economics
the study of how people make choices under conditions of scarcity and of the results of those choices for society
Cost-Benefit Principle
an action should be taken if, and only if, its benefits exceed its costs
economic surplus
the difference between the benefit gained and the cost incurred of taking an action
oppurtunity cost
The value of what is given up when you choose one option over another.
marginal cost
the increase in total cost that arises from an extra unit of production
marginal benefit
the additional benefit to a consumer from consuming one more unit of a good or service
demand curve
a curve that shows the relationship between the price of a product and the quantity of the product demanded
substitution effect
when consumers react to an increase in a good's price by consuming less of that good and more of other goods
income effect
the change in consumption resulting from a change in real income
buyer's reservation price
the largest dollar amount the buyer would be willing to pay for a good
supply curve
a graph of the relationship between the price of a good and the quantity supplied
equilibrium price
the price at which the quantity demanded equals the quantity supplied
equilibrium quantity
the quantity supplied and the quantity demanded at the equilibrium price
market equilibrium
a situation in which quantity demanded equals quantity supplied
excess supply (surplus)
Occurs when the quantity of a good demanded is smaller than the quantity supplied.
excess demand
The situation that exists when demand is greater than supply.
equilibrium
increase in quantity demanded
movement down the curve (to the right)
increase in demand
a rightward shift of the demand curve
Increase in quantity supplied
movement up the curve (to the right)
increase in supply
a rightward shift of the supply curve
normal goods
goods that consumers demand more of when their incomes rise
inferior good
a good that consumers demand less of when their incomes increase
Factors that cause a change in demand
1. changes in consumer income
2. changes in the number of consumers in the market
3. changes in the price of a related good
4. changes in expectations
5. demographic changes
6. changes in consumer tastes and preferences
Factors that cause a change in supply
1. changes in resource prices
2. changes in technology
3. elements of nature and political disruptions
4. changes in taxes
buyer's surplus
the difference between the buyer's reservation price and the price he or she actually pays
seller's surplus
the difference between the price received by the seller and his or her reservation price
socially optimal quantity
the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good
economic efficiency
wise use of available resources so as to obtain the greatest benefits possible
reservation price
the maximum price a consumer is willing to pay for a product or service based on the total perceived consumer benefits