Microeconomics Cowen & Tabarok

incentives

rewards and penalties that motivate behavior

scarce

when there isn't enough of a specific resource to satisfy all of our wants

great economic problem

how to arrange our scarce resources to satisfy as many of our wants as possible

opportunity cost

the value of the opportunities lost when a choice is made

inflation

an increase in the general level of prices

demand curve

a function that shows the quantity demanded at different prices

quantity demanded

the quantity that buyers are willing and able to buy at a particular price

consumer surplus

the consumer's gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price

total consumer surplus

amount measured by the area beneath the demand curve and above the price

normal good

a good for which demand increases when income increases

inferior good

a good for which demand decreases when income increases

substitutes

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

complements

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

supply curve

a function that shows the quantity supplied at different prices

quantity supplied

the quantity that sellers are willing and able to sell at a particular price

producer surplus

the producer's gain from exchange, or the difference between the market price and the minimum price at which a producer would be willing to sell a certain quantity

total producer surplus

an amount measured by the area above the supply curve and below the price

surplus

a situation in which the quantity supplied is greater than the quantity demanded

shortage

a situation in which the quantity demanded is greater than the quantity supplied

equilibrium price

the price at which the quantity demanded is equal to the quantity supplied

equilibrium quantity

the quantity at which the quantity demanded is equal to the quantity supplied

elasticity of demand

a measure of how responsive the quantity demanded is to a change in price, computed as the percentage change in the quantity demanded divided by the percentage change in price

inelastic

when the absolute value of the elasticity is less than 1

elastic

when the absolute value of the elasticity is greater than 1

unit elastic

when the absolute value of the elasticity is equal to 1

elasticity of supply

a measure of how responsive the quantity supplied is to a change in price, computed as the percentage change in the quantity supplied divided by the percentage change in price

deadweight loss

the reduction in total surplus caused by a market distortion of inefficiency

price ceiling

a maximum price allowed by law

deadweight loss

the reduction in total surplus caused by a market distortion of inefficiency

rent control

a price ceiling on rental housing

price floor

a minimum price allowed by law

private cost

a cost paid by the consumer or the producer

external cost

a cost paid by people other than the consumers of the producers trading in the market

social cost

the cost to everyone: the private cost plus the external cost

externalities

external costs or external benefits, that, costs or benefits that fall on bystanders

social surplus

consumer surplus plus producer surplus plus everyone else's surplus

efficient equilibrium

the price and quantity that maximize social surplus

efficient quantity

the quantity that maximizes social surplus

Pigouvian tax

a tax on a good with external costs

external benefit

a benefit received by people other than the consumers or the producers trading in the market

Pigouvian subsidy

a subsdiy on a good with external benefits

internalizing an externality

adjusting incentives so that decision makers take into account all the benefits and costs of their actions, private and external

transaction costs

all the costs necessary to reach an agreement

Coase theorem

says that if transaction costs are low and property rights are clearly defined, private bargains will ensure that the market equilibrium is efficient even when there are externalities

long run

the time it takes for substantial new investment and entry to occur

short run

the period before entry occurs

sunk cost

a cost that once incurred cannot be recovered

fixed costs

costs that do not vary with the quantity produced

explicit cost

a cost that requires an outlay of money

implicit cost

a cost that does not require an outlay of money

accounting profit

total revenue minus explicit costs

economic profit

total revenue minus total costs including implicit opportunity costs

total revenue

price times quantity sold: P times Q

total costs

the costs of producing a given quantity of output

variable costs

costs that vary with output

marginal revenue, MR

the change in total revenue from selling an additional unit. For a firm in a competitive industry, MR = Price

marginal cost, MC

the change in total cost from producing an additional unit

average cost

the cost per unit, that is, the total cost of producing a given quantity divided by that quantity, TC/Q

zero profits (or normal profits)

the condition when P = AC. At this price the firm is covering all of its costs including enough to pay labor and capital their ordinary opportunity costs

increasing cost industry

an industry in which the marginal costs of production increase with greater output. Shown with an upward-sloped supply curve

constant cost industry

an industry in which the marginal costs of production do not change with greater industry output. Shown with a flat supply curve

decreasing cost industry

an industry in which the marginal costs of production decrease with an increase in industry output. Shown with a downward-sloped supply curve

elimination principle

the principle that in a competitive market, above-normal profits are eliminated by entry and below-normal profits are eliminated by exit

market power

the power to raise prices above marginal cost without fear that other firms will enter the market

monopoly

a firm with market power

marginal revenue, MR

the change in total revenue from selling an additional unit

marginal cost, MC

the change in total cost from producing an additional unit

economies of scale

the advantages of large-scale production that reduce average cost as quantity increases

natural monopoly

a situation when a single firm can supply the entire market at a lower cost than two or more firms

barriers to entry

factors that increase the cst to new firms of entering an industry

antitrust laws (competition law)

laws that give a government legal authority to prosecute monopolies or attempts to monopolize (antitrust laws are called competition law in the European Union)