Microeconomics Final Exam Review

absolute advantage

the ability to produce a good using fewer inputs than another producer

average fixed cost (AFC)

Total fixed cost divided by the number of units of output; a per-unit measure of fixed costs. AFC = FC/Q

average total cost (ATC)

Total cost divided by the number of units of output ATC = TC/Q or ATC = AFC + AVC

average variable cost (AVC)

variable cost divided by the number of units of output AVC = VC/Q

budget constraint

the limits imposed on household choices by income, wealth, and product prices.

capital

goods used to produce other goods

cartel

a group of firms that gets together and makes joint price and output decisions to maximize joint profits

ceteris paribus

a devise used to analyze the relationship between two variable while the values of other variables are held unchanged.

clayton act

act outlawed specific monopolistic behaviors such as tying contracts

command economy

An economy in which a central government either directly or indirectly sets output targets, incomes, and prices

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other and vice versa

consumer goods

goods produced for present consumption

consumer sovereignty

The idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase).

consumer surplus

The difference between the maximum amount a person is willing to pay for a good and its current market price.

cross price elasticity of demand

measures the responsiveness of the quantity demand of a good to a change in the price of another good.

diseconomies of scale

The property whereby long-run average total cost rises as the quantity of output increases (right-most upward sloping part of the long-run ATC)

demand curve

a graph that shows the amount of a product that would be bought at all possible prices in the market

depreciation

the decline in an asset's economic value over time

diminishing marginal utility

the point reached when an additional unit of a product consumed is less satisfying than the one before

economic theory

A statement or set of related statements about cause and effect, action and reaction

economics

the study of how individuals and nations make choices about ways to use scarce resources to fulfill their needs and wants

efficiency

producing what people want at the least possible cost

elastic demand

the percentage change in quantity demanded is greater than the percentage change in price in absolute value

elasticity

a measure of responsiveness that tells us how a dependent variable such as quantity responds to a change in an independent variable such as price

equilibrium

the point at which quantity demanded and quantity supplied are equal

entrepreneur

a person who organizes, manages, and takes on the risks of a business

equity

(n.) the state of being just, fair, or impartial; fair and equal treatment; something that is fair; the money value of a property above and beyond any mortgage or other claim

shortage

quantity demanded exceeds quantity supplied

surplus

quantity supplied exceeds quantity demanded

externality

unintended side effect that either benefits or harms a third party not involved in the activity that caused it

fallacy of composition

The incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or whole.

firm

an organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand. transforms inputs into outputs. primary producing unit in a market economy

fixed cost

a cost that does not change, no matter how much of a good is produced. there are none in the long-run

free enterprise

the freedom of individuals to start and operate private businesses in search of profits

free rider problem

getting the benefits of something without having to contribute.. this problem also arises when individuals receive the benefit whether they contributed or not (Cleaner air).

Heckscher-Ohlin theorem

a country has a comparative advantage in the production of a product if that country is relatively well endowed with inputs used intensively in the production of that product.

homogenous products

undifferentiated products; products that are identical to, or indistinguishable from, one another

income

the money a person gets from salary or wages, profits, interest, investments, and other sources

imperfectly competitive industry

An industry in which single firms have some control over the price of their output

income elasticity of demand

measures the responsiveness of the quantity demanded of a good to the change in the income of the people demanding the good. Formula: (%change in quantity demanded) / (%change in income)

economies of scale

as a company produces larger numbers of a particular product, the cost of each of these products goes down aka increasing returns to scale

indifference curve

a curve showing the combinations of two goods that leave the consumer with the same level of utility.

inelastic demand

demand that responds a little bit to change in price. always has a numerical value between 0 and -1

inferior goods

good that demand falls when income rises

inputs

anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants

microeconomics

the branch of economics that studies the economy of consumers or households or individual firms

interest

the price paid for the use of borrowed money

monopolistic competition

market structure of an industry in which there are many firms and freedom of entry and exit but in which each firm has a product somewhat differentiated from the others, giving it some control over its price

monopoly

one firm that produces a product which there are no close substitutes for and in which significant barriers exist to prevent new firms from entering the industry

laissez faire economy

government has zero to no control over the economy

law of demand

consumers buy more of a good when its price decreases and less when its price increases

law of diminishing marginal utility

As the quantity of a good consumed increases the extra satisfaction gained decreases

law of diminishing returns

a law affirming that to continue after a certain level of performance has been reached will result in a decline in effectiveness

law of supply

the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises

lorenz curve

A widely used graph of the distribution of income, with cumulative percentage of families plotted along the horizontal axis and cumulative percentage of income plotted along the vertical axis.

macroeconomics

the branch of economics that studies the overall working of a national economy

marginal cost (mc)

the increase in total cost that results form producing one more unit of output

marginal revenue (mr)

the additional revenue that a firm takes in when it increases output by one additional unit

marginal social cost (msc)

the total cost to society of producing an addiotnal unit of a good or service

marginal utility (mu)

additional satisfaction gained by the consumption or use of one more unit of a good or service

marginalism

the process of analyzing the additional or incremental costs or benefits arising from a choice or decision

market

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

market failure

Situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers

market demand

sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service

market power

a firm's ability to raise the price of a good without losing all its sales

moral hazard

The risk that the behavior of one party may change to the detriment of another after a contract has been agreed upon. Example: Those with insurance may be less likely to guard against loss than those without insurance.

movement along the demand curve

the change in quantity demanded brought about by a change in price

movement along a supply curve

the change quantity supplied brought about by a change in price

natural monopoly

a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms

negative relationship

a relationship between two variables which a decrease in one is associated with an increase in another or vice versa

normal goods

goods which demand goes up when income is higher and goes down when income is lower

normative economics

the part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics

north american free trade agreement

an agreement signed by the united states, canada, and mexico in which it was agreed that north america be a "free-trade" zone

ockham's razor

irrelevant detail should be cut away

oligopoly

a market in which control over the supply of a commodity is in the hands of a small number of producers and each one can influence prices and affect competitors

opportunity cost

The next best alternative given up when making a choice

outputs

goods and services of value to households

payoff

an advantage or profit that you get as a result of doing something

perfect competition

a market structure that is characterized by a large number of small firms, a homogeneous product,freedom of entry and exit

perfect substitutes

identical products

perfectly elastic demand

demand in which quantity drops to zero at the slightest increase in price

perfectly inelastic demand

demand in which quantity demanded does not respond at all to a change in price

positive economics

An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works.

positive relationship

a relationship between two variables which a decrease in one is associated with a decrease in another. and a increase in one is associated with an increase in another

pos hoc, ergo propter hoc

the common misconception that if event a happens before event b that event b happened because of event a

producer surplus

the amount a seller is paid for a good minus the seller's cost of providing it.

product differentiation

a positioning strategy that many firms use to distinguish their products from those of competitors

price ceiling

a maximum price that sellers may charge for a good

price discrimination

charging different prices to different buyers

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

price floor

a minimum price below which exchange is not permitted

profit

the difference between revenues and cost

variable cost

a cost that depends on the level of production chosen

quantity demanded

how much people are willing to buy at a given price, only changes when price changes (move along curve)

quantity supplied

the amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.

real income

Set of opportunities to purchase real goods and services available to a household as determined by prices and money income.

scarce

limited

shift of a demand curve

The change that takes place in a demand curve corresponding to a new relationship between quantities demanded of a good and price of that good. The shift is brought about by a change in the original conditions.

shift of a supply curve

the change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions.