ECON Midterm 1

marginal

"extra" or additional

slope formula

(y₂- y₁) / (x₂- x₁)

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

perfectly competitive market

A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.

circular flow model

A model that shows the flow of goods and services and the interaction among households, businesses, and banks

Entrepenuer

A person who organizes, manages, and takes on the risks of a business.

shortage

A situation in which quantity demanded is greater than quantity supplied

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

free market

An economic system in which prices and wages are determined by unrestricted competition between businesses, without government regulation or fear of monopolies.

mixed economy

An economy in which private enterprise exists in combination with a considerable amount of government regulation and promotion.

In the circular flow diagram, which arrow shows the flow of goods and services?

B

capital goods

Buildings, machines, technology, and tools needed to produce goods and services.

Change in Supply vs. Change in Quantity Supplied

Change in supply means shift of whole curve, Change in the Quantity Supplied means shift along the curve

Which company has a comparative advantage in the production of shirts?

Company b

market economy

Economic decisions are made by individuals or the open market.

trade

Exchange of goods and services

Assume the cost of aluminum used by soft-drink companies increases. Which of the following correctly describes the resulting effects in the market for canned soft drinks? I. The demand for soft drinks decreases. II. The quantity of soft drinks demanded decreases. III. The supply of soft drinks decreases. IV. The quantity of soft drinks supplied decreases.

II and III

Invention vs. Innovation

Invention = creating something new Innovation = putting an invention in practice; "generating value from an invention"

factors of production

Land, labor, and capital; the three groups of resources that are used to make all goods and services

natural resources

Materials or substances such as minerals, forests, water, and fertile land that occur in nature and can be used for economic gain

Which of the following countries has an economy where most of the resource allocation is determined by a central planning authority?

North Korea

substitute goods

Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.

Quantity Supplied vs. Supply

Quantity Supplied refers to a particular amount offered for sale at a particular price, as shown by a point on a given supply curve. Supply is the entire relation between the price and quantity supplied, as shown by the supply schedule or supply curve.

consumer goods

Tangible items produced for personal use.

consumer surplus

The difference between the highest price a consumer is willing to pay for a good or service, and the price they actually pay

normative economics

The part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics.

Macroeconomics

The study of the economy as a whole

The graph above shows the market for laptop computers. Suppose the price of memory chips used in laptop computers decreases. How will this event impact on the equilibrium quantity and the market price?

The supply increases, causing the equilibrium quantity to rise and the market price to fall.

Complement goods

Two or more goods that tend to be used together. If two goods are complements, an increase in the price of one will lead to a decrease in the demand of the other.

Production Possibilities Frontier (PPF)

a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology

Inverse Demand

a demand curve written in the form of price as a function of quantity demanded

normal good

a good that consumers demand more of when their incomes increase

demand curve

a graph of the relationship between the price of a good and the quantity demanded

market

a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade any arrangement that allows buyers and sellers to exchange things

technological change

a positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs

market equilibrium

a situation in which quantity demanded equals quantity supplied

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

The outward shift of the production possibilities frontier from point A to point B in the above graph would most likely be caused by:

a technological advance that affects both the production of automobiles and aircraft carriers

invisible hand

a term coined by Adam Smith to describe the self-regulating nature of the marketplace

physical capital

all human-made goods that are used to produce other goods and services; tools and buildings

centrally planned economy

an economy in which the government decides how economic resources will be allocated

Law of Demand

consumers buy more of a good when its price decreases and less when its price increases

In the circular flow model of the economy, __________ are the suppliers of goods and services.

firms

If a country has a comparative advantage in the production of a good, then that country:

has a lower opportunity cost in the production of that good

marginal analysis

involves comparing marginal benefits and marginal costs

factor market

market in which firms purchase the factors of production from households collection of markets where the factors of production (land, labor & capital) are bought and sold.

The United States economy is best classified as a:

mixed economy

Refer to the graph. Which of the following best represents the situation in which BMW must face a trade-off between producing SUVs and producing hybrids?

moving from point b to c

When nations specialize in their comparative advantage and engage in trade:

overall standards of living increase

In the circular flow model, which of the following refers to markets where goods such as computers or services such as medical treatment are offered?

product markets

financial markets

refer to the markets where financial assets such as stocks and bonds are bought and sold. In the simplest version of the circular flow model, the financial markets are not shown.

The principle of opportunity cost evolves from the concept of:

scarcity

In the diagram, when supply decreases, a __________ develops at the original price. Equilibrium price will __________ and equilibrium quantity will __________ as a new equilibrium is established.

shortage; rise; fall

The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the _______ the payoff to devoting additional resources to that activity.

smaller

economic variables

something measurable that can have different values, such as the number of people employed in manufacturing.

absolute advantage

the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

marginal benefit

the additional benefit to a consumer from consuming one more unit of a good or service

positive economics

the analysis of facts or data to establish scientific generalizations about economic behavior

income effect

the change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power

Demographics

the characteristics of a population with respect to age, race, and gender.

Law of Supply

the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises a relationship between the quantity supplied and the market price.

marginal cost

the cost of producing one more unit of a good

market demand

the demand by all the consumers of a given good or service

producer surplus

the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives

opportunity cost

the highest- valued alternative given up in order to engage in some activity E.g. the opportunity cost of increasing funding for space exploration might be giving up the opportunity to fund cancer research. whatever must be given up to obtain some item

Trade-off

the idea that, because of scarcity, producing more of one good or service means producing less of another good or service

product market

the market in which households purchase the goods and services that firms produce markets where goods such as computers or services such as medical treatment are offered.

labor market

the market in which households sell their labor as workers to business firms or other employers

Cetirus Paribus

the requirement that when analyzing the relationship between two variable- such as price and quantity demanded- other variables must be held constant

Microeconomics

the study of how households and firms make decisions and how they interact in markets

economics

the study of the choices consumers, business managers and government officials make to attain their goals, given scarce resources

substitution effect

when consumers react to an increase in a good's price by consuming less of that good and more of other goods