Term
| first principles of individual choice |
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Definition
1. Resources are scarce
2. The real coast of something is what you must give up to get it (oppurtunity cost)
3. "How Much?" is a decision at the margin
4. People usually exploit opportunities t make themselves better off |
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Term
| Principles that underlie the interaction of individual choices |
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Definition
1. There are gains from trade
2. Markets move towards equilibrium
3. Resources should be used as effciently as possible to achieve society's goals
4. Markets usually lead to effciency
5. When markets dont achieve maximum efficiency, govenment intervention can improve society's welfare |
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Term
| Principles that underlie economy wide interactions |
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Definition
1. One person's spending is another person's income
2. Overall spending sometimes gets out of line with the economy's productive capacity
3. Government policies can change spending |
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Term
| Production Possibility Frontier |
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Definition
Helps deal with tradeoffs.
Improves understanding of trade-offs by considering a simplified economy that produces only two goods. |
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Term
| Comparative advantage vs. Absolute advantage |
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Definition
| Comparative advantage is when opportunit cost of producing the good or service is lower for that individual than for other people. Absolute advantage is an activity that an individual can do better than other people. |
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Term
| Determinants demand curves |
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Definition
1. Changes in prics of related goods or services
2. Changes in income
3. Changes in tastes
4. Changes in expectations
5. Changes in number of consumers |
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Term
| Determinants of market supply curve |
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Definition
1. Changes in input prices
2. Changes in the prices of related goods or services
3. Changes in technology
4. Changes in expectations
5. Changes in the number of producers |
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Term
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Definition
| an increase in price for a good or service leads people to demand a lower quantity |
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Term
| change in supply (demand) vs. change in quantity supplied (demanded) |
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Definition
| changge in supply shifts the curve,change in quantity supplied moves the point along the curve |
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Term
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Definition
legal restrictions on how high or how low a market price may go:
1. Price ceiling - max price sellers can charge, protects consumers
2. Price floor - minimum price buyers are required to pay, protects producers |
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Term
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Definition
| an upper limit on the quantity of some good that can be bought or sold. Also known as quota. The total amount of the good that can be legally transacted is the quota limit. |
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Term
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Definition
| Due to taxes: area under eq. point is fall in prooducer surplus. area above eq. point is fall in consumer surplus. Area of tax revenue is area between four points. Divide tax by 2 and add and subtract from eq. points to get new points |
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Term
| price elasticity of demand |
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Definition
| percent change in the quantity demanded divided by the percent chagne in the price (dropping the minus sign). Best to use midpoint method : (Q2-Q1/(Q1+Q2)/2)/(P2-P1/(P1+P2)/2) |
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Term
| Price elasticity of demand on a downward sloping demand curve |
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Definition
Price effect: after price increases, each unit sold sell at a higher price, which tends to increase revenue
Quantity effect: After price increases, few units are sold, lowers revenue. |
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Term
| income elasticy of demand |
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Definition
| % change in quantity demanded/% change in income |
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Term
| cross-price elasticity of demand |
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Definition
| % change in quantity of A demanded/ % change in price of B |
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Term
| Price elasticty of supply |
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Definition
| % change in quantity supplied/ % change in prie |
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Term
| Inelastic, elastic, or unit elastic |
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Definition
Inelastic: between 0 and 1
Unit-elastic: exactly 1
Elastic: greater than 1
Vertical demand curve: Perfectly inelastic
Horiztonal demand curve: Perfectly Elastic |
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Term
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Definition
Total Consumer: Add up all of the individual surplus (Willingness to pay - price paid).Also the area under the demand curve
Producer Surplus: Price recieved - cost. Above supply curve under price. |
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Term
| Explicit ad implicit cost |
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Definition
Explicit cost is a cost that requires and outlay of money.
Implicit cot does not involve an outlay of money. It is mesurd in dollar terms of the benefits that are forgone. |
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Term
| Accounting profit and economic profit |
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Definition
Accounting profit: business's revenue minus the explicit cost and depreciation
Economic profit: businss revenue minus the opportunity cost of its resources (usually less than accounting profit) |
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Term
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Definition
| the additional benefit derived from producing one more unit of that good or service. |
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Term
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Definition
| the additional cost incurred by producing ne more unit of that good or service |
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Term
| optimal quantity of an activity |
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Definition
| As stated in the principle of marginal analysis: it is when marginal benefit = marginal cost |
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Term
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Definition
| measureof the satisfaction the consumer derives from consumption of goods and services |
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Term
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Definition
| change in total utility generated by consuming one additional unit of that good or service |
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Term
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Definition
| Shows the consumption bundles available to a consumer who spends all of their income |
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Term
| Optimal consumption bundle |
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Definition
| maximizes total utility given the budget constraint |
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Term
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Definition
| A line that shows all the consumptonbundles that yield the same amount of total utility fo an individual |
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Term
| Marginal rate of substitution |
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Definition
| the ratio of the marginal utility of one good to the margnal utility of another |
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Term
| Perfect Substitutes vs. Perfect complements |
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Definition
Perfect substitutes when the marginal rate of substitution doesnot depend on the quantities cosumed, the indifference curve is straight.
Perfect complements are when the consumer wants to consume the goods in the same ratio regardless of their price, they are the L shaped indifference curves |
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Term
| How price changes affect the utility maximizing level of goods purchased |
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Definition
| A change in a price of one good changes where the budget line intercepts a axis. A change in income shifts the budget line to the left or right |
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Term
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Definition
the relationship beween the quantity of inputs a firm uses and the quantity o output it produces.
Fixed input: input whose quantity is fixed for a period of time and cannot be varied.
Variable input: an input whose quantity the firm can vary at any time |
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Term
| Marginal product of labor |
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Definition
| change in quantity of outut/ change in quantity of labor |
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Term
| diminishing marginal product |
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Definition
| As the quantity of one product (labor) increases, the amount per worker decreases |
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Term
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Definition
curve which has a constant output. different combinations of labor and capital are shown.
Isocost lines show all the combinations of labor and capital and firm can hire based off their budget |
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Term
| basic concepts of production in the short run |
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Definition
| It inovled the fixed cost (cost that does not depend on the quantity of output produced) and the average fixed cost (FC/Q). One input must be fixed |
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Term
| basic concepts of production in the long run |
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Definition
| All inputs can be varied. It involves the LRATC |
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Term
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Definition
| what you must give up in order to get a product. |
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Term
| fixed cost, variable cost, and total cost |
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Definition
fixed cost: does not depend on the quantity of output produced. It is the cost of the fixed input
Variable cost: depends on the quantity of output produced. Cost of variable input.
Total cost:Sum of fixed and variable costs |
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Term
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Definition
Change in total cost/ change in quantity of output
additional cost of each additional unit |
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Term
| Average total cost, Average Fixed Cost, Average variable cost |
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Definition
ATC = TC/Q
AFC = FC/Q
AVC = VC/Q |
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Term
| Perfectly competetive market |
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Definition
| all market participants are price takers. A good is a standardized product. Free entry and exit. D = MC. Profit or loss = (ATC-MR)*Q |
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Term
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Definition
| when market price falls below average variable cost (AVC) |
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Term
| Perfect Competitive Firm's Profitability and Production Conditions |
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Definition
P> min ATC: firm profits. enter industry in the long run
P= min ATC: firm breaks even
P < ATC:no profit. Exit industry in long run
P < AVC firm shuts down in the short run |
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Term
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Definition
| When a monopolist (firm that is only producer of a good that has no close substitutes) controls and industry. Optimal point at MR = MC. |
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Term
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Definition
| A small number of producers. imperfect competition. |
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Term
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Definition
| when firms ignore the effets of thei actions on each others' profits |
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Term
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Definition
| when firms cooperate to raise their joint profits |
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Term
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Definition
| a game where each player has incentive to choose an action that benefits itself at the other playe's expense and when both players act in this way, both are worse off than if they had acted cooperatively |
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Term
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Definition
| when it is a player's best action regardless of the action taken by the other player |
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Term
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Definition
| result when each player in a game choose the action that maximizes his or her payoff given the actions of other players, ignoring the effects of their actin on the payoffs recieved by other players |
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Term
| monopolistic competition in short run |
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Definition
| If MC=MR and Pd > ATC a firm is profitable if they are not profitable, firms exit |
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Term
| monopolistic competition in the long run |
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Definition
| as more firms enter market, the demand goes down for producers lowering profit. Eventually industry ends up at zer-profit equilibrium |
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Term
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Definition
| External costs and benefits. External costs are negative externalities. External benefits are positibe externalities |
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