Econ 111 - Glossary Terms

absolute advantage

a country has an absolute advantage over another country in the production of a particular good if it produces more of this good from a unit of resources than the other country does (MY)

adverse selection

situation in which insurance companies find that a disproportionately large share of their customers come from high-risk groups

alternative cost

the value of the product that particular resources could have produced had they been used in the best alternative way; also called opportunity cost

arc elasticity of demand

if P1 and Q1 are the first values of price and quantity demanded, and Pz and Qz are the second values, then arc elasticity equals - \[(Q1-Q2)/(Qi + Qz)\] / \[(P1-P2)1(P1 + P2)\]

asymmetric information

in some markets, all participants do not have the same information

* for example, in the market for used cars, sellers frequently have better information regarding the quality of a used car than do prospective buyers

average cost

(a) total cost divided by the quantity of output; also called average total cost. (MY)

(b) short-run average (total) cost (SRAC) = fixed (AFC) + variable (AVC) cost per unit output; or, long-run average cost (LRAC) = total cost per unit output (all factors variable in the long-run). (HHC)

average fixed cost

total fixed cost divided by the quantity of output

average product

total output divided by the quantity of input

average variable cost

total variable cost divided by the quantity of output (MY)

(AVC) = variable (short-run) cost per unit output

in the LR, all factor costs are variable (HHC)

benefits

a cardinal measure of economic well-being expressed in currency units

geometrically, can be computed as the area under a demand curve in the absence of external economies or diseconomies of consumption

benefit-cost analysis

an economically based tool designed to inform decision makers who try to achieve the highest level (or at least higher levels) of total surplus

calculating total benefits net of total costs is equivalent to calculating the sum of producers and consumer surplus

benefits .net of costs are maximized where marginal benefits equal marginal costs - a condition that is satisfied by the equilibrium in a perfectly competitive market

beta

a measure of the nondiversifiable risk attached to an investment

for glossary, a stock, it shows how sensitive the stock’s return is to changes in the return from all available stocks

bond yield

the return earned on a bond

break-even chart

a chart showing how both total revenue and total cost vary with changes in the total number of units of a product that is sold

the break-even point is the minimum number that must be sold to avoid loss (MY)

budget line

(a) a line showing all combinations of quantities of good X and good Y the consumer can buy given a specific income. It’s slope equals -1 times the price of good X divided by the price of good Y when X is measured along the horizontal axis and Y is measured along the vertical axis. The Yintercept in this case equals income divided by the price of Y (MY)

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(b) given a specific level of income (I) and assuming there are only two goods (x & y) and further assuming prices are Px and Py respectively, then a budget line can be plotted showing all commodity combinations of x and y that a consumer can afford

bundling

a marketing technique whereby a firm that sells two products requires customers who buy one of them to buy the other as well

capital

equipment, buildings, inventories, and other non-human and producible resources that contribute to the production, marketing and distribution of goods and services

capital gain

the amount that people receive when they sell a stock (or other asset) in excess of what they paid for it; capital losses are possible too

capitalism

a type of economic system that depends on the price system to answer the basic economic questions: What is produced? How is it produced? Who gets how much? What should be the rate of economic growth?

cardinal utility

utility that is measurable in a cardinal sense, like a person’s weight or height (which means that the difference between two utilities - i.e. marginal utility - is meaningful)

cartel

a form of market structure where there is an open and formal agreement among firms to collude in determining output, distribution, and/or price of a commodity

cobb-douglas production function

a production function of the form Q,= AL^al K^a2 M^a3 , where Q is the output rate, L is the quantity of labor, K is the quantity of capital, M is the quantity of raw materials, and A, a1, a2, and a3 are constants that are greater than 0 and less than 1

collusion

agreements by firms with others in their industry with regard to price, output, and other matters

comparative advantage

a country ha a comparative advantage over another country in the production of a particular good if the cost of making this good, compared with the cost of making other goods, is lower in this country than in the other country

complements

if goods X and Y are complements, the quantity demanded of X is inversely related to the price of Y

constant-cost industry

an industry with a horizontal long-run supply curve and a linear cost function; its expansion does not result in an increase or decrease in input prices