Economics 1010

accounting profit

a firm's net income, measured as revenue minus operating expenses and taxes paid

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 society equal to the marginal cost of producing it

antitrust laws

laws aimed at eliminating collusion and promoting competition among firms

asset

anything of value owned by a person or a firm

average fixed cost

fixed cost divided by the quantity of output produced

average product of labor

the total output produced by a firm divided by the quantity of workers

average revenue

total revenue divided by the quantity of the product sold

average total cost

total cost divided by the quantity of output produced

average variable cost

variable cost divided by the quantity of output produced

balance sheet

a financial statement that sums up a firm's financial position on a particular day, usually the end of a quarter or year

barriers to entry

anything that keeps new firms from entering an industry in which firms are earning economic profits

behavioral economics

the study of situations in which people make choices that do not appear to be economically rational

black market

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

bond

A financial security that represents a promise to repay a fixed amount of funds

brand management

the actions of a firm intended to maintain the differentiation of a product over time

budget constraint

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

Business Strategy

a set of actions that a firm takes to achieve a goal, such as maximizing profit

Canada's population

38.645 million

Cartel

a group of firms that collude by agreeing to restrict output to increase prices and profits

centrally planned economy

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

ceteris paribus condition

The requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant.

change in demand

a shift of the demand curve, which changes the quantity demanded at any given price

change in quantity demanded

movement along the demand curve resulting from a change in price

change in quantity supplied

a movement along the supply curve that occurs in response to a change in price

change in supply

a shift in the supply curve that is determined by a change in any other variable that impacts supply

collusion

an agreement among firms to charge the same price or otherwise not to compete

competitive market equilibrium

a market equilibrium with many buyers and sellers

complements

goods and services that are used together

constant returns to scale

the situation in which a firm's long-run average costs remain unchanged as it increases output

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

cooperative equilibrium

an equilibrium in a game in which players cooperate to increase their mutual payoff

Copyright

A government-granted exclusive right to produce and sell a creation.

Corporate Governance

the way in which a corporation is structured and the effect that structure has on the corporation's behavior

Corporation

a legal form of business that provides owners with protection from losing more than their investment should the business fail

coupon payment

an interest payment on a bond

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 good and the quantity demanded

Demographics

the characteristics of a population with respect to age, race, and gender.

direct finance

a flow of funds from savers to firms through financial markets, such as the New York Stock Exchange

diseconomies of scale

the situation in which a firm's long-run average costs rise as the firm increases output

Dividends

payments by a corporation to its shareholders

dominant strategy

a strategy that is the best for a firm, no matter what strategies other firms use

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 loss

the situation in which a firm's total revenue is less than its total cost, including all implicit costs

Economic model

a simplified version of reality used to analyze real-world economic situations

economic profit

a firm's total revenue minus its explicit and implicit costs

economic surplus

the sum of consumer surplus and producer surplus

economic variable

something measurable that can have different values, such as the number of people employed in manufacturing

Economics

the study of the choices people make to attain their goals, given their scarce resources

economies of scale

the situation in which a firm's long-run average cost falls as it increases the quantity of output it produces

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

Elasticity

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

endownment effect

the tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it

Equity

the fair distribution of economic benefits

explicit costs

a cost that involves spending money

fixed costs

costs that remain constant as output changes

game theory

the study of how people make decisions in situations in which attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of a firm depend on its interactions with other firms

horizontal merger

a merger between firms in the same industry

Hypothesis

a statement about an economic variable that may be correct or incorrect

implicit cost

a nonmonetary opportunity cost

incentive

something that motivates or encourages someone to do something

income effect

the change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power

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

income statement

a financial statement that shows a firm's revenues, costs, and profit over a period of time

indirect finance

A flow of funds from savers to borrowers through financial intermediaries such as banks. Intermediaries raise funds from savers to lend to firms (and other borrowers).

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

interest rate

the cost of borrowing funds, usually expressed as a percentage of the amount borrowed

Key Economic Assumptions

1. people are rational

2. people respond to incentives

3. optimal decisions are made at the margin

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 diminishing marginal utility

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

law of diminishing returns

the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline

Law of Supply

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

liability

anything owed by a person or a firm

limited liability

the legal provision that shields owners of a corporation from losing more than they have invested in the firm

long run

the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant

long-run average cost curve

a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed

long-run competitive equilibrium

the situation in which the entry and exit of firms has resulted in the typical firm breaking even

long-run supply curve

a curve that shows the relationship in the long run between market price and the quantity supplied

Macroeconomics

the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth

marginal analysis

analysis that involves comparing marginal benefits and marginal costs

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

marginal product of labor

the additional output a firm produces as a result of hiring one more worker

marginal revenue

the change in total revenue from selling one more unit of a product

marginal utility

the change in total utility a person receives from consuming one additional unit of a good or service

market

a group of buyers and sellers of a particular 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 power

the ability of a firm to charge a price greater than marginal cost

Marketing

all the activities necessary for a firm to sell a product to a consumer

Microeconomics

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

minimum efficient scale

the level of output at which all economies of scale are exhausted

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.

monopolistic competition

A market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products.