ECO 001 Exam 1 Vocabulary Terms

Absolute advantage

The ability of an individual, a

firm, or a country to produce

more of a good or service than

competitors, using the same

amount of resources.

Allocative efficiency

A state of the economy in which

production is in accordance

with consumer preferences; in

particular, every good or service

is produced up to the point

where the last unit provides a

marginal benefit to consumers

equal to the marginal cost of

producing it.

Black market

A market in which buying and selling take place at prices that violate government price regulations.

Budget constraint

The limited amount of income available to consumers to spend on goods and services.

Centrally planned economy

An economy in which the government decides how economic resources will be allocated.

Coase theorem

The argument of economist Ronald Coase that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities.

Command-and-control approach

A policy that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices.

Common resource

A good that is rival but not excludable.

Comparative advantage

The ability of an individual, a firm,

or a country to produce a good

or service at a lower opportunity

cost than competitors.

Competitive market equilibrium

A market equilibrium with many buyers and sellers.

Complements

Goods and services that are used together.

Consumer surplus

The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays.

Cross-price elasticity of demand

The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.

Deadweight loss

The reduction in economic surplus resulting from a market not being in competitive equilibrium.

Demand curve

A curve that shows the relationship between the price of a product and the quantity of the product demanded.

Demand schedule

A table that shows the relationship between the price of a product and the quantity of the product demanded.

Economic efficiency

A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.

Economic surplus

The sum of consumer surplus and producer surplus.

Elasticity

A measure of how much one economic variable responds to changes in another economic variable.

Elastic demand

The case where the percentage change in quantity demanded is greater than the percentage change in price, so the price elasticity is greater than 1 in absolute value.

Excess burden

A measure of the efficiency loss to the economy that results from a tax having reduced the quantity of a good produced; also known as the deadweight loss.

Excludability

The situation in which anyone who does not pay for a good cannot consume it.

Externality

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

Free market

A market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed.

Free riding

Benefiting from a good without paying for it.

Income effect

The change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding all other factors constant.

Income elasticity of demand

A measure of the responsiveness of the quantity demanded to changes in income, measured by the percentage change in the quantity demanded divided by the percentage change in income.

Inelastic demand

The case where the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1 in absolute value.

Inferior good

A good for which the demand increases as income falls and decreases as income rises.

Law of demand

A rule that states that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.

Law of supply

A rule that states that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

Marginal benefit

The additional benefit to a consumer from consuming one more unit of a good or service.

Marginal cost

The change in a firm's total cost from producing one more unit of a good or service.

Market

A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

Market demand

The demand by all the consumers of a given good or service.

Market economy

An economy in which the decisions of households and firms as they interact in markets determine the allocation of economic resources.

Market equilibrium

A situation in which quantity demanded equals quantity supplied.

Market failure

A situation in which the market fails to produce the efficient level of output.

Microeconomics

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Mixed economy

An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.

Opportunity cost

The highest-valued alternative that must be given up to engage in an activity.

Perfectly elastic demand

The case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity.

Perfectly inelastic demand

The case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero.

Price ceiling

A legally determined maximum price that sellers may charge.

Price elasticity of demand

The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price.

Price elasticity of supply

The responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product's price.

Price floor

A legally determined minimum price that sellers may receive.

Private good

A good that is both rival and excludable.

Producer surplus

The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives.

Production possibilities frontier (PPF)

A curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology.

Productive efficiency

A situation in which a good or service is produced at the lowest possible cost.

Property rights

The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.

Public good

A good that is both non-rival and non-excludable.

Quantity demanded

The amount of a good or service that a consumer is willing and able to purchase at a given price.

Quantity supplied

The amount of a good or service that a firm is willing and able to supply at a given price.

Rivalry

The situation that occurs when one person's consumption of a unit of a good means no one else can consume it.

Social benefit

The total benefit from consuming a good or service, including both the private benefit and any external benefit.

Social cost

The total cost of producing a good or service, including both the private cost and any external cost.

Supply curve

A curve that shows the relationship between the price of a product and the quantity of the product supplied.

Supply schedule

A table that shows the relationship between the price of a product and the quantity of the product supplied.

Tax incidence

The actual division of the burden of a tax between buyers and sellers in a market.

Tragedy of the commons

The tendency for a common resource to be overused.

Unit-elastic demand

The case where the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value.

Utility

The enjoyment or satisfaction people receive from consuming goods and services.

Voluntary exchange

A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction.