Term
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Definition
| The condition that arises because wants exceed the ability of resources to satisfy them. |
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Term
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Definition
| The social science that studies the choices 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. |
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Term
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Definition
| The study of the choices that individuals and businesses make and the way these choices interact and are influenced by governments. |
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Term
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Definition
| 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. |
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Term
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Definition
| The objects (goods) and the actions (services) that people value and produce to satisfy human wants. |
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Term
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Definition
| The choices that are best for the individual who makes them. |
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Term
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Definition
| The choices that are best for society as a whole. |
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Term
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Definition
| the expansion of international trade and the production of components and services by firms in other countries—has been going on for centuries |
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Term
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Definition
| The Earth is getting hotter and the ice at the two poles is melting. Since the late nineteenth century, the Earth’s surface temperature has increased about 1 degree Fahrenheit, and close to a half of that increase occurred over the past 25 years. |
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Term
| A Social Security Time Bomb |
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Definition
| Every year since 2001, the U.S. government has run a budget deficit. On average, the government has spent $1.8 billion a day more than it has received in taxes. The government’s debt has increased each day by that amount. Over the ten years 2002 through 2011, government debt increased by $6.5 trillion. Your personal share of this debt is $21,600. |
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Term
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Definition
| An exchange—giving up one thing to get something else. |
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Term
| Six ideas define the economic way of thinking: |
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Definition
- • A choice is a tradeoff
- • People make rational choices by comparing benefits and costs.
- • Benefit is what you gain from something.
- • Cost is what you must give up to get something.
- • Most choices are “how much” choices made at the margin.
- • Choices respond to incentives.
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Term
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Definition
| A choice that uses the available resources to best achieve the objective of the person making the choice. |
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Term
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Definition
| The benefit of something is the gain or pleasure that it brings. |
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Term
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Definition
| The opportunity cost of something is the best thing you must give up to get it. |
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Term
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Definition
A choice on the margin is a choice that is made by comparing all the relevant alternatives systematically and incrementally.
You can think of a choice at the margin as one that adjusts the border or edge of a plan to determine the best course of action |
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Term
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Definition
| The opportunity cost that arises from a one-unit increase in an activity. The marginal cost of something is what you must give up to get one additional unit of it. |
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Term
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Definition
| The benefit that arises from a one-unit increase in an activity. The marginal benefit of something is measured by what you are willing to give up to get one additional unit of it. |
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Term
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Definition
| a reward or a penalty—a “carrot” or a “stick”—that encourages or discourages an action. We respond positively to “carrots” and negatively to “sticks.” The carrots are marginal benefits; the sticks are marginal costs. A change in marginal benefit or a change in marginal cost changes the incentives that we face and leads us to change our actions. |
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Term
| Economists try to understand and predict the effects of economic forces by using the ---------------- first developed by physicists |
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Definition
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Term
| A scientist’s second step is to ------------- that provides a possible answer to the question of interest. |
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Definition
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Term
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Definition
| A description of some feature of the economic world that includes only those features assumed necessary to explain the observed facts. |
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Term
| A scientist’s third step is to -----------------------. |
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Definition
| check the proposed model against the facts |
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Term
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Definition
| is a situation that arises in the ordinary course of economic life in which the one factor of interest is different and other things are equal (or similar) |
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Term
| statistical investigation |
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Definition
looks for a correlation—a tendency for the values of two variables to move together (either in the same direction or in opposite directions) in a predictable and related way
For example, cigarette smoking and lung cancer are correlated. Sometimes a correlation shows a causal influence of one variable on the other. Smoking does cause lung cancer. But sometimes the direction of causation is hard to determine. |
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Term
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Definition
| The tendency for the values of two variables to move together in a predictable and related way. |
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Term
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Definition
| Disagreements that can’t be settled by facts |
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Term
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Definition
| Disagreements that can be settled by facts |
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Term
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Definition
| A graph that shows the values of an economic variable for different groups in a population at a point in time. |
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Term
| Positive relationship or direct relationship |
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Definition
| A relationship between two variables that move in the same direction. |
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Term
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Definition
| A relationship that graphs as a straight line. |
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Term
| Negative relationship or inverse relationship |
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Definition
| A relationship between two variables that move in opposite directions. |
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Term
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Definition
[image]
The change in the value of the variable measured on the y-axis divided by the change in the value of the variable measured on the x-axis. |
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Term
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Definition
other things remaining the same
Every laboratory experiment is an attempt to create ceteris paribus and isolate the relationship of interest. We use the same method to make a graph.
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Term
| Consumption goods and services |
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Definition
| Goods and services that are bought by individuals and used to provide personal enjoyment and contribute to a person’s quality of life. |
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Term
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Definition
| Goods that are bought by businesses to increase their productive resources. |
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Term
| Government goods and services |
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Definition
| Goods and services that are bought by governments. |
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Term
| Export goods and services |
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Definition
| Goods and services that are produced in one country and sold in other countries. |
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Term
| Factors of production are grouped into four categories: |
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Definition
- • Land
- • Labor
- • Capital
- • Entrepreneurship
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Term
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Definition
| The productive resources that are used to produce goods and services—land, labor, capital, and entrepreneurship. |
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Term
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Definition
| The “gifts of nature,” or natural resources, that we use to produce goods and services. |
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Term
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Definition
| The work time and work effort that people devote to producing goods and services. |
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Term
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Definition
| The knowledge and skill that people obtain from education, on-the-job training, and work experience. |
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Term
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Definition
| Tools, instruments, machines, buildings, and other items that have been produced in the past and that businesses now use to produce goods and services. |
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Term
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Definition
| The human resource that organizes labor, land, and capital to produce goods and services. |
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Term
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Definition
| Income paid for the use of land. |
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Term
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Definition
| Income paid for the services of labor. |
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Term
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Definition
| Income paid for the use of capital. |
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Term
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Definition
| Income earned by an entrepreneur for running a business. |
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Term
| Advanced economies are the richest 29 countries (or areas) |
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Definition
| The United States, Japan, Italy, Germany, France, the United Kingdom, and Canada belong to this group. So do four new industrial Asian economies: Hong Kong, South Korea, Singapore, and Taiwan. The other advanced economies include Australia, New Zealand, and most of the rest of Western Europe. Almost 1 billion people (15 percent of the world’s population) live in the advanced economies. |
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Term
| Emerging market economies are the 28 countries in Central and Eastern Europe and Asia |
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Definition
| Russia is the largest of these economies. Others include the Czech Republic, Hungary, Poland, Ukraine, and Mongolia. |
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Term
| Developing economies are the 119 countries in Africa, Asia, the Middle East, Europe, and Central and South America |
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Definition
| including China, India, Indonesia, and Brazil. These economies have not yet achieved high average incomes for their people. Average incomes in these economies vary a great deal, but in all cases, these average incomes are much lower than those in the advanced economies, and in some cases, they are extremely low. More than 5 billion people—almost four out of every five people—live in developing economies. |
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Term
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Definition
| 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. |
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Term
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Definition
| Individuals or groups of people living together. |
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Term
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Definition
| The institutions that organize the production of goods and services. |
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Term
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Definition
| Any arrangement that brings buyers and sellers together and enables them to get information and do business with each other. |
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Term
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Definition
| Markets in which goods and services are bought and sold. |
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Term
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Definition
| Markets in which the services of factors of production are bought and sold. |
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Term
| The federal government’s major expenditures provide |
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Definition
- 1. Good and services
- 2. Social Security and welfare payments
- 3. Transfers to state and local governments
The goods and services provided by the federal government include the legal system, which protects property and enforces contracts, and national defense. Social Security and welfare benefits, which include income for retired people and programs such as Medicare and Medicaid, are transfers from the federal government to households. Federal government transfers to state and local governments are payments designed to provide more equality across the states and regions. |
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Term
| The federal government finances its expenditures by collecting a variety of taxes. The main taxes paid to the federal government are |
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Definition
- 1. Personal income taxes
- 2. Corporate (business) income taxes
- 3. Social Security taxes
In 2010, the federal government spent $3.5 trillion—about 24 percent of the total value of all the goods and services produced in the United States in that year. The taxes they raised were less than this amount—the government had a deficit. |
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Term
| The state and local governments’ major expenditures are to provide |
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Definition
- 1. Goods and services
- 2. Welfare benefits
The goods and services provided by state and local governments include the state courts and police, schools, roads, garbage collection and disposal, water supplies, and sewage management. Welfare benefits provided by state governments include unemployment benefits and other aid to low-income families. |
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Term
| State and local governments finance these expenditures by collecting taxes and receiving transfers from the federal government. The main taxes paid to state and local governments are |
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Definition
- 1. Sales taxes
- 2. Property taxes
- 3. State income taxes
In 2007-08, state and local governments spent $2.1 trillion or 17 percent of the total value of all the goods and services produced in the United States. |
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Term
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Definition
| The total amount that the federal government has borrowed to make expenditures that exceed tax revenue—to run a government budget deficit. |
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Term
| Production possibilities frontier |
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Definition
| 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. |
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Term
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Definition
| 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. |
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Term
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Definition
| An exchange—giving up one thing to get something else. |
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Term
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Definition
| The sustained expansion of production possibilities. |
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Term
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Definition
| 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. |
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Term
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Definition
| The ability of a person to perform an activity or produce a good or service at a lower opportunity cost than anyone else. |
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Term
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Definition
| The amount of any good, service, or resource that people are willing and able to buy during a specified period at a specified price. |
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Term
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Definition
| 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. |
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Term
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Definition
| The relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same. |
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Term
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Definition
| A list of the quantities demanded at each different price when all the other influences on buying plans remain the same. |
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Term
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Definition
| 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. |
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Term
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Definition
| The sum of the demands of all the buyers in the market. |
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Term
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Definition
| A change in the quantity that people plan to buy when any influence on buying plans other than the price of the good changes. |
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Term
| The main influences on buying plans that change demand are |
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Definition
• Prices of related goods
• Expected future prices
• Income
• Expected future income and credit
• Number of buyers
• Preferences |
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Term
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Definition
| A good that can be consumed in place of another good. |
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Term
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Definition
| A good that is consumed with another good. |
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Term
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Definition
| A good for which demand increases when income increases and demand decreases when income decreases. |
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Term
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Definition
| A good for which demand decreases when income increases and demand increases when income decreases. |
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Term
| Change in the quantity demanded |
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Definition
| 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. |
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Term
| When you are thinking about the influences on demand, try to get into the habit of asking: Does this influence change the quantity demanded or does it change demand? |
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Definition
| The test is: Did the price of the good change or did some other influence change? If the price changed, then quantity demanded changed. If some other influence changed and the price remained constant, then demand changed. |
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Term
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Definition
| 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. |
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Term
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Definition
| The relationship between the quantity supplied and the price of a good when all other influences on selling plans remain the same. |
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Term
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Definition
| A list of the quantities supplied at each different price when all the other influences on selling plans remain the same. |
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Term
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Definition
| A graph of the relationship between the quantity supplied of a good and its price when all the other influences on selling plans remain the same. |
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Term
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Definition
| The sum of the supplies of all the sellers in the market. |
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Term
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Definition
| A change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes. |
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Term
| The main influences on selling plans that change supply are |
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Definition
- • Prices of related goods
- • Prices of resources and other inputs
- • Expected future prices
- • Number of sellers
- • Productivity
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Term
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Definition
| A good that can be produced in place of another good. |
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Term
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Definition
| A good that is produced along with another good. |
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Term
| Change in the quantity supplied |
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Definition
| A change in the quantity of a good that suppliers plan to sell that results from a change in the price of the good. |
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Term
| When you are thinking about the influences on supply, get into the habit of asking: Does this influence change the quantity supplied or does it change supply? |
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Definition
| The test is: Did the price change or did some other influence change? If the price of the good changed, then quantity supplied changed. If some other influence changed and the price of the good remained constant, then supply changed. |
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Term
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Definition
- When there is a surplus, the price falls; and when there is a shortage, the price rises.
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Term
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Definition
| a situation in which the quantity supplied exceeds the quantity demanded. If there is a surplus, suppliers must cut the price to sell more. |
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Term
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Definition
| a situation in which the quantity demanded exceeds the quantity supplied |
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Term
| Price elasticity of demand |
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Definition
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 in quantity demanded / Percentage change in price |
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Term
| Price elasticity of demand |
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Definition
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. |
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Term
Percentage Change in Price |
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Definition
Percentage change in price=
(New price - initial price/ initial price) x 100 |
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Term
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Definition
| The numerator, (New price − Initial price), is the same as before. The denominator, (New price + Initial price) ÷ 2, is the average of the new price and[image] the initial price. |
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Term
Percentage Change in Quantity Demanded |
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Definition
(New quantity -Initial quantity/(New Quantity+Initial Quantity)/2) x 100
[image] |
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Term
Elastic and Inelastic Demand |
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Definition
- • When the percentage change in the quantity demanded exceeds the percentage change in price, demand is elastic.
- • When the percentage change in the quantity demanded equals the percentage change in price, demand is unit elastic.
- • When the percentage change in the quantity demanded is less than the percentage change in price, demand is inelastic.
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Term
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Definition
| When the percentage change in the quantity demanded exceeds the percentage change in price. |
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Term
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Definition
| When the percentage change in the quantity demanded equals the percentage change in price. |
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Term
|
Definition
| When the percentage change in the quantity demanded is less than the percentage change in price. |
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Term
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Definition
| When the quantity demanded changes by a very large percentage in response to an almost zero percentage change in price. |
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Term
| Perfectly inelastic demand |
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Definition
| When the percentage change in the quantity demanded is zero for any percentage change in the price. |
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Term
| The influences on the price elasticity of demand fall into two groups: |
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Definition
- • Availability of substitutes
- • Proportion of income spent
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Term
| The demand for a good is elastic if a substitute for it is easy to find |
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Definition
| Soft drink containers can be made of either aluminum or plastic and it doesn’t matter which, so the demand for aluminum is elastic. |
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Term
| The demand for a good is inelastic if a substitute for it is hard to find |
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Definition
| Oil has poor substitutes (imagine a coal-fueled car), so the demand for oil is inelastic. |
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Term
| Three main factors influence the ability to find a substitute for a good: |
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Definition
whether the good is a luxury or a necessity,
how narrowly it is defined,
and the amount of time available to find a substitute for it. |
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Term
Computing the Price Elasticity of Demand |
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Definition
|
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Term
| price elasticity of demand |
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Definition
- • If the price elasticity of demand is greater than 1, demand is elastic.
- • If the price elasticity of demand equals 1, demand is unit elastic.
- • If the price elasticity of demand is less than 1, demand is inelastic.
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Term
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Definition
| The amount spent on a good and received by its seller and equals the price of the good multiplied by the quantity sold. |
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Term
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Definition
| 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). |
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Term
The relationship between the price elasticity of demand and
total revenue is |
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Definition
- • If price and total revenue change in opposite directions, demand is elastic.
- • If a price change leaves total revenue unchanged, demand is unit elastic.
- • If price and total revenue change in the same direction, demand is inelastic
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Term
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Definition
| When the quantity supplied changes by a very large percentage in response to an almost zero percentage change in price. |
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Term
|
Definition
| When the percentage change in the quantity supplied exceeds the percentage change in price. |
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Term
|
Definition
| When the percentage change in the quantity supplied equals the percentage change in price |
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Term
|
Definition
| When the percentage change in the quantity supplied is less than the percentage change in price. |
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Term
| Perfectly inelastic supply |
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Definition
| When the percentage change in the quantity supplied is zero for any percentage change in the price. |
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Term
| The two main influences on the price elasticity of supply are: |
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Definition
- • Production possibilities
- • Storage possibilities
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Term
Computing the Price Elasticity of Supply |
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Definition
Percentage change in quantity supplied/
Percentage chagne in price |
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Term
| If the price elasticity of supply is greater than 1, supply is |
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Definition
|
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Term
| If the price elasticity of supply equals 1, supply is |
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Definition
|
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Term
| If the price elasticity of supply is less than 1, supply is |
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Definition
|
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Term
| Cross elasticity of demand |
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Definition
| 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. |
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Term
| Cross elasticity of demand is calculated by: |
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Definition
Percentage change in quanity demanded of a good/
Percentage change in price of one of its subsitutes or complements |
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Term
| The income elasticity of demand is calculated by: |
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Definition
Percentage change in quantity demanded/
Percentage change in income |
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Term
| Income elasticity of demand |
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Definition
| A measure of the responsiveness of the demand for a good to a change in income when other things remain the same. |
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Term
| The income elasticity of demand falls into three ranges: |
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Definition
- • Greater than 1 (normal good, income elastic)
- • Between zero and 1 (normal good, income inelastic)
- • Less than zero (inferior good)
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Term
| As our incomes increase: items that have (9): |
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Definition
- • An income elastic demand take an increasing share of income
- • An income inelastic demand take a decreasing share of income
- • A negative income elasticity of demand take an absolutely smaller amount of income.
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|
Term
| Resources might be allocated by using any one or some combination of the following methods: |
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Definition
- • Market price
- • Command
- • Majority rule
- • Contest
- • First-come, first-served
- • Sharing equally
- • Lottery
- • Personal characteristics
- • Force
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Term
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Definition
| A system that allocates resources by the order of someone in authority. |
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Term
|
Definition
| allocates resources to a winner (or a group of winners) |
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Term
|
Definition
| allocates resources in the way that a majority of voters choose |
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Term
|
Definition
| the people who get the resource are those who are willing and able to pay the market price |
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Term
|
Definition
| allocates resources to those who are first in line |
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Term
|
Definition
| everyone gets the same amount of it, people must agree on how to use the resource and must make an arrangement to implement the agreement |
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Term
|
Definition
| allocate resources to those who pick the winning number, draw the lucky cards, or come up lucky on some other gaming system |
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Term
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Definition
| people with the “right” characteristics get the resources |
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Term
|
Definition
| getting the most out of the entire economy |
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Term
| Production possibilities frontier (PPF) |
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Definition
| 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. |
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Term
|
Definition
| 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. |
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Term
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Definition
| The highest-valued allocation. To find this allocation, we compare marginal benefit and marginal cost |
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Term
|
Definition
| The marginal benefit from a good or service in excess of the price paid for it, summed over the quantity consumed. |
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Term
|
Definition
| The price of a good in excess of the marginal cost of producing it, summed over the quantity produced. |
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Term
|
Definition
| The sum of producer surplus and consumer surplus. |
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Term
|
Definition
| A situation in which the market delivers an inefficient outcome. |
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Term
|
Definition
| The decrease in total surplus that results from an inefficient underproduction or overproduction. |
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Term
| Obstacles to efficiency that bring market failure and create deadweight losses are (6): |
|
Definition
• Price and quantity regulations
• Taxes and subsidies
• Externalities
• Public goods and common resources
• Monopoly
• High transactions costs |
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Term
|
Definition
| a cost or a benefit that affects someone other than the seller and the buyer of a good |
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Term
|
Definition
| The opportunity costs of making trades in a market. |
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Term
|
Definition
| A tradeoff between efficiency and fairness that recognizes the cost of making income transfers. |
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Term
| Harvard philosopher Robert Nozick argued for the fair rules view in a book entitled Anarchy, State, and Utopia, published in 1974. Nozick argued that fairness requires two rules: |
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Definition
- • The state must establish and protect private property rights.
- • Goods and services and the services of factors of production may be transferred from one person to another only by voluntary exchange with everyone free to engage in such exchange.
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Term
| Price ceiling or price cap |
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Definition
| A government regulation that places an upper limit on the price at which a particular good, service, or factor of production may be traded. |
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Term
|
Definition
| A regulation that makes it illegal to charge more than a specified rent for housing. |
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Term
|
Definition
| An illegal market that operates alongside a government-regulated market. |
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Term
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Definition
| The time spent looking for someone with whom to do business. |
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Term
|
Definition
| government regulation that places a lower limit on the price at which a particular good, service, or factor of production may be traded. |
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Term
|
Definition
| A government regulation that makes hiring labor services for less than a specified wage illegal. |
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Term
| The methods that governments use to support farms vary, but they almost always involve three elements: |
|
Definition
- • Isolate the domestic market from global competition
- • Introduce a price floor
- • Pay farmers a subsidy
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Term
|
Definition
| A price floor in an agricultural market maintained by a government guarantee to buy any surplus output at that price. |
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Term
|
Definition
| A payment by the government to a producer to cover part of the cost of production. |
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Term
|
Definition
| A good, service, or resource is excludable if it is possible to prevent someone from enjoying its benefits. |
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Term
|
Definition
| A good, service, or resource is nonexcludable if it is impossible (or extremely costly) to prevent someone from enjoying its benefits. |
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Term
|
Definition
| A good, service, or resource is rival if its use by one person decreases the quantity available for someone else. |
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Term
|
Definition
| A good, service, or resource is nonrival if its use by one person does not decrease the quantity available for someone else. |
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Term
|
Definition
| A good or service that can be consumed by only one person at a time and only by the person who has bought it or owns it. |
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Term
|
Definition
A good or service that can be consumed simultaneously by everyone and from whic h no one can be excluded.
A flood-control levee is an example of a public good |
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Term
|
Definition
A resource that can be used only once, but no one can be prevented from using what is available.
Ocean fish and the Earth’s atmosphere are examples of common resources |
|
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Term
|
Definition
| A person who enjoys the benefits of a good or service without paying for it. |
|
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Term
| Principle of minimum differentiation |
|
Definition
| The tendency for competitors to make themselves identical to appeal to the maximum number of clients or voters. |
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Term
|
Definition
| The decision not to acquire information because the marginal cost of doing so exceeds the marginal benefit. |
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Term
|
Definition
| The overuse of a common resource that arises when its users have no incentive to conserve it and use it sustainably. |
|
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Term
| The three main methods that might be used to achieve the efficient use of a common resource are |
|
Definition
- • Property rights
- • Production quotas
- • Individual transferable quotas (ITQs)
|
|
|
Term
| Individual transferable quota (ITQ) |
|
Definition
| A production limit assigned to an individual who is then free to transfer (sell) the quota to someone else. |
|
|
Term
| A private good is a good or service that is |
|
Definition
|
|
Term
| A public good is a good or service that is |
|
Definition
| nonrival and nonexcludable. |
|
|
Term
| A common resource is a resource that is |
|
Definition
|
|
Term
|
Definition
| 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. |
|
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Term
| there are four types of externalities: |
|
Definition
- • Negative production externalities
- • Positive production externalities
- • Negative consumption externalities
- • Positive consumption externalities
|
|
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Term
|
Definition
| A production or consumption activity that creates an external cost. |
|
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Term
|
Definition
| A production or consumption activity that creates an external benefit. |
|
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Term
|
Definition
| The cost of producing an additional unit of a good or service that is borne by the producer of that good or service. |
|
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Term
|
Definition
| The cost of producing an additional unit of a good or service that falls on people other than the producer. |
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Term
|
Definition
The marginal cost incurred by the entire society—by the producer and by everyone else on whom the cost falls. It is the sum of marginal private cost and marginal external cost.
[image] |
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Term
|
Definition
| Legally established titles to the ownership, use, and disposal of factors of production and goods and services that are enforceable in the courts. |
|
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Term
|
Definition
| The proposition that if property rights 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. |
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Term
|
Definition
| The opportunity costs of conducting a transaction. |
|
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Term
The three main methods that governments use to cope with external costs are: |
|
Definition
- • Pollution limits
- • Pollution charges or taxes
- • Marketable pollution permits (cap-and-trade)
|
|
|
Term
| Marketable pollution permits (also called cap-and-trade) |
|
Definition
| seek an efficient outcome by assigning or selling pollution rights to individual producers who are then free to trade permits with each other. |
|
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Term
| Marginal private benefit (MB) |
|
Definition
| The benefit from an additional unit of a good or service that the consumer of that good or service receives. |
|
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Term
| Marginal external benefit |
|
Definition
| The benefit from an additional unit of a good or service that people other than the consumer of that good or service enjoy. |
|
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Term
| Marginal social benefit (MSB) |
|
Definition
The marginal benefit enjoyed by society—by the consumer of a good or service and by everyone else who benefits from it. It is the sum of marginal private benefit and marginal external benefit.
[image] |
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Term
| To achieve a more efficient allocation of resources in the presence of external benefits, such as those that arise from education, governments can use three devices: |
|
Definition
- • Public provision
- • Private subsidies
- • Vouchers
|
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Term
|
Definition
| The production of a good or service by a public authority that receives most of its revenue from the government. |
|
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Term
|
Definition
| A payment by the government to a producer to cover part of the costs of production. |
|
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Term
|
Definition
| A token that the government provides to households, which they can use to buy specified goods or services. |
|
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Term
|
Definition
| A line that describes the limits to consumption possibilities and that depends on a consumer’s budget and the prices of goods and services. |
|
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Term
| Consumption possibilities shrink if |
|
Definition
| the price of one good rises when the prices of other goods and the budget remain the same |
|
|
Term
| Consumption possibilities expand if |
|
Definition
| the price of one good falls when the prices of other goods and the budget remain the same |
|
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Term
|
Definition
| The price of one good in terms of another good—an opportunity cost. It equals the price of one good divided by the price of another good. |
|
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Term
|
Definition
| is the benefit or satisfaction that a person gets from the consumption of a good or service |
|
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Term
|
Definition
- • Total utility
- • Marginal utility
|
|
|
Term
|
Definition
| The total benefit that a person gets from the consumption of a good or service. Total utility generally increases as the quantity consumed of a good increases. |
|
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Term
|
Definition
| The change in total utility that results from a one-unit increase in the quantity of a good consumed. |
|
|
Term
| Diminishing marginal utility |
|
Definition
| The general tendency for marginal utility to decrease as the quantity of a good consumed increases. |
|
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Term
| Utility-maximizing rule (2 step) |
|
Definition
The rule that leads to the greatest total utility from all the goods and services consumed. The rule is
- 1. Allocate the entire available budget.
- 2. Make the marginal utility per dollar equal for all goods.
|
|
|
Term
| Marginal utility per dollar |
|
Definition
| The marginal utility from a good relative to the price paid for the good. |
|
|
Term
Calculating the Marginal Utility per Dollar |
|
Definition
| The marginal utility per dollar equals the marginal utility from a good divided by the price of the good |
|
|
Term
|
Definition
| is the maximum price a consumer is willing to pay for an extra unit of a good or service when total utility is maximized |
|
|
Term
|
Definition
|
|
Term
|
Definition
| An opportunity cost incurred by a firm when it uses a factor of production for which it does not make a direct money payment (example: depreciation). |
|
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Term
|
Definition
| An opportunity cost of a firm using capital that it owns—measured as the change in the market value of capital over a given period. |
|
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Term
|
Definition
| The return to entrepreneurship. Normal profit is part of a firm’s opportunity cost because it is the cost of not running another firm. |
|
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Term
|
Definition
| A firm’s total revenue minus total cost. |
|
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Term
|
Definition
| the amount received from the sale of the product, it is the price of the output multiplied by the quantity sold |
|
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Term
|
Definition
| is the sum of the explicit costs and implicit costs and is the opportunity cost of production |
|
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Term
|
Definition
| The total quantity of a good produced in a given period. |
|
|
Term
|
Definition
| The change in total product that results from a one-unit increase in the quantity of labor employed. |
|
|
Term
|
Definition
[image]
The change in total product that results from a one-unit increase in the quantity of labor employed. |
|
|
Term
| Increasing marginal returns |
|
Definition
| When the marginal product of an additional worker exceeds the marginal product of the previous worker. |
|
|
Term
| Decreasing marginal returns |
|
Definition
| When the marginal product of an additional worker is less than the marginal product of the previous worker. |
|
|
Term
| law of decreasing returns |
|
Definition
| 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. |
|
|
Term
|
Definition
the total product per worker employed. It is calculated as
[image]
Another name for average product is productivity. |
|
|
Term
|
Definition
| The cost of all the factors of production used by a firm. |
|
|
Term
|
Definition
| The cost of the firm’s fixed factors of production—the cost of land, capital, and entrepreneurship. |
|
|
Term
|
Definition
| The cost of the firm’s variable factor of production—the cost of labor. |
|
|
Term
|
Definition
The change in total cost that results from a one-unit increase in output.
When, for example, output increases from 5 gallons to 6 gallons an hour, total cost increases from $25.90 to $28. So the marginal cost of this gallon of smoothies is $2.10 ($28 – $25.90). |
|
|
Term
|
Definition
|
|
Term
|
Definition
ATC=AFC+AVC
ATC=TC/Q
AFC=TFC/Q
AVC=TVC/Q
Q, quantity produced |
|
|
Term
|
Definition
| Total fixed cost per unit of output. |
|
|
Term
|
Definition
| Total variable cost per unit of output. |
|
|
Term
|
Definition
| Total cost per unit of output, which equals average fixed cost plus average variable cost. |
|
|
Term
| The U-shape of the average total cost curve arises from the influence of two opposing forces: |
|
Definition
- • Spreading total fixed cost over a larger output
- • Decreasing marginal returns
|
|
|
Term
| Average total cost, ATC, is the sum of average fixed cost, AFC, and average variable cost, AVC |
|
Definition
| So the shape of the ATC curve combines the shapes of the AFC and AVC curves |
|
|
Term
| When output increases, the firm spreads its total fixed costs over a larger output and its average fixed cost decreases- |
|
Definition
| its average fixed cost curve slopes downward. |
|
|
Term
| Decreasing marginal returns means that as output increases, ever larger amounts of labor are needed to produce an additional unit of output |
|
Definition
| So average variable cost eventually increases, and the AVC curve eventually slopes upward. |
|
|
Term
| The position of a firm’s short-run cost curves, depends on two factors: |
|
Definition
- • Technology
- • Prices of factors of production
|
|
|
Term
| Each of these three outcomes is possible, and they arise because when a firm changes the size of its plant, it might experience |
|
Definition
- • Economies of scale
- • Diseconomies of scale
- • Constant returns to scale
|
|
|
Term
|
Definition
Features of a firm’s technology that make average total cost fall as output increases.
The main source of economies of scale is greater specialization of both labor and capital. |
|
|
Term
|
Definition
Features of a firm’s technology that make average total cost rise as output increases.
Diseconomies of scale occur in all production processes but in some perhaps only at a very large output rate. |
|
|
Term
| Constant returns to scale |
|
Definition
| Features of a firm’s technology that keep average total cost constant as output increases. |
|
|
Term
| Long-run average cost curve |
|
Definition
| 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. |
|
|
Term
| The four market types are |
|
Definition
• Perfect competition
• Monopoly
• Monopolistic competition
• Oligopoly |
|
|
Term
| Perfect competition exists when |
|
Definition
- • Many firms sell an identical product to many buyers.
- • There are no barriers to entry into (or exit from) the market.
- • Established firms have no advantage over new firms.
- • Sellers and buyers are well informed about prices.
|
|
|
Term
|
Definition
| A market in which there are many firms, each selling an identical product; many buyers; no barriers to the entry of new firms into the industry; no advantage to established firms; and buyers and sellers are well informed about prices. |
|
|
Term
|
Definition
| A market in which one firm sells a good or service that has no close substitutes and a barrier blocks the entry of new firms. |
|
|
Term
|
Definition
| A market in which a large number of firms compete by making similar but slightly different products. |
|
|
Term
|
Definition
| A market in which a small number of interdependent firms compete. |
|
|
Term
| A firm’s objective is to maximize |
|
Definition
economic profit
which is equal to total revenue minus the total cost of production |
|
|
Term
|
Definition
| A firm that cannot influence the price of the good or service that it produces. |
|
|
Term
|
Definition
The change in total revenue that results from a one-unit increase in the quantity sold.
In perfect competition, marginal revenue equals price. |
|
|
Term
|
Definition
| If the firm shuts down temporarily, it receives no revenue and incurs no variable costs. The firm still incurs fixed costs. So, if a firm shuts down, it incurs an economic loss equal to total fixed cost. This loss is the largest that a firm need incur. |
|
|
Term
|
Definition
| A firm that produces an output receives revenue and incurs both fixed costs and variable costs. The firm incurs an economic loss equal to total fixed cost plustotal variable cost minus total revenue. If total revenue exceeds total variable cost, the firm’s economic loss is less than total fixed cost. But if total revenue is less than total variable cost, the firm’s economic loss will exceed total fixed cost. |
|
|
Term
|
Definition
| The point at which price equals minimum average variable cost and the quantity produced is that at which average variable cost is at its minimum. |
|
|
Term
| The market supply curve in the short run shows: |
|
Definition
| the quantity supplied at each price by a fixed number of firms. The quantity supplied at a given price is the sum of the quantities supplied by all firms at that price. |
|
|
Term
| Market demand and market supply determine |
|
Definition
| the price and quantity bought and sol |
|
|
Term
|
Definition
| the market forces that shift the supply curve and move the price to minimum average total cost in the long run |
|
|
Term
| Economic profit is an incentive for new firms to enter a market... |
|
Definition
| but as they do so, the price falls and the economic profit of each existing firm decreases. |
|
|
Term
| Economic loss is an incentive for firms to exit a market... |
|
Definition
| but as they do so, the price rises and the economic loss of each remaining firm decreases |
|
|
Term
|
Definition
efficient
Resources are used efficiently when it is not possible to get more of one good without giving up something that is valued more highly. To achieve this outcome, marginal benefit must equal marginal cost. That is the outcome that perfect competition achieves. |
|
|
Term
| We derive a firm’s supply curve in perfect competition from its |
|
Definition
marginal cost curve
The supply curve is the marginal cost curve at all points above the minimum of average variable cost (the shutdown price). Because the market supply curve is found by summing the quantities supplied by all the firms at each price, the market supply curve is the entire market’s marginal cost curve. |
|
|
Term
|
Definition
marginal benefit curve
Because the supply curve and demand curve intersect at the equilibrium price, that price equals both marginal cost and marginal benefit. |
|
|
Term
| Perfect competition in the long run seems to be fair on both views of fairness |
|
Definition
| It places no restrictions on anyone’s actions, all trade is voluntary, consumers pay the lowest possible prices, and entrepreneurs earn only normal profit. |
|
|
Term
| Monopoly arises when there are |
|
Definition
- • No close substitutes
- • A barrier to entry
|
|
|
Term
| There are three types of barrier to entry: |
|
Definition
- • Natural
- • Ownership
- • Legal
|
|
|
Term
|
Definition
| A monopoly that arises because one firm can meet the entire market demand at a lower average total cost than two or more firms could. |
|
|
Term
|
Definition
| A market in which competition and entry are restricted by the granting of a public franchise, government license, patent, or copyright. |
|
|
Term
|
Definition
| A monopoly that must sell each unit of its output for the same price to all its customers. |
|
|
Term
| Price-discriminating monopoly |
|
Definition
| A monopoly that sells different units of a good or service for different prices not related to cost differences. |
|
|
Term
| Compared to perfect competition, a single-price monopoly... |
|
Definition
| produces a smaller output and charges a higher price. |
|
|
Term
| Monopoly is inefficient because |
|
Definition
it creates a deadweight loss
But monopoly also redistributes consumer surplus. The producer gains, and the consumers lose. |
|
|
Term
|
Definition
The lobbying for special treatment from the government to create economic profit or to divert consumer surplus or producer surplus away from others.
“Rent” is a general term in economics that includes all forms of surplus such as consumer surplus, producer surplus, and economic profit |
|
|
Term
| two ways in which a person might become the owner of a monopoly: |
|
Definition
- • Buy a monopoly.
- • Create a monopoly by rent seeking.
|
|
|
Term
| To be able to price discriminate, a firm must |
|
Definition
- • Identify and separate different types of buyers.
- • Sell a product that cannot be resold.
|
|
|
Term
| firms discriminate in two broad ways: |
|
Definition
- • Among groups of buyers
- • Among units of a good
|
|
|
Term
| Perfect price discrimination |
|
Definition
| Price discrimination that extracts the entire consumer surplus by charging the highest price that consumers are willing to pay for each unit. |
|
|
Term
|
Definition
| Rules administered by a government agency to influence prices, quantities, entry, and other aspects of economic activity in a firm or industry. |
|
|
Term
|
Definition
| The process of removing regulation of prices, quantities, entry, and other aspects of economic activity in a firm or industry. |
|
|
Term
| Monopolistic competition is a market structure in which |
|
Definition
- • A large number of firms compete.
- • Each firm produces a differentiated product.
- • Firms compete on price, product quality, and marketing.
- • Firms are free to enter and exit.
|
|
|
Term
| In monopolistic competition, as in perfect competition, the industry consists of a large number of firms. The presence of a large number of firms has three implications for the firms in the industry. |
|
Definition
Small Market Share
No Market Dominance
Collusion Impossible |
|
|
Term
|
Definition
Making a product that is slightly different from the products of competing firms.
A differentiated product has close substitutes but it does not have perfect substitutes |
|
|
Term
| Product differentiation enables a firm to compete with other firms in three areas |
|
Definition
| quality, price, and marketing. |
|
|
Term
| Several factors must be considered to identify monopolistic competition and distinguish it from perfect competition on the one side and oligopoly and monopoly on the other side. One of these factors is the extent to which a market is dominated by a small number of firms. To measure this feature of markets, economists use two indexes called measures of concentration. These indexes are |
|
Definition
- • The four-firm concentration ratio
- • The Herfindahl-Hirschman Index
|
|
|
Term
| Four-firm concentration ratio |
|
Definition
| The percentage of the total revenue in an industry accounted for by the four largest firms in the industry. |
|
|
Term
| A four-firm concentration ratio that exceeds 60 percent is regarded as an indication of a market that is highly concentrated and dominated by a few firms— |
|
Definition
|
|
Term
| A ratio of less than 40 percent is regarded as an indication of a competitive market— |
|
Definition
| —monopolistic competition |
|
|
Term
| Herfindahl-Hirschman Index |
|
Definition
The square of the percentage market share of each firm summed over the 50 largest firms (or summed over all the firms if there are fewer than 50) in a market.
[image] |
|
|
Term
|
Characteristics
|
Perfect competition
|
Monopolistic competition
|
Oligopoly
|
Monopoly
|
|---|
|
Number of firms in industry
|
Many
|
Many
|
Few
|
One
|
|
Product
|
Identical
|
Differentiated
|
Identical or differentiated
|
No close substitutes or regulated
|
|
Barriers to entry
|
None
|
None
|
Moderate
|
High
|
|
Firm’s control over price
|
None
|
Some
|
Considerable
|
Considerable
|
|
Concentration ratio
|
0
|
Low
|
High
|
100
|
|
HHI
|
Close to 0
|
Less than 1,800
|
More than 1,800
|
10,000
|
|
Examples
|
Wheat, corn
|
Food, clothing
|
Cereals
|
Local water supply
|
|
|
Definition
|
|
Term
| The two main limitations of concentration measures alone as determinants of market structure are their failure to take proper account of |
|
Definition
- • The geographical scope of the market
- • Barriers to entry and firm turnover
|
|
|
Term
| A market in which the HHI is less than 1,000 is regarded as being competitive and an example of monopolistic competition. A market in which the HHI lies between 1,000 and 1,800 is regarded as being moderately competitive. It probably is an example of monopolistic competition. But a market in which the HHI exceeds 1,800 is regarded as being uncompetitive. |
|
Definition
| The Justice Department scrutinizes any merger of firms in a market in which the HHI exceeds 1,000 and is likely to challenge a merger if the HHI exceeds 1,800. |
|
|
Term
| A firm in monopolistic competition makes its output and price decision just as a monopoly firm does |
|
Definition
| maximizes profit by producing the quantity at which marginal revenue equals marginal cost and by charging the highest price that buyers are willing to pay for this quantity. |
|
|
Term
|
Definition
| The quantity at which average total cost is a minimum. |
|
|
Term
|
Definition
| The amount by which the efficient scale exceeds the quantity that the firm produces. |
|
|
Term
|
Definition
| The amount by which price exceeds marginal cost. |
|
|
Term
|
Definition
| An action taken by an informed person (or firm) to send a message to less-informed people. |
|
|
Term
| The distinguishing features of oligopoly are that |
|
Definition
- • A small number of firms compete.
- • Natural or legal barriers prevent the entry of new firms.
- In contrast to monopolistic competition and perfect competition, an oligopoly consists of a small number of firms. Each firm has a large share of the market, the firms are interdependent, and they face a temptation to collude.
|
|
|
Term
|
Definition
| A group of firms acting together to limit output, raise price, and increase economic profit. |
|
|
Term
|
Definition
| A market with only two firms. |
|
|
Term
|
Definition
| The tool that economists use to analyze strategic behavior—behavior that recognizes mutual interdependence and takes account of the expected behavior of others. |
|
|
Term
| All games share three features: |
|
Definition
- • Rules
- • Strategies
- • Payoffs
|
|
|
Term
|
Definition
| A game between two prisoners that shows why it is hard to cooperate even when it would be beneficial to both players to do so. |
|
|
Term
|
Definition
| All the possible actions of each player in a game. |
|
|
Term
|
Definition
| A table that shows the payoffs for each player for every possible combination of actions by the players. |
|
|
Term
|
Definition
| An equilibrium in which each player takes the best possible action given the action of the other player. |
|
|
Term
| The quantity produced of any good or service is the efficient quantity if the price |
|
Definition
| (which measures marginal benefit) equals marginal cost |
|
|
Term
|
Definition
| A body of law that regulates oligopolies and prohibits them from becoming monopolies or behaving like monopolies. |
|
|
Term
|
Definition
| An agreement between a manufacturer and a distributor on the price at which a product will be resold (also called vertical price fixing). |
|
|
Term
|
Definition
| Setting a low price to drive competitors out of business with the intention of setting a monopoly price when the competition has gone. |
|
|
Term
|
Definition
| An agreement to sell one product only if the buyer agrees to buy another, different product. |
|
|
