Ag & Consumer Economics Test 1

Microeconomics

the study of individual choices and the study of group behavior in individual markets

Macroeconomics

The study of broader aggregations of markets

economic theory

a set of ideas that attempt to explain how an economy functions, and why it behaves the way it does

reservation price

the price at
which a person would be indifferent between
doing x and not doing x

4 common pitfalls of decision making

1. ignoring implicit costs

2. failing to ignore sunk costs

3. measuring cost benefit as proportions and not absolute dollar amounts

4. failure to understand the average-marginal distinction

opportunity cost

the loss of potential gain from other alternatives when one alternative is chosen

sunk costs

costs that are beyond recovery at the moment a decision is made. should be ingorned

marginal cost

the increase in total cost that results
from carrying out one additional unit of activity

Marginal benefit

the increase in total benefit that
results from carrying out one additional unit of
activity

external cost of an activity

a cost that falls on
people who are not directly involved in the
activity

scarcity

the demand for a good or service is greater than the availability of the good or service

if marginal benefit exceeds marginal cost

Keep increasing the level of activity

cost-benefit analysis

A systematic process of evaluating the desirability of a decision by weighing its potential benefits and costs

external cost

when producing or consuming a good or service imposes a cost (negative effect) upon a third party.

explicit costs

out-of-pocket expenses a business incurs while operating

implicit costs

any cost that has already occurred but is not necessarily shown or reported as a separate expense

invisible hand

a metaphor that describes how the self-interested actions of individuals can lead to beneficial outcomes for society as a whole

marginal analysis

a decision-making tool that compares the costs and benefits of a specific action to determine if it will generate profit

markets

Consists of buyers and sellers of a good or service

Law of demand

the empirical observation
that when the price of a product falls, people
demand larger quantities of it

Law of supply

the empirical observation that
when the price of a product rises , firms offer
more of it for sale.

Equilibrium price and quantity

it is the price-quantity pair at which both buyers and sellers
are satisfied

Factors that shift the demand curve

1. incomes

2. taste and preferences

3. consumer expectations

4. population

5. prices of substitutes and compliments

normal goods

demand rises when oncome increases

inferior goods

demand falls when income increases

compliments

an increase in the price of one goods decreases demand for the other goods

factors that shift the supply curve

1. technology

2. factor prices

3. the number of suppliers

4. producer expectations

5. weather

excess supply

the amount by which quantity
supplied exceeds quantity demanded

excess demand

the amount by which
quantity demanded exceeds quantity
supplied

price ceiling

rent control, a level beyond which rents are not permitted to rise

Price floor

keeps prices above there equilibrium level

Rationing function of price

the process whereby price directs existing supplies of a product to the users who value it most highly- short term function

Allocative function of price

the process whereby price acts as a signal that guides resources away from the production of goods whose prices lie below cost toward the production of goods whose prices exceed cost - long term function

Production function

the relationship that describes how inputs like capital and labor are transformed into output

Variable input

an input that can be varied in the short run

fixed input

an input that cannot vary in the short run

Long run

the shortest period of time required to alter the
amounts of all inputs used in a production process

Short run

period of time during which at least one of the
inputs used in a production process cannot be varied

Law of diminishing returns

if other inputs are fixed, the increase in output from an increase in the variable input must
eventually decline

Total product curve

a curve showing the amount of output (Y) as a function of the amount of variable input (X)

Marginal product

change in total product due to a 1-unit change in the variable input

Average product

total output divided by the quantity of the variable input

Isoquant

the set of all input combinations
that yield a given level of output

Marginal rate of technical substitution
(MRTS)

the rate at which one input can be
exchanged for another without altering the
total level of output

Increasing returns to scale

the property of a production process whereby a proportional increase in every input yields a more than proportional increase in output

Constant return to scale

the property of a production process whereby a proportional increase in every input yields an equal proportional increase in output

Decreasing returns to scale

the property of a production process whereby a proportional increase in every input yields a less than proportional increase in output