Microeconomics Final

centrally planned economy

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

market economy

an economy in which the decisions of households and firms interacting in markets allocate economics resources

mixed economy

an economy in which most decisions are made by buyers and sellers in markets, but the government plays a significant role in the allocation of resources

absolute advantage

the ability to produce more of a good or service than competitors when using the same amount of resources

comparative advantage

the ability to produce a good or service at a lower opportunity cost than competitors

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 the production can be employed

substitutes

goods that are used interchangeably

complements

goods that are used together

substitution effect

think relative prices

income effect

think purchasing power

law of supply

Ceteris paribus, when the price of a product falls, the quantity supplied will decrease; when the price of a product rises, the quantity supplied will increase

law of demand

Ceteris paribus, when the price of a product falls, the quantity demanded will increase; when the price of a product rises, the quantity demanded will decrease

utility

the enjoyment or satisfaction people receive from consuming goods and services

marginal utility

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

law of 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

behavioral economics

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

sunk costs

costs that you have already paid and you are not getting back

positive externality in consumption

market produces too little

negative externality in production

market produces too much

coase theorem

if transactions costs are low, private bargaining will result in an efficient solution to the problems of externalities

pigovian taxes and subsidies

Government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities

rivalry

the situation that occurs when one person’s consuming a unit of a good means that no one else can consume it

excludability

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

private goods

excludable and rival

common resources

nonexcludable and rival

quasi-public goods

nonrival and excludable

public goods

nonexcludable and nonrival

tragedy of the commons

the tendency for a common resource to be overused

market failure

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

transaction costs

the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services

externality

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

elasticity

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

the more elastic your demand

The more narrowly defined your market…

direct relationship with total revenue

price for inelastic demand

indirect relationship with total revenue

price for elastic demand

positive sign

cross price elasticity: substitutes

negative sign

cross price elasticity: complements

positive sign

income elasticity: normal good

negative sign

income elasticity: inferior good

necessity goods

income elasticity between 0 and 1

luxury goods

income elasticity > 1

short run

the period of time during which at least one of a firm’s inputs is fixed

long run

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

technology

the processes a firm uses to turn inputs into outputs of goods and services

production function

The relationship between the inputs employed by a firm and the maximum output the firm can produce with those inputs

law of diminishing marginal 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 to decline

economies of scale

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

perfectly competition

many firms, identical products, no barriers to new firms

monopolistic competition

many firms, differentiated products, high ease of entry for new firms

oligopoly

few firms, identical or differentiated products, many barriers to new firms

monopoly

one firm, unique product, entry blocked

profits

Q * (P - ATC)

above minimum AVC

supply curves slope upward from what part of MC curve

productive efficiency

the situation in which a good or service is product at the lowest possible cost

allocative efficiency

A state of the economy in which production represents consumer preferences; each good is produced up to the point where MB = MC

tax incidence

The actual division of the tax burden between buyers and sellers