Microecon Terms

economics

study of choice under scarcity

marginal benefit

additional benefit of consuming one more unit of a good/service

law of diminishing returns

the marginal return of an input tends to fall as the quantity of the input rises beyond a certain point

opportunity cost

the value of what you gave up, the next best alternative

positive claims

the reality

normative claims

how things should be

absolute advantage

is A can produce results/services/goods using fewer resources than B

comparative advantage

production of a good if A’s opportunity cost lower than B

utility

measure of happiness

market

set of consumers and suppliers of a specific service or good

perfectly competitive market

a market of homogenous products wherein all participants are price takers

1st fundamental theorem of welfare economics

all market allocations are pareto optimal

1. complete marekts (no transaction costs, each actor has perfect information, market for every good
2. price taking
3. local nonsatiation

pareto optimal

cannot make anyone better off without making someone worse off

2nd fundamental theorem of welfare economics

any pareto optimal can be obtained by a competitive equilibrium with ex ante wealth transfers

demand curve

graphs the quantity demanded at each price , all else equal

law of demand

demand curves slope downwards

lower price —> greater quantity demanded

supply curves

graphs quantity supplies at each price, all else equal

supply slope upward

equilibrium

a state in which no inherent force generates change

price elasticity of demand

percent change in quantity demanded due to a 1 percent change in price

elastic

quantity of demand changes noticeably with one percent change in price

inelastic

quantity of demand does not change noticeably with one percent change in price

in terms of elasticity, what does a steeper demand curve show

inelastic

in terms of elasticity, what does a flatter demand curve show

elastic

income elasticity of income

how does 1% increase in income impact quantity consumed

cross price elasticity of demand

how does 1% increase in price of good X impact quantity of good Y that is consumed

price elasticity of supply

how does 1% change in price of good x impact quantity of X supplied