Economics, deffinitions .docx

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University of Toronto St. George
Robert Gazzale

Economics the study of how people make choices under conditions of scarcity and of the results of those choices for society. Choice compromise between two wants/desires. Scarcity (of resources) a fundamental fact in life. The lack of resources leads to choices and tradeoffs (e.g. Catan – road or settlement). Macroeconomics the study of the aggregate economy (i.e. it’s the big picture, composed of the sum of all the microeconomies) Microeconomics the study of all the little bits (i.e. it’s whether the farmer will grow bananas or apples, it’s whether the shirts industry will use 80% or 90% cotton, it’s the examination of one individual facet). Opportunity Cost the value of the next-best alternative choice/action. (i.e. when making a choice we lose the option of taking the alternative)/ Explicit Cost What you give/spend (e.g. spend $10 seeing a movie) Implicit Cost what you lose (of your own resources) (e.g. lose 2 hours of time and 10 marks for not studying) Average Cost (The total cost/benefit for n things)/n. It’s how much we’ve made. Marginal Cost Essentially synonymous with ‘extra’. It’s the total cost/benefit increase in relation to the increase in some activity. It’s how many we should make/sell. Cost-Benefit Principle we should only take action if the extra benefits outweigh the extra (opportunity) costs. Sunk Cost Fallacy The cognitive bias where people feel invested in spent money, rather than realizing rationally that it is irrelevant in any current decision. (e.g. spending $100 (non- refundable etc) on a plane ticket to see a show, before deciding to do a more fun activity back home. The $100 is spent either way, which would you prefer to see?) Low Hanging Fruit Principle It is Economically Efficient to pursue activity with the lowest opportunity cost first. Rationality Assumption all people are rational people, they have well-defined goals and they try to fulfill these as best as they can. Ceteris Paribus Assumption ‘All else equal’. Essentially ignore the ripple effect comparing two scenarios, and imagine that all other variables are fixed. Economic Surplus benefit – cost (e.g. save $10, but lose $9 of pay = :)) (e.g. save $10, but lose $11 of pay = :() Absolute Advantage Bob being able to perform a task/produce a good or service with fewer resources than Mary Comparative Advantage Mary’s opportunity cost of performing a task/producing a good or service is less than Bob’s opportunity cost. Production Possibilities Curve (PPC) A graph that has the maximum amount of good x at every amount of good y produced. Closed Economy One that doesn’t trade with the rest of the world Consumption possibilities == Production possibilities Open Economy No trade barriers, trades with everyone Consumption possibilities > Production possibilities (usually) The Law of Diminishing Returns Progressive decrease in marginal benefits as production increases more and more Market (of a good or service) All buyers (demanders) and sellers (suppliers) of a particular good or service. Central Planning/Regulated Market All economic decisions are made by an individual or small group of small individuals (examples are communist countries) This often leads to a mismatch between things like the number of gearsticks for tractors and the number of wheels for tractors. Free Market Individuals interact in private markets and make production and distribution decisions. If consumers want it, producers make it. Demand Intention to buy, i.e. willingness and ability to buy a G/S at the offered price. (Is **not*: desire). Demand Curve Graphical representation of a relationship between the amount of a good or service that buyers want to purchase in and at a given time and price. Quantity Demand Changes in the point along the Demand Curve based on a change in price. Buyer's Reservation Price The value the buyer attributes to the good/service (e.g. the most they're willing to pay for it). Supply Curve Graphical representation of the relationship between the amount of goods and services that a seller wants to supply in and at a given time frame and price. Seller's Reservation Price Smallest amount a seller is willing to sell each additional unit for (usually the marginal cost) Market Demand The sum of a bunch of individual people's demand curves. Purchasing Power The financial ability to buy goods or services. Substitution Effect The less substitutes there are, the steeper the curve (define substitutes) Real Income Effect Purchasing power changes with price change (i.e. you can buy more or less for the same amount) Compliments Two products that are linked. E.g. cars and petrol, tennis courts and tennis balls, etc Substitutes An alternative product (often inferior) that can be purchased instead of a 'normal' good. Equilibrium When the system is at rest, with no tendencies for either Demand
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