Micro Midterm

economics

the study of how society allocates scarce resources

macroeconomics

the branch of economics that studies national and international economics

microeconomics

the branch of economics that studies how people and firms make decisions

resources

also called "factors of production," these are commonly grouped into the four categories: labor, physical capital,land(natural resources), and entrepreneurial ability

capital

the resources that includes equipment, machinery, buildings, and tools

scarcity

the imbalance between limited productive resources and unlimited human wants

trade-offs

the reality of scare resources implies that individuals, firms,and governments are constantly faced with difficult choices that involve benefits an costs

opportunity cost

the value of the sacrifice made to pursue a course of action

marginal

the next unit, or increment, of an action

marginal benefit(MB)

the additional benefit received from the consumption of the next unit of a good or service

marginal cost(MC)

the additional cost of producing one more unit of output

marginal analysis

making decisions based upon weighing the marginal benefits and costs of that action. The rational decision maker will choose an action if the marginal benefit is greater that or equal to the marginal cost(MB\>\=MC)

production possibilities

the different quantity of goods that an economy can produce with a given amount of scare resources.

law of increasing costs

as more of a good is produced, the greater is its opportunity (or marginal ) cost

absolute advantage

the ability to produce more of a good than all other producers

comparative advantage

the ability to produce a good at a lower opportunity cost than all other producers.

specialization

production of goods or performance of tasks based upon comparative advantage

productive efficiency

production of maximum output for a given level of technology and resources

allocative efficiency

production of the combination of goods and service that provides the most net benefit to society; achieved when the marginal benefit equals the marginal cost(MB\=MC) of the next unit.

economic growth

the increase in an economy's production possibilities over time

economy

a system for coordinating society's productive activities

Market Economy(Capitalism)

an economic system in which resources are allocated through the decentralized decisions of firms and consumers

production possibility frontier(curve)

the graphical device used to show the production possibilities of two goods

Law of demand

all else equal, when the price of a good rises, the quantity demanded of that good falls

Demand price

the price of a given quantity at which consumers will demand that quantity

ceterus paribus

the assumption that all other variables are held constant so we can predict how a chang in one variable affects a second. Also sometimes referred to as the ceteris paribus assumption.

substitution effect

the change in quantity demanded resulting from a change in the price of one good relative to the price of other goods

income effect

due to a higher price, the change in quantity demanded that results from a change in the consumer's purchasing power (or real income)

demand schedule

a table showing quantity demanded for a good at various prices

demand curve

shows the quantity of a good demanded at all prices

determinants (shifters) of demand

the external factors that shift demand to the left or right

normal goods

a good for which demand increases with an increase in consumer income

inferior good

a good for which demand decreases with an increase in consumer income

substitute goods

two goods are consumer substitutes if they provide essentially the same utility to the consumer

complementary goods

two goods that provide more utility when consumed together than when consumed separately

law of supply

all else equal, when the price of a good rises, the quantity supplied of that good rises

supply schedule

a table showing quantity supplied for a good at various prices

supply curve

shows the quantity of a good supplied at all prices

determinants (shifters) of supply

the external factors that shift supply to the left or right

market equilibrium

this exists at the only price where the quantity supplied equals the quantity demanded. or it is the only quantity where the price consumers are willing to pay is exactly the price producers are willing to accept

shortage

a situation in which, at the going market priec, the quantity demanded exceeds the quantity supplied.

disequilibrium

any price where the quantity demanded does not equal the quantity supplied

surplus

a situation in which, at the going market price, the quantity supplied exceeds the quantity demanded

consumer surplus

the difference between buyer's willingness to pay and the price actually paid

producer surplus

the difference between the price received and the marginal cost of producing the good

elasticity

measures the sensitivity, or responsiveness, of a choice to a change in an external factor

price elasticity of demand

-measures the sensitivity of consumers' quantity demanded for good X when the price of good X changes

price elastic demand

Ed \> 1, meaning consumers are price sensitive

price inelastic demand

Ed < 1 or the (%ΔQd) < (%ΔP). Consumers are not price sensitive

unit elastic demand

Ed\=1. The percentage change in price is equal to the percentage change in quantity demand

perfectly elastic

Ed\=infinite. In this special case, the demand curve is horizontal meaning consumers have an instantaneous & infinite response to a change in price

perfectly inelastic

Ed\=0, In this special case, the demand curve is vertical and there is absolutely no response to a change in price

slope and elasticity

\-in general, the more vertical a good's demand curve, the more inelastic the demand for that good

\-the more horizontal a good's demand curve, the more elastic the demand for that good

determinants of elasticity

-demand for a good will generally be more elastic if: the good has more readily available substitutes; the consumers spends a high proportion of his or her income on that good

total revenue

the price of a good multiplied by the quantity of that good sold

total revenue test

total revenue rises with a price increase if demand is price inelastic and falls with a price increase if demand is price elastic

elasticity and demand curves

at the midpoint of a linear demand curve, Ed \=1 . above the midpoint demand is elastic , and below the midpoint demand is inelastic.

income elasticity

a measure of how sensitive the consumption of a good is to a change in consumer's income(Ei)

Luxury

a good for which the proportional increase in consumption is greater than the proportional increase in income

necessity

a good for which the proportional increase in consumption is less than the proportional increase in income

cross-price elasticity of demand

a measure of how sensitive the consumption of good X is to a change in the price of good Y

values of cross- price elasticity of demand

\-if Ec>0, goods X and Y are substitutes

\-if Ec

price elasticity of supply

measures the sensitivity of producer's quantity supplied for good X when the price of good X changes

deadweight loss

the lost net benefit to society caused by a movement away from the competitive market equilibrium

inefficient

a situation in which there are missed opportunities; some people could be made better off without making other people wore off

subsidy

-a government transfer, either to consumers or producers, of the consumption or production of a good

price floor

a legal minimum price, below which the product cannot be sold

price ceiling

a legal maximum price, above which the product cannot be sold

utility

the happiness, benefit, satisfaction, or enjoyment gained from consumption of goods and services

total utility(TU)

total happiness received from consumption of a number of units of a good

marginal utility(MU)

-the change in an individual's total utility from the consumption of an additional unit of a good or service

utils

a hypothetical unit of measurement often used to quantify utility; also referred to as "Happy Points."

law of diminishing marginal utility

in a given time period, as consumption of an item increases, the marginal(additional) utility from that item falls

utility maximizing rule

the consumer choose amounts of goods X and Y, with his or her limited income, so that the marginal utility per dollar spent is equal for both goods.

the firm

an organization that employs factors of production to produce a good or service that it hopes to profitably sell

accounting profit

the difference between total revenue and total explicit cost

economic profit

the difference between total revenue and total production cost, including the implicit costs

explicit cost

direct, purchased, out-of-pocket cost, paid to resource suppliers out side the firm; also referred to as "accounting costs"

implicit costs

indirect, nonpurchased, or opportunity costs of resources provided by the entrepreneur

short run

a period of time too short to change the size of the plant, but many other more variable resources can adjusted to meet demand (A period during which at least one of a firm's resources is fixed)

long run

a period or time long enough for the firm to alter all production inputs, including the plant size.

fixed inputs

production inputs that cannot be changed in the short run

variable input

production inputs the firm can adjust in the short run to meet changes in demand for its output

law of diminishing marginal returns

as successive units of a variable resources are added to a fixed resource, beyond some point the marginal product will decline.

total fixed costs(TFCs)

production costs that do not vary with the level of output

total variable costs(TVCs)

production costs that change with the level of output

total cost(TC)

the sum of total fixed and total variable costs at any level of output

marginal cost(MC).

the additional cost of producing one more unit of output

average fixed cost (AFC)

total fixed cost divided by the level of output

average variable cost(AVC)

total variable cost divided by the level of output

average total cost (ATC)

total cost divided by the level of output

economies of scale

the downward part of the long-run average total cost (LRATC) curve where LRATC falls as plant size increase

constant returns to scale

the horizontal range of long-run average total cost (LRATC) where LRATC is constant over a variety of plant sizes

diseconomies of scale

the upward of the long-run average total cost(LRATC) curve where LRATC rises as plant size increases

perfect competition

the most competitive market structure is characterized by many small price-taking firms producing a standardized production an industry in which there are no barriers to entry or exit

profit-maximizing rule

all firms maximizing profit by producing where marginal return (MR) \= marginal cost(MC)

break-even point

the output where average total cost (ATC) is minimized and economic profit is zero

shutdown point

\-the output where average variable cost(AVC) is minimized

\-if the price falls below this point, the firm chooses to shut down or produce zero units in short run.

perfectly competitive long-run equilibrium

-there is no more incentive for firms to enter or exit

normal profit

the opportunity of the entrepreneur's talents; another way of saying the firm is earning zero economic profit