Learn: UBC ECON 101 Test 1 Barber

Cost-Benefit Principle

Pursue an action only if its benefits are at least as large as costs (B ≥ C).

Willingness to Pay (WTP)

The maximum amount a person is willing to pay to receive a benefit.

Economic Surplus

The total benefit minus total cost of a decision (ES = Benefit - Cost).

Opportunity Cost

The value of the next-best alternative given up when making a choice.

Sunk Cost

A cost already incurred that cannot be recovered and should be ignored.

Marginal Principle

Keep increasing output or action as long as marginal benefit equals or exceeds marginal cost.

Rational Rule for Buyers

Buy additional units as long as marginal benefit is at least equal to price.

Rational Rule for Sellers

Produce additional units as long as price is at least equal to marginal cost.

Interdependence Principle

Your best choice depends on other choices, choices of others, market developments, and expectations.

Points inside the PPF

Attainable combinations of output that are economically inefficient.

Points on the PPF

Attainable and efficient combinations using all available resources.

Points outside the PPF

Unattainable combinations with current resources and technology.

Budget Constraint Slope

Equal to the negative price ratio of the two goods (-Px / Py).

Law of Demand

Holding other things constant, higher prices lead to lower quantity demanded.

Demand Curve

Graph representing the relationship between price and quantity demanded; equals marginal benefit curve.

Movement Along Demand Curve

Caused solely by a change in the good's own price.

Shift in Demand Curve

Caused by a change in a demand shifter other than own price.

Normal Good

A good whose demand increases when consumer income rises.

Inferior Good

A good whose demand decreases when consumer income rises.

Substitutes in Consumption

Goods used instead of each other; higher price of one increases demand for the other.

Complements in Consumption

Goods consumed together; higher price of one decreases demand for the other.

Network Effect

When a product becomes more valuable as more people use it.

Market Demand

The horizontal summation of all individual quantities demanded at each price.

Law of Supply

Holding other things constant, higher prices lead to higher quantity supplied.

Supply Curve

Graph representing the relationship between price and quantity supplied; equals marginal cost curve.

Substitutes in Production

Alternative goods a producer can make; price rise in one decreases supply of the other.

Complements in Production

Goods produced jointly; price rise in one increases supply of the other.

Market Equilibrium

The price and quantity point where quantity demanded equals quantity supplied.

Market Surplus

Occurs when quantity supplied exceeds quantity demanded, driving price downward.

Market Shortage

Occurs when quantity demanded exceeds quantity supplied, driving price upward.

Effect of Demand Increase on Equilibrium

Equilibrium price rises and equilibrium quantity rises.

Effect of Demand Decrease on Equilibrium

Equilibrium price falls and equilibrium quantity falls.

Effect of Supply Increase on Equilibrium

Equilibrium price falls and equilibrium quantity rises.

Effect of Supply Decrease on Equilibrium

Equilibrium price rises and equilibrium quantity falls.

Simultaneous Increase in Demand and Supply

Equilibrium quantity increases for certain; equilibrium price change is ambiguous.

Simultaneous Demand Decrease and Supply Increase

Equilibrium price falls for certain; equilibrium quantity change is ambiguous.

Opportunity Cost of Attending University

Includes direct costs (such as tuition) plus the opportunity cost of wages given up while in school.

Budget Constraint Equation

Represented as Px·x + Py·y = M, where M is total income and Px, Py are good prices.

Inverse Demand Equation

Expresses price as a function of quantity demanded, written in the form P = a + bq.

Direct Demand Equation

Expresses quantity demanded as a function of price, written in the form qD = a + bP.

General Demand Equation

Written as QD_x = a + bPx + cPy + dI, capturing own-price, related goods' prices, and income.

Algebraic Market Demand Aggregation

Calculated by summing individual direct demand functions horizontally across all consumers (Q = ∑q).

Individual Supply Curve Derivation

Plotting a price-taking seller's marginal cost for each successive unit creates their individual supply curve.

Absorbing State (Market Equilibrium)

A condition where, absent external shocks, prices and quantities remain stable once reached.

Planned Economy

An economic system where a central authority decides what, how, and for whom goods are produced.

Price Role in Market Economies

Prices coordinate decentralized buyer and seller choices based on self-interest without central planning.

Aggregating Identical Supply Curves

Market supply equals the individual supply curve multiplied by the total number of identical firms (QS = n · qS).

Simultaneous Decrease in Demand and Supply

Equilibrium quantity decreases for certain, while the effect on equilibrium price is ambiguous.

Solving Equilibrium Algebraically

Set quantity demanded equal to quantity supplied (QD = QS) and solve for price (P).

Ceteris Paribus

Latin phrase meaning "all other things being equal" or holding other variables constant.

Congestion Effect

Occurs when a good or service becomes less valuable as more people use it.

Marginal Benefit (MB)

The change in total benefit resulting from consuming or producing one additional unit.

Marginal Cost (MC)

The additional cost incurred from consuming or producing one additional unit.

PPF Slope and Opportunity Cost

The slope of the Production Possibility Frontier represents the opportunity cost of the x-axis good.

Demand Shifter: Expectations

Anticipation of future prices, income, or availability that alters buying choices today.

Demand Shifter: Number of Buyers

A change in the total population of potential buyers that directly shifts market demand.

Perfectly Competitive Market Characteristics

Includes many buyers and sellers, standardized products with no branding, and price-taking firms.

Price Taker

A firm that must accept prevailing market prices and cannot influence market price.

Supply vs. Quantity Supplied

Supply is the entire curve; quantity supplied is a specific point on the curve.

Diminishing Marginal Product

As output increases, marginal cost rises because each additional input produces less extra output.

Horizontal Summation

Adding the individual quantities supplied by each seller at every price level to find market supply.

Effect of Input Prices on Supply

Higher input prices increase marginal cost, shifting the supply curve to the left.

Individual vs. Market Supply Shifters

Shifters 1-4 alter individual seller decisions; the number of sellers shifts market supply directly.