Microeconomics and Macroeconomics Refresher
fallacy of composition
The mistaken assumption that what applies in the case of one applies in the case of many.
Scarcity
The shortage that exists when less of something is available than is wanted at a zero price.
Macroeconomics
The study of the economy as a whole
capital
products such as machinery and equipment that are used in production
economic good
Any item that is scarce
Points outside of the PPC
represent combinations of goods and services that are unattainable given the limitation of resources.
Points within the PPC
represent the underutilization, unemployment, or inefficient use of resources - more goods and services could be produced by using the limited resources more fully or efficiently.
The rule of specialization
specialize where the opportunity cost is lowest
comparative advantage
the ability to produce a good or service at a lower opportunity cost than someone else.
demand
the amount of a product that people are willing and able to purchase at each possible price during a given period of time, everything else held constant.
gains from trade
the difference between what can be produced and consumed without specialization and trade and with specialization and trade
barter
the direct exchange of goods and services without the use of money
Trade-off
the giving up of one good or activity in order to obtain some other good or activity.
opportunity cost
the highest-valued alternative that must be forgone when a choice is made.
Incentives in each allocation system
the incentives each allocation system creates a fundamental reason that the markets are selected to do the allocation. Only a market system created the incentives that lead to increasing standards of living.
marginal cost
the incremental amount of one good or service that must be given up to obtain one additional unit of another good or service.
rational self interest
the means by which people choose the options that give them the greatest amount of satisfaction
association as causation
the mistaken assumption that because two events seem to occur together, one causes the other
labor
the physical and intellectual services of people, including the remaining, education, and abilities of the individuals in a society.
allocation systems
the process of determining who gets the goods and services and who doesn't. (Different examples include: the government; first come, first served; lottery; or a market or price system)
law of demand
the quantity of a well-defined good or service that producers are willing and able to offer for sale during a particular period of time increases and decreases as the price decreases, everything else held constant.
private property rights
the right of ownership. (These are necessary for voluntary trade to develop. Private property rights refer to the laws, courts, and police required to enforce the prohibition of theft and murder.)
scarcity
the shortage that exists when less of something is available than is wanted at a zero price.
double coincidence of wants
the situation that exists when A has what B wants and B has what A wants.
Microeconomics
the study of how households and firms make decisions and how they interact in markets. It is the study of economics at the level of the individual.
market demand
the sum of all individual demands
When does demand change?
when one of the determinants of demand changes. (A demand change is illustrated as a shift of the demand curve.)
When does the quantity demanded change?
when the price of the good or service changes. (This is a change from one point on the demand curve to another point on the same demand curve.)
Where does comparative advantage exist?
whenever one person (firm, nation) can do something with lower opportunity costs than some other individual (firm, nation) can
What does the law of demand say about the the change in price of a good?
According to the law of demand, as the price of any good or service rises (falls), the quantity demanded of that good or service falls (rises), during a specific period of time, everything else held constant.
A Shift in the PPC
An outward (right) shift signals economic growth. This is caused by an increase of available resources, such as new technology.
What does specialization and trade enable?
It enables individuals, firms, and nations to get more than they could without specialization and trade. This is called gains from trade.
Is any allocation system fair?
No! No allocation system is fair in the sense that everyone gets everything they want this would defy the idea of scarcity. Some people will get the goods and resources and others will not.
quantity demanded
The amount of a product that people are willing and able to purchase at a specific price.
free good
a good for which there is no scarcity
demand curve
a graph of a demand schedule that measures price on the vertical axis and quantity demanded on the horizontal axis.
production possibilities curve
a graphical representation showing all possible quantities of goods and services that can be produces using the existing resources fully and efficiently.
market
a place that enables buyers and sellers to exchange goods and services.
demand schedule
a table or list of prices and the corresponding quantities demanded for a particular good or service
land
all natural resources, such as minerals, timber, and water, as well as the land itself
positive analysis
analysis of what is
normative analysis
analysis of what ought to be
economic bad
any item for which we would pay to have less
determinants of demand
factors other than the price of the good that influence demand - income, tastes, prices of related goods and services, expectations, and number of buyers.
inferior goods
goods for which demand decreases as income increases.
normal goods
goods for which demand increases as income increases.
Complementary goods
goods that are used together; as the price of one rises, the demand for the other falls.
substitute goods
goods that can be used in place of each other; as the price of one rises, the demand for the other rises.
Factors or production
goods used to produce other goods (i.e., land, labor and capital.)
inputs
goods used to produce other goods (land, labor and capital)
resources
goods used to produce other goods (land, labor, capital)
What is an advantage of using money?
it makes it easier to exchange goods and services
