Principles of Microeconomics Chapters 1-6

ceteris paribus

the other variables that aren't being talked about stay the same; when all else is equal

economic model

a simplified version of the economic environment, with all of the nonessential features eliminated

economics

the study of choices that are made when there is scarcity

entrepreneurship

effort to combine the other factors of production to produce and sell goods

factors of production

natural resources, labor, physical capital, human capital, and entrepreneurship

human capital

knowledge and skills a worker has that is required for their job, acquired through education and experience

labor

physical and mental effort used by people to produce goods

macroeconomics

the study of a nation's economics as a whole, focused on inflation, employment, and economic growth

microeconomics

the study of choices made by individuals, groups of people, businesses, and governments, and their effects on the economy

marginal change

how a small change in one variable affects another variable, and the effect of that change on decision making

natural resources

resources provided by nature, such as oil, water, mineral deposits; some use the term "land" instead

physical capital

the stock of equipment and infrastructure that is used to produce goods and services

normative analysis

type of economic analysis that predicts the consequences of actions by asking "what ought to be"

positive analysis

type of economic analysis that predicts the consequences of actions by asking "what is" or "what will be"

scarcity

the idea that resources are limited, but wants and needs are limitless

variable

a measure of something that can take on different values

marginal benefit

the additional benefit resulting from a small increase in an activity

marginal cost

the additional cost resulting from a small increase in an activity

nominal value

an amount of money at its face value

real value

an amount of money valued by the amount of goods it can buy

real-nominal principle

the amount of money people carry around depends on the price of the goods and services they buy

opportunity cost

the value of what you are missing out on by designating resources to a different area

production possibilities curve

curve that shows what is attainable based on available resources

absolute advantage

requiring less resources to provide the same good or service

centrally planned economy

an economy in which a planning authority decides what products to produce, how to produce them, and who gets the products

comparative advantage

having a lower opportunity cost to produce a good or service

export

a product produced in the home country and sold abroad

import

a product produced abroad and purchased in the home country

market economy

an economy in which the production of products and their prices are determined by an open market competition between businesses and firms

change in demand

when there is a change in the quantity consumers are willing to buy at a certain price point due to external variables, shifts the demand curve

change in quantity demanded

when there is a change in the quantity consumers are willing to purchase due to a change in the price, moves along the demand curve

change in quantity supplied

a change in the quantity a producer is willing and able to sell when the price changes

change in supply

when there is a change in the quantity suppliers are willing to produce and sell at a certain price point, shifts the supply curve

complements

two goods that are consumed together as a package, and a decrease in the price of one good decreases the cost of the entire package, causing consumers to buy more of both goods

demand schedule

table that shows the relationship between the price of a particular product and the quantity that an individual consumer is willing to buy

excess demand

at a certain market price, the quantity demanded exceeds the quantity supplied, meaning that consumers are willing to buy more than producers are willing to sell; a shortage

excess supply

the quantity supplied exceeds the quantity demanded, meaning that producers are willing to sell more than consumers are willing to buy; a surplus

individual demand curve

a graphical representation of the relationship between the price of a particular product and the quantity that an individual consumer is willing to buy

individual supply curve

a graphical representation of the relationship between the price of a particular product and the quantity that an individual producer is willing to sell

inferior good

consumers buy larger quantities of goods in this category when their income decreases

law of demand

all other factors being equal, as the price of a good or service increases, the quantity of goods or services that consumers demand will decrease, and vice versa

law of supply

all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa

market demand curve

shows the relationship between the price of the good and the quantity demanded by all consumers

market equilibrium

when the quantity of a product demanded equals the quantity supplied at the prevailing market price, no pressure to change the price

market supply curve

shows the relationship between the price of the good and the quantity that all producers together are willing to sell

minimum supply price

the lowest price at which a product is supplied, influenced by the marginal cost of producing the product

normal good

when income increases, a consumer buys a larger quantity, most goods fall into this category

perfectly competitive market

many buyers and sellers of a product, so no single buyer or seller can affect the market price

quantity demanded

how much of a particular product an individual consumer is willing and able to buy

quantity supplied

how much of a product a producer is willing and able to produce and sell

substitutes

two similar products, an increase in the price of the first good may cause some consumers to switch to the second good

supply schedule

table that shows the relationship between the price of a particular product and the quantity that an individual producer is willing to sell

cross-price elasticity of demand

the responsiveness of demand to changes in the prices of other goods, indicating how much more or less of a particular product is purchased as other prices change

elastic demand

price elasticity is greater than 1.0, examples include restaurant meals, air travel, and movies

income elasticity of demand

the responsiveness of demand to changes in income, equal to percent change in quantity demanded divided by percent change in income

inelastic demand

price elasticity is less that 1.0, examples include salt, eggs, coffee, and cigarettes

perfectly elastic demand

price elasticity is infinite and the demand curve is horizontal, meaning that only one price is possible

perfectly elastic supply

the percentage change in quantity supplied is infinite, meaning that if the price drops below a certain point, the quantity supplied would go to zero

perfectly inelastic demand

the quantity demanded doesn’t change as the price changes, so the demand curve is vertical at the fixed quantity, price elasticity of demand is 0

perfectly inelastic supply

price elasticity of supply is 0: the percentage change in quantity supplied is zero, one example is land

price elasticity of demand

the responsiveness of the quantity demanded to changes in price, equal to percent change in quantity demanded divided by percent change in price

price elasticity of supply

the responsiveness of the quantity supplied to changes in price, equal to percent change in quantity supplied divided by percent change in price

total revenue

total money a business generates from selling goods or services

unit elastic demand

price elasticity of demand is exactly 1.0: quantity increases by same amount as price, examples include housing and fruit juice

consumer surplus

your willingness to pay minus the price you actually pay

deadweight loss

deadweight loss is the decrease in the total surplus of the market due to a price floor or ceiling, in the sense that it is not offset by a gain to anyone else

deadweight loss from taxation

excess burden of a tax, loss of surplus that exceeds the amount lost to taxes from the government

efficiency

attained when economies distribute resources in a manner that maximizes benefits and eliminates waste

price ceiling

maximum price for a good set by the government to regulate a good

price floor

minimum price for a good set by the government to regulate a good

producer surplus

the price a producer receives for a product minus the marginal cost of production

total surplus

the sum of consumer surplus and producer surplus

willingness to accept

the minimum amount the seller is willing to accept as payment for a product, equal to the marginal cost of production

willingness to pay

the maximum amount you are willing to pay for the product

diminishing marginal utility

each additional unit of something leads to an ever-smaller increase in the utility of that unit