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71 Cards in this Set
- Front
- Back
The scarcity principle ('no-free-lunch')
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Although we have boundless needs and wants, the resources available to us are limited. Having more of one thing usually means having less of another.
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The cost-benefit principle
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An individual (firm, society) should undertake an action if, an only if, the extra benefits from undertaking that action are at least as great as the extra costs.
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The incentive principle
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A person (firm, society) is more likely to undertake an action if its benefit rises and less likely to undertake it if its cost rises. Incentives matter.
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The principle of comparative advantage
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Everyone can do better when each person (country) concentrates on the activities for which their opportunity cost is the lowest (or for which they have comparative advantage).
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The principle of increasing opportunity cost ('low-hanging-fruit')
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In expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterwards turn to resources with higher opportunity costs.
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The efficiency principle
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Efficiency is an important social goal. because when the economic pie grows larger, it is possible for everyone to have a larger slice.
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The equilibrium principle ('no cash on the table')
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A market in equilibrium leaves no unexploited opportunities for individuals , but may not exploit all gains achievable through collective action.
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average cost
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the total cost of undertaking n units of an activity divided by n.
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average benefit
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the total benefit of undertaking n units of an activity divided by n.
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cash on the table
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a metaphor used to describe unexploited gains from exchange.
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ceteris paribus (or 'all else being equal)
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the assumption that everything that could affect a variable of interest, other than the thing being studied, stays the same.
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comparative advantage
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when one person's opportunity cost of producing a good or service, or of performing a given task, is lower that another person's opportunity cost.
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economics
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the study of how people make choices under conditions of scarcity and of the results of those choices for society.
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elasticity
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a measure of how responsive one variable is to a change in one of the other things that determines it.
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economic surplus
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the gain that results from undertaking an action when the benefits outweigh the costs.
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opportunity cost
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the value of the next-best alternative to undertaking a particular action.
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macroeconomics
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the study of the performance of national economies and the policies of that the governments use to try to improve that performance.
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marginal benefit
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the increase in benefits associated with a small increase in the level of a particular activity.
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marginal cost
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the change in total cost divided by the corresponding change in output.
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sunk cost
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a cost that cannot be recovered at the moment a decision is made.
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normative economics
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economic analysis that states what should or ought to happen.
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positive economics
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economic analysis that explains what happens and why, but does not state what should happen.
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economic decision
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any decision whereby securing something of value means going without some other thing of value.
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economic naturalist
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someone who uses basic economic concepts to make sense of observations about all aspects of everyday life.
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absolute advantage
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when one person is able to produce a good or service, or perform a given task, with less resource than another person.
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attainable point
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any combination of goods that can be produced using currently available resources; all points either on or below and to the left of the PPC are attainable.
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efficient point
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any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction of the other; any point on the PPC is an efficient point.
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inefficient point
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any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other; any point that lies below and to the left of the PPC is inefficient.
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production possibilities curve (PPC)
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a graph that describes the maximum amount of one good that can be produced for every possible level of production of another good.
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buyer's reservation price
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the largest dollar amount that the buyer would be willing to pay for a particular good or service.
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buyer's surplus
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the difference between that buyer's reservation price and the price they actually pay.
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change in demand
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a shift of the entire demand curve.
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change in supply
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a shift of the entire supply curve.
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change in the quantity demanded
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a movement along the demand curve that occurs in response to a change in price.
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change in the quantity supplied
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a movement along the supply curve that occurs in response to a change in price.
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complements
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two goods are complements in consumption if an increase in the price of one causes a fall in demand for the other, as shown by a leftward shift in the demand curve for the other.
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demand curve
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a representation of the relationship between the amount of a particular good or service that buyers want to purchase in a give period and the price of that good or service.
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efficiency (economic efficiency)
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when all goods and services are produced an consumed at their respective socially optimal levels.
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equilibrium
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any situation in which a system is at rest, for example, where neither the price nor the quantity produced of a particular good or service is changing.
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equilibrium price and equilibrium quantity
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the values of price and quantity for which quantity supplied and quantity demanded are equal.
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excess demand (shortage)
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the amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price.
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excess supply (surplus)
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the amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price.
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horizontal interpretation of the demand curve
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a reading of the demand curve where we start with price on the vertical axis and read the corresponding quantity demanded on the horizontal axis.
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income effect
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the change in the quantity demanded of a good or service caused by a change in price, which results because of the change in the purchasing power of a buyer's income.
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inferior good
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a good whose demand curve shifts leftwards when the incomes of buyers increase, and rightwards when the incomes of buyers decrease.
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market
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the market for any good or service consists of all the buyers and sellers of that good or service.
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market equilibrium
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occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price.
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normal good
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a good whose demand curve shifts rightwards when the incomes of buyers increase and leftwards when the incomes of buyers decrease.
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price ceiling
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a maximum allowable price, specified by law.
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price floor
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a minimum allowable price specified by law.
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seller's reservation price
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the smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost.
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seller's surplus
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the difference between the price received by the seller and their reservation price.
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socially optimal quantity
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the quantity of a good or service that results in the maximum possible difference between the total benefits and total costs from producing and consuming that good or service.
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substitutes
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two goods are substitutes in consumption if an increase in the price of one causes a rise in demand for another, as shown by a rightward shift in the demand curve for the other.
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substitution effect
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the change in the quantity demanded of a good or service caused by a change in price, which results because the good or service becomes more or less expensive relative to other goods and services.
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supply curve
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a representation of the relationship between the amount of a particular good or service that sellers want to supply in a given time period and the price of that good or service.
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total surplus (total economic surplus)
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the sum of the buyer's surplus and the seller's surplus or, equivalently, the difference between the buyer's reservation price and the seller's reservation price.
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vertical interpretation of the demand curve
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a reading of the demand curve where we start with quantity on the horizontal axis and then read the marginal buyer's reservation price on the vertical axis.
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cross-price elasticity of demand
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the percentage by which the quantity demanded of a good change in response to a 1 per cent change in the price of a second good.
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econometrics
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a branch of economics that uses statistical techniques to analyse data on economic variables in order to test economic theories.
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elasticity demand
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demand is elastic with respect to price if price elasticity of demand is greater than 1.
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elasticity
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a measure of how responsive one variable is to a change of the other things that determines.
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income elasticity of demand
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the percentage by which the quantity demanded of a good changes in response to a 1 per cent change in income.
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inelastic demand
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demand is inelastic with respect to price if price elasticity of demand is less than 1.
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perfectly elastic demand
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demand is perfectly elastic with respect to price if price elasticity of demand is infinite.; this occurs when the demand curve is horizontal.
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perfectly elastic supply
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supply is perfectly elastic with respect to price if elasticity is infinite; this occurs when the supply curve is horizontal.
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perfectly inelastic demand
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demand is perfectly inelastic with respect to price if price elasticity of demand is zero; this occurs when the demand curve is vertical.
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perfectly inelastic supply
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supply is perfectly inelastic with respect to price if elasticity is zero; this occurs when the supply curve is vertical.
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price elasticity of demand
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the percentage change in quantity demanded that results from a 1 per cent change in price; denoted as e.
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price elasticity of supply
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the percentage change in quantity supplied that occurs in response to a 1 per cent change in price.
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total expenditure = total revenue
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the dollar amount that consumers spend on a product (P x Q) is equal to the dollar amount that sellers receive.
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