Economics 001

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

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

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 as they interact in markets determine the allocation of 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 with 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 Model

a simplified version of reality used to analyze real-world economic situations

Economic variable

something measurable that can have different values, such as the number of people employed in manufacturing

Positive Analysis

analysis concerned with what is

normative analysis

analysis concerned with what ought to be

Microeconomics

the study of how households and firms make decisions and how they 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

Production Possibilities Frontier (PPF)

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

Opportunity Cost

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

Economic Growth

The ability of an economy to produce increasing quantities of goods and services

Trade

Act of buying and selling

Absolute Advantage

The ability of an individual, a firm, or a country to produce more of a good or service than competitors, 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 Market

A market for goods-such as computers-or services-such as medical treatment

Factor Market

A market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability

Factors of production

Labor, capital, natural resources, and other inputs used to make goods and services

Circular-flow diagram

A model that illustrates how participants in markets are linked

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 factors of production-labor, capital, and natural resources-to produce goods or services.

Property Rights

The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.

perfectly competitive market

A market that meets the conditions of having (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 that shows 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 Demanded

The demanded by all the consumers of a given good or service

Law of Demand

A rule that states 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 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 other goods, holding constant the effect of the price change on consumer purchasing power.

Income effect

The change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding all other factors constant

Ceteris paribus ("all else equal") condition

The requirement that when analyzing the relationship between two variables-such as prices 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

a rule that states that, holding everything else constant, increases in price cause 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 given quantity of inputs

market equilibrium

A situation in which quantity demanded equals quantity supplied

competitive market equilibrium

a market equilibrium with many buyers and sellers

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

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 actual price the consumer pays.

Marginal benefit

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

Marginal Cost

The change in a firm's total cost from 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 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 take place at prices that violate government price regulations

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.

Private Cost

The cost borne by the producer of a good or service

Social Cost

The total cost of producing a good or service, including both the private cost and any external cost.

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

Market Failure

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

Property Rights

the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it

Transactions 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.

Coase Theorem

the argument of economist Ronald Coase that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities

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

a policy that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices

Rivalry

the situation that occurs when one person's consuming a unit of a good means no one else can consume it

Excludability

the situation in which anyone who does not pay for a good cannot consume it

Private Good

a good that is both rival and excludable

Public Good

A good that is both nonrival and nonexcludable

Free Riding

benefiting from a good without paying for it

Common resource

A good that is rival but not excludable

Tragedy of the Commons

the tendency for 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

the case where the percentage change in quantity demanded is greater than the percentage change in price, so the price elasticity is greater than 1 in absolute value

Inelastic Demand

The case where the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1 in absolute value

Unit-elastic demand

The case where the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value

Perfectly inelastic demand

The case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero

Perfectly elastic demand

The case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity

Total Revenue

The total amount of funds a seller receives from selling a good or service, calculated by multiplying price per unit by the number of units sold

cross-price elasticity of demand

the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good

Income elasticity of demand

A measure of the responsiveness of the quantity demanded to changes in income, measured by the percentage change in the quantity demanded divided by the percentage change in income.

Price elasticity of supply

The responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product's price.

Health Care

goods and services, such as prescription drugs, consultations with a doctor, and surgeries, that are intended to maintain or improve a person's health

Affordable Care Act (ACA)

health system reform legislation passed by Congress and signed by President Obama in 2010.

Health Insurance

a contract under which a buyer agrees to make payments, or premiums, in exchange for the provider's agreeing to pay some or all of the buyer's medical bills

Fee-for-service

A system under which doctors and hospitals receive a payment for each service they provide.

Single-payer health care system

a system, such as the one in Canada, in which the government provides health insurance to all of the country's residents