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spending money on one thing leaves less money to be spent on something else |
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benefits that cause a spender to purchase one thing over another |
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trade goods, all parties benefit from voluntary exchange |
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utilized to make intelligent choices |
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how wealth is spread out among society |
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all resources are limited. unlimited wants, limited resources. |
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exchanges take place through markets and are guided by the prices |
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markets in which firms sell their outputs |
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spending money on one thing leaves less money to be spent on something else |
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benefits that cause a spender to purchase one thing over another |
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trade goods, all parties benefit from voluntary exchange |
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utilized to make intelligent choices |
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how wealth is spread out among society |
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all resources are limited. unlimited wants, limited resources. |
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exchanges take place through markets and are guided by the prices |
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markets in which firms sell their outputs |
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market where services of workers are bought and sold |
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markets involved in borrowing and lending funds, banks, insurance, bonds, stock market |
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economic decisions in firms and households |
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studies the behavior of the economy as a whole |
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a set of assumptions, and conclusions drawn from those assumptions |
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a change in one variable is consistent with a change in another variable |
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a change in one variable is not only correlated with, but produces the change in, the other variable |
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describes how something might change and makes predictions, uses facts |
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inferences and evaluations, disputable |
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battle between producers for consumers |
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involves self-interested consumers, profit-maximizing businesses, and perfect competition |
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consumer chooses what maximizes his or her benefits |
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every business is a price taker and cannot influence the market price. it can sell as much as it wants but cannot change the price |
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sets their product at the market price of similar products |
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goods go to people and businesses that are most willing and able to pay for them |
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ownership of property by individuals or corporations |
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rights of private property owners; right to use it as they see fit and sell it |
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a system of allocating scarce resources |
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the group of available choices |
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the constriction of an opportunity set due to money |
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the constriction of an opportunity set due to time |
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the amount of goods a firm can produce given its resources |
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Production Possibilities Curve |
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shows the boundary of the opportunity set given the possibilities |
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as one input increases, the outputs become smaller and smaller |
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the ratio of any two prices |
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the next-best thing you gave up in order to get something |
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when a country can produce a good more efficiently than another country can |
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if one country's relative efficiency in the production of one good is higher than another country's |
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the cost to purchase one more of something |
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the benefits of buying one more of something |
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costs that have been taken and cannot be recovered |
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Steps of a Rational Choice |
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1. identify opportunity set 2. define trade-off(s) 3. calculate the costs correctly (ignore sunk costs) |
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what must be given in exchange for the good |
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the quantity of a good or service that a household/firm chooses to buy at a given price |
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Demand Curve vs. Market Demand Curve |
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shows the quantity demanded at each price, gives the total quantity of a good demanded at that price |
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if an increased price for one increases demand for the other (butter and margarine) |
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an increase in the price of one good decreases the demand for another (sugar and coffee) |
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causes the quantity demanded to shift at a given price. caused by a nonprice issue |
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Change in Quantity Demanded |
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movement along the demand curve, caused by a change in price |
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the quantity of something a firm wants to sell at a given price |
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Supply Curve vs. Market Supply Curve |
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the quantity a company is willing to supply at each price, total quantity of a good a company is willing to sell at a price |
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Change in Quantity Supplied |
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price issue, more produced as price increases |
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nonprice issue, change in tech, environmental change, increased input prices, etc |
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a situation where supply and demand points meet, no reason to change. |
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Equilibrium Price vs. Equilibrium Quantity |
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price at which demand=supply, quantity at which demand=supply |
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price where supply = demand, no excess |
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Excess Supply vs. Excess Demand |
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quantity supplied > quantity demanded; quantity demanded > quantity supplied |
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in equilibrium demand = supply, changes in prices reflect shifts in the curve |
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Price Elasticity of Demand |
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percent change in quantity demanded divided by percent change in price |
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more sensitive to price change >1% |
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less sensitive to price change <1% |
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price times quantity sold R=pQ |
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elasticity=1, change in price just offsets change in quantity |
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any change in price results in demand dropping to zero |
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the demand remains the same at any price |
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Price Elasticity of Supply |
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percentage change in quantity supplied divided by percentage change in price |
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shortage- too much demand surplus- too much supply |
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Price Ceilings vs. Price Floors |
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Ceilings- set a maximum price that can be charged for a product Floor- minimum price |
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Slope (of a budget constraint) |
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shows the trade-off of different budget allocations |
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Income Elasticity of Demand |
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percentage change in consumption divided by percentage change in income |
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Inferior Goods vs. Normal Goods |
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Definition
inferior - income increases, consumption decreases (negative income elasticity)
normal - income increases, consumption increases (positive income elasticity) |
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the reduction in consumption of a good who's price has increased (change in "real income") |
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the reduction in consumption of a good who's price has increased (change in price) |
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the benefits of consumption consumers get from the combination of goods they consume |
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Marginal Utility Diminishing Marginal Utility |
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the extra "enjoyment" someone gets from buying one more of something; as a person gets more and more of something the marginal utility becomes less and less |
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the difference between what was paid and what you would have been willing to pay |
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determining why people make choices using econ and psych |
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simply possessing something can alter a person's preferences |
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individuals are particularly sensitive to loss |
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people make decisions based on a usual reference point |
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increasing relations between the countries |
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produced abroad, bought domestically; produced domestically, bough abroad |
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Bilateral Trade vs. Multilateral Trade |
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trade between two entities, trade among several parties |
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Five Bases of Comparative Advantage |
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Definition
1.Natural Endowments 2.Acquired Endowments 3.Superior Knowledge 4.Specialization 5.Interactions |
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antitrade, wanting to "protect" the economy from the effects of trade |
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policies directed at affecting either imports or exports |
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limits the amount of foreign goods that can be imported; making a profit from buying at an international price and selling at a higher domestic price due to quotas |
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the sale of products overseas below the home countries prices AND below the price of cost |
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taxes that offset advantages provided by subsidies |
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Beggar-thy-neighbor Policies |
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attempts to increase national employment and output (takes away jobs from other countries) |
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firms will never be able to start up successfully unless they are protected from foreign companies |
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business protection can give a country a strategic advantage over rivals |
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Definition
General Agreement on Tariffs and Trade; World Trade Organization (multilateral trade agreements) |
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Definition
european union and north american free trade agreement (regional trade agreements) |
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Trade Creation vs. Trade Diversion |
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Definition
creation- new trade generated due to lower tariffs diversion- trade diverted away from outside countries as a result of a regional lowering of tariffs |
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