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74 Cards in this Set
- Front
- Back
Principles that underlie economics of individiual choice
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1. resources are scarce
2. the real cost of something is what you must give up to get it. 3. "how much?" is a decision at the margin 4. people usually exploit opportunities to make themselves better off |
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individual choice
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the decision by an individual of what to do, which necessarily involves a decision of what not to do
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resource
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anything that can be used to produce something else
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scarce
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there is not enough of the resources available to satisfy all the various ways a society wants to use them
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opportunity cost
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-the real cost of an item
-what you must give up in order to get or do something |
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trade-off
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when you compare the costs with the benefits of doing something
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marginal decisions
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decisions about whether to do a bit more or a bit less of an activity (how much?)
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marginal also means _____
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extra
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marginal analysis
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the study of "how much" decisions
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incentive
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anything that offers rewards to people who change their behavior
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Principles that underlie the INTERACTION of individual choices
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1. there are gains from trade
2. markets move towards equilibrium 3. resources should be used as efficiently as possible to achieve society's goals 4. markets usually lead to efficiency 5. when markets don't achieve efficiency, government intervention can improve a society's welfare. |
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trade
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individuals engage in trade, they provide goods and services to others and receive goods and services in return
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gains from trade
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people can get more of what they want through trade than they could if they tried to be self sufficient. this increase in output is due to specialization
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specialization
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each person specializes in the task that he or she is good at performing.
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equilibrium
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when no one would be better off by doing something different
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an economy is efficient if ...
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it takes all opportunities to make some people better off without making others worse off
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equity
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everyone gets his or her fair share.
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principles that underlie an economy-wide interaction
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1. one persons spending is another persons income
2. overall spending get out of line with the economy's produtive capacity 3. government policies can change spending |
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model
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a simplified representation of a real situation that is used to better understand real-life situations
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other things equal assumption (all else the same)
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means that all others relevant factors remain unchanged
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production possibilities frontier
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illustrates the trade-offs facing an economy that produces only two goods. it shows the maximum quantity of one good that can be produced for any given quantity produced of the other.
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factors of production
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resources used to produce goods and services
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technology
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the technical means for producing goods and services
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comparative advantage
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an individual has a comparative advantage in producing a good or service if the opportunity cost of producing the good or service is lower for that individual than for other people
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absolute advantage
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an individual has a absolute advantage in an activity if he or she can do it better than other people. having an absolute advantage is not the same thing as having a comparative advantage
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barter
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trade. when people directly exchange goods or services that they have for goods or services that they want
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household
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a person or group of people that share their income
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firm
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an organization that produces goods and services for sale
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markets for goods and services
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where firms sell goods and services that they produce to households
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factor markets
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where firms buy the resources they need to produce goods and services
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income distribution
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the way in which total income is divided among the owners of the various factors of production
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positive economics
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the branch of economic analysis that describes the way the economy actually works
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normative economics
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makes prescriptions about the way the economy should work
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forecast
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a simple prediction of the future
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competitive market
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a market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold
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supply and demand market
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model of how a competitive market works
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demand schedule
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shows how much of a good or service consumers will want to buy at different prices
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quantity demanded
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the actual amount of a good or service consumers are willing to buy at some specific price
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demand curve
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a graphical representation of the demand schedule. it shows the relationship between quantity demanded and price
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The law of Demand
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says that a higher price for a good or service, all else the same, leads people to demand a smaller quantity of that good or service
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shift of the demand curve
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a change in the quantity demanded at any given price, represented by the change of the original demand curve to a new position, denoted by a new demand curve.
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movement along the demand curve
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a change in the quantity demanded of a good that is the result of a change in that good's PRICE
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6 things that cause shifts in the demand curve
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1. Complements
2. change in income 3. change in tastes 4. change in expectation of future prices 5. population 6.substitutes |
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substitutes
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two goods are ___________ if a rise in the price of one of the goods leads to an increase in the demand for the other good
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complements
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two goods are ___________ if a rise in the price of one good leads to a decrease in demand for the other good
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normal good
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when a rise in income increases the demand for a good
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inferior good
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when a rise in income decreases the demand for a good
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individual demand curve
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illustrates the relationship between quantity demanded and price for an individual consumer
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quantity supplied
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the actual amount of a good or service producers are willing to sell at some specific price
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supply schedule
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shows how much of a good or service producers will supply at different prices
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supply curve
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shows the relationship between quantity supplied and price
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a shift in the supply curve
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a change in the quantity supplied of a good or service at any given price. it is represented by the change of the original supply curve to a new position, denoted by a new supply curve
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a movement along the supply curve
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a change in the quantity supplied of a good that is the result of a change in that good's PRICE.
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input
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a good or service that is used to produce another good or sevice
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individual supply curve
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illustrates the relationship between quantity supplied and price for an individual producer
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5 factors that shift supply curve
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changes in input prices
changes in the prices of related goods or services changes in technology changes in expectations of future prices changes in the number of producers |
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equilibrium price
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the price that matches quantity supplied and quantity demanded
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equilibrium quantity
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the quantity bought and sold at this price
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equilibrium price is aka
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market-clearing price
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surplus
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when the quantity supplied exceeds the quantity demanded. surpluses occur when price is about the equilibrium level
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shortage
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when the quantity demanded exceeds the quantity supplied. occurs when price is below equilibrium level
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a consumers willingness to pay for a good
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is the maximum price at which he or she would buy the good at
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individual consumer surplus
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the net gain to an individual buyer from the purchase of a good. it is = to the difference between the buyer's willingness to pay and the price paid
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total consumer surplus
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the sumer of the individual consumer surpluses of all the buyers of a good in a market
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consumer surplus is often...
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used to refer to both individual and total consumer surplus
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a seller's COST
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is the lowest price at which he or she is willing to sell a good
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individual producer surplus
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the net gain to an individual seller from selling a good. is = to the difference between the price received and the seller's cost or willingness to sell amount
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total surplus
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in a market is the sumer of the individual producer surpluses of all the sellers of a good in a market.
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producer surplus is often...
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used to refer to both individual and to total producer surplus
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the total surplus generated in a market
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the total net gain to consumers and producers from trading in the market. it is the sum of the producer and the consumer surplus
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property rights
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are the rights of owners of valuable items, whether resources or goods, to dispose of those items as they chose
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economic signal
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any piece of information that helps people make better economic decisions
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a market or economy is INEFFICIENT if...
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there are missed opportunities: some people could be made better off without making other people worse off
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market failure
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occures when a market fails to be efficient
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