Microeconomics Vocab

Economics

Economics

The study of how an entity, whether it be an individual or an organization, manages and allocates its resources in the most efficient way possible.

Scarcity

When demand for a product exceeds supply/production

Physical Capital

Manufactured goods that can by used in the production process

Human Capital/Labor

The physical and mental effort of people, and the knowledge and skills acquired through training and experience

Entrepreneurship

The ability to identify opportunity and organize production, and the willingness to accept risk in pursuit of rewards

Natural Resources/Land

Productive resource existing in nature (plants, minerals, wind, etc.)

Positive Economics

Describes the way things are

Normative Economics

Describes the way things should be

Centrally Planned (Command) Economic System

A system in which the government makes all the economic decisions and answers the three questions on its own. They set the prices for goods and services, as well as set wage rates. However, they do not respond to consumer wants, and innovation is discouraged.

Market Economic System

Economic changes are guided by the changes in price which occur as individuals and sellers interact in the market. There is a lot of competition and a variety of goods and services. However, there will be a wealth disparity in the market.

Mixed Economic System

A system which has characteristics of both central system and market economic system. There are private property rights which are protected, however, the government is able to intervene in order to meet societal aims.

Trade-Offs

The alternative choice which must be given up in order to make a decision. The goods and services which you do not choose are the trade-offs.

Opportunity Costs

The cost we forgo or sacrifice, to opt for another choice. The next best alternative if your first choice is unavailable.

Economic Growth

A sustained rise in aggregate output and an increase in standard of living (causes are developments in technology, or an increase in resources)

Productive Efficiency

The lowest cost possible on the PPC

Allocative Efficiency

The economy allocates resources so consumers are well off as possible, producing what is demanded

Consumer Goods

Goods/Products directly for the consumer

Capital Goods

Products purchased to produce other goods

Constant Opportunity Cost

Occurs when OC stays the same as the production of a good increases.

Increasing Opportunity Cost

When one good is produced more, you give up more of another good.

Absolute Advantage

Occurs when a firm as the ability to produce a specific amount of goods or services in comparison to the others.

Comparative Advantage

The ability of a firm to produce a good or service at the lowest possible cost

Terms of Trade

When people split up the work, and provide each other with a good in return for another. It is also the rate at which one good can be exchanged for another (if the price of a good obtained from trade is less than the opportunity cost of producing it, trade is beneficial)

Implicit Costs

monetary or non-monetary opportunity costs in terms of making a choice.

Explicit Costs

traditional out of pocket costs which are associated with choosing one course of action.

Utility

the measure of personal satisfaction (util is a unit of utility)

Marginal Utility

the change in total utility by consumer one additional unit of that good/service

Principle of Diminishing Utility

when additional units of a good/service add less total utility than the previous units do

Marginal Utility Per Dollar

MUgood/Pgood (marginal utility of one unit of the good / price of one unit of the good)

Optimal Consumption Rule

to maximize utility, marginal utility per dollar spend on each good = service in consumption bundle, MUc/Pc = MUt/Pt

Demand

the quantity which a consumer/buyer are willing and able to buy at different prices

Law of Demand

As price increases, demand decreases, and as price decreases, demand increases

Complements

Goods/Services consumed together (hamburgers and buns)

Income effect

as income increases, people will buy more of normal goods(oreos), and less of inferior goods(off-brand oreos)

Diminishing Marginal Utility

As more units of a product are consumed, the satisfaction/utility it provides tends to decline

Supply Curve

The greater the individual cost of a good, the more a supplier will supply

Marginal Cost

The cost of producing each item

Market Supply Curve

the total quantity of goods that suppliers are willing and able to provide at a certain price

Causes for change of Supply

Resources Costs, Availability, Other goods/services, alternatives to the product, technology, taxes, subsidies, expectation, number of sellers.

Productive Efficiency

When a firm produces at the lowest unit cost, MC = AC

Economies of Scope

When a firm’s average production cost decrease because multiple products are being produced. (ex. Juice and fruit, or pork and pigskin)

Elasticity

How responsive consumer behavior is to changes in the product/service they want

Market Equilibrium

When the demand and supply of a good is equal.

Market Disequilibrium

When external factors impact both or either supply or demand quantities, making them inequal.

Deadweight Loss/Efficiency Loss

a cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium

Excess Burden

An extra burden, on both or either the consumer or supplier, typically because of taxes.

Open Economy

An economy that trades with other countries through imports and exports

Closed Economy

A country that is self-sufficient and doesn’t trad with other countries.