Microeconomics Vocab Test #1 – Flashcards
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Microeconomics
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the study of the economy at the small-scale level, examining individuals and specific markets
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aggregate
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total
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macroeconomics
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the study of the economy at the large-scale level, examining total output, the price level, and other aggregate measures of the economy
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resources
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anything used to produce a good or service, whether it is provided by nature or is manufactured
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land
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all natural resources used in production
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labor
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all physical and mental activity devoted to producing goods and services
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capital
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the tools, machinery, infrastructure, and knowledge used to produce goods and services
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entrepreneurial ability
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the talent/ability to combine land, labor, and capital to produce goods and services
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scarcity
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the inability of limited resources to satisfy unlimited wants
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allocation
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assigning a good ,service, or resource to one use instead of another
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opportunity cost
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the value of the opportunity that you gave up when you chose one activity, or opportunity, instead of another
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self-interest
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the idea that people choose to do the things that interest them
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to make a good decision
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marginal benefit > marginal cost
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marginal decision making
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making choices in increments by evaluating the marginal benefit and the marginal costs
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optimization
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people make choices to maximize their overall benefit
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marginal benefit
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the additional benefit associated with one more unit of an activity
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marginal cost
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the additional cost associated with one more unit of an activity
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decreasing marginal benefit
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the more of a good/service is consumed, the lower the marginal benefit associated with each additional unit (negative relationship)
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increasing marginal cost
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the more a good/service is produced, the higher the marginal cost associated with each additional unit (positive relationship)
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marginal cost formula
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change in total cost ------------------------------------ change in quantity
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marginal benefit formula
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change in total benefit -------------------------------------- change in quantity
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circular flow model
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describes how goods, services, resources, and money flow back and forth in an economy
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market
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any place where, or mechanism by which, buyers and sellers interact to trade goods, services, or resources
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good
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a tangible product that consumers, firms, or governments wish to purchase
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service
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an intangible product or action that consumers, firms, or governments wish to purchase
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resource
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any item, whether a gift of nature, the result of production, or the result of human effort, that is used to produce goods and services
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law of demand
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a law in economics that states that as the price of a good, service, or resource rises, the quantity demanded will fall, and vice versa, all else held constant Price Increases, Quantity Decreases
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demand schedule
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a tabular representation of the relationship between the price of a good, service, or resource and the quantity that individuals and firms are willing and able to buy, all else held constant
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demand curve
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a graphical representation of the relationship between the price of a good, service, or resource and the quantity that individuals and firms are willing and able to buy, all else held constant
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quantity demanded
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the quantity of a good, service, or resource that consumers, firms, and governments are willing and able to buy at a given price, all else held constant
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change in quantity demanded
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dependent on price
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income effect
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the effect that a change in the price of a good, service, or resource has on the purchasing power of income
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substitution effect
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the effect that a change in the price of one good, service, or resource has on the demand of another
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diminishing marginal utility (demand)
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the negative relationship between the quantity of a good, service, or resource and the marginal utility obtained from each additional unit consumed in a given period of time
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3 Reasons for the inverse relationship between prices and quantities demanded
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1) Income Effect 2) Substitution Effect 3) Diminishing Marginal Utility
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market demand
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the overall or total demand for a good, service, or resource. It represents the summation of individual demand curves, whether they represent individuals, communities, states, or nations
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graphical shift to the right for demand curve
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increase in demand
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graphical shift to the left for demand curve
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decrease in demand
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normal good
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a good for which there is a direct relationship between the demand for the good and income As Income Increases, Demand Increases (ex: lobster)
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inferior good
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a good for which there is an inverse relationship between the demand for the good and income As Income Increases, Demand Decreases (ex: rice)
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tastes and preference
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the perception of the desirability associated with consuming a good, service, or resource
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buyers
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market participants who seek to obtain goods, services, and resources
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expectations
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the anticipation by individuals and firms of costs and benefits that lie in the future
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substitutes
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goods, services, or resources that are viewed as replacements for one another (coke vs. pepsi)
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complements
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goods, services, or resources that are used or consumed with one another (peanut butter & jelly)
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law of supply
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as the price of a good, service, or resource rises, the quantity supplied will increase, and vice versa, all else held constant Price Increases, Quantity Increases
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diminishing marginal utility (supply)
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if at least one input of production is fixed, the marginal productivity of additional variable resources will eventually fall, all else held constant
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supply schedule
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a tabular representation of the relationship between the price of a good, service, or resource and the quantities producers are willing and able to supply
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supply curve
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a graphical representation of the relationship between the price of a good, service, or resource and the quantities producers are willing and able to supply
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Increases in Production
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1) purchase additional resources 2) use existing resources more intensively 3) shift resources form one good to another
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market supply
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the overall, or total, supply of a good, service, or resource
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graphical shift to the right for supply curve
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increase in supply
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graphical shift to the left for supply curve
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decrease in supply
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subsidy
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a payment made by the government that doesn't require an exchange of economic activity in return increase in subsidy, shift to the right (supply curve)
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tax
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a payment made to the government that is the result of economic activity increase in tax, shift to the left (supply curve)
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technology
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the knowledge, inventions, and innovations that can increase resource productivity
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sellers
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market participants who are willing/able to sell goods, services, or resources
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seller expectations
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the anticipated future outcomes, including prices that sellers associate with the production of a good, service, or resource
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equilibrium price
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the price at which the quantity supplied of a good, service, or resource equals the quantity demanded
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equilibrium quantity
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the quantity traded when the quantity supplied of a good, service, or resource equals its quantity demanded
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shortage
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the quantity of an output demanded is greater than the quantity of output supplied at the current market price
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surplus
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a situation in which the quantity of output supplied is greater than the quantity of output demanded at the current market price
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nonprice determinant of demand
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a characteristic of the demand for a good, service, or resource other than its own market price
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change in demand
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an increase or decrease in the quantity demanded of a good, service, or resource at every price (shift)
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nonprice determinant of supply
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a characteristic of the supply of a good, service, or resource other than its own market price
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change in supply
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an increase or decrease in the quantity supplied of a good, service, or resource at every price (shift)
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price ceiling
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a maximum legal price at which a good, service, or resource can be sold
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nonbinding price ceiling
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a maximum legal price that is set above the existing equilibrium price. Because the market equilibrium price is lower than the price veiling, the ceiling has no effect on the market and is said to be nonbinding
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binding price ceiling
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a maximum legal price that is set below the existing equilibrium price. Because the market equilibrium price is lower than the price ceiling, the ceiling restricts trade and is said to be binding
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price floor
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a mnimum legal price at which a good, service, or resource an be sold
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nonbinding price floor
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market equilibrium price > price floor
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binding price floor
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market equilibrium price < price floor
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minimum wage
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the lowest wage firms can legally pay employees in the labor market
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exercise tax
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a tax on a good or service that depends on the units sold, not on the price of the good or service
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consumer suprlus
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the difference between the maximum price consumers are willing and able to pay for a good or service and the price they actually pay
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welfare economics
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a branch of economics that focuses on measuring the welfare of market participants and how changes in the market change their well-being
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producer surplus
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the difference between the price producers receive for a good or service and the minimum price they are willing and able to accept
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economic surplus
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the sum of consumer and producer surplus
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deadweight loss
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the value of the economic surplus that is forgone when a market is not allowed to adjust to its competitive equilibrium
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productive efficiency
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producing output at the lowest possible average total cost of production; uses the fewest resources possible
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allocative efficiency
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producing the goods/services that are the most wanted by consumers in such a way that their marginal benefit = marginal cost
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imports
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goods, services, or resources produced abroad and sold domestically
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exports
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goods, services, or resources produced domestically and sold abroad
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Benefits of International Trade
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1) lower-cost alternatives 2) increased diversity of choices 3) access to resources
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quota rent
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the income earned by whoever has the right to import the good at the world price and sell it in the domestic market at the higher quota price
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autarky
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a situation in which a country is closed to any international trade
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absolute advantage
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the ability to produce more output, given similar resources, than another producer
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gains from trade
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the benefit of one good, service, or resource in terms of another
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small-country model
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a model of international trade in which the production or consumption of a good, service, or resource in the domestic country is small relative to global markets
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price takers
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firms that take or accept the market price and have no ability to influence that price
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domestic price
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the price of a good, service, or resource that prevails in the domestic market
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world price
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the price of a good, service, or resource that prevails in the world market
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welfare effects
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the effects that a change in market conditions, usually price, has on the welfare, or economic well-being, of market participants
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barrier to trade
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any policy that is designed to reduce the competitiveness of foreign producers that wish to sell their goods or services in the domestic market, there by reducing the imports of foreign goods and services
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tariff
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a tax or fee that must be paid on goods imported from other countries
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quota
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a numerical limit on the amount of a good that can be imported
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free trade
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trade between nations that is free from barriers such as regulations, tariffs, or quotas
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exchange rate
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the rate, or price, at which one currency can be exchanged for another
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foreign exchange market
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a market in which people exchange one currency for another currency
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domestic currency
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the currency or money used in the domestic country
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foreign country
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the currency or money used in foreign countries
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flexible exchange rate
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an exchange rate that changes as demand and supply for the currency change
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reduction in exchange rate
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fewer dollars to purchase each euro -> goods in euros are cheaper for people with $US -> more willing/able to buy -> increasing quantity demand of euros
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higher exchange rate
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people with euros receive more $/euro -> goods in $US are cheaper for people with euros -> more willing/able to buy -> increasing quantity supplied of euros
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appreciation
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an increase in the value, or price, of one currency relative to another
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depreciation
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a decrease in the value, or price, of one currency relative to another
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Nonprice determinants of exchange market for single shifts
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* expectations * income * tastes and preferences * barriers to trade
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nonprice determinants of exchange market for double shifts
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* interest rates * inflation rates
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fixed exchange rate
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an exchange rate that is set at a specific value and maintained over time
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foreign reserves
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government holdings of foreign currencies; generally used to settle international transactions and conduct exchange rate policy
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expansionary monetary policy
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the actions taken by a country's central bank to expand the money supply and lower interest rates with the objective of increasing real GDP and reducing unemployment ("easy money"
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contractionary monetary policy
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the actions taken by a country's central bank to contract the money supply and raise interest rates with the objective of decreasing real GDP and controlling inflation ("tight money")
