Microeconomics Definitions

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Scarcity
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Situation in which unlimited wants exceed limited resources; necessitates trade-offs in making economic decisions for all economic agents (gov’nt, firms and households)
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Economics is the study of the _____ people make to attain their goals, given their _____ resources.
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choices; scarce
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An economic model is
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a simplified version of some aspect of economic life used to analyze an economic issue; a simplified version of real life.
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The term “market” in economics refers to
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a group of buyers and sellers of a product and the arrangement by which they come together to trade.
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Economists assume that
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optimal decisions are made at the margin.
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Economists assume that rational people
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respond to economic incentives.
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Your roommate Serafina, a psychology major, said, “The problem with economics is that it assumes that consumers and firms always make the correct decision. But we know that everyone’s human and we all make mistakes.” Do you agree with her comment?
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I disagree with her. Economics does not study correct or incorrect behaviors but rather it assumes that economic agents behave rationally, meaning they make the best decisions possible given their knowledge of the costs and benefits.
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Every society faces trade-offs. This means
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producing more of one good means less of another good can be produced.
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positive economic statements
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Are usually a what if analysis or an “if this happens, this follows” sentence. If the price of gasoline rises, a smaller quantity of it will be bought.
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In 2010, Smileytown consumed 50,000 tubes of toothpaste. In 2011, toothpaste consumption rose to 62,000 tubes. What is the change in toothpaste consumption?
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24 % [(62,000-50,000)/50,000] x 100 =(12,000-50,000) x 100 =0.24 x 100 =24%
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percentage change =
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[(new -old)/old] x 100
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Area of a trapezoid =
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area of a triangle + area of a rectangle
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Area of a rectangle =
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base x height
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Area of a triangle =
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1/2 x base x height
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What does the term “marginal” mean in economics?
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The edge of a market.
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Economics promotes _____ as the way to make the best decision.
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“the continuation of an enjoyable activity up to the point where its marginal benefit equals its marginal cost.”
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Trade-offs force society to make choices when answering what 3 fundamental questions?
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What goods and services to produce; How will these goods and services be produced; And who will receive them?
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Who decides the answers to the 3 fundamental economic questions in a Centrally Planned Economy?
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The government.
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Who decides the answers to the 3 fundamental economic questions in a Market Economy?
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Consumers and producers; Buyers and sellers; Households and firms; Not the government!
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Who decides the answers to the 3 fundamental economic questions in a Mixed Economy?
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The government, producers and consumers; The government, buyers and sellers; The government, households and firms.
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Goods are
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tangible; Something physical.
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Services are
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intangible; Something non-physical (ex. Customer service, teaching, etc.)
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What depends on the choices the government, households (consumers,buyers) and firms (producers and sellers) make?
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What goods and services to produce.
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Factors of production are also called
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inputs.
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Inputs (or factors of production) are
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Capital and Labor
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Physical Capital
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Land; Machinery; natural resources
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Human Capital
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Knowledge
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Financial Capital
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Money, etc.
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What depends on how income is distributed?
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Who receives the products and services of a society’s production choices.
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Equity
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is fair distribution of income; Lowers efficiency
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Productive Efficiency
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Production at lowest possible cost
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Allocative Efficiency
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Production according to consumer preferences; Occurs when every good or service is produced up to the point where the last unit provides a marginal benefit to society is the same as the marginal cost of producing it.
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Which Economy is more efficient?
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Market Economy; it provides/promotes competition and voluntary exchange; however, it may not be desirable because it does not promote equity.
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Desirable Efficient Economy
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Is a Mixed Economy (market and centrally planned); it promotes both competition & voluntary exchange, and a fair distribution of income (equity)
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Normative Economics
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Offers a solution to solving an economic problem; Usually has the word “should” in it; Fashion designers should be allowed to copyright designs to promote innovations.
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Assumptions
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Are part of an Economic Model.
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There is often a trade-off between
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Economic Efficiency and Economic Equity
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Opportunity Cost
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The highest valued alternative that must be given up to engage in an activity

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