Econ 101 Final

ceteris paribus

Assumption that other relevant factors or variables are held constant.

scarcity

Problem of having too many wants but too few resources to achieve them all, necessitating tradeoffs and choices.

efficiency

how well resources are used and allocated

production efficiency

occurs when goods are produced at the lowest cost, or with as much output as possible with a given amount of resources

allocative efficiency

occurs when individuals who desire a product the most obtain those goods and services

parieto efficiency

occurs when society improves the well-being of as many individuals as possible without making anyone worse off.

equity

the fairness of various issues and policies

positive analysis

statements or questions based on the understanding of information or facts and can usually be verified by data and observations

normative analysis

statements or questions that involve ones opinions or societal beliefs on what should or should not take place

opportunity cost

the value of the next best alternative use of resources

invisible hand

the phenomenon that markets promote efficiency through incentives faced by individuals and firms as if they were guided by an all-powerful force

absolute advantage

the ability to create the best possible product at the lowest possible cost among all competing producers

comparative advantage

considers the relative benefits of various choices of products to be produced, factoring in the lost opportunities in the discarded options

planned/command

economy in which most of the productive resources are owned by the govt and most economic decisions are made by central govt

capital

includes all manufactured products that are used to produce other goods and services

interest

payment to owners of capital

rent

payment for use of land

wages

how labor is paid

labor

mental and physical talents of people

substitution effect

When the price of a good decreases, consumers will buy more of this good and less of alternative goods that are now relatively more expensive.

income effect

When the price of a good decreases, less money is spent on that good, freeing up money that can be used to buy more of all goods, including the good that has fallen in price.

horizontal summation

The process of adding the number of units of the product purchased or supplied at each price to determine market demand or supply.

determinants of demand

Nonprice factors that affect demand

substitute

Goods that can be interchangeable for another. When the price of one good rises, the demand for the other good increases, and vice versa.

complement

Goods that are typically consumed together. When the price of a good rises, the demand for the other good declines, and vice versa.

change in demand

Occurs when one or more of the determinants of demand changes, shown as a shift of the entire demand curve.

change in quantity demanded

Occurs when the price of the product changes, shown as a movement along an existing demand curve.

supply schedule

A table that shows the quantity of a good producers are willing and able to supply at each price.

determinants of supply

Nonprice factors that affect supply

change in supply

Occurs when one or more of the determinants of supply changes, depicted as a shift in the entire supply curve.

change in quantity supplied

Occurs when the price of the product changes, shown as a movement along an existing supply curve.

marshall

father of the modern theory of supply and demand

equilibrium

Market forces are in balance when the quantities demanded by consumers just equal the quantities supplied by producers.

equilibrium price

The value at which the quantity demanded is just equal to the quantity supplied.

equilibrium quantity

The value that corresponds to the equilibrium price, where the quantity demanded is just equal to the quantity supplied.

surplus

Occurs when the price is above market equilibrium and quantity supplied exceeds quantity demanded.

shortage

Occurs when the price is below market equilibrium and quantity demanded exceeds quantity supplied.

buyers market

when a surplus of goods exist and sellers cannot sell all the good they produce thus reduce prices to attract customers

sellers market

when there is a shortage in the market and producers have no difficulty selling all they produce at the market price

consumer surplus

the difference between a person’s willingness-to-pay and the price paid.

producer surplus

the difference between the price a seller receives and a person’s willingness-to-sell.

price ceiling

maximimum price for a good

price floor

minimum price for a good

total utility

The total satisfaction that a person receives from consuming a given amount of goods and/or services.

marginal utility

The additional satisfaction received from consuming one more unit of a given product or service.

law of diminishing marginal utility

As we consume more of a given product, the added satisfaction we get from consuming an additional unit declines.

utility-maximizing rule

Total utility is maximized where the marginal utility per dollar is equal for all products

behavioural economics

The study of how human psychology enters into economic behavior as a way to explain why individuals sometimes act in predictable ways counter to economic models.

sunk cost fallacy

Occurs when people make decisions based on how much was already spent rather than how the decision might affect their current well-being.

framing bias

Occurs when individuals are steered into making one decision over another or are convinced they are receiving a higher value for a product than what was paid for it.

altruism

Actions undertaken merely out of goodwill or generosity.

sunk cost fallacy, framing bias, overconfidence, overemphasizing present, altruism, warm glow bias, guilt

limitations of marginal utility

sole proprietorship

business owned by single person, easy to form and dissolve, but unlimited liability

general partner

take management of firm, have unlimited liability

corporation

firm with separate legal entity, owners not liable

satisficing

strategy of considering options available to you until you find one that meets or exceeds predefines threshold

marginal utility

change in total utility / change in quantity

transitivity

someone that prefers choice option x to y and y to z must prefer x to z.

total value

consumer surplus + expenditure

long run

period sufficient for a firm to adjust all factors of production, all factors are variable

total revenue

price x quantity

marginal revenue

change in revenue / change in quantity

profit

revenue - accounting and opportunity costs

limited partner

take no action in firm, only liable for money invested

total cost

FC + VC

economic cost

sum of explicit and implicit costs

explicit

costs paid directly to another economic entity, including wages, lease payments, taxes, and utilities.

implicit

opportunity cost of a firm’s resources used in the business. These costs are not directly paid to another entity.

accounting profit

calculated by subtracting only explicit costs

economic profit

calculated by subtracting both explicit and implicit costs.

normal profit

The rate of return necessary to keep investors satisfied in the business over the long run. It is equal to zero economic profit.

short run

period over which at least one factor of production is fixed, or cannot be changed

marginal product

change in output (Q) / change in labour (L)

average product

total output (Q) / total labour (L)

increasing marginal returns

A new worker hired adds more to total output than the previous worker hired, so that both average product and marginal product are rising.

diminishing marginal returns

An additional worker adds to total output, but at a diminishing rate.

overhead

Fixed costs

total cost

fixed costs + variable costs

sunk cost

A cost that has been paid and cannot be recovered; therefore, it should not enter into decision-making affecting the present or future.

marginal cost

change in total cost / change in output

MC

(change in fixed cost / change in output) + (change in variable cost / change in output)

average fixed cost

total fixed cost (TC) / output (Q)

average variable cost

total variable cost (VC) / output (Q)

average total cost

average fixed cost (AFC) + average variable cost (AVC)

fall

When the cost to produce another unit is less than the average of the previous units produced, average costs will ___

rise

when the cost to produce another unit exceeds the average cost for all previous output, average cost will ___

long run average total cost

This curve shows the lowest unit cost at which any particular output can be produced in the long run.

decrease

as firms output increases, LRATC tends to ___

constant returns to scale

As a firm’s output increases, its long-run average total cost is constant.

diseconomies of scale

As a firm’s output increases, its long-run average total cost increases.

economies of scale

As a firm’s output increases, its long-run average total cost decreases.

economies of scope

By producing a number of products that are interdependent, firms are able to produce and market these goods at lower costs.

perfect competition

An industry with many price-taking firms producing a homogeneous product, with no barriers to entry

monopolistic competition

An industry with many firms producing a differentiated product, with little to no barriers to entry

profit maximizing rule

says that firms maximize profit at an output where marginal revenue equals marginal cost.

increase

when MR > MC, firm should ___ production

decrease

when MR < MC, firm should ___ production

break even point

where price is equal to the minimum average total cost. At this price, firms earn a normal profit.

warm glow bias

consumers may make choices bc they are trying to influence how other people perceive them