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Scarcity

answer

A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

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Economics

answer

The study of the choices people make to attain their goals, given their scarce resources.

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Economic model

answer

A simplified version of reality used to analyze real-world economic situations.

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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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Marginal analysis

answer

Analysis that involves comparing marginal benefits and marginal costs.

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Trade-off

answer

The idea that because of scarcity, producing more of one good or service means producing less of another good or service.

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Opportunity cost

answer

The highest-valued alternative that must be given up to engage in an activity.

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Centrally planned economy

answer

An economy in which the government decides how economic resources will be allocated.

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Market economy

answer

An economy in which the decisions of households and firms interacting in markets allocate economic resources.

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Mixed economy

answer

An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.

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Productive efficiency

answer

A situation in which a good or service is produced at the lowest possible cost.

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Allocative efficiency

answer

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit of society equal to the marginal cost of producing it.

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Voluntary exchange

answer

A situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction.

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Equity

answer

The fair distribution of economic benefits.

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Economic variable

answer

Something measurable that can have different values, such as the incomes of doctors.

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Positive analysis

answer

Analysis concerned with what is.

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Normative analysis

answer

Analysis concerned with what out to be.

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Microeconomics

answer

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

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Macroeconomics

answer

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

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Entrepreneur

answer

An entrepreneur is someone who operates a business. In a market system, entrepreneurs decide what goods and services to produce and how to produce them. An entrepreneur starting a new business puts his or her own funds at risk. If an entrepreneur is wrong about what consumers want or about the best way to produce foods and services, the entrepreneur's funds can be lost. This is not an unusual occurrence: In the United States, about half of new businesses close within four years. Without entrepreneurs willing to assume the risk of starting and operating businesses, economic progress would be impossible in a market system.

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Innovation

answer

There is a distinction between an invention and innovation. An invention is the development of a new good or a new process would be impossible in a market process for making a good. An innovation is the practical application of an innovation. (Innovation may also be used more broadly to refer to any significant improvement in a good or in the means of producing a good.) Much time often passes between the appearance of a new idea and its development for widespread use. For example, the Wright brothers first achievement self-propelled flight at Kitty Hawk, North Carolina, in 1903, but the Wright brothers' plane was very crude, and it wasn't until the introduction of the DC-3 by Douglas Aircraft in 1936 that regularly scheduled intercity airline flights became common in the United States. Similarly, the first digital electronic computer - the ENIAC - was developed in 1945, but the first IBM personal computer was not introduced until 1981, and widespread use of computers did not have a significant effect on the productivity effect on the productivity of U.S. business until the 1990s.

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Technology

answer

A firm's technology is the processes it uses to produce goods and services. In the economic sense, a firm's technology depends on many factors, such as the skill of its managers, the training of its workers, and the speed and efficiency of its machinery and equipment.

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Firm, company, or business

answer

A firm is an organization that produces a good or service. Most firms produce goods or services to earn profits, but there are also nonprofit firms, such as universities and some hospitals. Economists use the terms firm, company, and business interchangeably.

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Goods

answer

Goods are tangible merchandise, such as books, computers, or Blu-ray players.

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Services

answer

Services are activities done for others, such as providing haircuts or investment advice.

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Revenue

answer

A firm's revenue is the total amount received for selling a good or service. It is calculated by multiplying the price per unit by the number of units sold.

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Profit

answer

A firm's profit is the difference between its revenue and its costs. Economists distinguish between accounting profit and economic profit. In calculating accounting profit, we exclude the cost of some economic resources that the firm does not pay for explicitly. In calculating economic profit, we include the opportunity cost of all resources used by the firm. When we refer to profit in this book, we mean economic profit. It is important not to confuse profit with revenue.

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Household

answer

A household consists of all personal occupying a home. Households are suppliers of factors of production - particularly labor - used by firms to make goods and services. Households also demand goods and services produced by firms and governments.

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Factors of production or economic resources

answer

Firms use factors of production to produce goods and services. The main factors of production are labor, capital, natural resources - including land - and entrepreneurial ability. Households earn income by supplying to firms the factors of production.

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Capital

answer

The word capital can refer to financial capital or to physical capital. Financial capital includes stocks and bonds issued by firms, bank accounts, and holdings of money. In economics, though, capital refers to physical capital, which includes manufactured goods that are used to produce other goods and services. Examples of physical capital are computers, factory buildings, machine tools, warehouses, and trucks. The total amount of physical capital available in a country is referred to as the country's capital stock.

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Human capital

answer

Human capital refers to the accumulated training and skills that workers possess. For example, college-educated workers generally have more skills and are more productive than workers who have only high school degrees.

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Production possibilities frontier (PPF)

answer

A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.

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Economic growth

answer

The ability of the economy to increase the production of goods and services.

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Trade

answer

The act of buying and selling.

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Absolute advantage

answer

The ability of an individual, a firm, or a country to produce more of a good service than competitors, using the same amount of resources.

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Comparative advantage

answer

The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.

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Product market

answer

A market for goods - such as computers - or services - such as medical treatment.

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Factor market

answer

A market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability.

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Factors of production

answer

The inputs used to make goods and services.

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Circular-flow diagram

answer

A model that illustrates how participants in markets are linked.

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Free market

answer

A market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed.

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Property rights

answer

The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.

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Tariff

answer

A tax imposed by a government on imports.

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Imports

answer

Goods and services bought domestically but produced in other countries.

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Exports

answer

Goods and services produced domestically but sold in other countries.

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Autarky

answer

A situation in which a country does not trade with other countries.

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Terms of trade

answer

The ratio at which a country can trade its exports for imports from other countries.

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External economies

answer

Reductions in a firm's costs that result fro an increase in the size of an industry.

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Perfectly competitive market

answer

A market that meets the conditions of (1) many buyers and seller, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.

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Demand schedule

answer

A table that shows the relationship between the price of a product and the quantity of the product demanded.

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Demand curve

answer

A curve that shows the relationship between the price of a product and the quantity of the product demanded.

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Market demand

answer

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

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Quantity demanded

answer

The amount of a good or service that a consumer is willing and able to purchase at a given price.

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Law of demand

answer

The rule that, holding everything else constant, when the price a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.

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Substitution effect

answer

The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes.

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Income effect

answer

The change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power.

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Ceteris paribus ("all else equal") condition

answer

The requirement that when analyzing the relationship between two variables - such as price and quantity demanded - other variables must be held constant.

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Normal good

answer

A good for which the demand increases as income rises and decreases as income falls.

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Inferior good

answer

A good for which the demand increases as income falls and decreases as income rises.

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Substitutes

answer

Goods and services that can be used for the same purpose.

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Complements

answer

Goods and services that are used together.

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Demographics

answer

The characteristics of a population with respect to age, race, and gender.

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Quantity supplied

answer

The amount of a good service that a firm is willing and able to supply at a given price.

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Supply schedule

answer

A table that shows the relationship between the price of a product and the quantity of the product supplied.

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Supply curve

answer

A curve that shows the relationship between the price of a product and the quantity of the product supplied.

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Law of supply

answer

The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

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Technological change

answer

A positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs.

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Market equilibrium

answer

A situation in which quantity demanded equals quantity supplied.

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Competitive market equilibrium

answer

A market equilibrium with many buyers and many sellers.

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Surplus

answer

A situation in which the quantity supplied is greater than the quantity demanded.

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Shortage

answer

A situation is which the quantity demanded is greater than the quantity supplied.

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Price ceiling

answer

A legally determined maximum price that sellers may change.

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Price floor

answer

A legally determined minimum price that sellers may receive.

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Consumer surplus

answer

The difference between the highest price a consumer is willing to pay for a good or service and the price the consumer actually pays.

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Marginal benefit

answer

The additional benefit to a consumer from consuming one more unit of a good or service.

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Marginal cost

answer

The additional cost to a firm of producing one more unit of a good or service.

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Producer surplus

answer

The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives.

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Economic surplus

answer

The sum of consumer surplus and producer surplus.

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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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Economic efficiency

answer

A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.

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Black market

answer

A market in which buying and selling take place at prices that violate government price regulations.

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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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Externality

answer

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

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Private cost

answer

The cost borne by the production of a good or service.

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Social cost

answer

The total cost of producing a good or service, including both the private cost and any external cost.

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Private benefit

answer

The benefit received by the consumer of a good or service.

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Social benefit

answer

The total benefit from consuming a good or service, including both the private benefit and any external benefit.

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Market failure

answer

A situation in which the market fails to produce the efficient level of output.

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Transactional costs

answer

The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.

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The Coase theorem

answer

The argument of economist Ronald Coase that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities.

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Pigovian taxes and subsidies

answer

Government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities.

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Command-and-control approach

answer

An approach that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices.

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Elasticity

answer

A measure of how much one economic variable responds to changes in another economic variable.

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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.

question

Elastic demand

answer

Demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price, so the price elasticity is greater than 1 in absolute value.

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Inelastic demand

answer

Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1 in absolute value.

question

Unit-elastic demand

answer

Demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value.

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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 0.

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Perfectly elastic demand

answer

The case where the quantity demanded is infinitely responsive to price, and the price elasticity of demand equals infinity.

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Total revenue

answer

The total amount of funds received by a seller of a good or service, calculated by multiplying price per unit by the number of units sold.

question

Cross-price elasticity of demand

answer

The percentage change in quantity demanded of one good divided by the percentage change in the price of another good.

question

Income elasticity of demand

answer

A measure of the responsiveness of quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage change in income.

question

Price elasticity of supply

answer

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

question

Utility

answer

The enjoyment or satisfaction people receive from consuming goods and services.

question

Marginal utility (MU)

answer

The change in total utility a person receives from consuming one additional unit of a good or service.

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Law of diminishing marginal utility

answer

The principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time.

question

Budget constraint

answer

The limited amount of income available to consumers to spend on goods and services.

question

Income effect

answer

The change in the quantity demanded of a good that results from the effect of change in price on consumer purchasing power, holding all other factors constant.

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Substitution effect

answer

The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.

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Network externality

answer

A situation in which the usefulness of a product increases with the number of consumers who use it.

question

Behavioral economics

answer

The study of situation in which people make choices that do not appear to be economically rational.

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Endowment effect

answer

The tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to par to buy the good if they didn't already own it.

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Sunk cost

answer

A cost that has already been paid and cannot be recovered.

question

Indifference curve

answer

A curve that shows the combinations of consumption bundles that give the consumer the same utility.

question

Marginal rate of substitution (MRS)

answer

The rate at which a consumer would be willing to trade off one good for another.

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Technology

answer

The processes a firm uses to turn inputs into outputs of goods and services.

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Short run

answer

The period of time during which at least one of a firm's inputs is fixed.

question

Long run

answer

The period of time in which a firms can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant.

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Total cost

answer

The cost of all the inputs a firm uses in production.

question

Variable costs

answer

Costs that change as output changes.

question

Fixed costs

answer

Costs that remain constant as output changes.

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Explicit cost

answer

A cost that involves spending money.

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Implicit cost

answer

A nonmonetary opportunity cost.

question

Production function

answer

The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs.

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Average total cost

answer

Total cost divided by the quantity of output produced.

question

Marginal product of labor

answer

The additional output a firm produces as a result of hiring one more worker.

question

Law of diminishing returns

answer

The principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline.

question

Average product of labor

answer

The total output produced by a firm divided the quantity of workers.

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Marginal cost

answer

The change in a firm's total cost from producing one more unit of a good or service.

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Average fixed cost

answer

Fixed cost divided by the quantity of output produced.

question

Average variable cost

answer

Variable cost divided by the quantity of output produced.

question

Long-run average cost curve

answer

A curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed.

question

Economies of scale

answer

The situation when a firm's long-run average costs fall as it increases the quantity of output it produces.

question

Constant returns to scale

answer

The situation in which a firm's long-run average costs remain unchanged as it increases output.

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Minimum efficient scale

answer

The level of output at which all economies of scale are exhausted.

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Diseconomies of scale

answer

The situation in which a firm's long-run average costs rise as the firm increase output.

question

Isoquant

answer

A curve that shows all the combinations of two inputs, such as capital and labor, that will produce the same level of output.

question

Marginal rate of technical substitution (MRTS)

answer

The rate at which firm is able to substitute one input for another while keeping the level of output constant.

question

Isocost line

answer

All the combinations of two inputs, such as capital and labor, that have the same total cost.

question

Expansion path

answer

A curve that shows a firm's cost-minimizing combination of inputs for every level of output.

question

Price taker

answer

A buyer or seller that is unable to affect the market price.

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Profit

answer

Total revenue minus total cost.

question

Average revenue (AR)

answer

Total revenue divided by the quantity of the product sold.

question

Marginal revenue (MR)

answer

The change in total revenue from selling one more unit of a product.

question

Shutdown point

answer

The minimum point on a firm's average variable cost curve, if the price falls below this point, the firm shut down production in the short run.

question

Economic profit

answer

A firm's revenues minus all its costs, implicit and explicit.

question

Economic loss

answer

The situation in which as firm's total revenue is less than its total cost, including all implicit costs.

question

Long-run competitive equilibrium

answer

The situation in which the entry and exit of firms has resulted in the typical firm breaking even.

question

Long-run supply curve

answer

A curve that shows the relationship in the long run between market price and the quantity supplied.

question

Monopoly

answer

A firm that is the only seller of a good service that foes not have a close substitute.

question

Copyright

answer

A government-granted exclusive right to produce and sell a creation.

question

Public franchise

answer

A government designation that a firm is the only legal provider of a good or service.

question

Network externalities

answer

A situation in which the usefulness of a product increases with the number of consumers who use it.

question

Natural monopoly

answer

A situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms.

question

Market power

answer

The ability of a firm to charge a price greater than marginal cost.

question

Antitrust laws

answer

Laws aimed at eliminating collusion and promoting competition among firms.

question

Horizontal merger

answer

A merger between firms in the same industry.

question

Vertical merger

answer

A merger between firms at different stages of production of a good.

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