Unit 1 Flashcards
(50 cards)
scarcity
Not enough of it to meet everyone’s need and/or desire for it (key problem of economics)
rational actor theory
In economics, we assume that people are rational actors, meaning that they typically do what they believe to be in their best interest
opportunity cost
The highest-valued alternative given up when one chooses to have or do something (i.e. what would have otherwise been chosen)
Principle of Increasing Opportunity Costs
As one chooses to have or do more of something, the opportunity cost usually rises.
- When we start to have or do something, we begin by giving up the least valuables that we can. Once those are gone, we have to give up more valuable things.
Production of Possibilities Curve (or Frontier)
Assumes two products that can be produced by a producer in some combination with a given, fixed set of resources
- The production possibilities frontier would be drawn as a curve, due to the Law of Increasing Opportunity Costs.
Three Basic Questions of Economics
- WHAT goods to produce?
- HOW best to produce those goods?
- WHO gets whatever goods are produced?
specialization
Focusing upon doing what one does best. It’s assumed in economics that specialization is good in that it increases efficiency and total production.
division of labor
Combines specialization and the partition of a complex production task into several, or many, sub-tasks.
absolute advantage
Producer A has an absolute advantage in making a product over Producer B if A is more efficient when it comes to making it.
comparative advantage
Producer A has a comparative advantage in making a product over Producer B if that product is what A is best at making, relative to B and to any other products A might make.
demand
How much is wanted.
Law of Demand
There is normally an inverse relationship between the price of a good and the quantity demand of it.
inferior good
A good is inferior if, when incomes rise, its D curve shifts left, and, when incomes fall, its D curve shifts right. Typically, these are goods that people buy when incomes are lower because they’re cheap, but are not people’s preferred option.
substitute goods
Two goods are substitutes if they fulfill the same desire or need for a consumer.
complementary goods
Two goods are complementary if, when demand A increases, the D curve for B shifts right, and, when demand for A decreases, the D curve for B shifts left. Typically, these are goods used in conjunction with each other.
Giffen good
A Giffen good is one whose D curve slops upward. At a higher price, people want more of it. Exception to the Law of Demand.
supply
How much is produced.
Law of Supply
There is normally a positive relationship between the price of a good and the amount of it that producers are willing to supply.
price ceiling
Max price that can be charged for a good. A seller can charge less than it, but not more.
price floor
Minimum price that must be charged for a good. A seller can charge more than this, but not less.
utility
Whatever benefit one gets from acquiring a good.
- Very subjective + individualized.
In Econ, we measure utility as the maximum amount one is willing to pay for something (not necessarily what one actually does pay).
- So, utility is “built into” the demand curve, since the curve shows what people are willing to pay at any given quantity.
total utility
Sum of utilities of all units acquired.
marginal utility
(MU) The additional benefit gained from the next unit of a good that is acquired.
Law of Diminishing Marginal Utility
As one acquired more units of a good, the marginal utility usually declines and can become zero.
