Chapter 1

Economics

social science that examines how people choose among the alternatives available to them

Opportunity Cost

the value of the best alternative forgone in making any choice

Choice at the Margin

decision to do a little more or a little less of something

Microeconomics

branch of economics that focuses on the choices made by consumers & firms & the impact those choices have on individual markets

Macroeconomics

branch of economics that focuses on the impact of the choices on the total, or aggregate, lavel of economic activity

Hypothesis

Assertion of a relationship between 2 or more variables that could be proven true or false

Theory

hypothesis that has not been rejected after widespread testing & wins general acceptance

Law

Theory that has been subjected to more testing & has won virtually universal acceptance

Model

Set of Simplifying assumptions about some aspect of the real world

Model

set of sumplifying assumptions about some aspect of the real world

Cateris Paribus

Latin pgrase that meant “all other things unchanged”

Production Possibility Model

shows the goods and services that an economy is capable of producing—its possibilities—given the factors of production and. the technology it has available.

Production Possibilities Curve

Graphical representation of the alternative combinations of goods and services an economy can produce

Economic System

set of rules that define how an economy’s resources are to be owned and how decisions about their use are to be made

Factor of Production

the resources available to it for the production of goods and services (Land, Labor, Capital,)

Utility

The value or satisfaction that people derive from the goods and services they consume and the activities they pursue

Labor

human effort that can be applied to the production of goods and services

Capital

Factor of Production that has been produced for use in the production of other goods and services

Human Capital

the skills a worker has as a result of education, training, or experience that can be used in production

Financial Capital

Includes money and other “paper” assets (such as stocks and bonds) that represent claims on future payments

Natural Resources

Resources of nature that can be used for the production of goods and services

Comparative Advantages

producing a good or service if the opportunity cost of producing that good or service is lower for that economy than for any other

Market Capitalist Economy

resources are generally owned by private individuals who have power to make decisions about their use

Command Socualist Economy

the government is the primary owner of capital and natural resources and has broad power to allocate the use of factors or production

Markets

institutions that bring together buyers and sellers

Quantity Demanded

quantity buyers are willing and aboutt to buy at a particular price during a particular period, all other things unchanged

Demand Schedule

a table that shows the quantities of a good or service demanded at different prices during a particular period, all other things unchanged

Demand Curve

Show the relationship between the price and quantity demanded of a good or service during a particular period, all other things unchanged

Law of Demand

for virtually all goods and services, a higher price leads to reduction in quantity demanded and a lower price leads to an increase in quantity demanded

Demand Shifter

a variable that can change the quantity of a good or service demanded at each price

Complement

if a reduction in the price of one good increases the demand for another, the two goods are called; if an increase in the price of one reduces the demand for the other

Substitute

two goods if a reduction in the price of one good reduces the demand for another; if an increase in the price of one increases the demand for the other

Normal Good

a good for which demand increases when income increases

Inferior Good

a good for which demand decreses when income increases

Quantity Supplied

the quantity seller are willing to sell at a particular price during a particular period

Supply Schedule

a table that shows quantities supplied at different prices during a particular period

Supply Curve

graphical representation of a supply schedule, It shows the relationship between price and quantity supplied during a particular period, all other things unchanged

Supply Shifter

a variable that can change the quantity of a good or service supplied at each price

Equlubrium Quantity

quantity demanded and supplied at the equilibrium price

Surplus

amount by which the quantity supplied exceeds the quantity demanded at the current price

Shortage

amount by which the quantity demanded exceeds the quantity supplied at the current price

Circulat Flow Model

Provides a look at how market works and how they are related to each other

Sol Proprietorchip

a firm owned by one individual

Partnership

a firm owned by several individuals

Partnership

a firm owned by several individuals

Corporation

a firm owned by shareholders who own stock in the firm

Corporation stocks

shares in the ownership of a corporation

Stock Market

set of institutions in which shares of stock are bought and sold

Floor Price

a minimum allowable price set above the equilibrium price

Price Ceiling

a maximum allowable price; government forbids a price above the maximum price

Third Party Payer

When an agent other than the seller of the buyer pays part of the price of a good or service

Economic Profit

difference between total revenue and total cost

Net Benefit

total revenue minus total opportunity cost, or economic profit

Marginal Benefit

Amount by which an additional unit of an activity increases its total benefit

Marginal Cost

Amount by which an additional unit of an activity increases its total cost

Marginal Decision Rule

states if the marginal benefit of an additional unit of an activity exceeds the marginal cost, the quantity of the activity should be increased; if the marginal benefit is less then the marginal cost, the quantity should be reduced

Efficient

the allocation of resources when the net benefits of all economic activities are maximized

Property Rights

set of rules that specify the ways in which an owner can use a resource

Exclusice Property Right

one that allows its owner to prevent others from using the resource

Transferable Property Right

one that allows the owner of a resource to sell or lease it to someone else

Public Good

a good for which the cost of exclusion is prohibitive and for which the marginal cost of an additional user is zero

Private Good

A good for which exclision is possible for which the marginal cost of another user is positive

Free Rider

People or firms that consume a public good without paying for it

Marginal Utility

The amount by which total utility rises with consumption of an additional unit of a good, service, or activity, all other things unchanged

Law of Diminishing Marginal

tendency of marginal utility to decline beyond some level of consumption during a period; This law implies that all goods and services eventually will have downward-sloping marginal utility curves

Utility

Goods and services that provide you with satisfaction you feel better off because you have purchased them

Firms

organizations that produce goods and services

Fixed Factor of Production

When the quantity of a factor of production cannot be changed during a particular period

Variable factor of Production

a factor of production whose quantity can be changed during a particular period

Short Run

planning period over which the managers of a firm must consider one or more of their factors of production as fixed in quantity (cost analysis, markey dynamics, and resource allocations)

Long Run

the planning period over which a firm can consider all factos of production as variable

Variable Cost

costs associated with the use of variable factors of production

Fixed Costs/ Over head

costs associated with the use of fixrf factors of production

Capital Intensive

situation in which a firm has a high ratio of capital to labor; a firm increases its ration capital to labor

Labor Intensive

situation in which a firm has a low ration of labot to capital; a form reduces ratio of capital to labor

Economies of Scale

When long-run average cost declines as the firm expands its output

Perfect Competition

Model of the market based on the assumption that a large number of firms produce identical goods consumed by a large number of buyers

Price Takers

individuals or firms who must take the market prics as given

Total Revenue

a firm’s output multiplied by the price at which it sells that output

Explicit Costs

charges that must be paid for factors of production such as labor and capital, together with an estimate of depreciation

Implicit / Implied Cost

a cost that is included in the economic concept of opportunity cost, but that is not an explicit cost

Accounting Profit

Profit computed using only explicit costs