Microeconomics Hubbard / O'Brien All Chapters

vocab words from all chapters

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.

Three Key Economic Ideas

1. People are rational.

2. People respond to economic incentives.

3. Optimal decisions are made at the margin.

Market

A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

Marginal Analysis

Analysis that involves comparing marginal benefits and marginal costs.

Trade-off

The idea that because of scarcity, producing more of one good or service means producing less of another good or service.

Opportunity Cost

The highest-valued alternative that must be given up to engage in an activity.

Three Fundamental Questions Society Must Answer

1. What goods and services will be produced?

2. How will the good and services be produced?

3. Who will receive the goods and services produced?

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 markets allocate economic resources.

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 in the allocation of resources.

Productive Efficiency

A situation in which a good or service is produced at the lowest possible cost.

Allocative Efficiency

A state of the economy in which production is in accordance to 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 markets when both the buyer and seller of a product are made better off by the transaction.

Equity

The fair distribution of economic benefits.

Economic Variable

Something measurable that can have different values, such as the wages of software programmers.

Positive Analysis

Concerned with what is.

Normative Analysis

Concerned with what should be.

Microeconomics

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their chocies.

Macroeconomics

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Revenue

The total amount received for selling a good or service.

Profit

The difference between revenue and costs.

Physical Capital

Manufactured goods used to produce other goods or services, such as computers, factories, tools, and trucks.

Production Possibilities Frontier

A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.

Efficient Production

Production that fully utilizes all available resources, and the fewest possible resources are being used to produce a given amount of output. All points on a production possibilities frontier.

Inefficient

Maximum output is not being obtained from available resources.

Increasing marginal opportunity costs

The more resources already devoted to an activity, the smaller the payoff to devoting additional resources to that activity. Illustrated by an outward bowed PPF.

Economic growth effect on PPF

Entire PPF curve expands upward and rightward

Economic growth

The ability of the economy to increase the production of goods and services.

Comparative Advantage

The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors.

Absolute Advantage

The ability of an individual, firm, or country to produce more of a good or service than competitors, using the same resources.

Factor markets

Markets for the factors of production, labor, capital, natural resources, and entrepreneurial ability.

Circular Flow of Income

Firms purchase factors from households through factor markets, and sell householders goods and services through product markets.

Demand Schedule

The table showing the relationship between the price of a product and the quantity of the product 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 curve that shows the relationship between the price of a product and the quantity demanded.

Law of Demand

The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded will decrease.

Substitution Effect

The change in quantity demanded that results from a change in price, making that good or service more or less expensive RELATIVE to other goods that are substitutes.

Income Effect

The change in quantity demanded that results from the effect of a change in the good's price on consumers' purchasing power.

Ceteris paribus

"All else equal."

Five Variables that Shift Market Demand

1. Income

2. Prices of related goods

3. Tastes

4. Population and demographics

5. Expected future prices

What is the relationship between income and market demand?

Increases is income increase demand for normal goods and decrease demand for inferior goods.

What is the relationship between price of substitutes and market demand?

If the price of a substitute increases, demand increases.

What is the relationship between price of complements and market demand?

If the cost of a complement increases, demand for the product decreases.

What is the relationship between expected future price and market demand?

As expected future price increases, demand increases.

Five Variables that Shift Market Supply

1. Price of inputs

2. Technological change

3. Prices of substitutes in production

4. Number of firms in the market

5. Expected future prices

Quantity supplied

The amount of a good or service that a firm is willing and able to supply at a given price.

Which direction are the lines in a supply curve and demand curve, respectively?

Demand curve is downward, supply curve is upward.

Law of supply

The rule that, everything else constant, increases in price cause increases in quantity supplied, and decreases in price causes decreases in quantity supplied.

What is the relationship between price of inputs and market supply?

As prices of inputs increase, supply decreases.

What is the relationship between price of production substitutes and market supply?

As the price of the substitute increases, supply decreases.

What is the relationship between expected future price and market supply?

As expected future price increases, supply decreases.

What is the relationship between increased productivity and market supply?

As productivity increases, supply increases.

What is the relationship between number of firms in the market and market supply?

As the number of firms increases, supply increases.

Market equilibrium

A situation in which quantity demanded equals quantity supplied.

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.

If supply increases and demand does not change, what happens to the equilibrium prices?

The equilibrium price falls.

If demand increases and supply does not change, what happens to the equilibrium prices?

The equilibrium price rises.

Price ceiling

A legally determined maximum price that sellers may charge.

Price floor

A legally determined minimum price that sellers may receive.

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 additional benefit to a consumer from consuming one more unit of a good or service.

Marginal cost

The additional cost to a firm 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 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 its marginal cost of production. The sum of consumer surplus and producer surplus will be at maximum.

What is the effect of a price floor on consumer and producer surpluses?

A price floor increases producer surplus and reduces consumer surplus. This results in a deadweight loss due to a permanent surplus of production.

What is the effect of a price ceiling on consumer and producer surpluses?

A price floor increases consumer surplus and reduces producer surplus. This results in a deadweight loss to due a permanent shortage.

What is the effect of a price ceiling on wages (minimum wage)?

A minimum wage creates a deadweight loss due to a permanent surplus of workers.

Black market

A market in which buying and selling take place at prices that violate government price regulations.

How do taxes on goods or services affect supply?

When the tax on a good or service increases, less are supplied.

Tax incidence

The actual division of the burden of a tax between buyers and sellers in a market.

Externality

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

Social cost

The total cost of a good or service, including the private cost plus any external cost.

Private cost

The cost bourne by the producer of a good or service.

Private benefit

The benefit received by the consumer of a good or service.

Social benefit

The total benefit from consuming a good or service, including both the private benefit and any external benefit.

How does a negative externality (such as pollution) reduce economic efficiency?

When there is a negative externality in producing a good or service, too much of the good or service will be produced at market equilibrium, because marginal social cost is greater than marginal private cost.

How does a positive externality (such as education) reduce economic efficiency?

When there is a positive externality in producing a good or service, too little of the good or service will be produced at market equilibrium, because marginal social benefit is greater than marginal private cost.

Market failure

A situation in which the market fails to produce the efficient level of output.

The Coase Theorem

If transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities. In reality, this seldom happens.

What is the most economically efficient level of pollution?

The most economically efficient level of pollution is that at which the marginal benefit from pollution reduction equals the marginal cost.

Transaction costs

The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.

Pigovian taxes and subsidies

Government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities.

Command-and-control approach

The approach that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit, or requiring specific pollution controls.

Rivalry

The situation when one person's consumption of a good prevents others from consuming it.

Excludability

The situation in which those who do not pay for a good or service cannot consume it.

Private goods

Goods that are both rival and excludable. Example: Sandwich.

Public good

A good that is nonrival and nonexcludable. Example: National defense.

Quasi-public goods

Goods that are excludable but not rival. Example: Cable TV.

Common resources

A good that is rival but not excludable. Example: Forest land in many poor countries.

Tragedy of the commons

The tendency of a common resource to be overused.

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

Percentage change in quantity demanded is greater than the percentage change in price. In other words, PE > 1.

Inelastic demand

Percentage change in quantity demanded is less than the percentage change in price. In other words, PE < 1.

Unit-elastic demand

Percentage change in quantity demanded is exactly equal to the percentage change in price. In other words, PE = 1.