Microeconomics: Into to Economics Flashcards


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Microeconomics
Chapters 1-4
These are notecards for chapters 1-4 for the economics textbook.
updated 9 years ago by mckayleebug
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1

Economics

the study of how human beings coordinate their wants and desires given the decision-making mechanisms, social customs, and political realities of society

2

Coordination

refers to how 3 central problems facing any economy are solved
• What and how much to produce
• How to produce it
• For whom to produce it

3

Scarcity

the goods available are too few to satisfy individual desires
➢ Individuals want more that is available, given how much they are willing to work

Scarcity has 2 elements: our wants and our means of fulfilling those wants
➢ Degree of scarcity is constantly changing
➢ Quantity of goods, services, and resources depends on technology and human action (underlie production)

4

Coercion

limiting people’s wants and increasing amount of work individuals are willing to do to fulfill those wants

The answer to how the economy deals with scarcity

5

Microeconomics

study of how individual choice is influenced by economic forces:
• Pricing policies of firms
• Household decisions on what to buy
• How markets allocate resources among alternative ends

6

Macroeconomics

study of the economy as a whole.
• Considers problems of inflation, unemployment, business cycles, and growth

7

Marginal cost

additional cost above the cost that has already been incurred

8

Sunk cost

costs that have already been incurred and cannot be recovered

9

Marginal benefit

additional benefit above what has already been derived

10

Opportunity cost

benefit that you might have gained from choosing the next-best alternative

11

Economic forces

necessary reactions to scarcity

When economic force operates through the market, it becomes a market source

12

Economic reality controlled by 3 forces

➢ Economic forces (invisible hand)
➢ Social and cultural forces
➢ Political and legal forces

13

Market force

economic force given relatively free rein by society to work through the market
➢ When there is surplus, the price goes down

good will be produced based on what the public wants

14

Invisible hand

price mechanism, rise and fall of prices that guides our actions in the market

15

Economic model

a framework that places the insights of theory in specific contextual setting

16

Economic principle

commonly held economic insight stated as law or principle

17

Experimental economics

branch of economics that studies economy through controlled lab experiments. When lab experiments are possible, the economy is observed in order to figure out what it is doing

18

Theorems

propositions that are logically true based on the assumptions in a model (examples below)
➢ When the quantity supplied is greater that the quantity demanded, price usually falls
➢ When quantity demanded is greater that quantity supplied, price usually rises

19

Precepts

policy rules that conclude that a particular course of action is preferable
➢ Theorems must be combined with knowledge of real-world economic institutions in order to get to a precept

20

Invisible hand theorem

a market economy, through price mechanism, will tend to allocate resources efficiently

free market generally will answer the questions of…
➢ What to produce and how much
➢ How to produce correctly

21

Economic policies

actions or inactions taken by government to influence economic actions

22

Economics divided into 3 categories

➢ Positive economics: the study of what is and how the economy works
➢ Normative economics: study of what the goals of the economy should be
➢ Art of economics (political economy): application of knowledge learned in positive economics to achieve the goals set in normative economics

23

Production possibility table

Production possibility curve

a table that lists the trade-offs between two choices
________________________________________________________

a curve measuring the maximum combination of outputs that can be obtained from a given number of inputs. Created from the PPT by mapping a two-dimensional graph
➢ The curve demonstrates two things
• There is a limit to what you can achieve given the existing resources
• Every choice has an opportunity cost
➢ The curve is downward sloping and most are outward bowed. When the opportunity cost doesn’t change, the curve ends up being a straight line. Points on the curve represent efficiency. Points inside the curve are points of inefficiency and points outside the curve are unattainable
• The PPC can shift depending on how technology improves
It does not answer the question of “whom should the goods go to”?

24

Comparative advantage

resources are better suited to the production of one good than to the production of another good

25

Laissez-faire

an economic policy of leaving coordination of individuals’ actions to the market

(this is a precept, not a theorem, bc it extends the implications of a model to reality and draws conclusions about the real world)

26

The law of one price

the wages of workers in one country will not differ significantly from the wages of equal workers in another institutionally similar country

27

Efficiency vs. equity

tradeoff - as equity increases efficiency decreases (and vice versa)

28

Institutions

the formal and informal rules that constrain human economic behavior

29

Price

the mechanism through which people’s desires are coordinated and goods are rationed

30

socialism

economic system based on individuals’ goodwill towards others, not their own self-interest. Society decides how, what, and for whom to produce

31

capitalism

economic system based on the market in which the ownership of the means of production resides with a small group of individuals

32

U.S economy divided into three sectors

Business
Government
Households

33

goods market

Market where businesses produce goods and services and sell them to households and government

34

factor market

Market where households supply labor and factors of production to businesses

35

Businesses

private producing units in society
➢ Decides what to produce, how to produce, and for whom to produce it
➢ Decisions made on self-interest influenced by market incentives

Three primary forms of business
➢ Sole proprietorships: businesses that have only one owner
• Easiest to start and fewest hassles

➢ Partnerships: businesses with two or more owners
• Share the burden but create unlimited liability

➢ Corporations: businesses that are treated as a person, and are legally owned by their stockholders, who are not liable for the actions of the corporate “person”
• Largest form of business
• Ownership separated from control of the firm

demand side of factor markets and the supply side of goods markets.

36

Households

groups of individuals living together and making joint decisions

37

Government

➢ referee – setting rules to determine relationships between business and households
➢ actor – collecting money in taxes and spending it on projects (defense and education etc.)

demand side of both factor markets and goods markets.

Consume 20% of total output in U.S.

38

Externality

the effect of a decision on a third party not taken into account by the decision maker (can be positive or negative)

39

Public good vs. Private good

public good: good that is supplied to one person must be supplied to all and whose consumption by one individual does not prevent its consumption by another (national defense)

private good: a good that, when consumed by one individual, cannot be consumed by another individual (apple)

40

Market failures

situations in which the market does not lead to a desired result

41

Government failures

situations in which the government intervenes and makes things worse

42

Mercantilism

promoted government regulation of nations economy

relied less on invisible hand to coordinate economic decisions

43

Law of demand

quantity demanded rises as price falls, other things constant OR quantity demanded falls as price rises, other things constant

44

Demand curve

Market demand curve

graphic representation of the relationship between price and quantity demanded (Curve slopes downward from left to right because the law of demand relationship is an inverse relationship)

the horizontal sum of all individual demand curves

45

Demand
vs.
Quantity Demanded

Demand: a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant
➢ Refers to the entire demand curve → how much will be bought at various prices

Quantity demanded: a specific amount that will be demanded per unit of time at a specific price, other things constant

46

Shift factors of demand

➢ Society’s income
➢ The price of other goods
➢ Tastes
➢ Expectations
➢ Taxes and subsidies

47

Law of demand based on two phenomena

➢ At lower prices, existing demanders buy more
➢ At lower prices, new demanders enter the market

48

Law of supply

quantity supplied rises as price rises, other things constant or quantity supplied falls as price falls

49

Supply curve

Market supply curve

graphical representation of the relationship between price and quantity supplied (Slopes upward from left to right → quantity supplied varies directly with the price)

horizontal sum of all individual supply curves

50

Supply
vs.
Quantity Supplied

• Supply: a schedule of quantities as seller is willing to sell per unit of time at various prices, other things constant
➢ Refers to entire supply curve

• Quantity supplied: a specific amount that will be supplied at a specific price

51

shift factors of supply

➢ price of inputs
➢ technology
➢ expectations
➢ taxes and subsidies

52

Law of supply based on two phenomena

➢ At higher prices, existing suppliers supply more
➢ At higher prices, new suppliers enter the market

53

Equilibrium

Equilibrium Quantity

Equilibrium price

a concept in which opposing dynamic forces cancel each other out

the amount bought and sold at the equilibrium price

the price toward which the invisible hand drives the market

54

Excess supply

Excess demand

quantity supplied is greater than quantity demanded

quantity demanded is greater than quantity supplied

55

Fallacy of composition

the false assumption that what is true for a part will also be true for the whole

56

Changes in demand/quantity demanded

Changes in supply/quantity supplied

• Change in demand = shift in demand curve
• Change in quantity demanded = movement along demand curve

• Change in supply = shift in demand curve
• Change in quantity supplied = movement along supply curve

*when price is the only determining factor