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Scarcity
The limited availability of a resource compared to the unlimited wants for that resource.
Purchasing Power
The amount of goods and services that a unit of currency can buy.
Marginal Benefit
The additional satisfaction or utility received from consuming one more unit of a good or service.
Complements
Goods that are consumed together; an increase in the price of one leads to a decrease in the quantity demanded of the other.
Substitutes
Goods that can replace each other; an increase in the price of one leads to an increase in the quantity demanded of the other.
Law of Demand
As the price of a good decreases, the quantity demanded increases, and vice versa.
Law of Supply
As the price of a good increases, the quantity supplied increases, and vice versa.
Market Demand
The total quantity of a good or service demanded by all consumers in the market at various prices.
Market Supply
The total quantity of a good or service that producers are willing and able to sell at various prices.
Shifters of Demand
Factors other than price that cause demand to increase or decrease (e.g., income, tastes, prices of related goods).
Shifters of Supply
Factors other than price that cause supply to increase or decrease (e.g., technology, costs of production, number of sellers).
Elasticity of Demand
A measure of how much the quantity demanded of a good responds to a change in price.
Cross Price Elasticity of Demand
A measure of how the quantity demanded of one good changes in response to a change in the price of another good.
Perfectly Competitive Market
A market structure characterized by many buyers and sellers, identical products, and no barriers to entry.
Monopolistic Competition
A market structure with many firms selling similar but not identical products; barriers to entry are low.
Monopoly
A market structure where a single seller controls the entire market for a product or service.
Oligopoly
A market structure dominated by a few large firms, where the actions of one firm influence the others.
Game Theory
The study of strategic interactions among rational decision-makers.
Shutdown Rule
A firm should continue to operate in the short run if the revenue covers variable costs; if not, it should shut down.
Deadweight Loss
The loss in economic efficiency that occurs when the equilibrium outcome is not achievable or not achieved.
Accounting Profit
Total revenue minus explicit costs; does not account for opportunity costs.
Economic Profit
Total revenue minus total costs (explicit and implicit); considered a more comprehensive measure of profit.
Normal Profit
The level of profit that allows a firm to earn just enough to cover its opportunity costs.
Profit Maximizing Rule
Firms maximize profit by producing the quantity of output where marginal cost equals marginal revenue.
Price Discrimination
The practice of charging different prices to different consumers for the same product.
Economies of Scale
Reductions in cost per unit resulting from increased production, leading to greater efficiency.
Diseconomies of Scale
Increases in per unit costs as production becomes too high, often due to inefficiencies.
Short-run Equilibrium
The market condition where quantity demanded equals quantity supplied at a specific price.
Long-run Equilibrium
The market condition where all firms earn normal profit, and no firm wishes to enter or exit the market.
Average Variable Cost
Total variable costs divided by the number of units produced.
Average Total Cost
Total costs (fixed and variable) divided by the number of units produced.
Total Variable Cost
The sum of all costs that vary with output levels.
Total Fixed Cost
Costs that do not change with the level of output.
Total Revenue
The total amount of money received from sales of a good or service.
Total Cost
The total expense incurred in producing a good or service, including both fixed and variable costs.
Social Optimal Price/Quantity
The price and quantity produced at which the marginal social benefit equals the marginal social cost.
Economic Systems
Structures that determine the allocation of resources, including command, market, and mixed economies.
Price Controls
Government regulations that set maximum or minimum prices for goods and services.
Least Cost Rule
A principle stating that firms should produce at the combination of labor and capital that minimizes costs.
Diminishing Marginal Returns
The principle that as more of a variable input is added to a fixed input, the additional output gained will eventually decrease.
Payoff Matrix
A table that shows the potential outcomes of a strategic decision based on the choices of others.
Dominant Strategy
A strategy that yields a higher payoff regardless of what the other player does.
Nash Equilibrium
A situation where no player can benefit from changing their strategy while the others keep theirs unchanged.
Derived Demand
Demand for a factor of production that results from the demand for the final goods produced.
Factor Market
A market for the factors of production, such as labor, capital, and land.
Labor Demand
The total quantity of labor that employers are willing to hire at different wage levels.
Labor Supply
The total quantity of labor that workers are willing to offer at different wage levels.
Positive Externalities
Benefits experienced by third parties not directly involved in an economic transaction.
Negative Externalities
Costs incurred by third parties not directly involved in an economic transaction.
Government Responses to Externalities
Policies implemented to correct market failures caused by externalities, such as taxes or subsidies.
Absolute Advantage
The ability of a party to produce more of a good or service with the same resources than another party.
Comparative Advantage
The ability of a party to produce a good or service at a lower opportunity cost than another.
Per Unit Tax/Subsidy
A tax or subsidy applied to each unit of a product sold.
Lump Sum Tax/Subsidy
A fixed amount tax or subsidy that does not change with the level of output.
Production Possibilities Curve
A graph that shows the maximum feasible amount of two goods that can be produced with available resources.
Antitrust Laws
Legislation to promote competition and prevent monopolies in the market.
Public Goods
Goods that are non-excludable and non-rivalrous; consumption by one individual does not reduce availability to others.
Lorenz Curve
A graphical representation of income or wealth distribution within a population.
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