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Buyer

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Someone who purchases goods and services from a seller for money.

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Competition

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Occurs between large numbers of buyers and sellers who vie for the opportunity to buy or sell goods and services.

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Demand

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The amount of goods and services that buyers are willing to purchase.

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Demand Curve

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The graphical representation of the relationship between quantities of goods and services that buyers are willing to purchase and the price of those goods and services.

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Elastic

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A supply or demand curve which is relatively responsive to changes in price.

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Elasticity

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The degree of responsiveness a curve has with respect to price. If quantity changes easily when price changes, then the curve is elastic; if quantity doesn't change easily with changes in price, the curve is inelastic. The numerical equation to determine elasticity is: Elasticity = (% Change in Quantity)/(% Change in Price)

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Equilibrium Price

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The price of a good or service at which quantity supplied is equal to quantity demanded.

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Equilibrium Quantity

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Amount of goods or services sold at the equilibrium price.

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Goods and Services

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Products or work that are bought and sold

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Inelastic

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Describes a supply or demand curve which is relatively unresponsive to changes in price.

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Long Run

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The distant future, for which buyers and sellers make "permanent" decisions, such as exiting the market or permanently decreasing consumption.

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Market

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A large group of buyers and sellers who are buying and selling the same good or service.

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Market Economy

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An economy in which the prices and distribution of goods and services are determined by the interaction of large numbers of buyers and sellers who have no significant individual impact on prices or quantities.

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Market Equilibrium

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Point at which quantity supplied and quantity demanded are equal, and prices are market-clearing prices, leaving no surplus or shortage.

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Market-Clearing Price

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The price of a good or service at which quantity supplied is equal to quantity demanded. Also called the equilibrium price.

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Seller

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Someone who sells goods and services to a buyer for money.

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Shortage

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Situation in which the quantity demanded exceeds the quantity supplied for a good or service; in such a situation, the price of a good is below equilibrium price.

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Short Run

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The immediate future, for which buyers and sellers make "temporary" decisions, such as shutting down production or increasing consumption, for the time being.

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Supply

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Refers to the amount of goods and services that sellers are willing to sell. Typically, supply increases with increases in price, this trend can be graphically represented with a supply curve

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Supply Curve

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Graphical representation of the relationship between quantities of goods and services that sellers are willing to sell and the price of those goods and services.

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Surplus

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Situation in which the quantity supplied exceeds the quantity demanded for a good or service; in this situation, the price of a good is above equilibrium price.

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Unit Elastic

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Describes a supply or demand curve which is perfectly responsive to changes in price. That is, the quantity supplied or demanded changes according to the same percentage as the change in price. A curve with an elasticity of 1= this

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Gini Coefficient

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Numerical measurement between 0 and 1 of income equality; calculated by dividing the area between the Lorenz curve and the equal distribution curve by the area beneath the equal distribution curve.

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Income Distribution

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Refers to how evenly the total amount of income in an economy is divided between members of the workforce.

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Income Mobility

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Refers to the ease with which members of the workforce can move between levels of economic prosperity.

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In-Kind Transfer

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Indirect means of redistributing income; gives low income workers goods or vouchers for goods instead of giving them direct cash payments.

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Lorenz Curve

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Curve that plots out the cumulative percentage of income earned by segments of the workforce, as compared to a straight-line curve that represents perfectly equal income distribution. Used to calculate the Gini coefficient.

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Pure Monopoly

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A firm that satisfies the following conditions: 1.It is the only supplier in the market. 2.There is no close substitute to the output good. 3.There is no threat of competition.

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Natural Monopoly

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A firm with such extreme economies of scale that once it begins creating a certain level of output, it can produce more at a lower cost than any smaller competitor. Generally characterized by a declining average cost curve.

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Economies of Scale

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Savings acquired through increases in quantity produced. Oftentimes, large firms in industries with high fixed costs can take advantage of savings that smaller firms cannot.

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Price Taker

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An agent who takes prices as given. For instance, a firm who faces a perfectly flat demand curve has no choice but to sell at one price.

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Perfect Competition

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A market operates under perfect competition if it satisfies the following conditions: 1.Numerous firms 2.Freedom of entry and exit 3.Homogeneous output 4.Perfect information

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Deadweight Loss

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The dollar amount of social surplus that goes unrealized as compared to the socially optimal solution.

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Price Setter

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The opposite of a price taker; a price setter has the power to set prices. For instance, a firm who faces a downward sloping demand curve can choose price.

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Socially Optimal

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Describes points at which social surplus is maximized, social surplus being the combined utilities of the firms and the public.

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Oligopoly

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A market dominated by a small number of firms. At least several of these firms are large enough to influence the market price.

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Duopoly

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A market dominated by two firms. Both firms are large enough to influence the market price.

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Cournot Duopoly

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A model of duopolies under which two firms simultaneously choose the quantity to produce.

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Stackelburg Duopoly

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A model of duopolies under which two firms choose the quantity to produce with one firm choosing before the other in an observable manner.

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Bertrand Duopoly

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A model of duopolies under which two firms simultaneously choose the price for a good.

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Cartel

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A small number of independent firms who act together to set monopoly prices and make monopoly profits.

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Public Information

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Information known to everyone.

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Reaction Curve

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A function that takes as input the moves of the other players and returns the optimal move given the other players' moves.

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Nash Equilibrium

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An equilibrium in which all players are playing their best responses to everyone else's best response.

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Aggregate Demand

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The combined demand of all buyers in a market.

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Aggregate Supply

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The combined supply of all sellers in a market.

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Complementary Good

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A good is called a complementary good if the demand for the good increases with demand for another good. One extreme example: right shoes are complementary goods for left shoes.

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Firm

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Unit of sellers in microeconomics. Because it is seen as one selling unit in microeconomics, a firm will make coordinated efforts to maximize its profit through sales of its goods and services. The combined actions and preferences of all firms in a market will determine the appearance and behavior of the supply curve.

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Horizontal Addition

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The process of adding together all quantities demanded at each price level to find aggregate supply or aggregate demand.

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Household

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Unit of buyers in microeconomics. Because it is seen as one buying unit in microeconomics, a household will make coordinated efforts to maximize its utility through its choices of goods and services. The combined actions and preferences of all households in a market will determine the appearance and behavior of the demand curve.

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Labor Market

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A large group of firms and workers in the same industry: the firms want to hire workers, the workers want jobs. The interaction between the two groups determines the market wage and quantity of labor used.

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Law of Diminishing Returns

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Concept that the marginal revenue derived from additional units of labor decreases as quantities of labor increases.

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Marginal Product

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The additional amount of goods generated by using one more unit of work.

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Marginal Revenue Product

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The additional income generated by using one more unit of input.

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Optimization

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To maximize utility by making the most effective use of available resources, whether they be money, goods, or other factors.

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Price Ceiling

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Maximum price set by the government on a specific good. Usually is set below market price, causing a shortage.

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Price Floor

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Minimum price set by the government on a specific good. Usually is set above market price, causing a surplus.

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Revenue

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The income a firm makes from selling its products. Revenue as equal to price per unit times quantity sold, (P)x(Q).

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Budget Constraint

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Outermost boundary of possible purchase combinations that a person can make given how much money they have and the price of the goods in consideration.

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Income Effect

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The effects of changes in prices on consumption. According to the income effect, an increase in price causes a buyer to feel poorer, lowering the quantity demanded, and vice versa. Although the buyer's actual income hasn't changed, the change in price makes the buyer feel as if it has.

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Indifference Curve

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Graphical representation of different combinations of goods and services that give a consumer equal utility or happiness.

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Normal Good

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A good for which an increase in income causes an increase in demand, and vice versa.

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Substitution Effect

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Describes the effects of changes in relative prices on consumption. According to the substitution effect, an increase in price of one good causes a buyer to buy more of the other, substituting good, since the first good has become relatively expensive with respect to the second good, and vice versa. The buyer substitutes consumption of the second good for consumption of the first.

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Utility

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An approximate measure for levels of "happiness."

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Giffen Good

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Theoretical case in which an increase in the price of a good causes an increase in quantity demanded.

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Expected Value

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How much a buyer thinks that a good or investment will be worth after a time lapse, based on the probabilities of different possible outcomes. Usually refers to stocks and other uncertain investments.

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Inferior Good

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A good for which quantity demanded decreases with increases in income.

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Marginal Utility

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Additional utility derived from each additional unit of goods acquired.

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Microeconomics

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Subfield of economics which studies how households and firms behave and interact in the market.

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Resource

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A supply of capital that can be used in an economy. Because resources are scarce, however, there is not enough to go around.

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Risk

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Refers to the amount of variation in possible payoffs. A very risky investment will have wide variation in possible payoffs, but might have a higher expected value; a less risky investment will have a more predictable payoff, but a lower expected value.

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Risk Averse

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Refers to a buyer who is unwilling to invest in an investment with wide variation in possible payoffs. Someone who is risk-averse might even refuse to invest in something with a positive expected value if the variation in possible outcomes is too great.

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Risk Loving

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Refers to a buyer who is willing to invest in an investment with wide variation in possible payoffs, in the hopes of getting a large return. In extreme cases, a risk lover might even invest in something with a negative expected value.

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Risk Neutral

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Refers to a buyer who does not care about variation in possible payoffs. A risk-neutral buyer will invest in any investment with a positive expected return, regardless of how risky it is.

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Scarcity

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Goods, services, or resources are scarce if there is not enough for everyone to have as much as they would like.

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Substitute Good

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Refers to a good which is to some extent interchangeable with another good, meaning that when the price of one good increases, demand for the other good increases.

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Average Fixed Cost

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Average amount of fixed costs incurred per unit of goods produced. Is equal to Total Fixed Costs divided by quantity sold, TFC/q.

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Average Revenue

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Average amount of income generated per unit of goods sold. Is equal to Total Revenue divided by quantity sold, TR/q.

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Average Variable Cost

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Average amount of variable costs incurred per unit of goods produced. Is equal to Total Variable Costs divided by quantity sold, TVC/q.

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Total Cost

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All of the money a firm has to pay in order to be able to sell its products. Includes total variable costs and total fixed costs.

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Total Fixed Costs

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All costs which do not vary with quantity produced that a firm has to pay in order to produce and sell its goods. Example: rent.

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Total Revenue

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All of the income a firm makes from selling its products. Is equal to price per unit times quantity sold, (P)x(Q).

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Total Variable Costs

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All costs which vary with quantity produced that a firm has to pay in order to produce and sell its goods. Example: materials used in production.

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Positive Statement

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Describes a relationship, could use data to confirm or refute

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Normative Statement

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A value judgement, cannot be confirmed or refuted

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