and for whom it is produced.
False
Globalization is the social arrangements that determine what is produced, how it is produced, and for whom it is produced.
False
Inferior goods is a law that prevents a price from falling below a certain level.
False
Law of diminishing marginal utility is when it is impossible to produce more of one good without decreasing the quantity produced of another good.
False
Normal goods is when a change in some economic factor related to supply causes a different quantity to be supplied at every price.
False
Production possibilities frontier means when the mix of goods being produced represents the allocation that society most desires.
False
Productive efficiency is whatever must be given up to obtain something that is desired.
False
Quantity supplied means at the existing price, the quantity demanded exceeds the quantity supplied.
False
Social surplus is the benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to accept.
False
Substitutes means when a change in some economic factor related to supply causes a different quantity to be supplied at every price.
False
The term complements describes goods that can replace each other to some extent, so that a rise in the price of one good leads to a lower quantity consumed of another good, and vice versa.
False
The term consumer surplus refers to goods where the quantity demanded falls as income rises.
False
The term demand schedule refers to the price where quantity demanded is equal to quantity supplied.
False
The term equilibrium describes the sum of consumer surplus and producer surplus.
False
The term law of demand describes the total number of units of a good or service sold at a certain price.
False
The term law of supply describes a line that shows the relationship between price and quantity demanded of a certain good or service on a graph, with quantity on the horizontal axis and the price on the vertical axis.
False
What affects the budget constraint?
Income and prices of goods
Causes of Shifts in Demand
Population changes, Income Changes, Taste and Preference Changes, Substitutes, Complementary Goods.
Ceteris Paribus Assumption
The assumption that nothing changes except the factor or factors being studied.
Productive efficiency
The production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum and marginal product per dollar's worth of input is the same for all inputs.
Ceteris paribus ("all else equal") condition
The requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant.
Black market is an illegal market that breaks government rules on prices or sales.
True
Budget constraint is a diagram that shows the possible choices.
True
Command economy is an economy in which the government either makes or strongly influences most economic decisions.
True
Compound interest means when interest payments accumulate, so that in later time periods, the interest rate is paid on the interest that has been earned and reinvested in previous years.
True
Deadweight loss means the loss in social surplus that occurs when a market produces an inefficient quantity.
True
Demand curve is a line that shows the relationship between price and quantity demanded of a certain good or service on a graph, with quantity on the horizontal axis and the price on the vertical axis.
True
Division of labor means dividing the work required to produce a good or service into tasks performed by different workers.
True
Economics means the study of the production, distribution, and consumption of goods and services.
True
Economy is the social arrangements that determine what is produced, how it is produced, and for whom it is produced.
True
Equilibrium price is the price where quantity demanded is equal to quantity supplied.
True
Equilibrium quantity means the quantity at which quantity demanded and quantity supplied are equal at a certain price.
True
Exports are goods and services that are produced domestically and sold in another country.
True
Financial capital market means the market in which those who save money provide financial capital and receive a rate of return from those who wish to raise money and pay a rate of return.
True
Globalization is the trend in which buying and selling in markets have increasingly crossed national borders.
True
Goods and services market is a market in which firms are sellers of what they produce and households are buyers.
True
Inflation is rise in the overall level of prices.
True
Positive statements means statements that describe the world as it is.
True
Price ceiling is a law that prevents a price from rising above a certain level.
True
Price floor means a law that prevents a price from falling below a certain level.
True
Producer surplus is the benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to accept.
True
Productive efficiency is when it is impossible to produce more of one good without decreasing the quantity produced of another good.
True
Quantity demanded means the total number of units of a good or service purchased at a certain price.
True
Substitutes means goods that can replace each other to some extent, so that a rise in the price of one good leads to a lower quantity consumed of another good, and vice versa.
True
Sunk cost is costs that were incurred in the past and cannot be recovered, and thus should not affect current decisions.
True
Supply curve is a line that shows the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis and price on the vertical axis.
True
Supply is a relationship between price and the quantity supplied of a certain good or service.
True
The US agricultural sector experienced a severe drought in 2012. A drought decreases the supply of agricultural products, which means that at any given price, a lower quantity will be supplied; conversely, exceptionally good weather would shift the supply curve to the right.
True
The term ceteris paribus describes other things being equal.
True
The term complements describes goods that are often used together, so that a rise in the price of one good tends to decrease the quantity consumed of the other good, and vice versa.
True
The term shift in supply refers to when a change in some economic factor related to supply causes a different quantity to be supplied at every price.
True
The term supply schedule refers to a table that shows a range of prices for a good or service and the quantity supplied at each price.
True
An economy is a set of social arrangements that determines
What is produced, how it is produced, and who gets it
production possibilities frontier
a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
demand schedule
a table that shows the relationship between the price of a good and the quantity demanded
supply schedule
a table that shows the relationship between the price of a good and the quantity supplied
opportunity set
all possible combinations of consumption that someone can afford given the prices of goods and the individual's income
Most economies
are somewhere between the market and command sides
Law of diminishing returns
as additional increments of resources are added to producing a good or service, the marginal benefit from those additional increments will decline
Margins for action in response to price controls
black markets, side payments, quality adjustments, shifts in who is involved in the transaction
Markets are not always right. Income might be high,
but the standard of living may be low
Markets move toward equilibrium
but try not to move away
Even a "simple" business like a restaurant
can have several labor divisions
Factors other than price
cause the curve to shift
Causes of shifts in Supply
changes in input prices, changes in prices of related goods, changes in technology, changes in expectations (future prices), changes in number of sellers, changes in weather sometimes
marginal decision making
comparison of additional benefits of a choice against the additional costs it would bring, without considering related benefits and costs of past choices
sunk costs
costs that have already been incurred and cannot be recovered
Market economy
economic system in which decisions on production and consumption of goods and services are based on voluntary exchange in markets
There is a market for
every good and service
economies of scale
factors that cause a producer's average cost per unit to fall as output rises
The term shift in supply refers to when a change in some economic factor related to demand causes a different quantity to be demanded at every price.
false
Workers who specialize
find new ways to be even more efficient
Black markets
illegal markets that arise when price controls are in place
labor-leisure trade-off
illustrates the opportunity costs people entail when choosing between working and not working
Choices outside the opportunity set are
impossible, but those inside it are wasteful
Factors that shift the demand curve
income, price of related goods, expectations of future prices, number of buyers, tastes and preferences
Demand curve shifts right
increase in demand
Index of Economic Freedom
index reflecting the ease of doing business in any given country
Factors that shift the supply curve
input/resource prices, technology, taxes, expectations of future prices, number of sellers
Every transaction
interconnects within the entire economy
All market-oriented economies have some level of government control,
just like all command economies have black markets
Microeconomics vs. Macroeconomics
just two perspectives on the same subject
Price controls
legal restrictions on how high or low a market price may go
A group with well-divided tasks can produce
more than one person doing all the work
Equilibrium
occurs when quantity demanded and quantity supplied of a product are equal, or where demand and supply curves intersect on a graph
Equilibrium in supply and demand
point (price & quantity) at which quantity demanded equals quantity supplied
People don't
produce most of what they consume
law of supply
producers offer more of a good as its price increases and less as its price falls
Equilibrium
quantity supplied equals quantity demanded
People don't actually make graphical models or calculate opportunity cost in their heads, but these are good ways to
represent more concretely how society deals with scarcity
Demand curve and schedule
represent the law of demand (as price increases, quantity demanded decreases, except in the case of inferior goods)
Supply curve and schedule
represent the law of supply (as price increases, quantity supplied usually increases)
budget constraint line
represents how people could handle scarcity
Interest rate
risk premium + expected inflation + time value of money
when quantity demanded is greater than quantity supplied
shortage
How to analyze an economic situation
sketch a diagram pre-event decide which curve the event affects sketch new curves corrected for the event's effects compare old and new graphs and equilibriums
As globalization increases,
so does the interdependence of economies
when quantity supplied is greater than quantity demanded
surplus
Consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
Producer surplus
the amount a seller is paid for a good minus the seller's cost of providing it
Division of labor
the assignment of different parts of a manufacturing process or task to different people in order to improve efficiency.
consumption choice set
the collection of all consumption choices available to the consumer
Specialization
the concentration of the productive efforts of individuals and firms on a limited number of activities
intertemporal budget constraint
the measure of the rate at which individuals can trade off consumption in one period for consumption in another period
Deadweight loss
the reduction in economic surplus resulting from a market not being in competitive equilibrium
Macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
Microeconomics
the study of how households and firms make decisions and how they interact in markets
Microeconomics
the study of the economic behavior and decision making of small units, such as individuals, families, and businesses
Social surplus
the sum of consumer surplus and producer surplus
If a price ceiling is set below the equilibrium price:
there will be a shortage
If the price floor is set above the equilibrium price,
there will be a surplus
Thousands of millions of products, and
therefore markets, in an economy
A person works to pay for the goods and services
they cannot produce themselves
Policies that directly affect supply and demand are preferred over price controls
to avoid the shortages, surpluses, and other unintended consequences
Modern economies are
very interconnected
Margins for action
ways of going about something
We cannot have everything, so
we must choose what's most important
Excess demand
when quantity demanded is more than quantity supplied
Excess supply
when quantity supplied is more than quantity demanded
allocative efficiency
when the mix of goods being produced represents the mix that society most desires
Total surplus
will always be highest at the equilibrium price level and quantity than at any other point