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Economics

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Study of how we handle scarcity and study of how we exchange goods and services.

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Positive economics

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Objective economic analysis

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Normative economics

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Non-objective, expresses value judgements.

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Scarcity

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The idea that explains that nothing is unlimited- money, resources, labor, time- except our wants.

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Ceteris paribus

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All else being equal

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Trade-offs

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Created by scarcity- what you give up when you make a decision

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Macroeconomics

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branch of economics that handles larger scales- nation-wide, international, and large corporate economies.

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Aggregate data

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A set of data that is created from several others.

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Microeconomics

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Branch of economics that handles smaller scales- cities or small companies.

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Marginal

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Additional.

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Circular flow model

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The diagram that shows how everything and everyone is connected. All money that you spend will somehow go back to something you get. Government, households, companies, and the rest of the world are involved. Markets include factor markets, product markets, and financial markets.

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Full employment

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All available resources are being used.

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Full production

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All resources being used in order to provide maximum fulfillment for our unlimited wants.

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Factors of production

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Land, labor, capital and entrepreneurship-- everything involved in production.

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Productive resources

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Anything that adds value to a company.

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Land

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Any resource that comes from the world- grass, oil, mud, anything.

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Labor

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The physical work that goes toward production

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Capital

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The money and other resources that are required to produce.

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Entrepreneurship

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The knowledge and innovation required to produce.

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Economic growth

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the increasing ability of the economy to satisfy the wants of people.

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Economic system

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The relationship between people, the government, businesses, and the rest of the world. Ex. tradition, command, market economies

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Traditional economy

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Barter and agriculture- maintaining the economic ways of traditional villages.

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Market economy

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People choose-- basic questions of production are decided BY a firm.

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Consumer vs. capital goods

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Consumer goods are used by customers for personal use. Capital goods are used to produce other goods.

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Demand (curve)

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Graph showing how the demand changes with price.

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Supply (curve)

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Graph showing how the supply changes with price.

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Surplus

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More produced than purchased- the amount leftover.

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Shortage

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Less produced than purchased- the amount needed to fulfill everyone's wants and needs.

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Demand schedule

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Lists the the price at which a consumer will purchase a certain amount of a product - lists the values that are illustrated in the demand curve.

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Supply schedule

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Lists the the price at which a firm will produce a certain amount of a product - lists the values that are illustrated in the supply curve.

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Equilibrium price

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The price at which the supply and demand curve intersect.

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Equilibrium quantity

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The quantity at which the supply and demand curve intersect.

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Quantity demanded

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A specific point on the demand curve.

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Factors of demand

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What influences the demand curve- price, income, substitutes, tastes and preferences, expectations, and number of consumers.

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Change in demand (curve)

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The demand curve will shift to the left (decrease) or right (increase) when the entire set of data changes- people are willing to buy more/less quantities at ALL prices.

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Change in quantity demanded

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The change in a point on the demand curve- movement along the curve.

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Law of supply

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Producers will be more willing to produce the higher the price, and less willing to produce with a lower price.

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Factors of supply

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Price of inputs, technology, producer expectations, number of producers

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Change in supply curve

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A shift of the entire curve- the willingness of producers to produce at different prices change, not the price itself.

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Quantity supplied

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A specific point on the supply curve

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Change in quantity supplied

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A change in the point on the graph- a change in the price being charged and therefore quantity being supplied, but not the whole graph.

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Price ceiling

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A maximum amount that can be charged for a specific product- enforced by the government.

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Price floor

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A minimum amount that can be charged for a specific product- enforced by the government.

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Normal goods

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The products that you would buy more of if you had enough money.

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Inferior goods

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The goods that you only buy as a necessity, because you can't afford normal goods.

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Cost of production

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A theory that the price is determined by the price of the inputs.

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Profit expectations

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What a company expects to make- effects supply

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substitute good

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A good that can be used in place of another. This effects the demand of a product.

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Rationing function of price

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The idea of 'the higher the price, the less consumed' used to ration goods.

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Complementary goods

answer

Goods that can be used in conjunction with others. For example, the cost of shoe laces will effect the demand of shoes.

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Market clearing price

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A low price, one that will help all items be sold.

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Qs = Qd

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When quantity supplied equals quantity demanded- equilibrium

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Command economy

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Everything is controlled by the government- basic questions of production are decided for a firm.

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Opportunity cost

answer

The next best thing that you gave up in making a decision.

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Law of demand

answer

Consumers buy more with a lower price, and less with a higher price.

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Price elasticity of demand

answer

Can show the 'importance' of a product- a measure used to show the elasticity of the quantity demanded of a product to a change in it's price.

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Elastic demand

answer

if the price goes up drastically, the quantity demanded will fall drastically. 'unimportant'.

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Inelastic demand

answer

changes in price have little effect on the quantity demanded-- 'important' product.

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Unit elasticity

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When an increase in price causes the same percent decrease in quantity demanded, and total revenue remains unchanged.

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Perfectly elastic demand

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Any change in price, no matter how small, will result in the demand going to zero.

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Total revenue test

answer

A test for the elasticity of a product

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Mid-point formula for elasticity

answer

Another method of calculating elasticity

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Price elasticity of supply

answer

Responsiveness of quantity supplied to a change in price.

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Market period

answer

Period of time in which the inputs are fixed, and the quantity of output is fixed.

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Short run

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A period of time short enough that at least one input is fixed.

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Long run

answer

All quantities can be varied.

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Cross elasticity of demand

answer

Responsiveness of good x to a change in price of good y.

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Income elasticity

answer

measures the relationship between a change in qd of good X and a change in income.

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Black market

answer

A market which operates outside a formal one.

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Income effect

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The change in consumption resulting from a change in real income.

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Substitution effect

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As prices rise, or incomes fall, consumers will replace items with less expensive ones (normal goods with inferior goods)

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Utility

answer

Total satisfaction received from consuming a good or service.

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Total utility

answer

Aggregate sum of satisfaction received from consuming a good or service.

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Marginal utility

answer

Additional satisfaction gained from an additional unit of a good or service.

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Law of Diminishing Marginal Utility

answer

As a person increases consumption, the additional satisfaction gained from an additional unit of a good or service will decrease.

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Rational behavior

answer

Decision making process that involves making decision based on gaining the most satisfaction.

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Budget constraint

answer

Limitations presented by limited resources.

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Utility maximizing rule

answer

To get the most satisfaction, you should spend money so that the last dollar spent on each good or service gives the same marginal utility.

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Consumer surplus

answer

The difference between the amount they would be willing to spend and the amount they actually spent.

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Producer surplus

answer

The difference between the amount they would be willing to sell and the amount they actually sold for.

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Perfectly inelastic demand

answer

Changes in price do not effect demand in any way.

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Explicit cost

answer

monetary, obvious costs

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Implicit cost

answer

Non-monetary costs, including the opportunity cost.

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Normal profit

answer

When economic profit is zero.

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Economic profit

answer

Accounting profit, (monetary), and opportunity cost, etc.

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Fixed costs

answer

Costs that do not change- must be paid.

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Variable costs

answer

Costs that can vary with the output level.

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Total costs

answer

Variable Costs plus Fixed Costs

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Average fixed costs (AFC)

answer

Total Fixed Costs divided by units of output.

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Average variable costs (AVC)

answer

Total variable costs divided by units of output.

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Marginal costs (MC)

answer

Additional costs incurred by an additional unit of output.

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Total product curve (TP)

answer

Shows the relationship of inputs and outputs in the short run.

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Marginal product curve (MP)

answer

Shows the relationship of marginal product and quantity of variable output.

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Average product (AP)

answer

Total product divided by quantity of variable input.

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Law of Diminishing Marginal Returns

answer

Says that there is a point when an additional unit of input will not return as much additional satisfaction as the input before.

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Economies of scale

answer

Cost advantages gained by the expansion of a business.

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Diseconomies of scale

answer

Cost disadvantages of a larger company.

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Constant returns to scale

answer

Refers to changes in output resulting from a proportional change in all inputs.

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Pure (perfect) competition

answer

Doesn't exist- a system in which price is completely determined by the market.

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Pure monopoly

answer

Only one firm- they set the price and if someone wants their product or service, they must get it from the monopolistic company.

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Monopolistic competition

answer

Several firms sell differentiated products

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Oligopoly

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A few firms producing the same product.

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Imperfect (not impure!) competition

answer

No rigid rules- include monopoly, oligopoly, monopolistic competition, monopsony and oligopsony.

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Price taker

answer

A firm that 'takes' the market-set price in a type of competition like pure competition.

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Average revenue

answer

Total revenue per unit of output.

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Total revenue

answer

Total money received from a sale.

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MC=MR rule

answer

MR must equal MC in order for a firm to cover their fixed costs.

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Short-run supply curve

answer

Shows the relationship between quantity supplied and market price.

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Long-run supply curve

answer

Describes the response of the quantity supplied to a change in price.

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Constant cost industry

answer

Occurs because the entry of new firms does not affect the long run average cost curve of firms

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Increasing cost industry

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Occurs because the entry of new firms causes the long-run average cost curve of a firm to shift up.

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Productive efficiency

answer

Occurs when the economy is utilizing all resources.

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Allocative efficiency

answer

Occurs when the value customers put on a good or service equals the cost of the input of that good or service.

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Break-even point

answer

The point at which a company can only cover their fixed costs, but not their variable costs. The company will not stay in business if they stay at this point in the long term, but it covers short-term costs.

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Market power

answer

The ability of a firm to alter the price of a good or service.

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Barriers to entry

answer

Obstacles to entering a market. Includes government regulations, economic factors, and marketing conditions.

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Price discrimination

answer

Sales of identical products are sold at different prices

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Perfect price discrimination

answer

When a producer pays the maximum amount a consumer was willing to pay.

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Natural monopoly

answer

A monopoly that occurs naturally and isn't enforced. For example, gas or electric companies.

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Regulation of monopoly pricing

answer

A monopoly is the only seller of a product, so they could, theoretically, charge way above what is fair. The government, therefore, regulates monopoly pricing.

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Socially optimal price

answer

Where social marginal cost = social marginal benefit

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Fair-return price

answer

Price= ATC

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Non-price competition

answer

Situation where competitors can't lower prices, so they use other things to market like quality, service, etc.

question

Homogeneous oligopoly

answer

An oligopoly with identical products.

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Differentiated oligopoly

answer

An oligopoly with differentiated products.

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Mutual interdependence

answer

All firms are price takers and they work together to establish a price.

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Concentration ratio

answer

Total output produced in an industry by a given number of firms in the industry.

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Herfindahl index

answer

Used to measure market concentration.

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Game theory

answer

A mathematical method to decision-making.

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Collusion

answer

Rival companies cooperate for mutual benefit.

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Kinked demand model

answer

The idea that a firm will face two market demand curves.

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Cartel

answer

Multiple firms coming together, agreeing to keep prices high, in order to all gain more money.

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Price leadership

answer

A firm that is a leader in the industry determines the price and others follow.

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Product differentiation

answer

A marketing strategy that shows the differences in products.

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Prisoners' dilemma

answer

Complex idea that two prisoners, in different rooms, are offered a deals. If both prisoners stay silent, they both only get one month. If they both confess, they both get 3 months. The dilemma comes when one confesses and the other doesn't. The one that confesses goes free, and the other gets 1 year.

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Dominant strategy

answer

Occurs in game theory when one strategy is better than another, no matter what the other person does.

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Nash equilibrium

answer

A set of strategies in which no player can do better by unilaterally changing the strategy.

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Tit for tat strategy

answer

Strategy in which one of the players repeats the action of the other.

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Nominal wage

answer

Wages in units of currency, not adjusted for inflation.

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Real wage

answer

Wages that have been adjusted for inflation.

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monopsony

answer

Market type in which there are multiple sellers, but only one buyer.

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bilateral monopoly

answer

Market type in which there is one seller and one buyer.

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Derived demand

answer

demand for one good or service occurs as a result of demand for another.

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Marginal product

answer

additional output created from an additional unit of input

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Marginal revenue product (MRP)

answer

change in revenue that results from an additional unit when all else is kept equal.

question

Value of marginal product

answer

price of an output times additional output created from an additional unit of input.

question

Marginal resource cost (MRC)

answer

Increase in price of a resource = change in cost of resource / change in quantity of resource

question

MRP = MRC rule

answer

A company should have the quantity of a resource where MRP=MRC

question

Output effect

answer

impact of an increase in production on the utilization of a specific input.

question

Least cost combination of resources

answer

when the last dollar spent yields the same marginal product.

question

Profit maximizing combination of resources

answer

When each resource is employed to the point at which its mrp= resource price.

question

Marginal productivity theory of income distribution

answer

the idea that income is distributed according to contribution to society's output.

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investment in human capital

answer

such as training or college- spending money on a person in order to make them better, so they will make the money back quickly.

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Free riders

answer

People who don't pay, but still get the benefits.

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Private good

answer

Excludable and no shared consumption

question

Public good

answer

Non-excludable and shared consumption.

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Excludable goods

answer

Those who don't pay, can't use.

question

Non-excludable goods

answer

If someone doesn't pay, the can still use the service. Ex: highways or streetlights, even non-tax payers can enjoy the benefits.

question

Pigouvian taxes

answer

A government tax on companies that create negative externalities in order to force them to produce less.

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External cost (negative externality)

answer

A third party suffers the negative aspect of a firm producing or consumer consuming.

question

External benefit (positive externality)

answer

A third party gets the benefits of a firm producing or consumer consuming.

question

Coase Theorem

answer

States that two parties should be able to solve problems created by an externality if they negotiate.

question

Benefits principle

answer

The amount you benefit from programs like welfare, etc. determines what you pay.

question

Ability to pay principle

answer

The ability to pay taxes determines how much you pay- the more you make, the more you pay.

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Proportional tax

answer

No matter how much you make, you pay the same percentage rate.

question

Progressive tax

answer

The more you make, the higher percentage you pay.

question

Regressive tax

answer

The more you make, the less percent rate you pay.

question

Lorenz curve

answer

a graphical way of showing income inequality

question

Marginal social cost of pollution

answer

How much people suffer from the pollution

question

Marginal social benefit of pollution

answer

The benefits people receive from the cause of the pollution

question

Socially optimal level of pollution

answer

Where MSC=MSB

question

Internalize the externality

answer

Making a change in the private costs to change the social costs or benefits.

question

Tradable emissions permits

answer

Firms are given permits to be allowed to emit a certain amount of pollution- used to regulate the pollution emission.

question

Pigouvian subsidy

answer

Given to firms that produce positive externalities.

question

Industrial policy

answer

government-sponsored policy to progress technology, etc.

question

Rival in consumption

answer

Only one person can use at a time.

question

Non-rival in consumption

answer

One person's use doesn't prevent another person from using a good or service, too. Ex: movies or streetlights

question

Common (pool) resource

answer

Everyone can use it, so it's not as well taken care of.

question

Tax efficiency

answer

Attempt to minimize tax liability.

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Tax fairness/equity

answer

tax platforms that aims to be fair, clear and equivalent for all payers.

question

Tax base

answer

Assessed value of a set of assets or one asset that is subject to taxation.

question

Marginal tax rate

answer

Amount of tax paid on an additional dollar of income.

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Distribution of income

answer

Illustrates how much different groups of people make and how off that is from the line of equality.

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Poverty line

answer

Below this, a family is living in poverty.

question

Negative income tax

answer

Income subsidies are given to families under the poverty line.

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