MACRO Chapters 3 & 4 Definitions

Behavioral Economics

Jointly analyzes the economic and psychological factors that explain human behavior, helping to identify situations in which agents choose optimally and situations in which people don’t come close to choosing optimally.

Optimal Choice

The best feasible option.

Optimum

The best feasible option.

Marginal Analysis

A cost-benefit calculation that studies the difference between a feasible alternative and the next feasible alternative.

Marginal Cost

The extra cost generated by moving from one feasible alternative to the next.

Principle of Optimization at the Margin

States that an optimal feasible alternative has the property that moving to it makes you better off and moving away from it makes you worse off.

Market

A group of economic agents who are trading a good or service plus the rules and arrangements for trading.

Market Price

If all sellers and all buyers face the same price, that is the market price.

Perfectly Competitive Market

Sellers all sell an identical good or service and any individual buyer or any individual sellter isn’t powerful enough on their own to affect the market price of that good or service.

Price-Taker

A buyer or seller who accepts the market price; buyers cannot bargain for a lower price and vice versa.

Quantity Demanded

The amount of a good that buyers are willing to purchase at a given price.

Demand Schedule

A table that reports the quantity demanded at different prices, holding all else equal.

Holding All Else Equal

Implies that everything else in the economy is held constant (ceteris paribus).

Demand Curve

Plots the quantity demanded at different prices and the demand schedule.

Negatively Related

When two variables move in opposite directions.

Law of Demand

The quantity demanded rises when the price falls, holding all else equal.

Willingness to Pay

The highest price a buyer is willing to pay for an extra unit of a good.

Diminishing Marginal Benefit

As you consume more of a good, your willingness to pay for an additional unit declines.

Aggregation

The process of adding up individual behaviors is referred to as aggregation.

Market Demand Curve

The sum of the individual demand curves of all potential buyers. Plots the relationship between the total quantity demanded and the market price, holding all else equal.

Demand Curve Shifts

Shifts only when the quantity demanded changes at a given price.

Movement Along the Demand Curve

If a good’s own price changes and its demand cure hasn’t shifted, the own price change produces a movement along the demand curve.

Normal Good

For a normal good, an increase in income causes the demand curve to shift to the right, or in other words, causes buyers to buy more of the good.

Inferior Good

An increase in the income causes the demand curve to shift to the left, or in other words, causes buyers to buy less of the good.

Substitutes

Two goods are substitutes when a rise in the price of one leads to a rightward shift in the demand curve for the other.

Complements

When a fall in the price of one leads to the rightward shift in the demand curve for another.

Quantity Supplied

The amount of a good or service that sellers are willing to sell at a given price.

Supply Schedule

A table that reports the quantity supplied at different prices, holding all else equal.

Supply Curve

Plots the quantity supplied at different prices and the supply schedule.

Positively Related

Two variables move in the same direction.

Law of Supply

In almost all cases, the quantity supplied rises when the price rises, holding all else equal.

Willingness to Accept

The lowest price that a seller is willing to get paid to sell an extra unitof a good. At a particular quantity supplied, willingness to accept is the height of the supply curve. Also the same as the marginal cost of production.

Market Supply Curve

The sum of the individual supply curves of all the potential sellers. Plots the relationship between the total quantity suppplied and the market price, holding all else equal.

Input

A good or service used to produce another good or service.

Supply Curve Shifts

Only when the quantity supplied chages at a given price.

Movement Along the Supply Curve

If a good’s price changes and its supply curve hasn’t shifted, the price change produces a movement on the supply curve.

Competitive Equilibrium

The crossing point of the supply and demand curves.

Competitive Equilibrium Price

Equates quantity supplied and quantity demanded.

Competititve Equilibrium Quantity

The quantity that corresponds to the competitive equilibrium price.

Excess Supply

When the market price is above the competitive equilibrium price, quantity supplied exceeds quantity demanded, creating excess supply.

Excess Demand

When the market price is below the competitive equilibrium price, quantity demanded exceeds quantity supplied, creating excess demand.