Elasticity
A measure of how much one economic variable responds to changes in another economic variable
Price elasticity of demand
% of change in QD / % of change in price
Elastic demand
Greater than 1
Inelastic demand
Less than 1
Unit elastic demand
Equal to 1
Perfectly Inelastic demand
Equals zero
Perfectly elastic demand
Equals infinity
Total revenue
Q x P
Cross price elasticity
% change QD of one product / % change of price in another
Income elasticity of demand
% change QD / % change Income
Price elasticity of supply
% change QS / % change of P
Utility
Satisfaction from consuming
Marginal utility
Change in satisfaction after continuous consumption
Law of diminishing marginal utility
Satisfaction goes down after each additional unit consumed
Budget constraint
Limited amount of income available
Income effect
The change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding all other factors constant
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, holding constant the effect of the price change on consumer purchasing power.
Network externality
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 not appear to be economically rational
Opportunity cost
The highest alternative cost 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 then the price that 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 removed
Indifference curve
A curve that shows the combinations of consumption bundles that give the consumer the same utility
Marginal rate of substitution
That rate at which a consumer would be willing to trade off one good for another
Technology
The process 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 to 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 its physical plant
Total cost
The cost of all the inputs a firm uses in production
Variable change
Costs that change as output changes
Fixed costs
Costs that remain constant as output changes
Explicit cost
A cost that involves money
Implicit cost
An opportunity cost
Production function
The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs
Average total cost
TC/Q
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 declin
Average product of labor
The total output produced by a firm divided by the quantity of workers
Marginal cost
Change in TC / Change in Q
Average fixed cost
FC/Q
Average variable cost
VC/Q
Long run average cost curve
A curve showing the lowest cost at which a firm is able to produce given quantity of output in the long run, when no inputs are fixed
Economies of scale
The situation when a firm's long-run average costs fall as it increases output
Constant returns of 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 economies of scale are exhausted
Diseconomies of scale
The situation when a firm's long-run average costs 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
Expansion path
A curve that shows a firm's cost-minimizing combination of inputs for every level of output