Art of Economics
the application of knowledge learned in positive economics to the achievement of the goals determined in normative economics
Economic Decision Rule
If benefits exceed costs, do it. If costs exceed benefits, don't
Economic Force
Necessary reactions to scarcity
Economic Model
A framework that places the generalized insights of theory in a more specific contextual setting
Economic Policy
Action taken by government to influence economic actions
Economic Prinicple
A commonly held economic insight states as a law or general assumption
Economics
The study of how human beings coordinate their wants
Efficiency
Achieving a goal as cheaply as possible and with the fewest amount of inputs
Experimental Economics
A branch of economics that studies the economy through controlled laboratory experiments
Invisible Hand
Metaphor for the price mechanism
Invisible Hand Theorem
The insight that a market economy, through the price mechanism, will allocate resources effciently
Macroeconomics
The study of the economy as a whole
Marginal Benefit
Additional Benefit above what you have already derived
Marginal Cost
Additional cost above what you have already incurred. The cost of changing the level of output by one unit.
Market Force
An economic force that is given relatively free rein by society to work through the market
Microeconomics
The study of individual choice, and how that choice is influenced by economic forces
Natural Experiment
A naturally occurring event that approximates a controlled experiment
Normative Economics
Study of what the goals of the economy should be
Opportunity Cost
The benefit forgone, or the cost, of the next-best alternative to the activity you have chosen
Positive Economics
The study of what is, and how the economy works
Precept
Rules that conclude that a particular course of action is preferable
Scarcity
Goods available are too few to satisfy individuals' desires
Sunk Cost
Cost that has already been incurred and cannot be recovered
Theorem
Propositions that are logically true based on the assumptions in a model
Comparative Advantage
The advantage that attaches to a resource when that resource is better suited to the production of one good than to the production of another good
Globalization
The increasing integration of economies, cultures, and institutions across the world
Inefficiency
Getting less output from inputs that, if devoted to some other activity, would produce more output
Laissez-faire
An economic policy of leaving coordination of individuals' actions to the market
Law of One Price
Wages of (equal) workers in one country will not differ significantly from wages in another institutionally similar country
Production Possibility Table
Table that lists a choice's opportunity cost by summarizing alternative outputs that can be achieved with your inputs
Productive Efficiency
Achieving as much output as possible from a given amount of inputs
Production Possibility Curve
A curve measuring the maximum combination of outputs that can be obtained from a given number of inputs
Business
Private producing units in our society
Capitalism
An economic system based on the market in which the ownership of the means of production resides with a small group of individuals called capitalists
Consumer Sovereignty
Principle that the consumer's wishes rule what's produced
Corporation
A business that is treated as a person, and is legally owned by its shareholders who are not liable for the actions of the corporate "person
Demerit Good or Activity
A good or service that society believes is bad for people even though they choose to use the good or engage in the activity
Entrepreneurship
The ability to organize and get something done
Externality
The effect of a decision on a third party not taken into account by the decision maker
Global Corporation
Corporation with substantial operations on both production and sales in more than one country
Government Failure
A situation where the government intervenes and makes things worse
Households
Groups of individuals living together and making joint decisions
Institutions
The formal and informal rules that constrain human economic behavior
Macroeconomic Externalities
Externalities that affect the levels of unemployment, inflation, or growth in the economy as a whole
Market Economy
An economic system based on individuals' goodwill toward others, not on their own selfinterst, in which society decides what, how, and for whom to produce
Market Failure
Situations in which the market does not lead to a desired result
Merit Good or Activity
A good or activity that government believes is good for you even though you may not choose to engage in the activity or consume the good
Partnership
A business with two or more owners
Private Good
A good that, when consumed by one individual, cannot be consumed by another individual
Private Property Right
The control a private individual or firm has over an asset
Profit
What's left over from total revenue after all appropriate costs have been subtracted. Total revenue minus total costs (excluding implicit revenue and costs)
Public Good
A good that if supplied to one person must be supplied to all and whose consumption by one individual does not prevent its consumption by another individual
Socialism
An economic system based on individuals' goodwill toward others, not on their own self-interest, in which society decides what, how, and for whom to produce
Sole Proprietorship
A business that has only one owner
Demand
A schedule of quantities of a good that will be bought per unit of time at various prices, other things constant
Demand Curve
Curve that tells how much of a good will be bought at various prices
Equilibrium
A concept in which opposing dynamic forces cancel each other out
Equilibrium Price
the price toward which the invisible hand (economic forces) drives the market
Equilibrium Quantity
Amount bought and sold at the equilibrium price
Excess Demand
Quantity demanded is greater than quantity supplied
Excess Supply
Quantity supplied is greater than quantity demand
Fallacy of Composition
The false assumption that what is true for a part will also be true for the whole
Law of Demand
Quantity demanded rises as price falls, other things constant
Law of Supply
Quantity supplied rises as prices rises, other things constant
Market Demand Curve
The horizontal sum of all individual demand curves
Market Supply Curve
The horizontal sum of all individual supply curves
Movement Along a Demand Curve
The graphic representation of the effect of a change in price on the quantity demanded
Movement Along a Supply Curve
The graphic representation of the effect of a change in price on the quantity supplied
Quantity Demanded
A specific amount that will be demanded per unit of time at specific price, other things constant
Quantity Supplied
A specific amount that will be offered for sale per unit of time at a specific price
Shift in Demand
The effect of a change in a shift factor on a demand curve.
Excise Tax
Tax that is levied on a specific good
Minimum Wage Law
The law thats sets lowest wage a firm can legally pay an employee
Price Ceiling
A government-imposed limit on how high a price can be charge
Rent Control
Price ceiling on rents set by government
Tariff
Tax on an imported good
Third-Party Payer Market
The person who decided how much of the good to buy differs from the person paying for the good
Complements
Goods that are used in conjunction with other goods
Cross-Price Elasticity of Demand
The percentage change in demand of one good divided by the percentage change in the price of a related good
Elastic
Percent change in quantity is greater than percent change in price E>1. A rise in price would yield a decrease in total revenue
Income Elasticity of Demand
The percentage change in demand divided by percentage change in income
Inelastic
Percent change in quantity is less than the percent change in price. E<1. A rise in price would yield an increase in total revenue
Inferior Goods
Goods whose consumption decreases when income increases. Has negative income elasticities
Luxury
A good that has an income elasticity greater than one.
Necessity
A good that has an income elasticity between 0 and 1
Normal Goods
Goods whose consumption increases with an increase in income. Income elasticity greater than zero.
Perfectly Elastic
Quantity responds enormously changes in price. E=infinity.
Perfectly Inelastic
Quantity does not respond to changes in price. E=0
Price Elasticity of Demand
A measure of the percent change in the quantity demanded
Price Elasticity of Supply
A measure of the percent change in the quantity supplied divided by the percent change in the price of that good
Substitutes
Goods that can be used in place of one another
Unit Elastic
The percentage change in quantity is equal to the percentage change in price. E=1. A rise in price leaves total revenue unchanged
Consumer Surplus
The value the consumer gets from buying a product less its price
Deadweight Loss
the loss to society of consumer and producer surplus from a tax
General rule of Political Economy
Small groups that are significantly affected by a government policy will lobby more effectively than large groups that are equally affect by that same policy
Producer Surplus
The price producer sells a produce for less the cost of producing it
Rent-Seeking Activity
Activity designed to transfer surplus from one group to another
Welfare Loss Triangle
A geometric representation of the welfare cost in terms of misallocated resources caused by a deviation from a supply-demand equilibrium
Average Fixed Cost
Fixed cost dived by quantity produced
Average Product
total output divided by the quantity of the input
Average Total Cost
Total cost divided by the quantity produced
Average Variable Cost
Variable cost divided by quantity produced
Economic Profit
Explicit and implicit revenue minus explicit and implicit cost
Firm
an economic institution that transforms factors of production into goods and services and sells the produced goods and services
Fixed Costs
Costs that are spent and cannot be changed in the period of time under consideration
Law of Diminishing Marginal Productivity
As more and more of a variable input is added to an existing fixed input, after some point the additional output one gets from the additional input will fall
Long-Run Decision
A decision in which the firm can choose among all possible production techniques
Marginal Product
Additional output forthcoming from an additional input, other inputs constant.
Production
The transformation of factors into goods and services
Production Function
Equation that describes the relationships between inputs and outputs, telling the maximum amount of output that can be derived from a given number of inputs
Production Table
a table showing the output resulting from various combinations of factors of productions or inputs
Short-Run Decision
Firm is constrained in regard to what production decisions it can make
Total Cost
Sum of fixed and variable costs
Total Revenues
The amount a firm receives for selling its product or service plus any increase in the value of assets owned by the firm
Variable Costs
The costs of variable inputs
Constant returns to Scale
Where long-run average total costs do not change with an increase in output
Depreciation
A measure of the decline in value of an asset that occurs over time
Diseconomies of Scale
An increase in per-unit costs as a result of an increase in output
Economically Efficient
Using the method of production that produces a given level of output at the lowest possible cost
Economies of Scale
A decrease in per-unit costs as a result of an increase in output
Economies of Scope
The costs of producing products are interdependent so that producing one good lowers the cost of producing another
Entrepreneur
Individual who sees an opportunity to sell an item at a price higher than the average cost of producing it
Indivisible Setup Cost
the cost of an indivisible input for which a certain minimum amount of production must be undertaken before the input becomes economically feasible to use
Learning by Doing
Becoming more proficient at doing something by actually doing it
Minimum Efficient Level of Production
The level of production run that spreads out setup costs sufficiently for a firm to undertake production profitable
Monitoring Costs
Costs incurred by the organizer of production seeing to it that employees do what they're supposed to do
Team Spirit
the feelings of friendship and being part of something that bring out people's best efforts
Technical Efficiency
A situation in which as few inputs as possible are used to produce a given output
Technological Change
An increase in the range of production techniques that provides new ways of producing existing foods and new goods
Marginal Rate of Substitution
The rate at which one factor must be added to compensate for the loss of another factor, to keep output constant. Slope of the isoquant curve
Isoquant Curve
A curve that represents combinations of factors of production that result in equal amounts of output
Price Taker
Firm or individual who takes the market price as given
Marginal Revenue
The change in total revenue associated with a change in quantity
Normal Profit
the amount of money the owners of a business would have received in their next-best alternative
Perfectly Competitive Market
Market in which economic forces operate unimpeded
Price Taker
Firm or individual who takes the market as given
Profit-Maximizing Condition
Produce where MC=MR
Shutdown Point
Point at which the firm will gain more by temporarily shutting down than it will be staying in business
Monopolistic Competition
A market structure in which there are many firms selling differentiated products and few barriers to entry
Monopoly
A market structure in which one firm makes up the entire market
Natural Monopoly
Monopolies that exist because economies of scale create a barrier to entry
Patent
A legal protection of technical innovation that gives the person holding it sole right to use that innovation
Price Discriminate
To charge a different price to different price to different individual or groups of individuals
Antitrust Policy
Government's policy toward the competitive process
Cartel
A combination of firms that acts like a single firm
Cartel Model of Oligopoly
A model that assumes that oligopolies act as if they were a monopolist that has assigned output quotas to individual member firms of oligopoly so that total output is consistent with join profit maximization
Concentration Ratio
The value of sales by the top firms of a industry states as percentage of total industry sales
Contestable Market Model
A model that bases pricing and output decisions on entry and exit conditions, not on market structure
Herfindahl Index
An index of market concentration calculated by adding the squared values of individual market shares of all firms in the industry
Implicit Collusion
Multiple firms making the same pricing decisions even though they have not consulter with one another
Judgement by Performance
Judging the competitiveness of markets by the behavior of firms in that market
Judgment by Structure
Judging the competitiveness of markets by the number of firms in the market and market shares
North American Industry Classification System (NAICS)
An industry classification that categorizes firms by type of economic activity and groups firms with like production processes
Oligopoly
A market structure with a few interdependent firms
Strategic Decision Making
Taking explicit account of a rival's expected response to a decision you are making
Conspicuous Consumption
Consumption of goods not for one's direct pleasure, but simply to show off
Income Effect
The reduction in quantity demanded because the price increase has made us poorer
Marginal Utility
The satisfaction one gets from consuming one additional unit of a product above and beyond what has already been consumed up to that point
Principle of Diminishing Marginal Utility
As you consume more of a good, at some point, consuming another unit of the good will yield less additional pleasure compared to the preceding unit
Principle of Rational Choice
Spend your money on those goods that give you the most marginal utility per dollar
Status Quo Bias
Individual's actions are influence by the current situation even when that situation is not important to the decision
Substitution Effect
The reduction in quantity demanded because the relative price has risen
Total Utility
The total satisfaction one gets from a product
Ultimatum Game
An exercise that demonstrates people care about fairness as well as personal total utility
Utility
A measure of the pleasure or satisfaction one gets from consuming a good or service
Utility Maximizing Rule
A rule stating that one should consume that combination of goods where the ratios of their marginal utilities to their prices are equal
Externalities
Effects of a decision on a third party that are not taking into account by the decision maker
Negative Externality
Effects of a decision not taken into account by the decision maker are detrimental to others. Change in supply curve
Positive Externalities
Effects of a decision not taken into account by the decision maker are beneficial to others. Change in demand curve
Marginal Social Cost
Marginal private costs of production plus the cost of the negative externalities associated with that production
Marginal Social Benefit
Marginal private benefit of consuming a good plus the benefits of the positive externalities resulting from consuming that good
Effluent Fees
Charges imposed by the government on the level of pollution created
Free Rider Problem
Individuals' unwillingness to share in the cost of a public good
Optimal Policy
one in which the marginal cost of undertaking the policy equals the marginal benefit of that policy
Signaling
Action taken by an informed party that reveals information to an uninformed party and thereby partially offsets adverse selection
Screening
Action taken by the uninformed party that induces the informed party to reveal information
Monopsony
a market in which a single firm is the only employer. It would raise market prices if it buys more
Bilateral monopoly
A market with only a single seller and a single buyer
Efficiency Wages
Wages paid above the going market wage to keep workers happy and productive
Closed Shops
Firms where the union controls hiring. illegal
Union Shops
Firms in which all workers must join the union
Wealth
The value of the things individuals own less the value of what they owe
Income
Payments receives plus or minus changes in value of person's assets in a specified time period
Progressive Tax
The average tax rate increases with income
Proportional Tax
The average rate of tax is constant regardless of income level
Regressive Tax
The average tax rate decreases as income increase