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63 Cards in this Set
- Front
- Back
Economy
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system for coordinating society's productive activities
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Market Economy
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economy in which decisions about productions and consumption are made by individuals---not a central authority
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Microeconomics
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study of how individuals, firms, governments make DECISIONS about what to do with SCARCE resouces and how they INTERACT with eachother
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Opportunity Cost
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"real" (economic) cost of an item -- what you must give up to get it
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Marginal Analysis
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solves the question of "how much"?
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Specialization
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we each do the task we're best at performing
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Adam Smith
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looked at assembly line for pins and came up with SPECIALIZATION
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Incentive
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anything that offers rewards to individuals for a change in behavior
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Equilibrium
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situation in which no one is better off by changing their behavior
--arises out of arbitrage --ex. 2nd grocery line opens & they eventually stabilize at the same length |
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Pareto Efficiency
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no one can be better off without making someone worse off
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4 Themes in Econ
How Individuals Make Decisions |
1. Resources are scarce (income, natural resources, labor, land, time)
2. Opportunity Cost (the next best alternative) 3. Marginal Analysis (decide not to buy a second..) 4. Arbitrage (agents exploit opportunities to make themselves better off---incentives matter) |
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5 Themes in Econ
How Economies Work |
1. There are gains from trade
(we're not self sufficient --higher standard of living through specialization 2. Equilibrium (no one's better off changing their behavior -- arises from arbitrage) 3. Efficiency is desirable (using resources to their fullest ability--(not the same as equity)) 4. Markets Usually lead to Efficiency (idividuals doing the best for themselves brings us to efficiency -- incentives are key -- makes individuals use resources wisely) 5. Government Intervention can improve well being by correcting market failures (environmental pollution, provision of public services, monopolies, labor rights, natural disasters(releif), civil rights |
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MODELS
(& 2 Types) |
simplified representation of reality to better understand real situations
1) Production Possibilities Frontier [PPF] 2)Circular Flow Diagram |
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Production Possibilites Frontier [PPF]
Shows: |
Shows Maximum quantitiy of a good that can be produced for a given quantity of another good
(ex. france's production of airplanes decreases with increasing production of wheat) |
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Opportunity Cost
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(what you give up) / (what you give)
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Command Economy
-opp of market |
Central authorities make decisions about production/consumption
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Invisible Hand
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the tendency of market economies to harness the power of self interest for the good of society
(a person is led to make decisions that are good for society as a whole) |
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Market Failure
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when the pursuit of one's own interest makes society worse off
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Recession
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A downturn in the economy
---main concern of MACROeconomics (overall ups & downs of society) |
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Economic Growth
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the growing ability of the economy to produce goods/services
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Trade Off
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When you compare the costs/benefits of doing something (studying for chem = less studying for econ)
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Marginal Decision
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decisions making trade-offs at the margin
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the study of marginal decisions
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Marginal Analysis
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Gains From Trade
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people get more of what they want by specializing and trading
The economy as a whole can produce more w/ trade & specialization |
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Equilibrium
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when no individual would be better off doing something different
[ex. rule of road-everyone stays to the right before law was in place] |
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When is an economy efficient?
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When it takes all opportunities to make people better off without making anyone worse off
-all resources are being used efficiently *the invisible hand enforces officiency --brain surgeons don't plow fields |
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Why Markets Fail
(3) |
1) Individual actions have side effects not taken into account by the market
2)one party tries to capture more resources for themselves preventing mutually beneficial trades 3)Some goods by nature are unsuited for efficient management in markets |
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Supply/Demand Model
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describes how competetive markets work
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Market
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mechanism which allows buyers/selleers to exchange goods/services
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Competitive Market
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many buyers & sellerns of the same good or service
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Demand Curve
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Shows how much goods/services consumers buy at a given price
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Quantity Demanded
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The actual amount consumers are willing to buy at a certain point
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Market Demand
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sum (aggregate) of all the individuals demands
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Law of Demand
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a higher price for a good = a smaller quantity demanded of the good
*exceptions = Giffen Goods |
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Determinants of Demand
*Demand Shifters* |
1)Price of a related good
a)substitute goods b)complimentary goods 2)Change in Income a)normal goods b)inferior goods 3)Taste/Preferences *big sunglasses* 4)Expectations *if price will be higher in the future (xmas) demand will increase now 5) # of consumers |
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Substitute Goods
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an increase in the price of one good = an increase in the demand of a second good
*coke & pepsi* |
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Complimentary Goods
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an increase in the price of one good = a decrease in demand for the other good
(*hot dogs & hot dog buns, dvds & dvd players*) |
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Normal good
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with an increase in income there is an increase in demand for the good
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Inferior Goods
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with an increase in income there is a decrease in demand for the good
*ramen* |
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Supply Curve
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shows how much of a good/service producers want to sell at a given price
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Quantity Supplied
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actual amount sellers are willing to sell at a given price
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Market supply
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sum (aggregation) of an individual firm's supplies
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Law of Supply
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increasing price for a good = firms supply a larger quantity
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Determinants of supply
(supply shifters) |
1) change input prices (wages, rent)
-with increase in resource prices, firms will supply a lower quantity at each given price 2)Technology -increase in technology = increase in supply 3)Expectations -when planning increase in future price (xmas) supply is lowered now 4)number of sellers |
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Price Control
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legal restriction of how low/high the price can go
a)price celing (legal max) b)price floor (legal min) |
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Quotas
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quantity contorls
-legal restrictions on quantity of good that can be bought/sold *taxi liscences* ----can = shortages, higher prices, gypsy cabs |
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Excise Tax
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tax on sales of a good/service
ex. cigs, gas, alcohol |
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Tax Revenue
Equation |
Quantity taxed times tax
(Qt x t) |
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Tax Amount
Equation |
consumer price - producer price
Pc - Pp = tax amt |
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Elasticity
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measure of responsiveness to changes in price / income
(how sensitive you are to price) |
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Price Elasticity of Demand
(Ed) (same equation for supply) |
% changes in quantity demanded
DIVIDED BY % change in price absval* %Qchange/%Pchange *absval |
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% Change
Equation |
(new value - old value) /
(old value) *100 |
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Elasticity of Something
(Ed) Values for inelatic v elastic |
Ed > 1 = Elastic
Ed = 1 = Unit Elastic Ed < 1 = Inelastic |
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Perfectly Elastic v
Perfectly Inelastic Demand |
Perfectly Elastic
Ed = infinity Perfectly Inelastic Ed = 0 |
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Midpoint Formula
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*absval* Q2-Q1/([Q1+Q2]/2)
divided by P2-P1/([P1+P2]/2) *absval* |
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Decision Rules for Elasticity
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Elastic---->lower price
Inelastic---->raise price Unit Elastic---->stay the same |
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Determinants of Elasticity of Demand
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1)are there close substitutes?
-yes=more elastic 2)Time Frame -longer time frame=more elastic 3)Necessities = more inelastic Luxuries = more elastic |
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Cross-price elasticity of Demand
definition & equation |
How is the demand of one good affected by a price change in another good
% change in Qa / % change in Pb (quantity a & price b) |
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Substitutes
(goods that are similar) & Complements affecting cross price |
substitues = + cross price
complements = - cross price |
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Income Elasticity of Demand
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How is the demand for a good affected by a change in income
Ei = %change in Qd / %change in I |
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Determinants of Price Elasticity of Supply
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1)availability of inputs
-lots of substitute inputs=more elastic 2)Time -longer time periods=more elastic |
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Market Equilibrium Maximized Total Surplus
BECAUSE: |
1)Buyer who values good the most actually purchases it
2)Seller who values the sale the most will make the sale (sellers with the lowest cost) |
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When is the market outcome not efficient
(3) |
1)Monopolies
[1 seller] 2)Public Goods [H20, public transportation] 3)Externalities [pollution] |