Macro ch 3-4

behavioral economics

explains why people pick (or nearly pick) the optimum in some situations and don’t come close in others (even in situations where they’re trying to choose well)

optimal choice

the best feasible option

optimum

best feasible option

marginal analysis

cost-benefit calculation that focuses one the difference between one feasilble alternative and the next feasible alternative

marginal cost

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

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

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

market price

what the price is called when it is faced by all buyers and all sellers

perfectly competitive market

sellers all sell an identical good/service

any individual buyer or any individual seller isn’t powerful enough on their own to affect the market price

price-taker

they accept the market price and can’t bargain for a better price

quantity demanded

the amount of the good/service that buyers are willing to purchase at a given price

demand schedule

table that reports the quantity demanded at different prices

holding all else equal

everything else in the economy is held constant

demand curve

plots the relationship between prices and quantity demanded holding all else equal

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

highest price that 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

market demand curve

sum of the individual demand curves of all potential buyers

demand curve shifts

only when the quantity demanded changes at a given prices

movement along the demand curve

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

normal good

an increase in income shifts the demand curve to the right (holding all else equal), causing buyers to purchase more of the good

inferior good

an increase in income causes the demand curve to shift to the left (hold all else equal) causing buyers to buy less

substitutes

when a rise in price of one good leads to a rightward shift in the demand curve for the other good

complements

when a fall in the price of one good leads to a rightward shift in the demand curve for the other good

quantity supplied

the amount of the good/service that sellers are willing to supply at a given price

supply schedule

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

supply curve

plots the quantity supplied at different prices

positively related

two variables move in the same direction

Law of Supply

quantity supplied and price are positively related holding all else equal

willingness to accept

lowest price a seller is willing to get paid to sell an extra unit of a good

market supply curve

plots the relationship between total quantity supplied and market price holding all else equal

input

a good/service used to produce another good/service

supply curve shifts

only when the quantity supplied changes at a given price

movement along the supply curve

if a good’s own price changes and its supply curve hasn’t shifted, the own price change produces a movement along the supply curve

competitive equilibrium

the intersection point of the demand curve and the supply curve

competitive equilibrium price

the price at competitive equilibrium point

competitive equilibrium quantity

the quantity at competitive equilibrium point

excess supply

when the market price is above the competitive equilibrium price, quantity supplied exceeds quantity demanded

excess demand

when the market price is below the competitive equilibrium price, quantity demanded exceeds quantity supplied