| Term | Definition |
|---|---|
| scarcity | the condition that arises because wants exceed the ability of resources to satisfy them |
| economics | the social science that studies the choice that individuals, businesses, governments, and entire societies make as they cope with scarcity, the incentives that influence those choices, and the arrangements that coordinate them |
| microeconomics | the study of the choices that individuals and businesses make and the way these choices interact and are influenced by governments |
| macroeconomics | the study of the aggregate (or total) effects on the national economy and the global economy of the choices that individuals, businesses and governments make |
| goods and services | the objects and the actions that people value and produce to satisfy human wants |
| Economic questions | What?How?For Whom?Self-interest vs. Social interest |
| self-interest | the choices that are best for the individual who makes them |
| social interest | the choices that are best for society as a whole |
| Core ideas of economic thinking | tradeoff, rationality, benefit, cost, margins, incentives |
| tradeoff | an exchange-giving up on one thing to get something else |
| rational choice | a choice that uses the available resources to best achieve the objective of the person making the choice |
| benefit | the gain or pleasure that something brings |
| opportunity cost | the best thing you must give up to get something |
| margin | a choice that is made by comparing all the relevant alternative systematically and incrementally |
| marginal cost | the opportunity cost that arises from a one-unit increase in an activity |
| marginal benefit | the benefit that arises from a one-unit increase in an activity |
| incentive | a reward or penalty- a "carrot" or a "stick"- that encourages or discourages an action |
| economic model | a description of some feature of the economic world that includes only those features assumed necessary to explain the observed facts |
| correlation | the tendency for the values of two variables to move together in a predictable and related way |
| Categories of Goods and Services | Consumption goods and services,Capital goods,Government goods and services,Export goods and services |
| consumption goods and services | goods and services that are bought by individuals and used to provide personal enjoyment and contribute to a person's quality of life |
| capital goods | goods that are bought by businesses to increase their productive resources |
| government goods and services | goods and services that are bought by governments |
| export goods and services | goods and services that are produced in one country and sold in other countries |
| factors of production | the productive resources that are used to produce goods and services-land, labor, capital and entrepreneurship |
| land | the "gifts of nature," or natural resources, that we use to produce goods and services |
| labor | the work time and work effort that people devote to producing goods and services |
| human capital | the knowledge and skill that people obtain from education, on-the-job training, and work experience |
| capital | tools, instruments, machines, buildings, and other items that have been produced in the past and that businesses now use to produce goods and services |
| entrepreneurship | the human resource that organizes labor, land, and capital to produce goods and services |
| rent | income paid for the use of land |
| wages | income paid for the services of labor |
| interest | income paid for the use of capital |
| profit/loss | income earned by an entrepreneur for running a business |
| Parts of a Circular Flow Model | households, firms, goods markets, factor markets, real flow, money flow |
| circular flow model | a model of the economy that shows the circular flow of expenditures and incomes that result from decision makers' choices and the way those choices interact to determine what, how, and for whom goods and services are produced |
| market | any arrangement that brings buyers and sellers together and enables them to get information and do business with each other |
| goods markets | markets in which goods and services are bought and sold |
| factor markets | markets in which the services of factors of production are bought and sold |
| production possibilities frontier | the boundary between the combinations of goods and services that can be produced, given the available factors of production and the state of technology |
| Features of PPF | attainable vs unattainable; efficient vs inefficient; tradeoffs vs free lunches |
| production efficiency | a situation in which the economy is getting all that it can from its resources and cannot produce more of one good or service without producing less of something else |
| tradeoff | an exchange-giving up one thing to get something else |
| economic growth | the sustained expansion of production possibilities |
| absolute advantage | when one person (or nation) is more productive than another-needs fewer inputs or takes less time to produce a good or perform a production task |
| comparative advantage | the ability of a person to perform an activity or produce a good or service at a lower opportunity cost than anyone else |
| quantity demanded | the amount of any good, service, or resource that people are willing and able to buy during a specified period at a specified price |
| Law of Demand | Other things remaining the same, if the price of a good rises, the quantity demanded of that good decreases; and if the price of a good falls, the quantity demanded of that good increases |
| demand | the relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same |
| demand schedule | a list of the quantities demanded at each different price when all the other influences on buying plans remain the same |
| demand curve | a graph of the relationship between the quantity demanded of a good and its price when all the other influences on buying plans remain the same |
| market demand | the sum of the demands of all the buyers in the market |
| change in demand | a change in the quantity that people plan to buy when any influence on buying plans other than the price of the good changes |
| substitute | a good that can be consumed in place of another good |
| complement | a good that is consumed with another good |
| normal good | a good for which demand increases when income increases and demand decreases when income decreases |
| inferior good | a good for which demand decreases when income increases and demand increases when income decreases |
| change in the quantity demanded | a change in the quantity of a good that people plan to buy that results from a change in the price of the good with all other influences on buying plans remaining the same |
| Law of Supply | Other things remaining the same, if the price of a good rises, the quantity supplied of that good increases; and if the price of a good falls, the quantity supplied of that good decreases |
| supply | a list of the quantities supplied at each different price when all the other influences on selling plans remain the same |
| supply schedule | a list of the quantities supplied at each different price when all the other influences on selling plans remain the same |
| supply curve | a graph of the relationship between the quantity supplied of a good and its price when all other influences on selling plans remain the same |
| market supply | the sum of the supplies of all the sellers in the market |
| change in supply | a change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes |
| substitute in production | a good that can be produced in place of another good |
| complement in production | a good that is produced along with another good (like cream and skim milk) |
| change in the quantity supplied | a change in the quantity of a good that suppliers plan to sell that results from a change in the price of the good |
| market equilibrium | when the quantity demanded equals the quantity supplied-buyers' and sellers' plans are in balance |
| equilibrium price | the price at which the quantity demanded equals the quantity supplied |
| equilibrium quantity | the quantity bought and sold at the equilibrium price |
| Questions for Predicting Price Changes | 1. Demand or Supply affected? 2. Increase or Decrease? 3. New Equilibrium Point and magnitude of change |
| Determinants of Demand/ Influences on Buying Plans | 1. Income 2. Price of Related Goods 3. Consumer Expectations 4. Taste/ Preferences 5. # of Buyers |
| Determinants of Supply/ Influences on Supply Plans | 1. Input/Resource Crisis 2. Price of Added Goods 3. Producer Expectations 4. Technology 5. # of Sellers |
| Determinants of Quantity Demanded | Price |
| Determinants of Quantity Supplied | Price |
| price elasticity of demand | a measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers' plans remain the same |
| Percentage change formula | ((New Value – Initial Value) / ((New Value + Initial Value) / 2)) x 100 |
| elastic demand | when the percentage change in the quantity demanded exceeds the percentage change in price |
| unit elastic demand | when the percentage change in the quantity demanded equals the percentage change in price |
| inelastic demand | when the percentage change in the quantity demanded is less than the percentage change in price |
| Types of Elasticity | Elastic, Unit Elastic, Inelastic |
| perfectly elastic demand | when the quantity demanded changes by a very large percentage in response to an almost zero percentage change in price |
| perfectly inelastic demand | when the percentage change in the quantity demanded is zero for any percentage change in the price |
| Influences on Price Elasticity of Demand | Availability of Substitutes, Proportion of Income Spent |
| Price Elasticity of Demand meaning | If PEoD > 1, demand is elastic; if PEoD = 1, demand is Unit Elastic; if PEoD < 1, demand is Inelastic |
| total revenue | the amount spent on a good and received by its seller and equals the price of the good multiplied by the quantity sold |
| total revenue test | a method of estimating the price elasticity of demand by observing the change in total revenue that results from a price change (with all other influences on the quantity sold remaining unchanged) |
| Relationship between PEoD and Total Revenue | If negative, demand is elastic; If price doesn't change revenue, demand is unit elastic; if positive, demand is inelastic |
| price elasticity of supply | a measure of the responsiveness of the quantity supplied of a good to a change in its price when all other influences on sellers' plans remain the same |
| perfectly elastic supply | when the quantity supplied changes by a very large percentage in response to an almost zero percentage change in price |
| elastic supply | when the percentage change in the quantity supplied exceeds the percentage change in price |
| unit elastic supply | when the percentage change in the quantity supplied equals the percentage change in price |
| inelastic supply | when the percentage change in the quantity supplied is less than the percentage change in price |
| perfectly inelastic supply | when the percentage change in the quantity supplied is zero for any percentage change in the price |
| Influences on the Price Elasticity of Supply | Production Possibilities, Storage Possibilities |
| cross elasticity of demand | a measure of the responsiveness of the demand for a good to a change in the price of a substitute or complement when other things remain the same |
| Cross Elasticity of Demand Formula | Percentage change in quantity demanded of a good / Percentage change in price of one of its substitutes or complements |
| income elasticity of demand | a measure of the responsiveness of the demand for a good to a change in income when other things remain the same |
| Three Ranges of Income Elasticity of Demand | IEoD>1 (normal good, income elastic), 0<IEoD<1 (normal good, income inelastic), IEoD<0 (inferior good) |
| Resource Allocation Methods | Market Price, Command, Majority Rule, Contest, First-come First-served, Sharing Equally, Lottery, Personal characteristics, Force |
| command system | a system that allocates resources by the order of someone in authority |
| production possibilities frontier | the boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and the state of technology |
| allocative efficiency | a situation in which the quantities of goods and services produced are those that people value most highly-it is not possible to produce more of a good or service without giving up some of another good that people value more highly |
| consumer surplus | the marginal benefit from a good or service in excess of the price paid for it, summed over the quantity consumed |
| producer surplus | the price of a good in excess of the marginal cost of producing it, summed over the quantity produced |
| total surplus | the sum of producer surplus and consumer surplus |
| market failure | a situation in which the market delivers an inefficient outcome |
| deadweight loss | the decrease in total surplus that results from an inefficient underproduction or overproduction |
| Sources of Market Failure | Price and Quantity Regulations, Taxes and Subsidies, Externalities, Public Goods and Common Resources, Monopoly, High Transaction Costs |
| transactions costs | the opportunity costs of making trades in a market |
| price ceiling or price cap | a government regulation that places an upper limit on the price at which a particular good, service, or factor of production may be traded |
| rent ceiling | a regulation that makes it illegal to charge more than a specified rent for housing |
| black market | an illegal market that operates alongside a government-regulated market |
| search activity | the time spent looking for someone with whom to do business |
| price floor | a government regulation that places a lower limit on the price at which a particular good, service, or factor of production may be traded |
| minimum wage law | a government regulation that makes hiring labor services for less than a specified wage illegal |
| Government Methods to Support Farms | Isolate the domestic market from global competition. introduce a price floor, pay farmers a subsidy |
| price support | an agricultural market maintained by a government guarantee to buy any surplus output at that price |
| subsidy | a payment by the government to a producer to cover part of the cost of production |
| excludable | a good, service, or resource that someone can be prevented from enjoying benefits from |
| nonexcludable | a good, service, or resource that is impossible (or extremely costly) to prevent someone from enjoying its benefits |
| rival | a good, service, or resource whose use by one person decreases the quantity available for someone else |
| nonrival | a good, service, or resource whose use by one person does not decrease the quantity available for someone else |
| examples of private goods | car, food, drink, hoouse |
| examples of common resources | fish in ocean. atmosphere, national parks |
| examples of natural monopoly goods | internet, cable tv, bridges, tunnels |
| examples of public goods | national defense, the law, levees |
| private goods | a good or service that can be consumed by only one person at a time and only by a person who bought it or owns it |
| public goods | a good or service that can be consumed simultaneously by everyone and from which no one can be excluded |
| common resources | a resource that can be used only once, but no one can be prevented from using what is available |
| natural monopoly goods | a good that is non-rival but excludable |
| negative production externality | cost caused by production; ex. air and noise pollution |
| positive production externality | benefit caused by production; ex. coral or advertising agencies in NYC |
| negative consumption externalities | cost caused by private consumption; ex. smoking in a public place or cell phones ringing |
| positive consumption externalities | benefit caused by private consumption; ex. sports team on tv or pretty cityscapes |
| free rider | a person who enjoys the benefit of a good or service without paying for it |
| mixed goods | private goods with attributes that benefit the public at large |
| marginal private benefit | the benefit from an additional unit of a good or service that the consumer of that good or service receives |
| marginal external benefit | the benefit from an additional unit of a good or service that people other than the consumer of the good or service enjoy |
| marginal social benefit formula | MPB + MEB = MSB Marginal Private Benefit + Marginal External Benefit = Marginal Social Benefit |
| principle of minimum differentiation | the tendency for competitors to make themselves identical to appeal to the maximum number of clients or voters |
| rational ignorance | the decision not to acquire information because the marginal cost of doing so exceeds the marginal benefit |
| tragedy of the commons | the overuse of a common resource that arises when its users have no incentive to conserve it an use it sustainably |
| Methods to Achieve Efficient Use of Common Resources | Property Rights, Production Quotas, Individual Transferable Quotas (ITQs) |
| externality | a cost or a benefit that arises from production and that falls on someone other than the producer; or a cost or benefit that arises from consumption and that falls on someone other than the consumer |
| negative externality | a production or consumption activity that creates an external cost |
| positive externality | a production or consumption activity that creates an external benefit |
| property rights | legally established titles to the ownership, use, and disposal of factors of production and goods and services that are enforceable in courts |
| Coase theorem | the proposition that if property right exist, only a small number of parties are involved, and transactions costs are low, then private transactions are efficient and the outcome is not affected by who is assigned the property right |
| Government Methods to Cope with External Costs | Pollution Limits, Pollution Charges or Taxes, Marketable Pollution Permits (cap-and-trade) |
| marginal private benefit | the benefit from an additional unit of a good or service that the consumer of that good or service receives |
| marginal external benefit | the benefit from an additional unit of a good or service that people other than the consumer of that good or service enjoy |
| marginal social benefit | the marginal benefit enjoyed by society-by the consumer of a good or service and by everyone who benefits from it. It is the sum of marginal private benefit and marginal external benefit |
| Government Actions to Allocate Resources | Public Provision, Private Subsidies, Vouchers |
| public provision | the production of a good or service by a public authority that receives most of its revenue from the government |
| subsidy | a payment by the government to a producer to cover part of the costs of production |
| voucher | a token that the government provides to households, which they can use to buy specified goods or services |
| budget line | a line that describes the limits to consumption possibilities and that depends on a consumer's budget and the prices of goods and services |
| relative price | the price of one good in terms of another good-an opportunity cost |
| Relative Price Formula | = Price of one good / Price of another good |
| utility | the benefit or satisfaction that a person gets from the consumption of a good or service |
| Types of Utility | Total Utility, Marginal Utility |
| total utility | the total benefit that a person gets from the consumption of a good or service |
| marginal utility | the change in total utility that results from a one-unit increase in the quantity of a good consumed |
| diminishing marginal utility | the general tendency for marginal utility to decrease as the quantity of a good consumed increases |
| utility maximizing rule definition | the rule that leads to the greatest total utility from all th goods and services consumed |
| Utility Maximizing Rule conditions | 1. Allocate the entire available budget, 2. Make the marginal utility per dollar equal for all goods |
| marginal utility per dollar | the marginal utility from a good relative to the price paid for the good |
| marginal benefit (extended definition) | the maximum price a consumer is willing to pay for an extra unit of a good or service when total utility is maximized |
| Condition for Fair Rules | Protected Property Rights, Voluntary Exchange |
| explicit cost | a cost paid in money |
| implicit cost | an opportunity cost by a firm when it uses a factor of production for which it does not make a direct money payment |
| economic depreciation | the opportunity cost of the firm using capital that it owns |
| normal profit | the return to entrepreneurship; part of a firm's opportunity cost because it is the cost of not running another firm |
| economic profit | a firm's revenue minus total cost |
| Total Revenue Formula | Price X Quantity Sold |
| Opportunity Cost Formula | Total Cost = Implicit Costs + Explicit Costs |
| Economic Profit Formula | Total Revenue – Total Cost |
| short run | the time frame in which the quantities of some resources are fixed; a firm can usually change the quantity of labor it uses but not its technology and quantity of capital |
| long run | the time frame in which the quantity of all resources can be varied |
| Concepts that Relate Output and Quantity of Labor | Total Product, Marginal Product, Average Product |
| total product (tp) | the total quantity of a good produced in a given period |
| marginal product | the change in total product that results from a one-unit increase in the quantity of labor employed |
| increasing marginal returns | when the marginal product of an additional worker exceeds the marginal product of the previous worker |
| decreasing marginal returns | when the marginal product of an additional worker is less than the marginal product of the previous worker |
| law of decreasing returns | as a firm uses more of a variable factor of production, with a given quantity of fixed factors of production, the marginal product of the variable factor eventually decreases |
| average product or productivity | total product per worker employed |
| Concepts that Relate Output and Cost | Total Cost, Marginal Cost, Average Cost |
| total cost (TC) | the cost of all the factors of production used by a firm |
| total fixed cost (TFC) | the cost of the firm's fixed factors of production- the cost of land, capital, and entrepreneurship |
| total variable cost (TVC) | the cost of the firm's variable factor of production-the cost of labor |
| Total Cost Formula | TC = TFC + TVC |
| marginal cost | the change in total cost that results from a one-unit increase in output |
| Average Cost Concepts | Average Fixed Cost, Average Variable Cost, Average Total Cost |
| average fixed cost (AFC) | total fixed cost per unit of output |
| average variable cost (AVC) | total variable cost per unit of output |
| average total cost (ATC) | total cost per unit of output |
| Average Total Cost formula | ATC = AFC + AVC |
| economies of scale | features of a firm's technology that make average total cost fall as output increases |
| diseconomies of labor | features of a firm's technology that make average total cost rise as output increases |
| constant returns to scale | features of a firm's technology that keep average total cost constant as output increases |
| long-run average cost curves | a curve that shows the lowest average total cost at which it is possible to produce each output when the firm has had sufficient time to change both its plant size and labor employed |
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