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71 Cards in this Set

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The scarcity principle ('no-free-lunch')
Although we have boundless needs and wants, the resources available to us are limited. Having more of one thing usually means having less of another.
The cost-benefit principle
An individual (firm, society) should undertake an action if, an only if, the extra benefits from undertaking that action are at least as great as the extra costs.
The incentive principle
A person (firm, society) is more likely to undertake an action if its benefit rises and less likely to undertake it if its cost rises. Incentives matter.
The principle of comparative advantage
Everyone can do better when each person (country) concentrates on the activities for which their opportunity cost is the lowest (or for which they have comparative advantage).
The principle of increasing opportunity cost ('low-hanging-fruit')
In expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterwards turn to resources with higher opportunity costs.
The efficiency principle
Efficiency is an important social goal. because when the economic pie grows larger, it is possible for everyone to have a larger slice.
The equilibrium principle ('no cash on the table')
A market in equilibrium leaves no unexploited opportunities for individuals , but may not exploit all gains achievable through collective action.
average cost
the total cost of undertaking n units of an activity divided by n.
average benefit
the total benefit of undertaking n units of an activity divided by n.
cash on the table
a metaphor used to describe unexploited gains from exchange.
ceteris paribus (or 'all else being equal)
the assumption that everything that could affect a variable of interest, other than the thing being studied, stays the same.
comparative advantage
when one person's opportunity cost of producing a good or service, or of performing a given task, is lower that another person's opportunity cost.
economics
the study of how people make choices under conditions of scarcity and of the results of those choices for society.
elasticity
a measure of how responsive one variable is to a change in one of the other things that determines it.
economic surplus
the gain that results from undertaking an action when the benefits outweigh the costs.
opportunity cost
the value of the next-best alternative to undertaking a particular action.
macroeconomics
the study of the performance of national economies and the policies of that the governments use to try to improve that performance.
marginal benefit
the increase in benefits associated with a small increase in the level of a particular activity.
marginal cost
the change in total cost divided by the corresponding change in output.
sunk cost
a cost that cannot be recovered at the moment a decision is made.
normative economics
economic analysis that states what should or ought to happen.
positive economics
economic analysis that explains what happens and why, but does not state what should happen.
economic decision
any decision whereby securing something of value means going without some other thing of value.
economic naturalist
someone who uses basic economic concepts to make sense of observations about all aspects of everyday life.
absolute advantage
when one person is able to produce a good or service, or perform a given task, with less resource than another person.
attainable point
any combination of goods that can be produced using currently available resources; all points either on or below and to the left of the PPC are attainable.
efficient point
any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction of the other; any point on the PPC is an efficient point.
inefficient point
any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other; any point that lies below and to the left of the PPC is inefficient.
production possibilities curve (PPC)
a graph that describes the maximum amount of one good that can be produced for every possible level of production of another good.
buyer's reservation price
the largest dollar amount that the buyer would be willing to pay for a particular good or service.
buyer's surplus
the difference between that buyer's reservation price and the price they actually pay.
change in demand
a shift of the entire demand curve.
change in supply
a shift of the entire supply curve.
change in the quantity demanded
a movement along the demand curve that occurs in response to a change in price.
change in the quantity supplied
a movement along the supply curve that occurs in response to a change in price.
complements
two goods are complements in consumption if an increase in the price of one causes a fall in demand for the other, as shown by a leftward shift in the demand curve for the other.
demand curve
a representation of the relationship between the amount of a particular good or service that buyers want to purchase in a give period and the price of that good or service.
efficiency (economic efficiency)
when all goods and services are produced an consumed at their respective socially optimal levels.
equilibrium
any situation in which a system is at rest, for example, where neither the price nor the quantity produced of a particular good or service is changing.
equilibrium price and equilibrium quantity
the values of price and quantity for which quantity supplied and quantity demanded are equal.
excess demand (shortage)
the amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price.
excess supply (surplus)
the amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price.
horizontal interpretation of the demand curve
a reading of the demand curve where we start with price on the vertical axis and read the corresponding quantity demanded on the horizontal axis.
income effect
the change in the quantity demanded of a good or service caused by a change in price, which results because of the change in the purchasing power of a buyer's income.
inferior good
a good whose demand curve shifts leftwards when the incomes of buyers increase, and rightwards when the incomes of buyers decrease.
market
the market for any good or service consists of all the buyers and sellers of that good or service.
market equilibrium
occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price.
normal good
a good whose demand curve shifts rightwards when the incomes of buyers increase and leftwards when the incomes of buyers decrease.
price ceiling
a maximum allowable price, specified by law.
price floor
a minimum allowable price specified by law.
seller's reservation price
the smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost.
seller's surplus
the difference between the price received by the seller and their reservation price.
socially optimal quantity
the quantity of a good or service that results in the maximum possible difference between the total benefits and total costs from producing and consuming that good or service.
substitutes
two goods are substitutes in consumption if an increase in the price of one causes a rise in demand for another, as shown by a rightward shift in the demand curve for the other.
substitution effect
the change in the quantity demanded of a good or service caused by a change in price, which results because the good or service becomes more or less expensive relative to other goods and services.
supply curve
a representation of the relationship between the amount of a particular good or service that sellers want to supply in a given time period and the price of that good or service.
total surplus (total economic surplus)
the sum of the buyer's surplus and the seller's surplus or, equivalently, the difference between the buyer's reservation price and the seller's reservation price.
vertical interpretation of the demand curve
a reading of the demand curve where we start with quantity on the horizontal axis and then read the marginal buyer's reservation price on the vertical axis.
cross-price elasticity of demand
the percentage by which the quantity demanded of a good change in response to a 1 per cent change in the price of a second good.
econometrics
a branch of economics that uses statistical techniques to analyse data on economic variables in order to test economic theories.
elasticity demand
demand is elastic with respect to price if price elasticity of demand is greater than 1.
elasticity
a measure of how responsive one variable is to a change of the other things that determines.
income elasticity of demand
the percentage by which the quantity demanded of a good changes in response to a 1 per cent change in income.
inelastic demand
demand is inelastic with respect to price if price elasticity of demand is less than 1.
perfectly elastic demand
demand is perfectly elastic with respect to price if price elasticity of demand is infinite.; this occurs when the demand curve is horizontal.
perfectly elastic supply
supply is perfectly elastic with respect to price if elasticity is infinite; this occurs when the supply curve is horizontal.
perfectly inelastic demand
demand is perfectly inelastic with respect to price if price elasticity of demand is zero; this occurs when the demand curve is vertical.
perfectly inelastic supply
supply is perfectly inelastic with respect to price if elasticity is zero; this occurs when the supply curve is vertical.
price elasticity of demand
the percentage change in quantity demanded that results from a 1 per cent change in price; denoted as e.
price elasticity of supply
the percentage change in quantity supplied that occurs in response to a 1 per cent change in price.
total expenditure = total revenue
the dollar amount that consumers spend on a product (P x Q) is equal to the dollar amount that sellers receive.