ECO 113 Final Study Guide Vocabulary

This set of vocabulary flashcards covers the key economic concepts and market structures listed in the ECO 113 Final Study Guide, including supply and demand factors, cost curve analysis, game theory, and market failures.

Incentives

Factors that motivate a person to act or exert effort, which can be positive, negative, direct, or indirect.

Cost Curves

The graphical representations of a firm's costs, including Average Total Cost ($ATC$), Average Fixed Cost ($AFC$), Average Variable Cost ($AVC$), and Marginal Cost ($MC$).

Opportunity Costs

The value of the next-best alternative that must be sacrificed when a choice is made.

Explicit Costs

Tangible, out-of-pocket expenses that a business pays to its factors of production.

Implicit Costs

The opportunity costs of using resources that the firm already owns, which do not involve a direct money payment.

Scarcity

The limited nature of society's resources, which necessitates trade-offs.

Accounting Profits

Total revenue minus explicit costs.

Economic Profits

Total revenue minus both explicit and implicit costs.

Production Possibilities Frontier (PPF)

A model that illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently.

Market Structures

The four classifications of competition in an industry: perfect competition, monopoly, monopolistic competition, and oligopoly.

Inferior Goods

Goods for which demand decreases as consumer income rises.

Normal Goods

Goods for which demand increases as consumer income rises.

Shut Down Condition

The short-run decision for a perfectly competitive firm to cease production if price is less than its minimum Average Variable Cost (P < AVC).

Law of Demand

The principle that, all else equal, quantity demanded of a good falls when the price of the good rises.

Law of Supply

The principle that, all else equal, the quantity supplied of a good rises when the price of the good rises.

Sunk Costs

Costs that have already been incurred and cannot be recovered.

Natural Monopoly

A situation where a single firm can supply the entire market at a lower cost than two or more firms could.

Rent Seeking Behavior

Actions taken by individuals or groups to lobby the government for special privileges or to transfer wealth to themselves at the expense of others.

Excess Demand (Shortage)

A situation where the quantity demanded is greater than the quantity supplied at the current market price.

Excess Supply (Surplus)

A situation where the quantity supplied is greater than the quantity demanded at the current market price.

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, often calculated using the midpoint formula.

Advertising Paradox

A phenomenon in market structures like monopolistic competition where advertising increases costs but may not increase long-run profits due to competition.

Mutual Interdependence

A characteristic of oligopoly where each firm's profit and strategy depends on the actions of other firms in the market.

Nash Equilibrium

A situation in game theory where economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen.

Dominant Strategy

A strategy that is best for a player in a game regardless of the strategies chosen by the other players.

Tit-for-tat Strategy

A long-run strategy in repeated games where a player mimics the opponent's previous move (cooperating after they cooperate, and defecting after they defect).

Switching Costs

The costs a consumer incurs as a result of changing brands, suppliers, or products.

Predatory Pricing

The practice of setting prices deliberately low to drive competitors out of the market.

Compensating Differentials

Difference in wages that arises to offset the nonmonetary characteristics of different jobs.

Efficiency Wages

Above-equilibrium wages paid by firms to increase worker productivity and reduce turnover.

Externalities

Costs or benefits of a market activity that affect a third party; can be internal or external and require specific policies to correct for market failure.

Free Rider Problem

A problem occurring when people receive the benefit of a good but avoid paying for it, typically associated with public goods.

Network Externalities

A situation where the value of a product or service increases as the number of users grows.

Deadweight Loss (DWL)

The fall in total surplus that results from a market distortion, such as an excise tax or monopoly power.

Price Ceiling

A legally established maximum price for a good or service.

Price Floor

A legally established minimum price for a good or service.

Mark-up

The difference between the price charged by a firm and the marginal cost of production ($P - MC$), characteristic of monopolistically competitive long-run equilibrium.

Excess Capacity

The difference between the profit-maximizing output and the output that minimizes average total cost, found in monopolistic competition in the long run.