Economics Chapter 1-3 Answers

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Economics Definition
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the study of how individuals and socities choose to use the scarce resources that nature and the previous generations have provided
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Three fundamental concepts
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opportunity cost, marganalism, the working of efficient markets
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Opportunity Cost
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the best alternative that we give up, all or nothing
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Marganalism
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the process of analyzing the additional or incremental costs or benefits arising from a choice or desiscion (next unit, one more) choice made when you decide what to do
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Mircoeconomics
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households, firms
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Macroeconomics
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national income
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Positive economics
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describes what exists and how it works, can show proof
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Normative economics
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looks at the outcome of economic behavior and asks whether they are good or bad and whether they can be better; making a judgement
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Four Criteria frequently applied in judging economic outcomes
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efficiency(on the curve), equity(fair), growth(choice), stability(good government control, good control between relationships, between household and firms
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Efficiency
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producing a good or service at the lowest cost (money, time), ex. baking cookies tastes better but buying saves time
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Inefficient
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not working to the curve
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Efficient market
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always on the curve
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Market
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place where buyers and sellers come to agree on a same price (are efficient)
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Comparative advantage
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person has this advantage over another if they can produce product at a lower opportunity cost
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Absolute advantage
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person has this advantage over another if they can produce that product using fewer resources
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Capital
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things that are produced and then used in the production of other goods or services (roads, bridges, highways, buildings, equipment, desks, chairs, software)
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3 questions
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What gets produced? How is it produced? Who gets what is produced? (money)
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Quantity Demanded
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The amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at current market price
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Law of Demand
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The negative relationship between price and demand, ceteris paribus, as price rises, quainty demanded decreases, as price falls, quantity demanded increases during a given period of time, all other things remain constant
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Scarcity
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when you have a resource that is completely and totally exhausted from overuse
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Shortage
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If I can replace the resources in the future
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6 things that matter in output market
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price, income, total wealth of household, price of other goods, taste and preference, expectations
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Factors
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basic resources available to society
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Production
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The process that transforms scarce resources into useful goods and services
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Consumer goods
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goods produced for present consumption
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Investment
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The process of using resources to produce new capital
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Price theory
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the basic coordinating mechanism in a free market system is price
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Unemployment
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unemployment of labor means unemployment of capital
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Economic growth
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An increase in the total output of an economy growth occurs when a society acquires new resources or when it learns to produce more existing resources
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Efficient Output
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to be efficient an economy must produce what people want
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Command Economy
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An economy in which a central government either directly or indirectly sets output targets, incomes, and prices (China, Soviet Union)
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Laissez-fair economy “allow (them) to do”
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An economy in which individual people and firms pursue their own self-interest without any government direction or regulation
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Making a profit
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selling goods or services for more than it costs to produce them
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Firms
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an organization that transforms resources (inputs) into products (outputs). Are primary producing units in a market economy. Some produce goods, some services. Most exist to make a profit
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Entrepreneur
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A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business
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Households
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The consuming units in an economy (group of people who come together to share chores)
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In output markets
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Firms supply and households demand
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To produce goods and services
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firms must buy resources in input or factor markets
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Labor market
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The input/factor market in which households supply land or other real property in exchange for rent
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Factors of production
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The inputs into the production process, and, labor, and capital are the three key factors of …
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Household income
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is determined by the supply of inputs and their prices
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Market Demand
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The sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service
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Market Supply
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The sum of all that is supplied each period by all producers of a single product
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Equilibrium
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The condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for a price to change
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Excess demanded or shortage
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The condition that exists when quantity demanded exceeds quantity supplied at the current price
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Excess supply or surplus
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The condition that exists when quantity supply exceeds quantity demanded at the current price

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