econ ch 1 preliminaries

• What is microeconomics?

  The study of individual economic units
• What does macroeconomics study?

  Aggregate economic variables like GDP
• What does the concept of trade-offs imply?

  Choosing one thing means giving up another
• How do prices function in markets?

  Prices reflect scarcity and facilitate interactions
• What is a model in economics?

  A simplified representation of real-world phenomena
• What is positive analysis in economics?

  It explains how the world works objectively
• What is normative analysis in economics?

  It prescribes how the world should be subjectively
• What defines a market?

  A group of buyers and sellers determining price
• What does market definition specify?

  Which buyers, sellers, and products are included
• What is arbitrage?

  Buying low in one market and selling high
• What characterizes a perfectly competitive market?

  Many buyers and sellers with no market power
• What is market price?

  The prevailing price in a competitive market
• What does the extent of a market refer to?

  The geographical and product boundaries of a market
• What is a nominal price?

  The actual monetary price, not adjusted for inflation
• What is a real price?

  The price adjusted for inflation using a price index
• What does the Consumer Price Index (CPI) measure?

  The average change in prices paid by consumers
• What does the Producer Price Index (PPI) measure?

  Average changes in prices received by producers