absolute advantage
the ability to produce a good using fewer inputs than another producer
average fixed cost (AFC)
Total fixed cost divided by the number of units of output; a per-unit measure of fixed costs. AFC = FC/Q
average total cost (ATC)
Total cost divided by the number of units of output ATC = TC/Q or ATC = AFC + AVC
average variable cost (AVC)
variable cost divided by the number of units of output AVC = VC/Q
budget constraint
the limits imposed on household choices by income, wealth, and product prices.
capital
goods used to produce other goods
cartel
a group of firms that gets together and makes joint price and output decisions to maximize joint profits
ceteris paribus
a devise used to analyze the relationship between two variable while the values of other variables are held unchanged.
clayton act
act outlawed specific monopolistic behaviors such as tying contracts
command economy
An economy in which a central government either directly or indirectly sets output targets, incomes, and prices
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
complements
two goods for which an increase in the price of one leads to a decrease in the demand for the other and vice versa
consumer goods
goods produced for present consumption
consumer sovereignty
The idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).
consumer surplus
The difference between the maximum amount a person is willing to pay for a good and its current market price.
cross price elasticity of demand
measures the responsiveness of the quantity demand of a good to a change in the price of another good.
diseconomies of scale
The property whereby long-run average total cost rises as the quantity of output increases (right-most upward sloping part of the long-run ATC)
demand curve
a graph that shows the amount of a product that would be bought at all possible prices in the market
depreciation
the decline in an asset's economic value over time
diminishing marginal utility
the point reached when an additional unit of a product consumed is less satisfying than the one before
economic theory
A statement or set of related statements about cause and effect, action and reaction
economics
the study of how individuals and nations make choices about ways to use scarce resources to fulfill their needs and wants
efficiency
producing what people want at the least possible cost
elastic demand
the percentage change in quantity demanded is greater than the percentage change in price in absolute value
elasticity
a measure of responsiveness that tells us how a dependent variable such as quantity responds to a change in an independent variable such as price
equilibrium
the point at which quantity demanded and quantity supplied are equal
entrepreneur
a person who organizes, manages, and takes on the risks of a business
equity
(n.) the state of being just, fair, or impartial; fair and equal treatment; something that is fair; the money value of a property above and beyond any mortgage or other claim
shortage
quantity demanded exceeds quantity supplied
surplus
quantity supplied exceeds quantity demanded
externality
unintended side effect that either benefits or harms a third party not involved in the activity that caused it
fallacy of composition
The incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or whole.
firm
an organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand. transforms inputs into outputs. primary producing unit in a market economy
fixed cost
a cost that does not change, no matter how much of a good is produced. there are none in the long-run
free enterprise
the freedom of individuals to start and operate private businesses in search of profits
free rider problem
getting the benefits of something without having to contribute.. this problem also arises when individuals receive the benefit whether they contributed or not (Cleaner air).
Heckscher-Ohlin theorem
a country has a comparative advantage in the production of a product if that country is relatively well endowed with inputs used intensively in the production of that product.
homogenous products
undifferentiated products; products that are identical to, or indistinguishable from, one another
income
the money a person gets from salary or wages, profits, interest, investments, and other sources
imperfectly competitive industry
An industry in which single firms have some control over the price of their output
income elasticity of demand
measures the responsiveness of the quantity demanded of a good to the change in the income of the people demanding the good. Formula: (%change in quantity demanded) / (%change in income)
economies of scale
as a company produces larger numbers of a particular product, the cost of each of these products goes down aka increasing returns to scale
indifference curve
a curve showing the combinations of two goods that leave the consumer with the same level of utility.
inelastic demand
demand that responds a little bit to change in price. always has a numerical value between 0 and -1
inferior goods
good that demand falls when income rises
inputs
anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants
microeconomics
the branch of economics that studies the economy of consumers or households or individual firms
interest
the price paid for the use of borrowed money
monopolistic competition
market structure of an industry in which there are many firms and freedom of entry and exit but in which each firm has a product somewhat differentiated from the others, giving it some control over its price
monopoly
one firm that produces a product which there are no close substitutes for and in which significant barriers exist to prevent new firms from entering the industry
laissez faire economy
government has zero to no control over the economy
law of demand
consumers buy more of a good when its price decreases and less when its price increases
law of diminishing marginal utility
As the quantity of a good consumed increases the extra satisfaction gained decreases
law of diminishing returns
a law affirming that to continue after a certain level of performance has been reached will result in a decline in effectiveness
law of supply
the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
lorenz curve
A widely used graph of the distribution of income, with cumulative percentage of families plotted along the horizontal axis and cumulative percentage of income plotted along the vertical axis.
macroeconomics
the branch of economics that studies the overall working of a national economy
marginal cost (mc)
the increase in total cost that results form producing one more unit of output
marginal revenue (mr)
the additional revenue that a firm takes in when it increases output by one additional unit
marginal social cost (msc)
the total cost to society of producing an addiotnal unit of a good or service
marginal utility (mu)
additional satisfaction gained by the consumption or use of one more unit of a good or service
marginalism
the process of analyzing the additional or incremental costs or benefits arising from a choice or decision
market
A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
market failure
Situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers
market demand
sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service
market power
a firm's ability to raise the price of a good without losing all its sales
moral hazard
The risk that the behavior of one party may change to the detriment of another after a contract has been agreed upon. Example: Those with insurance may be less likely to guard against loss than those without insurance.
movement along the demand curve
the change in quantity demanded brought about by a change in price
movement along a supply curve
the change quantity supplied brought about by a change in price
natural monopoly
a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
negative relationship
a relationship between two variables which a decrease in one is associated with an increase in another or vice versa
normal goods
goods which demand goes up when income is higher and goes down when income is lower
normative economics
the part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics
north american free trade agreement
an agreement signed by the united states, canada, and mexico in which it was agreed that north america be a "free-trade" zone
ockham's razor
irrelevant detail should be cut away
oligopoly
a market in which control over the supply of a commodity is in the hands of a small number of producers and each one can influence prices and affect competitors
opportunity cost
The next best alternative given up when making a choice
outputs
goods and services of value to households
payoff
an advantage or profit that you get as a result of doing something
perfect competition
a market structure that is characterized by a large number of small firms, a homogeneous product,freedom of entry and exit
perfect substitutes
identical products
perfectly elastic demand
demand in which quantity drops to zero at the slightest increase in price
perfectly inelastic demand
demand in which quantity demanded does not respond at all to a change in price
positive economics
An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works.
positive relationship
a relationship between two variables which a decrease in one is associated with a decrease in another. and a increase in one is associated with an increase in another
pos hoc, ergo propter hoc
the common misconception that if event a happens before event b that event b happened because of event a
producer surplus
the amount a seller is paid for a good minus the seller's cost of providing it.
product differentiation
a positioning strategy that many firms use to distinguish their products from those of competitors
price ceiling
a maximum price that sellers may charge for a good
price discrimination
charging different prices to different buyers
price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
price floor
a minimum price below which exchange is not permitted
profit
the difference between revenues and cost
variable cost
a cost that depends on the level of production chosen
quantity demanded
how much people are willing to buy at a given price, only changes when price changes (move along curve)
quantity supplied
the amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.
real income
Set of opportunities to purchase real goods and services available to a household as determined by prices and money income.
scarce
limited
shift of a demand curve
The change that takes place in a demand curve corresponding to a new relationship between quantities demanded of a good and price of that good. The shift is brought about by a change in the original conditions.
shift of a supply curve
the change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions.
short run
a period of time sufficiently short that at least one of the firm's factors of production cannot be varied
slope
a measurement that indicates weather the relationship between variables is positive or negative and how much of a response there is
social capital
capital that provides services to the public
substitues
goods that can serve as replacements for one another; wen the price of one increases demand for the other increases
supply curve
a graph illustrating how much of a product a firm will sell at different prices
theory of comparative advantage
Ricardo's theory that specialization and free trade will benefit all trading parties, even those that may be absolutely more efficient producers.
total cost (tc)
total fixed costs plus total variable costs TC = TFC + TVC
total fixed cost (tfc)
the total of all costs that do not change with output even if output is zero
total revenue (tr)
the amount received from the sale of the product; the price per unit X the quantity of output the firm decides to produce
total utility
total amount of satisfaction obtained form consumption of a good or service
total variable cost (tvc)
the total of all costs that vary with output in the short run
trade deficit
the situation when a country imports more than it exports
trade surplus
the situation when a country exports more than it imports
unitary elasticity
A situation in which total revenue remains the same when prices change.
utility
the satisfaction a product yields
variable
a measure that can change from time to time or form observation to observation
isoquant
a graph that shows all the combinations of capital and labor that can be used to produce a given amount of output