Scarcity
Something is scarce if it has a value in an alternate use.
Law of Demand
An increase in price of good A leads to a decrease in consumption of good A (in other words{demand slopes down)
Complement
Two goods are complements (in consumption) if an increase in the price of one leads to a decrease in the consumption of the other holding all else equal.
Normal Good
A good is a normal good if an increase in income leads to an increase in consumption of that good
Elasticity of Supply
The percentage change in quantity supplied for a one percent change in price
Marginal Utility
The amount utility changes with a change in a good
Marginal Rate of Substitution
measures how much
of x2 you would be willing to give up to get an extra unit of x1. In utility terms, MRS =MU1/MU2, which is the absolute value of the slope of the indifference curve.
Substitution Effect
The effect on consumption of a compensated price change. The substitution
effect involves a movement along an indifference curve to a point where the slope
of the indifference curve is the same as the slope of the new budget line.
Perfect Complement
Two goods such that that if the price of one rises, consumption of the other
falls according to a fixed consumption ratio.
Perfectly Competitive Firm
Firm that is a price taker in input and output markets; Its too small to effect
price; It operates under perfect information
Marginal Productivity of Labor
The change in output from hiring one additional unit of labor assuming that
no other inputs to production change.
Opportunity Cost
the value of a good in its next best use
Inferior Good
amount that it is consumed decreases when income increases
Excess Supply
a surplus, when supply exceeds demand
Incidence
indicates how much of hte tax burden is borne by various market participants
Inelastic Demand
when the absolute value of elasticity is less than 1; when demand is not responsive to price changes
Budget Constraint
identifies all of the consumption bundles a consumer can afford over some period of time
Money Market Utility
the value, measured in $, that indicates the consumer's relative well-being/happiness; higher utility indicates greater overall satisfaction than lower
Indifference Curve
indicates all combinations that have equal utility value, shows that the consumer likes all the alternatives equally well
Perfect Substitutes
Two goods x1 and x2 are perfect substitutes if the consumer's marginal rate of substitution between the two goods is constant
Price-taking firm
does not have the ability to individually affect the
prevailing price in the market for its output. In a perfectly competitive market, all firms are pricetakers.
As a result, each can sell as much as it produces at the market price
Marginal Product of Labor
The marginal product of labor measures how much extra output is produced when the number of workers increases by one (holding all other inputs to production fixed).
Equilibrium
a price and quantity such that there are no forces acting to increase or reduce the equilibrium price; where supply and demand curves intersect
Iso-Quant
identifies all the input combinations that efficiently produce a given amount of output
Production Function
a function of the form Output =
f(Inputs), giving the amount of output a rm can produce from given amounts
of inputs using efficient production methods.
Technological Efficiency
situation where it is impossible
to produce larger output from the same amount of inputs. It implies that inputs
are not wasted
Cost Function
describes the total cost of producing
each possible level of output. It is a function of the form Total Cost = C(Output)
Iso-Cost Line
line that indicates allocation possibilities that all yield the same cost
Marginal Cost
The additional cost incurred by producing one more unit of output
Marginal Revenue Product
Marginal Productivity of Labor multiplied by price; change in revenue that comes from hiring one more unit of labor
Perfectly Competitive Firm
Firm that is a price taker; Its too small to effect price; It operates under perfect information
Fixed Cost
These are costs that must be incurred by a firm to have
any Q. They do not vary with Q.
Producer Surplus
The difference between what producers supply
and the price they actually receive. The level of producer surplus is
the area above the supply curve and below the market price.
Pareto Efficient
impossible to reallocate resources to make someone better off without making someone else worse off
Consumer Surplus
Consumer surplus is diff erence between price paid and marginal willingness
to pay summed over all buyers in the marke
Variable Cost
Variable cost is the part of a fi rm's cost that varies with output.
Income Effect
the change in the consumption of a good that results from a change in income (change budget constraint lines)
Substitution Effect
the effect on consumption of a compensated price change