Micro Economics Exam 2

Elasticity

A measure of how responsive one variable is to a change in another variable; calculated as the percentage change in quantity divided by the percentage change in price.

Price Elasticity of Demand

A measure of how responsive quantity demanded is to a change in price.

Elastic demand

When an increase in price leads to a large decrease in quantity demanded.

Inelastic demand

When an increase in price leads to a small decrease in quantity demanded.

Cost Price Elasticity

A measure of the effect of a change in the price of one product on the quantity demanded of another.

Cross-Price Elasticity of Demand

A measure that indicates how the quantity demanded of one good responds to a change in the price of another good.

Substitutes

Goods, services, or resources that are viewed as replacements for one another.

Complements

Goods, services, or resources that are used or consumed with one another.

Income Elasticity of Demand

A measure of how responsive demand is to a change in consumer income.

Normal goods

Goods that are consumed more when income increases.

Inferior goods

Goods that are consumed less when income increases.

Market Failures

A situation in which a market fails to produce the efficient level of output that maximizes total surplus.

Externality

The benefit or cost enjoyed or imposed on a third party not directly involved in the production or consumption of a good or service.

Positive Externality

An unpaid benefit enjoyed by a third party not directly involved in the production or consumption of a good or service.

Negative Externality

An uncompensated cost imposed on a third party not directly involved in the production or consumption of a good or service.

Nonrival goods

Goods whereby the consumption by one person does not diminish the amount available to someone else.

Rival goods

Goods whereby the consumption by one person does diminish the amount available to someone else.

Nonexcludable goods

Goods whereby people cannot easily be prevented from consuming them, even if they don’t pay.

Excludable goods

Goods whereby people can easily be prevented from consuming them.

Tragedy of the Commons

A situation in which individual users overuse and deplete a shared resource, leading to the detriment of the whole group.

Free-Rider Problem

An agent that benefits from something without expending any effort or paying for it.

Property Rights

The exclusive right to determine how a resource is used.

Coase Theorem

If a property right is well defined and transaction costs are low, resources will naturally gravitate to their highest valued use.

Transaction Costs

Costs in terms of time, energy, and resources associated with completing a transaction.

Utility

The satisfaction or happiness received from the consumption of goods and services.

Total Utility

The total satisfaction received from the consumption of a good or service.

Marginal Utility

The additional satisfaction received from the consumption of an additional unit of a good or service.

Law of Diminishing Marginal Utility

The principle that the marginal utility associated with consumption of a good or service becomes smaller with each extra unit consumed.

Equal Marginal Principle

Consumers maximize utility when they allocate their limited incomes so that the marginal utility per dollar spent is equal.

Budget Line

A line showing different combinations of two products that can be purchased with a given budget.

Indifference Curves

Curves that show combinations of two products that generate the same amount of total utility.

Consumption Bundle

The total amount of goods and services that an individual consumes.

Total Product

The total amount of output produced with a given amount of resources.

Marginal Product

The additional production received from using one more unit of a resource.

Average Product

The average production received from each unit of resource.

Marginal Cost

The additional cost associated with producing one more unit of activity.

Economies of Scale

Conditions in which the long-run average total cost of production decreases as production increases.

Constant Returns to Scale

Conditions in which the long-run average total cost of production remains constant as production increases.

Diseconomies of Scale

Conditions in which the long-run average total cost of production increases as production increases.

Economic Profit

Revenue minus implicit and explicit costs.

Accounting Profit

Revenue minus explicit costs.