Economics:12 Final Exam Vocabulary and Terms – Flashcards
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economics
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the study of how people deal with scarcity
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scarcity
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the situation in which the quantity of resources is insufficient to meet all wants
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choice
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a selection among alternative goods, services, or actions
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economic interaction
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exchanges of goods and services between people
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market
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an arrangement by which economic exchanges between people take place
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opportunity cost
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the value of the next-best forgone alternative that was not chosen because something else was chosen
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gains from trade
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improvements in income, production, or satisfaction owing to the exchange of goods or services
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division of labor
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the division of production into various parts in which different groups of workers specialize
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comparative advantage
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a situation in which a person or country can produce one good at a lower opportunity cost than another person or country
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international trade
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the exchange of goods and services between people or firms in different nations
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production possibilities
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alternative combinations of production of various goods that are possible, given the economy's resources
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increasing opportunity cost
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a situation in which producing more of one good requires giving up an increasing amount of production of another good
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production opportunity curve
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a curve showing the maximum combinations of production of two goods that are possible, given the economy's resources
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market economy
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an economy characterized by freely determined prices and the free exchange of goods and services in markets
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command economy
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an economy in which the government determines prices and production; also called a centrally planned economy
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freely determined prices
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a price that is determined by the individuals and firms interacting in markets
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property rights
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rights over the use, sale, and proceeds from a good or resource
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incentives
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a device that motivates people to take action, usually so as to increase economic efficiency
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market failure
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any situation in which the market does not lead to an efficient economic outcome and in which there is a potential role for government
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government failure
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a situation in which the government makes things worse than the market, even though there may be market failure
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gross domestic product (GDP)
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a measure of the value of all the goods and services newly produced in an economy during a specified period of time
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relative price
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the price of a particular good compared to the price of other things
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economic variable
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any economic measure that can vary over a range of values
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controlled experiments
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empirical tests of theories in a controlled setting in which particular effects can be isolated
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experimental economics
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a branch of economics that uses laboratory experiments to analyze economic behavior
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circular flow diagram
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a diagram illustrating the flow of funds through the economy as people buy and sell in markets
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economic model
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an explanation of how the economy or part of the economy works
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positively related
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a situation in which an increase in one variable is associated with an increase in another variable; also called directly related
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negatively related
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a situation in which an increase in one variable is associated with a decrease in another variable; also called inversely related
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ceteris paribus
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all other things being equal; refers to holding all other variables constant or keeping all other things the same when one variable is changed
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microeconomics
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the branch of economics that examines individual decision-making at firms and households and the way they interact in specific industries and markets
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macroeconomics
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the branch of economics that examines the workings and problems of the economy as a whole -- GDP growth and unemployment
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mixed economy
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a market economy in which the government plays a very large role
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positive economics
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economic analysis that explains what happens in the economy and why, without making recommendations about economic policy
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normative economics
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economic analysis that makes recommendations about economic policy
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Council of Economic Advisors
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a three-member group of economists appointed by the president of the United States to analyze the economy and make recommendations about economic policy
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Cartesian coordinate system
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a graphing system in which ordered pairs of numbers are represented on a plane by the distances from a point to two perpendicular lines, called axes
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time-series graph
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a graph that plots a variable over time, usually with time on the horizontal axis
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dual scale
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a graph that uses time on the horizontal axis and different scales on the left and right vertical axes to compare the movements of two variables over time
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scatter plot
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a graph in which points in a Cartesian coordinate system represent the values of two variables
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slope
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a characteristic of a curve that is defined as the change in the variable on the vertical axis divided by the change in a the variable on the horizontal axis
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positive slope
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a slope of a curve that is greater than zero, representing a positive or direct relationship between two variables
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negative slope
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a slope of a curve that is less than zero, representing a negative or inverse relationship between two variables
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linear
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a situation in which a curve is straight, with a constant slope
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movement along the curve
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a situation in which a change in the variable on one axis causes a change in the variable on the other axis, but the position of the curve is maintained
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shift of the curve
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a change in the position of a curve, usually caused by a change in a variable not represented on either axis
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demand
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a relationship between price and quantity demanded
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price
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refers to a particular good and is defined as the amount of money or other goods that one must pay to obtain the good
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quantity demanded
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the quantity of a good that people want to buy at a given price during a specific time period
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demand schedule
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a tabular presentation of demand showing the price and quantity demanded for a particular good, all else being equal
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law of demand
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the tendency for the quantity demanded of a good in a market to decline as its price rises
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demand curve
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a graph of demand showing the downward-sloping relationship between price and quantity demanded
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normal good
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a good for which demand increases when income rises and decreases when income falls
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inferior good
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a good for which demand decreases when income rises and increases when income falls
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substitute
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a good that has many of the same characteristics as and can be used in place of another good
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complement
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a good that is usually consumed or used together with another good
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supply
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a relationship between price and quantity supllied
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quantity supplied
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the quantity of a good that firms are willing to sell at a given price
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supply schedule
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a tabular presentation of supply showing the price and quantity supplied of a particular good, all else being equal
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law of supply
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the tendency for the quantity supplied of a good in a market to increase as its price rises
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supply curve
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a graph of supply showing the upward-sloping relationship between price and quantity supplied
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shortage (excess demand)
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the situation in which quantity demanded is greater than quantity supplied
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surplus (excess supply)
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the situation in which quantity supplied is greater than quantity demanded
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equilibrium price
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the price at which quantity supplied equals quantity demanded
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equilibrium quantity
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the quantity traded at the equilibrium price
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market equilibrium
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the situation in which the price is equal to the equilibrium price and the quantity traded equals the equilibrium quantity
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price control
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a government law or regulation that sets or limits the price to be charged for a particular good
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price ceiling
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a government price control that sets the maximum allowable price for a good
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rent control
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a government price control that sets the maximum allowable rent on a house or apartment
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price floor
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a government price control that sets the minimum allowable price for a good
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minimum wage
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a wage per hour below which it is illegal to pay workers
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price elasticity of demand
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the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good
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price elasticity of supply
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the percentage change in quantity supplied divided by the percentage change in price
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Utility
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A numerical indicator of a person's preferences in which higher levels of utility indicate a greater preference
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Budget Constraint
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An income limitation on a person's expenditure on goods and services
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Utility Maximization
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An assumption that people try to achieve the highest level of utility given their budget constraint
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Income Effect
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The amount by which quantity demanded falls because of the decline in real income from the price increase
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Substitution Effect
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The amount by which the quantity demanded falls when the price rises, exclusive of the income effect
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Marginal Benefit
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The increase in the benefit from, or the willingness to pay for, one more unit of a good
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Individual Demand Curve
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A curve showing the relationship between quantity demanded of a good by an individual and the price of the good
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Market Demand Curve
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The horizontal summation of all the individual demand curves for a good; also simply called the demand curve
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Consumer Surplus
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The difference between what a person is willing to pay for an additional unit of a good -- the marginal benefit -- and the market price of the good; for the market as a whole, it is the sum of all the individual consumer surpluses, or the area below the market demand curve and above the market price
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Invisible Hand
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The idea that the free interaction of people in a market economy leads to a desirable social outcome; the term was coined by Adam Smith
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Competitive Equilibrium Model
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A model that assumes utility maximization on the part of consumers and profit maximization on the part of firms, along with competitive markets and freely determined prices
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Double-Auction Model
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A market in which several buyers and several sellers state prices at which they are willing to buy or sell a good
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Pareto Efficient
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A situation in which it is not possible to make someone better off without making someone else worse off
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First Theorem of Welfare Economics
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The conclusion that a competitive market results in an efficient outcome; sometimes called the "invisible hand theorem;" the definition of efficiency used in the theorem is Pareto efficiency
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Income Inequality
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Disparity in levels of income among individuals in the economy
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Deadweight Loss
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The loss in producer and consumer surplus due to an inefficient level of production
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Firm
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An organization that produces goods or services
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Price-Taker
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Any firm that takes the market price as given; this firm cannot affect the market price because the market is competitive
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Competitive Market
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A market in which no firm has the power to affect the market price of a good
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Profits
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Total revenue received from selling the product minus the total costs of producing the product
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Total Revenue
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The price per unit times the quantity the firm sells
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Total Costs
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The sum of variable costs and fixed costs
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Production Function
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A relationship that shows the quantity of output for any given amount of input
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Marginal Product of Labor
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The change in production due to a one-unit increase in labor input
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Diminishing Returns of Labor
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A situation in which the increase in output due to a unit increase in labor declines with increasing labor input; a decreasing marginal product of labor
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Fixed Costs
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Costs of production that do not depend on the quantity of production
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Variable Costs
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Costs of production that vary with the quantity of production
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Marginal Costs
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The change in total costs due to a on-unit change in quantity produced
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Profit Maximization
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An assumption that firms try to achieve the highest possible level of profits -- total revenue minus total costs - given their production function
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Marginal Revenue
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The change in total revenue due to a one-unit increase in quantity sold
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Producer Surplus
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The difference between the price received by a firm for an additional item sold and the marginal cost of the item's production; for the market as a whole, it is the sum of all the individual firms' producer surpluses, or the area above the market supply curve and below the market price.
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Unit-Free Measure
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A measure that does NOT depend on a unit of measurement
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Elastic Demand
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Demand for which price elasticity is greater than 1
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Perfectly Inelastic Demand
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Demand for which the price elasticity is zero, indicating no response to a change in price and therefore a vertical demand curve
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Inelastic Demand
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Demand for which the price elasticity is less than 1.
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Perfectly Elastic Demand
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Demand for which the price elasticity is infinite, indicating an infinite response to a change in the price and therefore a horizontal demand curve
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Income Elasticity of Demand
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The percentage change in quantity demanded of one good divided by the percentage change in income
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Perfectly Elastic Supply
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Supply for which the price elasticity is infinite, indicating an infinite response of quantity supplied to a change in price and thereby a horizontal supply curve
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Perfectly Inelastic Supply
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Supply for which the price elasticity is zero, indicating no response of quantity supplied to a change in price and thereby a vertical supply curve
