Exam 1 definitions Flashcards
(34 cards)
opportunity cost
the true cost of a decision
e.g. a college education costs a lot, but in the long run is it worth it?
normative statement
positive statement
normative - expresses a value judgement about whether or a situation is subjectively desirable or not
(normally involves the word “should”, or at least ways to dance around it)
positive - a statement that is in principle testable or than can be disproven. it does not express a value judgement
(almost scientific-like statement)
positive economics
normative economics
positive - describing, explaining or predicting economic events
normative - recommendations and arguments about what public policy should and should not be
autarky
closed economy - no international trade
absolute advantage
comparative advantage
Absolute advantage is achieved when one producer is able to produce a competitive product using fewer resources, or the same resources in less time.
Comparative advantage considers the opportunity cost when assessing the viability of a product, accounting for alternative products
opportunity cost
the loss of potential gain from other alternatives when one alternative is chosen.
arbitrage
buy low sell high
quantity demanded
amount of a good that consumers are willing to buy at any given price
(reflects preferences of all consumers in the market)
consumer surplis
opposite of producer surplus
for the individual: the difference between willingness to pay for a given unit of the good (point on the demand curve) and what they actually pay
for the market: the sum of CS for all individuals who purchase the good at the market price
(e.g. if you’re willing to pay $5 for a slice of pizza but they are charging $2, then the CS is $3)
change in quantity demanded
change in demand
change in quantity demanded - change in own price
change in demand - change in anything else
normal good
inferior good
the adjective describes the product in itself
e.g. steak v ramen
substitute good
compliment good
substitute: products whose demand curve goes up when another goes down, normally because of price changes
e. g. pura and paul’s milk
compliment: products whose markets move together because they are often paired together
e. g. peanut butter and jelly
quantity supplied
amount of a good that sellers will produce and bring to market at any given price
higher price - greater quantity supplied
(reflects aggregate behaviour of all producers in the market)
producer surplus
opposite of consumer surplus (the triangle below the meeting point of the SD graph)
equilibrium
no tendency to change unless an outside force acts on system
If the system is in equilibrium, then there is no tendency for price or quantity to change
If the system is not in equilibrium, there is a tendency for price and quantity to move towards equal values
elasticity
elasticity is a unit-free measure of responsiveness of quantity demanded or supplied to price
it explains how total spending on a good (revenue) changes with a price change
central planning
a single official or bureaucracy is responsible for allocating limited resources
e.g. communism
speculation
the attempt to profit from future price changes
e.g. buy low sell high
tariff
tax on imports
quota
quantity limits on imports
private cost
cost paid by the consumer or producer (two parties in a transaction)
external cost
cost impost on a third party as a result of the transaction
social surplus
just like a normal surplus but including the impact on a third party
specialization
a method of production whereby an entity focuses on the production of a limited scope of goods to gain a greater degree of efficiency
