ECON 1001 midterm 1 review

ceteris paribus

“other things equal”; change in one thing while all else remains the same

utility

happiness, satisfaction; something every rational individual wants to maximize

positive statement

claims about what is (factual)

normative statement

claims about what ought to be (opinion/subjective)

cost-benefit principle

measuring an individuals willingness to do something based on the cost and benefits of said action (where the cost is greater than or equal to benefits)

opportunity-cost principle

measuring an individuals willingness to do something where the cost of said action is the next best benefit

sunk cost

costs that cannot be reversed

sunk cost fallacy

an individual makes a decision based on costs that are no longer relevant

willingness to pay (WTP)

maximum price a customer is willing to pay for a product or service

economic surplus

access of goods/benefits where the total benefits are greater than the total costs (rational individuals seek to increase/maximize their economic surplus)

production possibility frontier

graphical illustration of opportunity cost; graphing the production of one good and its effects on another

the marginal principle

measuring an individuals willingness to do something based on the marginal befits and marginal costs of each (additional) action

marginal benefit

difference in benefits between each quantity

marginal cost

difference in costs between each quantity

the rational rule

if the marginal benefit exceeds the marginal costs, an individuals should continue doing it

rational rule for buyers —> buyers should continue buying as long as the marginal benefit exceeds the marginal cost

rational rule for sellers —> sellers should continue selling as long as the market price is above the marginal cost

the interdependence principle

individual choices are not made in isolation

unintended consequences

outcomes of a decision or having unforseeable effects

demand function

representation of demand through tables, curves/lines, and equations; combination of marginal cost and marginal benefits graphs

law of demand

demand curves always slope down

diminishing marginal benefits/utility

benefits of an additional unit begins to decline

movement (along a curve/line) (demand)

changes in one variable (either price or quantity); movement along the curve/line

shift (along a curve/line) (demand)

changes in entire function; change in the entire curve/line

achieved through…

• income

• tastes

• price of related goods

• popularity

…

normal goods

goods in which demand increases as income increases

inferior goods

goods in which demand decreases as income increases

complimentary goods

goods that coincide with one another (mirroring one another in terms of affects)

substitute goods

goods that clash with one another (opposing one another in terms of effects)

network and congestion effects

how often other individuals use said product, creating a shift in demand curve

supply function

representation of supply through tables, curves/lines, and equations; combination of marginal cost and marginal benefits graphs

law of supply

supply curves always slope down

increasing marginal costs

marginal costs always increase, meaning it usually costs more to make one additional product, even if there is a slight decrease at the beginning

inputs

things suppliers need to produce goods

declining marginal product of inputs

additional quantity of the good one more unit of an input makes possible; often decreasing

perfect competition

market where sellers have (1) identical good and (2) have small buyers and sellers

price-takers

market participant that must take the price given to them because they lack power

fixed cost

costs that do not change/remain the same

variable cost

costs that do change according to production volume

movement (along a curve/line) (supply)

changes in one variable (either price or quantity); movement along the curve/line

shift (along a curve/line) (supply)

changes in entire function; change in the entire curve/line

achieved through…

• input prices

• productivity and technology

• price and related outputs

• expectations

• type and number of sellers

…

productivity

measures how efficiently a producer converts inputs into outputs

substitutes-in-production

alternatives goods that a company or producer can make using shared resources and inputs

complements-in-production

goods that are jointly produced from the same shared recources or