PPF (Production Possibilities Frontier)
Shows max output combinations of two goods using existing resources to get full potential at given state of
... [Show More] technology
Opportunity Cost
The next best use of a resource given up; Incremental or marginal cost
Sunk cost
A sacrifice from a past decision
Positive Statement
If welfare payments are reduced, hours worked will rise; If there were more stop signs erected, there would be fewer traffic accidents
Normative Statement
There should be fewer stop signs in Bloomington
Scarcity
Limited resources and unlimited wants
Economics
Study of how society manages its scarce resources
Efficiency
The property of society getting the most from its scarce resources
Equality
The property of distributing economic prosperity uniformly among society's members
Rational
Systematically and purposefully doing the best you can to achieve your objectives
Marginal Change
An incremental adjustment to an existing plan
Incentive
Something that induces a person to act
Market Economy
An economic system where interaction of households and firms in markets determinees the allocation of resources
Property Rights
The ability of an individual to own and exercise control over scarce resources
"Invisible Hand"
The principle that self interested market participants may unknowingly maximize the welfare of society as a whole
Market Failure
A situation in which the market fails to allocate resources efficiently
Externality
When one person's actions have an impact on a bystander
Market Power
The ability of an individual or group to substantially influence market prices
Monopoly
The case in which there is only one seller in the market
Productivity
The amount of goods and services produced from each unit of labor input
Inflation
An increase in the overall level of prices
Business Cycle
Fluctuations in economic activity
Scientific Method
Objective development and testing of theories
Economic Models
Simplifications of reality based on assumptions
Circular flow diagram
A diagram of the economy that shows the flow of goods and services, factors of production, and monetary payments between households and firms
Factors of Production
Inputs such as land, labor, and capital
Microeconomics
The study of how households and firms make decisions and how they interact in markets
Macroeconomics
The study of economy wide phenomena
Absolute Advantage
The ability to produce a good using fewer inputs than another producer
Comparative Advantage
The ability to produce a good at a lower opportunity cost than another producer
Gains from trade
The increase in total production due to specialization allowed by trade
Imports
Goods produced abroad and sold domestically
Exports
Goods produced domestically and sold abroad
Shifts in Demand Curve
Income, Prices of related goods, tastes, expectations, number of buyers
Normal Good
Increase in income leads to an increase in demand
Inferior good
Increase in income leads to decrease in demand
Shifts in Supply Curve
Input prices, technology, expectations, number of sellers
Technology
An improvement in this reduces costs, makes production more profitable, and increases supply
Market
A group of buyers and sellers of a particular good or service
Competitive Market
A market in which there are many buyers and sellers so that each has a negligible impact on the market price
Quantity Demanded
The amount of a good that buyers are willing and able to purchase
Law of Demand
The claim, that other things equal, the quantity demanded of a good falls when the price of the good rises
Demand Schedule
A table that shows the relationship between the price of a good and the quantity demanded
Substitutes
Two goods for which an increase in the price of one leads to an increase in the demand for the other
Complements
Two goods for which an increase in the price of one leads to a decrease in the demand for the other
Quantity Supplied
The amount of a good that sellers are willing and able to sell
Equilibrium Quantity
The quantity supplied and the quantity demanded at the equilibrium price
Law of supply and demand
The claim that the price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance
Surplus
A situation in which quantity supplied is greater than quantity demanded
Shortage
A situation in which quantity demanded is greater than quantity supplied
Compliments
Jointly consumed goods, shift demand
Inputs
Used to produce goods, shifts supply
Equilibrium Price
The price that balances quantity supplied and quantity demanded
Law of supply
States that increase in the price of a good increases the quantity supplied for that good [Show Less]