scarcity
unlimited wants exceed the limited resources available to fulfill those wants
trade-off
the idea that, because of scarcity, producing more of one good or service means producing less of another good or service
opportunity cost
the highest-valued alternative given up in order to engage in some activity
centrally planned economy
an economy in which the government decides how economic resources will be allocated
market economy
an economy in which the decisions of households and firms interacting in markets allocate economic resources
market
a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
mixed economy
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
productive efficiency
a situation in which a good or service is produced at the lowest possible cost
allocative efficiency
a state of the economy in which production is in accordance with consumer preferences (MB=MC)
the four factors of production
labor, capital, natural resources, and entrepreneurial ability
positive analysis
analysis concerned with what is
normative analysis
analysis concerned with what ought to be
Production Possibilities Frontier
a curve showing the maximum attainable combinations of two goods that can be produced with available resources and current tech
absolute advantage
the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources
comparative advantage
the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors
comparative advantage sources
climate and natural resources, relative abundance of labor and/or capital, technological differences, external economies
terms of trade
ratio at which a country can trade its exports for imports from other countries
utility
the enjoyment or satisfaction that people receive from consuming goods or services
law of diminishing marginal utility
the principle that consumers experience diminishing additional satisfaction as they consumer more of a good or service during a given period of time
budget constraint
the limited amount of income available to consumers to spend on goods and services
marginal utility per dollar spent
the rate at which the item allows the consumer to transform money into utility
marginal rate of substitution (MRS)
rate at which the consumer is willing to trade off one product for another, while keeping the consumer's utility constant
indifference curve
a curve showing the combinations of consumption bundles that give the consumer the same utility
income effect
the change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing
normal goods
those we consume more as our income rises
inferior goods
consume less when income rises
substitution effect
the change in the quantity demanded of a good that results from a change in price making the good more or less expensive related to other goods
network externalities
situations in which the usefulness of a product increases with the number of consumers who use it
elasticity
a measure of how much one economic variable response to changes in another economic variable
elastic
describes demand that is very sensitive to a change in price
inelastic
Describes demand that is not very sensitive to a change in price
perfectly inelastic
quantity does not respond at all to changes in price (E=0), vertical line
perfectly elastic
horizontal line, E=infinity
cross price elasticity
measures the strength of substitute or complement relationships between goods
income elasticity
measure of the responsiveness of the quantity demanded to changes in income
consumer surplus
the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays
producer surplus
the difference between the lowest a firm would be willing to accept for a good or service and the price it actually recieves
marginal cost
the additional cost to a firm of producing one more unit of a good or service
deadweight loss
the reduction in economic surplus resulting from a market not being in competitive equilibrium
price ceiling
a legally determined maximum price that sellers may charge
price floor
a legally determined minimum price that sellers may receive
per-unit taxes
taxes assessed as a particular dollar amount on the sale of a good or service, as opposed to a percentage tax
tax incidence
the actual division of the burden of a tax between buyers and sellers in a market
externality
a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service
the Coarse Theorem
private parties could solve the externality problem through private bargaining
transaction costs
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
Pigovian taxes and subsides
the use of government taxes and subsidies in bringing about an efficient level of output in the presence of externalities
rivalry
the situation that occurs when one person's consumption of a unit of a good means no one else can consume it
excludability
the situation in which anyone who does not pay for a good cannot consume it
technology
the processes a firm uses to turn inputs into outputs of goods and services
variable costs
costs that change as output changes
fixed costs
costs that remain constant as output changes
explicit cost
a cost that involves spending money
implicit cost
a non-monetary opportunity cost
perfect competition
many firms, identical products, high ease of entry
monopolistic competition
many firms, differentiated products, high ease of entry
oligopoly
few firms, either same or different products, low ease of entry
monopoly
one firm, unique products, entry blocked