Eco 001 Quiz 1 Gunter

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.

Centrally planned economy

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

Economic model

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

Economic variable

Something measurable that can have different values, such as the incomes of doctors.

Economics

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

Equity

The fair distribution of economic benefits.

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.

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 economy

An economy in which the decisions of households and firms interacting in markets allocate economic resources.

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.

Normative analysis

Analysis concerned with what ought to be.

Opportunity cost

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

Positive analysis

Analysis concerned with what is.

Productive efficiency

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

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Trade-off

The idea that because of scarcity, producing more of one good or service means producing less of another good or service.

Voluntary exchange

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

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.

Circular-flow diagram

A model that illustrates how participants in markets are linked.

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.

Economic growth

The ability of the economy to increase the production of goods and services.

Entrepreneur

Someone who operates a business, bringing together the factors of production—labor, capital, and natural resources—to produce goods and services. 2.3 LEARNING OBJECTIVE

Factor markets

A market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability.

Factors of production

The inputs used to make goods and services.

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.

Market

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

Opportunity cost

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

Product markets

A market for goods—such as computers—and services—such as medical treatment.

Production possibilities frontier (PPF)

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

Property rights

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

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Trade

The act of buying and selling.

Ceteris paribus ("all else equal") condition

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

Competitive market equilibrium

A market equilibrium with many buyers and many sellers.

Complements

Goods and services that are used together.

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.

Demographics

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

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.

Inferior good

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

Law of demand

The rule 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

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.

Market demand

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

Market equilibrium

A situation in which quantity demanded equals quantity supplied.

Normal good

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

Perfectly competitive market

A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.

Quantity demanded

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

Demand schedule

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

Demographics

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

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.

Inferior good

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

Quantity supplied

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

Shortage

A situation in which the quantity demanded is greater than the quantity supplied.

Substitutes

Goods and services that can be used for the same purpose.

Substitution effect

The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes.

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.

Surplus

A situation in which the quantity supplied is greater than the quantity demanded.

Technological change

A positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs.

Black market

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

Consumer surplus

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

Deadweight loss

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

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.

Marginal benefit

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

Marginal cost

The additional cost to a firm of producing one more unit of a good or service.

Price ceiling

A legally determined maximum price that sellers may charge.

Price floor

A legally determined minimum price that sellers may receive.

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.

Tax incidence

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

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

An approach 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.

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 riding

Benefiting from a good without paying for it.

Market failure

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

Pigovian taxes and subsidies

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

Private benefit

The benefit received by the consumer of a good or service.

Private cost

The cost borne by the producer of a good or service.

Private good

A good that is both rival and excludable.

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 nonrival and nonexcludable.

Rivalry

The situation that occurs when one person's consuming 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.

Tragedy of the commons

The tendency for a common resource to be overused.

Transactions 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.

Cross-price elasticity of demand

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

Elastic demand

Demand is elastic when 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.

Income elasticity of demand

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

Inelastic demand

Demand is inelastic when 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.

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 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.

Total revenue

The total amount of funds received by a seller of a good or service, calculated by multiplying price per unit by the number of units sold.