ECON251-Exam 1 Terms

ECON 251 Exam 1
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social science that studies the choices we make as we cope with sc
arcity and the incentives that influence and reconcile our choices.
available resources are insufficient to satisfy wants
4 categories of resources
land labor capitol entrepreneurship
reward ot penalty that encourages or discourages an action
positive analysis
normative analysis
opportunity cost
value of best alternative
sunk cost
inevitable/irreversible cost
ECON 251 Exam 1
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marginal benefit (MB)
benefit of one additional unit of a good MB decreases as Q increas
marginal cost (MC)
cost of an additional unit MC increases as Q increases
absolute advantage
produce more in same amount of time OR produce same in less ti
comparative advantage
produced at lower cost
2 rules of advantage
1) If one person has comparative advantage in one task, the other
will have comp advantage in other task. 2) NO ONE can have comp
advantage in everything.
production possibility frontier (PPF)
graph of maximum output that can be produced
characteristics of individual PPF
1) negative slope 2) magnitude of the slope reflects the MC of "x"
characteristics of economy-wide PPF
1) negative slope 2) maginitude of slope reflects MX of "x" 3) slope
gets steeper as "x" increases
ECON 251 Exam 1
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production efficiency
produce combination of goods at lowest cost
allocative efficiency
resources are used where they are most highly valued
shift in PPF
anything that changes either the level of resources OR anything tha
t changes the productivity of resources
maximum quantity a consumer is willing and able to purchase at va
rious prices
law of demand
as Q increases, D decreases and vice versa
changes in demand
1) changes in income 2) change in prices of "related goods" 3) chan
ges in expectations 4) change in # buyers 5) changes in tastes or p
normal good
good where D rises when income rises and D falls when income fall
inferior good
good where D rises when income falls and D falls when income rise
s (ex. Ramen noodles)
ECON 251 Exam 1
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substitutes in consumption
goods that are used in place of one another (ex. Thin Mints and Ore
compliments in consumption
goods that are used together )ex. milk and cookies)
maximum quantity a seller is willing and able to sell at various pric
law of supply
positive relationship between price and quantity supplied
changes in supply
1) change in input prices 2) change in prices of related goods 3) ex
pectations 4) change in # of sellers 5) change in technology
substitutes in production
goods that can be produced with same resources (ex. corn and soy
compliments in production
goods that are produced together; biproducts (ex. beef and leather)
Q supplied > Q demanded
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Q supplied < Q demanded
Q supplied = Q demanded
price elasticity of demand
measure of the responsiveness of consumers to a change in price
inelastic demand
Ed < 1
elastic demand
Ed > 1
"unit elastic"
determinants of Ed
1) availability of substitutes 2) proportion of income 3) time
ECON 251 Exam 1
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total revenue
price x Q demanded
elasticity and revenue
when D is elastic, revenue follows Q demanded. when D is inelastic,
revenue follows P.
cross-price elasticity
cpe > 0 : substitutes in consumption cpe < 0 : compliments in cons
determinants of Es
1) availability of substitutes inputs 2) time
consumer surplus
producer surplus
dead weight loss
decrease in CS and PS as a result of inefficient level of production
ECON 251 Exam 1
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symmetry principle
people in similar situations should be treated similarly
achieve the greatest happiness for the greatest number
maximum principle
make the poorest person as well off as possible
excise tax
per unit tax
tax incidence
division of the burden of a tax between buyer and seller
upper limit on Q of a good that can be sold
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