econ

elasticity

a measure of how much consumers and producers will respond to a change in market conditions

economics

the study of how people, individually and collectively, manage resources

microeconomics

the study of how individuals and firms manage resources

price elasticity of demand

the size of the change in the quantity demanded of a good or service when its price changes

macroeconomics

the study of the economy as a whole, and how policymakers manage the growth and behavior of the overall economy

rational behavior

making choices to achieve goals in the most effective way possible

perfectly elastic demand

demand for which any increase in price will cause quantity demanded to drop to zero; represented by a perfectly horizontal line

Scarcity

the condition of wanting more than we can get with available resources

perfectly inelastic demand

demand for which quantity demanded remains the same regardless of price; represented by a perfectly vertical line

opportunity cost

the value of what you have to give up in order to get something; the value you could've gained by choosing the next best alternative

elastic

demand that has an absolute value of elasticity greater than 1

inelastic

demand that has an absolute value of elasticity less than 1

marginal decision making

comparison of additional benefits of a choice against the additional costs it would bring, without considering related benefits and costs of past choices

sunk costs

costs that have already been incurred and cannot be recovered or refunded

unit elastic

demand that has an absolute value of elasticity exactly equal to 1

incentive

something that causes people to behave in a certain way by changing the trade

total revenue

the amount that a firm receives from the sale of goods and services; calculated as the quantity sold multiplied by the price paid for each unit

Efficiency

use of resources in the most productive way possible to produce the goods and services that have the greatest total economic value to society

price elasticity of supply

the size of the change in the quantity supplied of a good or service when its price changes

Correlation

a consistently observed relationship between two events or variables

cross price elasticity of demand

a measure of how the demand for one good changes when the price of a different good changes

Causation

a relationship between two events in which one brings about the other

model

a simplified representation or the important parts of a complicated situation

willingness to pay (reservation price)

the maximum price that a buyer would be willing to pay for a good or service

circular flow model

a simplified representation of how the economy's transactions work together

willingness to sell

the minimum price that a seller is willing to accept in exchange for a good or service

positive statement

a factual claim about how the world actually works

surplus

a way of measuring who benefits from transactions and by how much

normative statement

a claim about how the world should be

consumer surplus

the net benefit that consumer receives from purchasing a good or service, measured by the difference between willingness to pay and the actual price

production possibilities frontier

a line or curve that shows all the possible combinations of two outputs that can be produced using all available resources

producer surplus

the net benefit that a producer receives from the sale of a good or service, measured by the difference between the producer's willingness to sell and the actual price

efficient points

combination of production possibilities that squeeze the most output possible from all available resources

total surplus

a measure of the combined benefits that everyone receives from participating in an exchange of goods or services

absolute advantage

the ability to produce more of a good or service than others can with a given amount of resources

zero sum game

a situation in which whenever one person gains, another loses an equal amount, such that the net value of any transaction is zero

efficient market

an arrangement such that no exchange can make anyone better off without someone becoming worse off

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

Specialization

spending all of your time producing a particular good

deadweight loss

a loss of total surplus that occurs because the quantity of a good that is bought and sold is below the market equilibrium quantity

gains from trade

the improvement in outcomes that occurs when producers specialize and exchange goods and services

market failures

situations in which the assumption of efficient, competitive markets fails to hold

market economy

an economy in which private individuals, rather than a centralized planning authority, make the decisions

price control

a regulation that sets a maximum or minimum legal price for a particular good

market

buyers and sellers who trade a particular good or service

price ceiling

a maximum legal price at which a good can be sold

competitive market

a market in which fully informed, price

price floor

a minimum legal price at which a good can be sold

price taker

a buyer or seller who cannot affect the market price. In a perfectly competitive market, firms are price takers as a consequence of many sellers selling standardized goods

tax wedge

the difference between the price paid by buyers and the price received by sellers in the presence of a tax

standardized good

a good for which any two units have the same features and are interchangeable

tax incidence

the relative tax burden borne by buyers and sellers

transaction cost

the cost incurred by buyer and seller in agreeing to and executing a sale of goods or services

subsidy

a requirement that the government pay an extra amount to producers or consumers of a good

quantity demanded

the amount of a particular good that buyers will purchase at a given price during a specified period

private costs

costs that fall directly on an economic decision maker

law of demand

a fundamental characteristic of demand which states that, all else equal, quantity demanded rises as price falls

external costs

costs imposed without compensation on someone other than the person who caused them

demand schedule

a table that shows the quantities a particular good or service that consumers are willing and able to purchase (demand) at various prices

social cost

the entire cost of a decision, including both private costs and any external costs

demand curve

a graph that shows the quantities of a particular good or service that consumers will demand at various prices

private benefits

benefits that accrue directly to the decision maker

external benefits

benefits that accrue without compensation to someone other than the person who caused it

substitutes

goods that serve a similar enough purpose that a consumer might purchase one in place of the other

complements

goods that are consumed together, so that purchasing one will make consumers more likely to purchase the other

social benefit

the entire benefits of a decision, including both private benefits and external benefits

normal goods

a good for which demand increases with an increase in consumer income

externality

a cost or benefit imposed without compensation on someone other than the person who caused it

inferior goods

Goods for which demand tends to fall when income rises.

network externality

the effect that an additional user of a good or participant in an activity has on the value of that good or activity for others

quantity supplied

the amount of a particular good or service that producers will offer for sale at a given price during a specified period

production externality

an externality that occurs when a good when a good or service is being produced

law of supply

a fundamental characteristic of supply which states that, all else equal, quantity supplied rises as price rises

consumption externality

an externality that occurs when a good or service is being consumed

supply schedule

a table that shows the quantities of a particular good or service that producers will supply at various prices

Coase theorem

the idea that even in the presence of an externality, individuals can reach an efficient equilibrium through private trades, assuming zero transaction costs

Pigovian tax

a tax meant to counterbalance a negative externality

supply curve

a graph that shows the quantities of a particular good or service that producers will supply at various prices

Equilibrium

the situation in a market when the quantity supplied equals the quantity demanded; graphically this convergence happens where the supply line and demand line intersect

tradable allowance

a production or consumption quota that can be bought and sold

equilibrium price

the price at which the quantity demanded equals the quantity supplied

excludable

a characteristic of a good or service that allows owners to prevent its use by people who have not paid for it

equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price

rival in consumption

the characteristic of a good for which one person's consumption prevents or decreases others' ability to consume it

surplus (excess supply)

A situation in which quantity supplied is greater than quantity demanded

private goods

goods that are both excludable and rival

shortage (excess demand)

a situation in which the quantity of a good that is demanded is higher than the quantity supplied

public good

a good that is neither excludable nor rival

common resource

a good that is not excludable but is rival

free rider problem

a problem that occurs when the nonexcludability of a public good leads to undersupply

mid point method

method that measures percentage change in quantity demanded (or quantity supplied) relative to a point midway between two points on a curve; used to estimate elasticity

tradegy of commons

the depletion of a common resource due to individually rational but collectively inefficient overconsumption

perfectly elastic demand

demand for which any increase in price will cause quantity demanded to drop to zero; represented by a perfectly horizontal line

perfectly inelastic demand

demand for which quantity demanded remains the same regardless of price; represented by a perfectly vertical line

elastic

demand that has an absolute value of elasticity greater than 1

Inelastic

demand that has an absolute value of elasticity less than 1

unit elastic

demand that has an absolute value of elasticity exactly equal to 1

total revenue

the amount that a firm receives from the sale of goods and services; calculated as the quantity sold multiplied by the price paid for each unit

income elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income

total cost

the amount that a firm pays for all of the inputs that go into producing goods and services