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| The value of the next best alternative given up in order to accomplish a certain goal. Note the subjective nature of opportunity cost in that it can be different for different people who are trying to accomplish the same goal. |
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| This occurs when relatively unlimited human wants (demands) exceed the ability of limited resources to satisfy those wants |
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| Occurs when individuals weigh the costs and the benefits of their actions, all other things held constant. Individuals tend to take actions when benefits exceed costs and not to take actions when costs exceed benefits. |
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| NOTE: Individuals can be classified as belonging to one of three groups: Marginal consumers who are right on the borderline between buying and not buying; Inframarginal consumers who are well above this borderline; and Submarginal consumers who are well below this borderline. Only marginal consumers will respond to a change in price; other consumers will remain unaffected by any such price change. |
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| When two parties to a potential exchange can bargain over the exchange price and (a) exchange the good if both parties benefit from the exchange, or (b) refrain from exchange if one party does not benefit from the exchange. |
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| When one party to a potential exchange can force an exchange (by getting a law passed) as long as such an exchange is beneficial to him. The other party will typically lose from the exchange, and so would not have consented to the exchange if given the freedom to refuse the offer. |
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| An order created by people who desire to interact with one another on a regular basis. These people will develop rules for governing specific ways of interacting on a trial and error basis. If a rule is good it will facilitate interactions, reduce the number of disputes, and be imitated by other potential users. If a rule is bad it will increase conflicts and disputes, be amended or discarded, or be ignored by other potential users. Good rules will survive and promote mutually beneficial interactions while bad rules will disappear. Thus a good set of rules will evolve smoothly over time rather than appear abruptly. |
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| Third parties who are not involved in particular interactions develop and impose general rules on the parties involved in these interactions. These rules are meant to achieve specific goals by consciously designed solutions and benefit some parties at the expense of others. While these general rules will fit some circumstances very well, they will fit other circumstances very poorly. Over time, the general rules will tend to fit fewer and fewer circumstances very well because of two factors: those affected by the general rules circumvent them and new circumstances emerge which were not foreseen by the original rule-makers. These general rules do not evolve smoothly over time because powerful beneficiaries of these rules will resist their change through the political process, thereby producing short-run stability, but long-run instability in the way such rules change. |
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| Individuals, pursuing their own self- interest, interact so as to produce beneficial outcomes which are unintended by any one individual. |
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| An institutional setting where voluntary exchange occurs between buyers and sellers. The emphasis is on "voluntary" since both buyers and sellers are free to participate or not as they see fit. |
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These are general rights to own tangible or intangible goods and must satisfy three characteristics:
(a) Property rights must be well-defined,
(b) Property rights must be enforceable (i.e. owners must be able to exclude anyone from using their property and this ability to exclude can be enforced),
(c) Property rights must be transferable. |
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Definition
The quantity demanded of a good varies inversely with its price, all other things held constant. All other things held constant refers to those factors which shift the position of the demand curve and must be held constant in order to observe the influence of changes in the price of a good on the quantity demanded of that good:
(a) Consumers' incomes,
(b) Tastes,
(c) Prices of related goods in consumption (substitutes and complements)
(d) The number of consumers of this good
(e) Expected future prices. |
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NOTE THE FOLLOWING:
(1) The quantity demanded of a good is the amount of a good that buyers are willing and able to purchase at any given price.
(2) Varies inversely means that changes in the price of a good induce changes in the quantity demanded of a good in the opposite direction.
(3) The direction of causation is from changes in price to changes in quantity demanded. |
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| The maximum price a consumer is willing and able to pay for any particular unit of a good. |
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The quantity supplied of a good varies directly with its price, all other things held constant. All other things held constant refers to those factors which shift the position of the supply curve and must be held constant in order to observe the influence of changes in the price of a good on the quantity supplied of that good:
(a) Input prices,
(b) Technology,
(c) Prices of related goods in production
(d) Taxes (regulation) and subsidies
(e) The number of producers of this good
(f) Expected future prices. |
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NOTE THE FOLLOWING:
(1) The quantity supplied of a good is the amount of a good that sellers\producers are willing and able to offer for sale at any given price
(2) Varies directly means that changes in the price of a good induce changes in the quantity supplied in the same direction
(3) The direction of causation is from changes in price to changes in quantity supplied. |
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| The minimum price at which a producer is willing and able to sell any particular unit of a good. This minimum price is dictated by the opportunity costs of the resources used to produce any particular unit of a good. |
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| Where the quantity supplied equals the quantity demanded at a given price. |
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| Where the quantity supplied is greater than the quantity demanded at a given price (aka a surplus). NOTE: Excess supply causes price to fall. |
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| Where the quantity demanded exceeds the quantity supplied at a given price (aka a shortage). NOTE: Excess demand causes price to rise. |
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| A shift in the demand curve when one of the things being held constant changes. |
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NOTE THE FOLLOWING:
(1) Contrasts with a change in the quantity demanded which is a movement along an unshifted demand curve and is caused only by a change in the price of the good in question. |
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| A shift in the supply curve when one of the things being held constant changes. |
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NOTE THE FOLLOWING:
(1) Contrasts with a change in the quantity supplied which is a movement along an unshifted supply curve and is caused only by a change in the price of the good in question. |
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| The difference between the demand price and the market price or the price the consumer actually pays summed over all units of the good actually purchased. |
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| The difference between the price that suppliers actually receive in payment and the supply price summed over all units of the good actually sold |
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| This occurs when the sum of the consumers' surplus and the producers' surplus is a maximum. In the absence of any market failures, this point can be found at market equilibrium |
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| This occurs because either output is too small relative to output at the social welfare maximum (with resources being diverted to other markets where they have lower valued uses) or too much output is produced relative to output at the social welfare maximum (with resources being used in a lower valued use in the given market). |
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NOTE THE FOLLOWING:
(1) Typically, when too few resources are used in the given market, other parts of the economy are using too many resources. If these resources had been used in the market in question instead of elsewhere, the economy would have experienced a net welfare gain.
(2) Again, when too many resources are attracted into a given market, too few resources are employed elsewhere. If the resources used in this market had been used elsewhere, the economy would have experienced a net welfare gain. |
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| The maximum legal price that can be charged in a designated market. An effective price ceiling must be placed below the equilibrium price. As a result, a price ceiling suppresses the adjustment process that would have eliminated an excess demand in its absence. |
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| The minimum legal price that can be charged in a designated market. An effective price floor must be placed above the equilibrium price. As a result, a price floor suppresses the adjustment process that would have eliminated an excess supply in its absence. |
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