Principles of Microeconomics, 7th Edition (Mankiw)

scarcity

limited nature of society's resources

economics

study of how society manages its scarce resources

efficiency

property of society getting the most surplus it can from its scarce resources

equality

property of giving economic prosperity equally to all

opportunity cost

whatever must be given up to obtain some item

rational people

people who systematically and purposefully do the best they can to achieve their objectives

marginal change

small incremental adjustment to a plan of action

incentive

something that induces a person to act

market economy

economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

property rights

ability of an individual to own and exercise control over scarce resources

market failure

situation in which a market left on its own fails to allocate resources efficiently

externality

uncompensated impact of one person's actions on the well-being of a bystander

market power

ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

productivity

quantity of goods and services produced from each unit of labor input

inflation

increase in overall level of prices in the economy

business cycle

fluctuations in economic activity, such as employment and production

production possibilities frontier

graph showing the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

microeconomics

study of how households and firms make decisions and how they interact in markets

macroeconomics

study of economy-wide phenomena, including inflation, unemployment, and economic growth

positive statements

claims that attempt to describe the world as it is

normative statements

claims that attempt to prescribe how the world should be

market

group of buyers and sellers of a particular good or service

competitive market

market in which there are many buyers and sellers so that each has a negligible impact on the market price / market with many buyers and sellers trading identical products so that each buyer and seller is a price taker

quantity demanded

amount of a good that buyers are willing and able to purchase

law of demand

claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises

demand schedule

table that shows the relationship between the price of a good and the quantity demanded

demand curve

graph of the relationship between the price of a good and the quantity demanded

normal good

good for which, other things being equal, an increase in income leads to an increase in demand

inferior good

good for which, other things being equal, an increase in income leads to a decrease in demand

substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other

complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other

quantity supplied

amount of a good that sellers are willing and able to sell

law of supply

claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises

supply schedule

table that shows the relationship between the price of a good and the quantity supplied

supply curve

graph of the relationship between the price of a good and the quantity supplied

equilibrium

situation in which the market price has reached the level at which quantity supplied equals quantity demanded

equilibrium price

price that balances quantity supplied and quantity demanded

equilibrium quantity

quantity supplied and the quantity demanded at the equilibrium price

surplus

situation in which quantity supplied is greater than quantity demanded

shortage

situation in which quantity demanded is greater than quantity supplied

law of supply and demand

claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

elasticity

measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

price elasticity of demand

measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

total revenue

amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold / the amount a firm receives for the sale of its output

income elasticity of demand

measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

cross-price elasticity of demand

measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good

price elasticity of supply

measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

price ceiling

legal maximum on the price at which a good can be sold

price floor

legal minimum on the price at which a good can be sold

tax incidence

manner in which the burden of a tax is shared among participants in a market

welfare economics

study of how the allocation of resources affects economic well-being

willingness to pay

maximum amount that a buyer will pay for the good

consumer surplus

amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

cost

value of everything a seller must give up to produce a good

producer surplus

amount a seller is paid for a good minus the seller's cost of providing it

deadweight loss

fall in total surplus that results from a market distortion, such as tax

world price

price of a good that prevails in the world market for that good

tariff

tax on goods produced abroad and sold domestically

internalizing the externality

altering incentives so that people take account of the external effects of their actions

corrective tax

tax designed to induce private decision makers to take account of the social costs that arise from a negative externality

Coase theorem

proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

transaction costs

costs that parties incur in the process of agreeing to and following through on a bargain

excludability

property of a good whereby a person can be prevented from using it

rivalry in consumption

property of a good whereby one person's use diminishes other people's use

private goods

goods that are both excludable and rival in consumption

public goods

goods neither excludable nor rival in consumption

common resources

goods that are rival in consumption but not excludable

club goods

goods that are excludable but not rival in consumption

free rider

person who receives the benefit of a good but avoids paying for it

cost-benefit analysis

study that compares the costs and benefits to society of providing a public good

Tragedy of the Commons

parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole

total cost

market value of the inputs a firm uses in production

profit

TR - TC; (P - ATC)*Q

explicit costs

input costs that require an outlay of money by the firm

implicit costs

input costs that do not require an outlay of money by the firm

economic profit

total revenue minus total cost, including both explicit and implicit costs

accounting profit

total revenue - total explicit cost

production function

relationship between quantity of inputs used to make a good and the quantity of output of that good

marginal product

increase in output that arises from an additional unit of input

diminishing marginal product

property whereby the marginal product of an input declines as the quantity of the input increases

fixed costs

costs that do not vary with the quantity of output produced

variable costs

costs that vary with the quantity of output produced

average total cost

total cost divided by the quantity of output

average fixed cost

fixed cost divided by the quantity of output

average variable cost

variable cost divided by the quantity of output

marginal cost

increase in total cost that arises from an extra unit of production

efficient scale

quantity of output that minimizes average total cost

economies of scale

property whereby long-run average total cost falls as the quantity of output increases

diseconomies of scale

property whereby long-run average total cost rises as the quantity of output increases

constant returns to scale

property whereby long-run average total cost stays the same as the quantity of output changes

average revenue

total revenue divided by the quantity sold; equals the price of the good in all firms

marginal revenue

change in total revenue from an additional unit sold; equals the price of the good for competitive firms

sunk cost

cost that has already been committed and cannot be recovered

monopoly

firm that is the sole seller of a product without close substitutes

natural monopoly

monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms

price discrimination

business practice of selling the same good at different prices to different customers

oligopoly

market structure in which only a few sellers offer similar or identical products

monopolistic competition

market structure in which many firms sell products that are similar but not identical

game theory

study of how people behave in strategic situations

collusion

an agreement among firms in a market about quantities to produce or prices to charge