Principles of Economics Module 1

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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


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