Studied by 40 people
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 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 and the price it actually receives
economic surplus
the sum of consumer surplus 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 and in which the sum of consumer surplus and producer surplus is at a maximum.
black market
a market in which buying and selling takes place at prices violate government price regulations.
Perfectly competitive market
A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
Demand schedule
A 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 of the product demanded.
market demand
the demand by all the consumers of a given good or service.
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 the product rises, the quantity demaded of the product will decrease
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 the other goods that are substitutes
income effect
the change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power.
Ceteris paribus ("all else equal")
the requirement that when analyzing the relationship between two variables - such as price and quantity demanded - other variables must be held constant
Normal good
A good for which the demand increases as income rises and decreases as income falls.
inferior good
a good for which the demand increases as income falls and decreases as income rises.
substitutes
goods and services that can be used for the same purpose.
complements
goods and services that are used together.
demographics
the characteristics of a population with respect to age, race, and gender.
quantity supplied
the amount of a good or service that a firm is willing and able to supply at a given price
supply schedule
A table that shows the relationship between the price of a product and the quantity of the product supplied
supply curve
a curve that shows the relationship between the price of a product and the quantity of the product supplied.
law of supply
The rule that, holding everything else constant, increases in price causes increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.
technological change
a positive or negative change in the ability of a firm to produce a given level of output with a give quality or inputs.
market equilibrium
a situation in which quantity demanded equals quantity supplied
competitive market equilibrium
a market equilibrium with many buyers and many sellers
surplus
a situation in which quantity supplied is greater than the quantity demanded
shortage
a situation in which the quantity demanded is greater than the quantity supplied
scarcity
The 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 scarce resources
economic model
a simplified version of reality used to analyze real-world economic situations
market
a group of buyers and sellers of a good or service and the instition 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 service or good means producing less of another good or service.
opportunity cost
the highest valued alternative that must be given up to engage in an activity
centrally planned economy/controll demand
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
the 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 with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides marginal benefit to society equal to the marginal cost of producing it
voluntary exchange
the 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
analysis concerned with what is
normative analysis
analysis concerned with what ought be
microeconomics
the study of how households and firms make choices, how the interact in markets, and how the government attempts to influence their choices
macroeconomics
the study of the economy as a whole, including topics such as inflation, unemployment and economic growth
economic growth
the ability of an economy to produce increasing quantities of goods and services
trade
the act of buying or selling
absolute advantage
the ability of an individual, a firm, or country to produce more of a good or service than competitiors, using the same amount of resources
comparative advantage
the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors
product markets
markets for goods- such as computers- and services- such as medical treatment
factor markets
markets for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability.
factors of production
the inputs used to makegoods and services
free market
a market with few government restrictions on how a good or service can be produced or sold, or on how a factor of production can be employed.
entrepreneur
someone who operates a business, bringing together the factor of production-labor, capital, and natural resources-to produce goods and services.
property rights
the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it
Explicit costs
input costs that require an outlay of money by the firm
Implicit costs
Input costs that do not require an outlay of money by the firm (e.g. interest forgone on money used). The opportunity costs associated with a firm's use of resources that it owns.
Accounting Profits
A firm's total revenue minus its explicit costs
Economic profits
total revenues minus total opportunity costs of all inputs used, or the total of all implicit and explicit costs.
Zero economic profit
a condition for long-run equilibrium; all inputs make exactly their opportunity costs so that no firm wants to enter or exit the industry
Sunk costs
Costs that have already been incurred and cannot be recovered
short run
A period during which at least one of a firm's resources is fixed
long run
a period of time long enough for all inputs to be varied (no fixed costs)
production function
relationship between the quantity of inputs a firm uses and the quantity of output it produces
Marginal product
extra output due to the addition of one more unit of input
Law of diminishing returns
increasing one factor of production will increase output up to a point, then begin to decrease
Fixed cost
a cost that does not change, no matter how much of a good is produced
Variable cost
a cost that rises or falls depending on how much is produced
Average fixed cost (AFC)
Fixed cost divided by the quantity produced
Average variable cost (AVC)
total variable costs divided by quantity of output
Average total cost (ATC)
total costs divided by quantity of output
Marginal costs (MC)
The change in total cost that results from a change in output: MC= ΔTC/ΔQ
profit
the total revenue a firm receives from the sale of its product minus all costs incurred (implicit and explicit) producing it
profit maximizing firm
a firm whose primary goal is to maximize the difference between its total revenues and total costs
factor of production
an input used in the production of a good or service
perfectly competitive market
a market in which no individual supplier has significant influence on the market price of the product
price taker (perfectly competitive firm)
a firm that has no influence over the price at which it sells its product
four conditions of a perfectly competitive market
1. all firms sell the same standardized product 2. the market has many buyers and sellers, each of which buys or sells only a small fraction of the total quantity exchanged 3. productive resources are mobile 4. buyers and sellers are well informed
short run
a period of time sufficiently short that at least one of the firm's factors of production cannot be varied
long run
a period of time sufficient in length so that all the firm's factors of production are variable
production function
a technological relationship between inputs and outputs
marginal product
the increase in total output caused by an increase of one unit in the variable factor of production, holding all else constant
variable factor of production
an input whose quantity can be altered in the short run
fixed factor of production
an input whose quantity cannot be altered in the short run
average product
total output divided by units of the variable factor of production
marginal revenue
the increase in total revenue obtained by producing and selling one more unit of output
marginal cost
the increase in total cost incurred by producing one more unit of output
variable cost
any cost that changes as the firm changes its output
formula for marginal cost
Change in total cost / change in quantity
formula for average variable cost
total variable cost / quantity
short run cost minimizing quantity of output
the quantity of output at which a factory reaches minimum average total cost
short run shutdown point
a firm's minimum average variable cost; if price drops below minimum average variable cost, the firm will minimize its losses by shutting down
price elasticity of supply
the change in quantity supplied arising from a one percent change in price
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