Economic Variable
Something measurable that can have different values, such as the wages of software programmers
Positive Analysis
analysis concerned with what is
Normative Analysis
analysis concerned with what ought to be
Demand Schedule
a table that shows the relationship between the price of a good and the quantity demanded
Quantity Demanded
the amount of a good or service that a consumer is willing and able to purchase at a given price
Demand Curve
a graph of the relationship between the price of a good and the quantity demanded
Market Demand
the demand by all consumers of a given good or service
Demographics
the characteristics of a population with respect to age race, and gender
Quantity Supplied
the amount of a good that sellers are willing and able to sell
Supply Curve
a graph of the relationship between the price of a good and the quantity supplied
Law of Supply
Increases in price leads to an increase in quantity supplied, Decrease in price causes decrease in quantity supplied
Technological Change
a positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs
Surplus
a situation in which the quantity supplied is greater than the quantity demanded
Shortage
A situation in which the quantity demanded is greater than the quantity supplied
Price ceiling
A legally determined maximum price that sellers may charge
Price floor
A legally determined minimum price that sellers may recieve
Consumer Surplus
The difference between the highest price a consumer is willing to pay for a good or service and the price the consumer actually pays
Marginal Benefit
The benefit to a consumer from consuming on more unit of a good or service
Marginal Cost
The additional cost of producing one more unit of a good or service
Producer surplus
The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives
Economic Surplus
The sum of consumer surplus and producer surplus
Deadweight Loss
The reduction in economic surplus resulting from a market not being in competitive equilibrium
Economic Efficiency
A market outcome in which the marginal benefit to consumers of the last unit produced is equal to it's marginal cost of production in which the sum of consumer surplus and producer surplus is maximized
Tax incidence
The actually division of the burden of a tax between buyers and sellers in a market
Elasticity
A measure of how much one economic variable responds to changes in another economic variable.
Price elasticity of demand
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
Elastic Demand
the percentage change in quantity demanded is greater than the percentage change in price
Inelastic Demand
the percentage change in quantity demanded is less than the percentage change in price.
Perfectly Inelastic demand
the case where the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero.
Perfectly elastic demand
the case where the quantity demanded is infinitely responsive to price, and the price elasticity of demand equals infinity.
Total revenue
the total amount of money a firm receives by selling goods or services
Cross-price elasticity of demand
the percentage change in quantity demanded of one good divided by the percentage change in the price of another good.
Utility
The enjoyment or satisfaction people receive from consuming goods and services
Marginal Utility
The change in total utility a person receives from consuming one additional unit of a good or service
Law of diminishing marginal utility
The principle that consumers experience diminishing additional satisfaction as they consume 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 or services
Network externalities
A situation in which the usefulness of a product increases with the number of consumers who use it
Behavioral economics
The study of situations in which people make choices that do no appear to be economically rational
Opportunity Cost
The highest valued alternative that must be given up to engage in an activity
Endowment effect
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 pay to buy the good if they didn't already own it
Sunk Cost
A cost that has already been paid and cannot be recovered
Marginal rate of substitution
The rate at which a consumer would be willing to trade off one good for another.
Technology
The processes a firm uses to turn inputs into outputs of goods and services
Technological change
A change in the ability of a firm to produce a given level of output with a given quantity of inputs
Short run
The period of time during which at least one of a firm's inputs is fixed
Long run
The period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of it's physical plant
Total cost
The cost of all the inputs a firm uses in production
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 nonmonetary opportunity cost
Production function
The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs
Marginal product of labor
The additional output a firm produces as a result of hiring one more worker
Law of diminishing returns
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
Average product of labor
The total output produced by a firm divided by the quantity of workers.
Marginal cost
The change in a firm's total cost from producing one more unit of a good or service
Long-run average cost curve
A curve showing the lowest cost at which a firm is able to produce a given quantity of outputs in the long run, when no inputs are fixed
Economics of scale
The situation when a firm's long-run average costs fall as it increases output
Constant returns to scale
The situation when a firm's long-run average costs remain unchanged as it increases output
Minimum efficient scale
The level of output at which all economics of scales are exhausted
Diseconomies of scale
The situation when a firm's long-run average cost rise as the firm increases output
Marginal rate of technical substitution
The rate at which a firm is able to substitute one input for another while keeping the level of output constant
Isocost line
All the combinations of two inputs, such as capital and labor, that have the same total cost
Trade-off
The idea that because of scarcity, producing more of one good or service means producing less of another good or service
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 market allocate economic resources
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants
Economics
The study of the choices people make to attain their goals, given their scarce resources
Economic model
A simplified version of reality used to analyze real-world economic situations
Marginal analysis
Analysis that involves comparing marginal benefits and marginal cost
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 to the allocation of resources
Productive efficiency
A situation in which a good or service is produced at the lowest cost possible
Allocative efficiency
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 to society equal to the marginal cost of producing it
Voluntary exchange
A situation that occurs in the market when both the buyer and seller of a product are made better off by the transaction
Equity
The fair distribution of economy benefits
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 relative to other goods that are substitutes
Income effect
The change in the quantity demanded of a good that results from the effect of a change in the good's price on consumer's purchasing power
Ceteris paribus
The requirement that when analyzing the relationship between two variable-such as price and quantity demanded-other variables are held constant
Market equilibrium
A situation in which quantity demanded equals quantity supplied
Price taker
A buyer or seller that is unable to affect the market price
Shutdown point
The minimum point on a firm's average variable cost curve, if the firm falls below then it shuts down in production in the short run.
Economic profit
A firm's revenues minus all it's cost, implicit and explicit
Brand management
The actions of a firm intended to maintain the differentiation of a product over time.
Oligopoly
A market structure in which a small number of interdependent firms compete
Barriers to entry
Anything that keeps new firms from entering an industry in which firms are earning economic profits.
Payoff matrix
A table that shows the payoff that each firm earns from every combination of strategies by the firms.
Collusion
An agreement among firms to charge the same price or otherwise not to compete.
Dominant Strategy
A strategy that is the best for a firm, no matter what strategies others use.
Nash equilibrium
A situation in which each firm chooses the best strategy, given the strategies chosen by other firms.
Prisoner's dilemma
A game in which pursuing dominant strategies results in noncooperation that leaves everyone worse off
Cartel
A group of firms that collude by agreeing to restrict output to increase prices and profits
Copyright
A government-granted exclusive right to produce and sell a creation
Public Franchise
A government designation that a firm is the only legal provider of a good or service.
Natural monopoly
A situation in which economies of scales are so large that one firm can supply the entire market at a lower average total cost than can two or more firms.
Market power
The ability of a firm to charge a price greater than marginal cost
Antitrust laws
Laws aimed at eliminating collusion and promoting competition among firms
Price discrimination
Charging different prices to different customers for the same product when the price differences are not due to differences in cost.
Two-part tariff
A situation in which consumers pay one price for the right to buy as much of a related good as they want at a second price
Derived demand
The demand for a factor of production; it depends on the demand for the good the factor produces
Marginal product of labor
The additional output a firm produces as a result of hiring one more worker
Marginal revenue product of labor
The change in a firm's revenue as a result of hiring one more worker
Human capital
The accumulated training and skills that workers possess
Compensating differentials
Higher wages that compensate workers for unpleasant aspects of a job
Economic discrimination
Paying a person a lower wage or excluding a person from an occupation on the basis of an irrelevant characteristic such as race or gender.
Labor union
An organization of employees that has the legal right to bargain with employers about wages and working conditions.
Personnel economics
The application of economic analysis to human resources issues.
Economic rent
The price of a factor of production that is in fixed supply
Monopsony
The sole buyer of a factor of production