Micro exam

Economics

The study of how people manage resources.

Resources

Tangible and intangible things: cash, land, time, ideas, technology, experience, relationships.

Goods markets

Markets for goods and services.

Input markets

Markets for labor, land, capital, entrepreneurial ability.

Financial markets

Markets for savings and loans.

Institution

Any long-lived social organization.

Microeconomics

The study of how individuals and firms manage resources.

Macroeconomics

The study of the economy on a regional, national, or international scale.

Classical theory

Focuses on equilibrium conditions where supply and demand interact.

General Theory of Employment, Interest, and Money

Keynesian economics that suggests markets may not always need to be in equilibrium for the economy to operate.

Scarcity

Condition of wanting more than we can get with available resources.

Opportunity cost

The value of what you have to give up in order to get something.

Marginal decision making

Rational comparison of additional benefits of a choice against additional costs.

Sunk costs

Costs that have already been incurred and cannot be recovered.

Incentive

Something that causes people to behave in a certain way by changing the trade-offs they face.

Efficiency

Resources used in the most productive way to produce goods and services with greatest societal value.

Correlation

If events appear to occur in relation to each other.

Causation

One event brings about another.

Positive statement

A factual declaration about how the world actually works.

Normative statement

A claim about how the world should be.

Production possibilities frontier

Graphical representation showing output combinations of goods that an economy can produce with available inputs.

Labor Productivity

Output produced per hour of labor effort.

Normal goods

Goods for which demand increases as income increases.

Inferior goods

Goods for which demand decreases as income increases.

Consumer Price Index (CPI)

Overall price level of goods and services.

Inflation

State of overall price increases measured by the CPI.

Monetary policy

Policy conducted by the central bank to control money supply and interest rates.

Fiscal policy

Government policy regarding spending and taxation.

Trade-offs

Weighing benefits against costs.

Performance indicators

Economic measurements that indicate where we are and help us set goals.

Business cycles

Short-run output fluctuations in the economy.

Unemployment rates

Measure of unemployed workers in the labor force.

GDP

Measurement of national income represented by the dollar value of all final goods and services produced domestically.

Demand

How much of something people are willing and able to buy under certain circumstances.

Law of demand

Inverse relationship between price and quantity demanded.

Ceteris paribus

Assumption that all other variables are held constant.

Substitutes

Goods that serve similar purposes and can replace each other.

Complements

Goods consumed together where buying one increases the likelihood of purchasing the other.

Market equilibrium

The price at which quantity demanded equals quantity supplied.

Surplus

The quantity supplied is higher than the quantity demanded.

Shortage

The quantity demanded is higher than the quantity supplied.

Elasticity

A measure of how much consumers and producers will respond to a change in market conditions.

Price elasticity of demand

Measures how responsive the quantity demanded is to a change in price.

Marginal cost

The cost of producing one additional unit of output.

Average cost

Total costs divided by the quantity of output.

Perfect competition

A market structure where many firms sell identical products and no single buyer or seller can influence market price.

Monopoly

Market structure where a single seller dominates the market and can set prices higher than marginal cost.

Price discrimination

Charging different prices for the same product based on the consumer's willingness to pay.

Negative externality

A cost imposed on a third party not involved in a transaction.

Positive externality

A benefit received by a third party not involved in a transaction.

Public goods

Goods that are non-excludable and non-rivalrous, such as street lighting.

Taxation

Government levies on income, property, or sales used to raise revenue.

Subsidy

Government payment to encourage the production or consumption of a good.

Antitrust laws

Laws designed to promote competition and prevent monopolistic practices.

Coase Theorem

Theory that private bargaining can resolve externalities when property rights are well-defined and transaction costs are low.

Economies of scale

Lower average costs achieved when production increases.

Diseconomies of scale

Higher average costs that arise when a firm becomes too large.

Market failure

A situation where the market does not allocate resources efficiently.

Consumer surplus

The net benefit a consumer receives when they purchase a good for less than their maximum willingness to pay.

Producer surplus

The net benefit a producer receives when they sell a good for more than their minimum willingness to accept.

Total Surplus

The sum of consumer surplus and producer surplus.

Deadweight loss

Loss of economic efficiency when the equilibrium outcome is not achievable.

Utility

A measure of the satisfaction or pleasure derived from consuming goods and services.

Indifference curves

Graphs that show the combination of two goods that provide the same level of utility to the consumer.

Budget constraint

An economic concept representing the combinations of goods and services that a consumer can purchase given their income and the prices of those goods.

Diminishing marginal utility

The principle that as more of a good is consumed, the additional satisfaction gained from consuming each additional unit decreases.

Fixed costs

Costs that do not vary with the level of output.

Variable costs

Costs that change with the level of production.

Marginal product

The additional output produced by adding one more unit of input.

Economic profit

Total revenue minus all opportunity costs.

Accounting profit

Total revenue minus explicit costs.

Short run

A period in which at least one factor of production is fixed.

Long run

A period in which all factors of production can be varied.

Natural monopoly

A market where a single firm can provide the good or service at a lower cost than multiple firms.

Positive network effects

Increased participation enhances the value of a product or service.

Negative network effects

Over-participation reduces the value of a product or service.

Carbon pricing

Taxes or tradable permits to reduce greenhouse gas emissions.