Economics Key Concepts: Positive vs. Normative, Opportunity Cost, Market Equilibriums, and Market Structures

What is the difference between a positive and normative statement?

is objective and can be tested or validated, while a normative statement is subjective and expresses opinions or values about what ought to be.

What is opportunity cost?

the value of the next best alternative that is forgone when making a decision.

What are direct costs?

expenses that can be directly attributed to a specific product or service.

What does a point in a PPF diagram indicate?

A point inside the PPF is attainable but inefficient, a point on the curve is efficient, and a point outside the curve is unattainable.

What is the difference between comparative and absolute advantage?

Comparative advantage refers to the ability to produce a good at a lower opportunity cost than another producer, while absolute advantage refers to the ability to produce more of a good with the same resources.

What is a surplus?

when the quantity supplied exceeds the quantity demanded at a given price.

What is a shortage?

when the quantity demanded exceeds the quantity supplied at a given price.

What are substitute goods?

products that can replace each other; when the price of one rises, the demand for the other increases.

What are complement goods?

products that are used together; when the price of one rises, the demand for the other decreases.

What are price and income elasticities?

Price elasticity measures how much the quantity demanded or supplied changes in response to a price change, while income elasticity measures how much the quantity demanded changes in response to a change in consumer income.

What is the difference between normal and inferior goods?

Normal goods are those whose demand increases as consumer income rises, while inferior goods are those whose demand decreases as consumer income rises.

What is a price ceiling?

a maximum price set by the government that can be charged for a good or service, which can lead to shortages.

What is a price floor?

a minimum price set by the government that must be paid for a good or service, which can lead to surpluses.

What is marginal utility?

the additional satisfaction or benefit gained from consuming one more unit of a good or service.

What is diminishing marginal utility?

the decrease in added satisfaction or benefit as more units of a good or service are consumed.

What is marginal product?

the additional output generated by adding one more unit of a specific input while keeping other inputs constant.

What is diminishing marginal product?

occurs when adding an additional unit of input results in a smaller increase in output.

What is a sunk cost?

a cost that has already been incurred and cannot be recovered, and should not affect future economic decisions.

What is total revenue?

the total amount of money a firm receives from selling its goods or services, calculated as price multiplied by quantity sold.

What is marginal revenue?

the additional revenue gained from selling one more unit of a good or service.

MR=MC

the point when raising the output no longer raises profit.

What are the three conditions for a competitive market?

The three conditions for a competitive market are: many buyers and sellers, homogeneous products, and free entry and exit from the market.

Price elasticity of demand (equation)

%change in quantity demanded/%change in price

income elasticity of demand(equation)

%change in quantity demanded/%change in income

(Budget constraint) income increases

shift outwards

(Budget constraint) income decreases

shift inwards

(Budget constraint) price increases

flatter slope (rotate)

(Budget constraint) price decreases

steeper slope (rotate)

how should a consumer spend their money

MU/P then compare

marginal cost definition

additional cost of producing one more unit of output

marginal cost equation

MC = deltaTC/deltaQ

Average cost definition

the cost per unit of output

Average cost equation

AC = TC/Q

why is the firm's demand curve horizontal for a perfectly competitive firm

because there are many sellers selling at the same price, and they have no influence on price ie; MR = P

why is the marginal revenue(MR) below the demand curve

For a single-price monopolist, the marginal revenue curve lies below the demand curve because selling additional units requires lowering the price on all units, so the extra revenue from each additional unit is less than the price.

price discrimination

when a firm charges different prices to different consumers for the same good or service, not because of cost differences, but because of differences in willingness to pay.

Oligopoly

An industry with few producers, high entry barriers, and each one has market power. They compete on either price or quantity and may charge the same or different prices.

game theory

The mathematical study of strategic interactions between rational actors where the outcome of any actor's actions depends on the actions of others.

Nash Equilibria

These are combinations of actions such that no player regrets his/her action once it is revealed what everyone else has chosen to do

payoff matrix

A table representation of a specific game theory situation. The payoff matrix shows the players involved in the game, as well as the possible strategies and payoffs available to those players.

Cartel

A group of firms who have agreed formally or informally to work together in ways that will in essence, create the advantages of being a monopoly.

Collusion

The act of firms cooperating (rather than competing) with each other through some form of agreement.

Monopolistic competition

An industry with many competitors, all producing slightly different products.

Strategic dependence

The concept of how each firm in an oligopoly has an optimal strategy to maximize profits, but that strategy depends on the actions of other firms in the oligopoly

Cap-and-trade

A policy that places an absolute limit on an aggregate amount of a pollutant and allows people to compete in a market for portions of that limit.

Coase theorem

Regardless of who has the legal right (or the property right), allocative inefficiencies resulting from external costs or benefits can be resolved through private negotiations between affected parties.

Common resource

A resource that can be consumed by only one producer or consumer at a time and is found in environments in which it is difficult to exclude nonpaying users.

External benefit

The benefits received by individuals other than the producer or consumer.

External cost

The costs of producing a good or service that are borne by individuals other than the producer or consumer.

Marginal social benefit

The marginal benefit of consumption from society's point of view.

Marginal social cost

The marginal cost of production from society's point of view.

Market failure

When private markets do not produce in a way that leads to an allocatively efficient use of resources. In other words, when the private market does not maximize total surplus.

Private good

A good and service that can be consumed by only one person at a time. It is also possible to exclude non-buyers from consuming the goods.

Public good

A public good has two characteristics. First, it is difficult or impossible to exclude non-buyers from consuming the good. Second, consumers can consume a public good without interfering with others' consumption of the same good.

Social benefit

External benefits plus private benefits.

Social cost

External costs plus private costs.