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Scarcity

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the condition that results from limited resources combined with unlimited wants

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Opportunity Cost

answer

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another

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Factors of Production

answer

resources of land, labor, capital, and entrepreneurship used to produce goods and services

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Land

answer

the physical location where production occurs. Includes bodies of water as well as resources extracted from the earth.

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Labor

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the work done by humans that is used in the production of goods and services.

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Capital

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previously manufactured goods used to make other goods and services

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Entrepreneurship

answer

the process of starting, organizing, managing, and assuming the responsibility for a business

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Market

answer

a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade

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Demand

answer

The quantity of a good or service that consumers are willing and able to purchase at a given price in a given period of time.

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Consumer Demand

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The amount of a good or service a consumer is willing and able to purchase at a range of prices.

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Market Demand

answer

the demand by all the consumers of a given good or service

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Law of Demand

answer

the claim that, ceteris paribus, the quantity demanded of a good falls when the price of the good rises

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Demand Curve

answer

a graph of the relationship between the price of a good and the quantity demanded.The Law of Demand implies that this curve is negatively sloped.

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Determinants of Demand

answer

Anything other than price of the current item that influences consumer buying decisions, including income, tastes and preferences, price of related items (substitutes and complements), number of consumers in the market, and expected future price.

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Supply

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The quantity of a product that producers are willing and able to produce at a given price in a given period of time.

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Market Supply

answer

the total of all individual suppliers' products in a market at a particular time

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Determinants of Supply

answer

Anything other than price of the current item that influences production decisions, including cost of raw materials, cost of labor, level of technology used to produce, number of producers in the market, price of related products, and expected future price.

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Equilibrium

answer

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

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Scarcity

answer

when a price is below equilibrium causing quantity demanded to be greater than quantity supplied

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Surplus

answer

when a price is above equilibrium causing quantity demanded to be less than quantity supplied

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Price Mechanism

answer

price signals which determines allocation of resources through interaction of supply and demand

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Price Elasticity of Demand

answer

The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price.

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Price elastic

answer

The demand for a product is highly responsive to price changes. The range of a demand curve where elasticities of demand are greater than 1.0.

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Price inelastic

answer

The demand for a product is not very responsive to price changes. The range of a demand curve where elasticities of demand are less than 1.0.

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Unit elastic

answer

a given change in price causes a proportional change in quantity demanded. The point of any demand curve where revenue is maximised.

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Perfectly elastic demand

answer

Any increase in price results in all demand being eliminated.

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Perfectly inelastic demand

answer

the case where the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero.

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Cross (Price) Elasticity of Demand

answer

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good.

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Substitutes

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two goods for which an increase in the price of one leads to an increase in the demand for the other. Occurs when XED is a positive value.

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Complements

answer

two goods for which an increase in the price of one leads to a decrease in the demand for the other. Occurs when XED is a negative value.

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Income Elasticity of Demand

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a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

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Normal good

answer

a good for which demand goes up when income is higher and for which demand goes down when income is lower.

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Inferior good

answer

a good that consumers demand less of when their incomes increase. Occurs when yED is a negative value.

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Price Elasticity of Supply

answer

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

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Specific Tax

answer

a fixed amount that is imposed upon a product by the government; it has the effect of shifting the supply curve vertically upwards by the amount of the tax.

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ad valorem tax

answer

an indirect tax where a percentage is added to the selling price of each unit.

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Excise tax

answer

A tax on a good that is often meant to limit consumption of that good.

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Tax incidence

answer

the actual division of the burden of a tax between buyers and sellers in a market

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Subsidies

answer

Government payments given to certain industries to help offset some of their costs of production. It has the effect of shifting the curve vertically downwards.

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Price Ceiling

answer

a maximum price that can be legally charged for a good or service: set below equilibrium

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Price Floor

answer

a legal minimum on the price at which a good can be sold: set above equilibrium

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Consumer Surplus

answer

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

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Producer Surplus

answer

the amount a seller is paid for a good minus the seller's cost of providing it

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Community Surplus

answer

the sum of consumer and producer surplus; the total benefit to society, this is maximised at the equilibrium.

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Allocative Efficiency

answer

the apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal

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Externalities

answer

economic side effects or by-products that affect an uninvolved third party; can be negative or positive

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Positive externality of consumption

answer

When there is a spillover benefit of consuming a good or service onto a third party.

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Positive externality of production

answer

when the production of a good or service creates a benefit to third parties.

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Marginal Private Benefit

answer

The benefit from an additional unit of a good or service that the consumer of that good or service receives.

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Marginal Social Benefit

answer

The true benefit to society of a one unit increase in the production of a good or service

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Marginal Private Cost

answer

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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Marginal Social Cost

answer

the true cost borne by society when the production of a good or service is increased by one unit

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Merit Good

answer

a good or service considered as beneficial for people and that would be under provided by the market and so under consumed

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Demerit Good

answer

a good or service considered to be harmful for people who consume them and society as a whole. If left to the market forces or private enterprise, they would be over-produced and thus over consumed

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Tradable Permits

answer

licenses to emit limited quantities of pollutants that can be bought and sold by polluters (AKA Cap and Trade)

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Deadweight loss

answer

the reduction in economic surplus resulting from a market not being in competitive equilibrium

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Public Good

answer

A good that is neither excludable nor rivalrous in consumption

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Free Rider Problem

answer

tendency for people to refrain from contributing to the common good when a resource is available without requiring any personal cost or contribution

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Common Access Resource

answer

a resource that is owned by no one, but is available to all users at little or no charge

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Sustainability

answer

providing the best outcomes for human and natural environments both in the present and for the future

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Asymmetric Information

answer

situations in which buyers and sellers are not equally well informed about the characteristics of goods and services for sale in the marketplace

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Short Run

answer

a period of time sufficiently short that at least one of the firm's factors of production cannot be varied

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Long Run

answer

A period of sufficient time to alter all factors of production used in the productive process - all inputs can be changed.

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Total Product

answer

all the goods and services produced by a business during a given period of time with a given amount of input

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Law of Diminishing Marginal Returns

answer

As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

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Economic Costs

answer

The total opportunity costs of production to a firm, including the opportunity cost of entrepreneurship.

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Fixed Costs

answer

Costs that do not vary with the quantity of output produced

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Variable Costs

answer

Costs that vary directly with the level of production

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Average Costs

answer

Total Costs divided by quantity. ATC = TC/Q

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Increasing returns to scale

answer

When long-run average total cost declines as output increases. Economies of scale outweigh diseconomies of scale

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Economies of Scale

answer

factors that cause a producer's average cost per unit to fall as output rises in the long run

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Diseconomies of Scale

answer

factors that cause a producer's average cost per unit to rise as output rises in the long run

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Total Revenue

answer

the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold

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Economic profit

answer

Total revenue minus total cost, including both explicit and implicit costs - accounting profit minus the opportunity costs.

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Normal Profit

answer

the payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm

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Profit Maximization

answer

Refers to a firm earning as much sales revenue as possible while, at the same time, keeping costs to a minimum. Profit maximisation is the most common goal for a firm. Occurs at the quantity of output where MR=MC

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Revenue Maximization

answer

An alternative goal of some firms: to produce the output level yielding the highest value of sales (MR=0)

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Growth Maximization

answer

An alternative goal of some firms: to expand output as quickly as possible

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Satisficing

answer

Choosing an option that is acceptable, although not necessarily the best or perfect.

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Perfect Competition

answer

a market structure in which a large number of firms all produce the same product and no single seller controls supply or price and barriers to entry are low

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Necessity Goods

answer

products that have income elasticity between 0 and 1. When consumer income grows, quantity demanded rises by less than the rise in income.

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Luxury Goods

answer

goods that have income elasticities greater than 1. when consumer income grows, quantity demanded of luxury goods rises more than the rise in income

question

Negative externality of consumption

answer

when a good or service consumed by individuals adversely affects third parties

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Negative externality of production

answer

when the production of a good or service adversely affects third parties

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Average product

answer

the average amount produced by each unit of a variable factor of production

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Marginal product

answer

The increase in output that arises from an additional unit of input

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Marginal Cost

answer

the extra cost of producing one more unit of output

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Total Costs

answer

the sum of the fixed and variable costs for any given level of production

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Productive efficiency

answer

the production of a good in the least costly way: occurs at ATC minimum.

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Decreasing returns to scale

answer

when long-run average total cost increases as output increases: diseconomies of scale outweigh economies of scale

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Constant returns to scale

answer

the property whereby long-run average total cost stays the same as the quantity of output changes

question

Average Revenue

answer

Revenue per unit produced. It is calculated by dividing TR by the output. NOTE: This is always equals Price if there is no price discrimination.

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Marginal Revenue

answer

the additional income from selling one more unit of a good; sometimes equal to price

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Shutdown

answer

a short-run decision not to produce anything during a specific period of time because of current market conditions. This would minimize losses for the firm if AVC > AR at Qpm. The firm would only be losing it's fixed costs.

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Operate at a loss

answer

a short-run decision to continue operating in spite of losses. Losses would be minimized with this decision if AR>AVC at Qpm. In other words, the revenue would be paying for all of the variable costs and some portion of the fixed costs.

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Product Differentiation

answer

a strategy that firms use to achieve market power. Accomplished by producing products that have distinct positive identities in consumers' minds.

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