ECN 201 - Review Terms for Test 1

Important terms and ideas that should be known for Test 1 in Microeconomic Principles.

Opportunity Cost

The most highly valued opportunity or alternative forfeited when a choice is made.

Marginal Benefits (MB)

Additional benefits; the benefits connected with consuming an additional unit of a good or undertaking one more unit of a activity,

Marginal Costs (MC)

Additional costs; the costs connected with consuming an additional unit of a good or undertaking one more unit of an activity.

Decisions at the Margin

Decision making characterized by weighing the marginal benefits of a change against the marginal costs of a change with respect to current conditions.

Production Possibilities Frontier (PPF)

The possible combinations of two goods that can be produced during a certain span of time under the conditions of a given state of technology and fully employed resources.

Productive Efficient

The condition in which the maximum output is produced with the given resources and technology.

Productive Inefficient

The condition in which less than the maximum output is produced with the given resources and technology. It implies that more of one good can be produced without any less of another being produced.

Incentive

Something that encourages or motivates a person to undertake an action.

Comparative Advantage

The situation in which someone can produce a good at a lower opportunity cost than someone else can.

Absolute Advantage

The situation in which someone can produce more of a good using the same amount of resources.

Ceteris Paribus

Latin term meaning “all other things constant” or “nothing else changes”. It is a shorthand indication of the effect one economic has on another, provided all other variables remain the same.

Positive Economics

The study of “what is” in economics. It is based on objectivity and data, using cause and effect relationships to prove the “what is” in the world.

Normative Economics

The study of “what should be” in economics. It relies on judgment of value to make subject statements of “what should be” in the world.

Microeconomics

The branch of economics that deals with human behavior and choices as they relate to relatively small units: an individual, a firm, an industry, a single market.

Macroeconomics

The branch of economics that deals with human behavior and choices as they relate to highly aggregate markets (e.g., the market for goods and services) or the entire economy.

Straight-Line PPF

Represents constant opportunity costs.

Bowed-Outward PPF

Represents increasing opportunity costs.

Law of Increasing Opportunity Costs

As more of a good is produced, the opportunity costs of producing that good increase.

Scarcity

The condition in which the wants (or goods, services, etc.) are greater than the resources available to satisfy them.

Unemployed Resources

When the economy exhibits productive inefficiency, it may not be using all of these, resulting in them being referred to as…

Demand

The willingness and ability of buyers to purchase different quantities of a good at different prices during a specific period.

Law of Demand

As the price of a good rises, the quantity demanded of the good falls, ceteris paribus.

As the price of a good falls, the quantity demanded of the good rises, ceteris paribus.

Substitution Effect and Diminishing Marginal Utility (as a collective)

Why the price and quantity demanded are inversely related.

Substitution Effect

The idea that people substitute lower priced goods for higher priced goods.

Law of Diminishing Marginal Utility

The idea that, over a given period, the marginal utility or satisfaction gained by consuming equal successive units of a good will decline as the amount of the good consumed increases.

The less utility you receive from a unit of a good, the lower the price you are willing to pay for it.

Change in Quantity Demanded

A movement from one point to another point on the same demand curve that is caused by a change in the price of a good.

Change in Demand

A shift in the entire demand curve. When demand increases, the entire curve shifts rightward. When demand decreases, the entire curve shifts leftward.

Income

Demand Shift Factor: As a person's ___ increases or decreases, that individual's demand for a particular good may rise, fall, or remain constant.

Direct relationship between ___ and demand for Normal Goods (e.g., luxury items).

Inverse relationship between ___ and demand for Inferior Goods (e.g., ramen noodles).

No relationship between ___ and demand for Neutral Goods (e.g., toilet paper).

Preferences

Demand Shift Factor: A change in ___ in favor of a good shifts the demand curve rightward (increase in demand). A change in ___ away from the good shifts the demand curve leftward (decrease in demand).

Price of Related Goods

Demand Shift Factor:

When the price of an item increases, the quantity demanded for that item decreases, resulting in an increase in demand for a substitute item. When the price of an item decreases, the quantity demanded for that item increases, resulting in a decrease in demand for a substitute item.

When the price of an item increases, the quantity demanded for that item decreases, resulting in a decrease in demand for a complement item. When the price of an item decreases, the quantity demanded for that item increases, resulting in an increase in demand for a complement item.

Substitutes

Two goods that satisfy similar needs or desires.

Complements

Two goods that are used jointly in consumption.

Number of Buyers

Demand Shift Factor: The demand for a good in a particular market area is related to the ___ in the area: more buyers means higher demand; fewer buyers means lower demand.

Expectations of Future Price

Demand Shift Factor: Buyers who expect the price of a good to be higher next month may buy it now, thus increasing the current demand for the good.

Buyers who expect the price of a good to be lower next month may wait until next month to buy it, thus decreasing the current (or present) demand for the good.

The Weather (D)

Demand Shift Factor: Environmental factors, like ___, can influence how much consumers are willing to spend, what they buy, where they shop, and how they shop.

Supply

The willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific period.

Law of Supply

As the price of a good rises, the quantity supplied of the good rises, ceteris paribus.

As the price of a good falls, the quantity supplied of the good falls, ceteris paribus.

Change in Quantity Supplied

A movement from one point to another point on the same supply curve that is caused by a change in the price of a good.

Change in Supply

A shift in the entire supply curve. When supply increases, the entire curve shifts rightward. When supply decreases, the entire curve shifts leftward.

Price of Relevant Resources

Supply Shift Factor: If the price of a ___ (i.e., a resource used to produce a good) increases, producing the good becomes more costly, resulting in a decrease in supply.

If the price of a ___ decreases, producing the good becomes less costly, resulting in an increase in supply.

Technology

Supply Shift Factor: An advance in ___ refers to the ability to produce more output with a fixed amount of resources, reducing per-unit production costs—which increases profitability and therefore provides producers with an incentive to increase the supply of the good.

Price of Other Goods

Supply Shift Factor: If the price of something that a supply is not producing rises relative to what they are producing, the supplier may shift their effort and resources towards the production of this new good.

Number of Sellers

Supply Shift Factor: If more sellers begin producing a good, perhaps because of high profits, the supply curve will shift rightward (increase in supply). If some sellers stop producing a good, perhaps because of losses, the supply curve will shift leftward (decrease in supply).

Expectations of Future Price

Supply Shift Factor: If the price of a good is expected to be higher in the future, producers may hold back some of the product today (that is, if possible—perishables cannot be held back), then they will have more to sell at the higher future price.

If the price of a good is expected to be lower in the future, producers may push more of their product now than previously planned.

Taxes and Subsidies

Supply Shift Factor: Some taxes increase per-unit costs, which leads to a leftward shift in the supply curve (decrease in supply). The removal of this tax results in a rightward shift in the supply curve (increase in supply).

Subsidies have the opposite effect, as they pay suppliers more to produce a certain good. This leads to a rightward shift in the supply curve (increase in supply). The removal of this subsidy results in a leftward shift in the supply curve (decrease in supply).

Government Restrictions

Supply Shift Factor: Sometimes governments act to reduce supply, such as through an import quota—a quantitative restriction on a foreign good. For the good with the import quota, the supply curve will shift leftward (decrease in supply). The removal of the government restriction will result in the supply curve shifting rightward (increase in supply).

The Weather (S)

Supply Shift Factor: ___ can cause significant disruptions to transportation, which is a critical component of the stability of the supply chain. Storms, floods, and heavy snow can make roads and highways impassable, leading to delayed or canceled shipments.

Surplus

A condition in which the quantity supplied is greater than the quantity demanded. They occur only at prices above the equilibrium price.

Shortage

A condition in which the quantity demanded is greater than the quantity supplied. They occur only at prices below the equilibrium price.

Equilibrium

Means “at rest”. The price-quantity combination from which buyers or sellers for not tend to move away.

Equilibrium Price

The price at which the quantity demanded equals to the quantity supplied.

Equilibrium Quantity

The quantity at which the amount of the good that buyers are willing and able to buy equals the amount that sellers are willing and able to sell—and both equal the amount actually bought and sold.

Disequilibrium

A state of either surplus or shortage in a market, when the price is anything other than the equilibrium price.

Consumers’ Surplus (CS)

The difference between the maximum price a buyer is willing and able to pay for a good or service and the price actually paid.

Producers’ Surplus (PS)

The difference between the price sellers receive for a good and the minimum or lowest price for which they would have sold the good.

Total Surplus (TS)

The sum of consumers’ surplus and producers’ surplus.

Price as a Rationing Device and Price as a Transmitter of Information

The jobs performed by the price of a good or resource.

Price acts as a Rationing Device

Because of scarcity, something is needed to determine who gets what of the limited available resources and goods.

Price acts as a Transmitter of Information

Price provides information about the relative scarcity of the good.

Price Ceiling

A government-mandated maximum price above which legal trades cannot be made.

Effects of a Price Ceiling

It creates shortages, fewer exchanges, and nonprice rationing devices (first come, first served; longer wait times, etc.).

Price Floor

A government-mandated minimum price below which legal trades cannot be made.

Effects of a Price Floor

It creates surpluses, fewer exchanges, and nonprice rationing devices (think about the potential inverse effect of a higher minimum wage—companies have to determine which of the surplus of unskilled workers they want to keep hired).

Absolute Price

The price of a good in terms of money (e.g., the price of a car is $30,000).

Relative Price

The price in terms of another good (e.g., the price of a car is 15 computers).

The Market "Feeds” Cleveland? Why?

The market is an invisible manifestation of the actions of the millions of people trying to make themselves better off. It is a spontaneous order that emerged out of the self-interested actions of humans.