Economics - Unit 2

Demand, Assumptions of law of demand (AHL), Assumption of the law of supply (AHL), Supply,

market power

the control that a seller may have over the price of the product

individual demand

quantities of good or service that a consumer is willing and able to buy at different prices and periods of time

market demand

sum of all individual demands for a good

normal good

demand for a good increases as consumer income increases

inferior goods

demand for a good falls as consumer income increases

complementary goods

goods that tend to be used together

change in quantity demanded

movement along the demand curve, a change in price

change in demand

shift of the demand curve, a non price determinent

law of diminishing marginal utility

consumer behavior explains the negative relationship between price and quantity demanded

utility

satisfaction consumers gain from consuming something (subjective)

total utility

total satisfaction a consumer gets from consuming something

marginal utility

the extra satisfaction consumers get from consuming one more unit of good

law of diminishing marginal utility

as consumption of a good increases, marginal utility decreases with each additional unit

substitution effect

if the price of a good falls the consumer substitutes (buys more) of the now less expensive good

income effect

if the price of a good falls, consumers real income (purchasing power) increases

fixed

unchanging in quantity and quality

short run

at least one input if fixed and cannot be changed

long run

all inputs can be changed

total product

total quantity of output produced by firm

marginal product

extra output produced by an additional unit of variable input

law of diminishing marginal returns

as more units of variable inputs are added to fixed inputs, the marginal product at first increases then decreases

total cost

all costs of production incurred by a firm

marginal cost

extra or additional cost of producing one more unit of output

supply

how much of a product producers will supply at each range of possible prices during a specific time

law of supply

a direct relationship between price of a product and quantity supplied

subsidies

government pays producers for each unit of produce, increases supply

taxes

payments from firms to government, supply decreases

changes in supply

shift of supply curve, caused by a non price determinant

changes in quantity supplied

movement along supply curve, caused by price

market equilibrium

when price and quantity supplied are at a level at which supply equals demand

equilibrium price

price of a good at which the quantity supplied is equal to the quantity demanded

equilibrium quantity

quantity of output at which supply quals demand

marginal social benefit (MSB)

demand of a good represents the benefits society gets from the consumption of that good

marginal social cost (MSC)

supply of a good represents the cost to society of producing the good, the greater the amount produced, the more it costs to add additional units

allocative efficiency

achieved when MSB = MSC

consumer surplus

refers to the benefit enjoyed by consumers that are willing to pay a higher price than they need to for a good

producer surplus

refers to the benefit enjoyed by producers who would be willing to sell their product at a lower price than they need to

total welfare

the sum of consumer surplus and producer surplus, at maximum when market is in equilibrium

direct tax

taxation of an individual

indirect tax

taxation of a specific item

excess supply

more supply than demand, a surplus

excess demand

more demand than supply, a shortage

market price

when the quantity consumers are willing and able to buy is equal to the quantity firms are willing to supply (equilibrium)

price mechanism

the prices determined by the forces of supply and demand in competitive markets

signals

prices communicate information to decision makers

incentives

prices motivate decision makers to respond to the information

rationing

a method of apportioning out goods and services among consumers or households

welfare loss

happens as a result of social surplus being reduced due to markets failing to achieve allocative efficiency

ratinal consumer choice

Consumers will make purchasing decisions according to their tastes and preferences

bias

Refers to systematic errors in thinking or evaluating

rule of thumb

Simple guidelines based on experience and common sense

anchoring

Involves the use of irrelevant information to make decisions

framing

How choices are presented to decision makers

availability

Refers to information that is most recently available

bounded rationality

Consumers are rational only within limits, as consumer rationality is limited by the consumer’s limited information, costliness of obtaining information, and the human minds’ ability to process large amounts of information

bounded self-control

People exercise self control only within limits. Often, people do not have the self control that is required to make rational decisions

bounded selfishness

People are selfish only within limits, andalso do thing for other without anything in return

nudge

A method used to influence consumers’ choices in a predictable way, without financial incentive imposing sanctions, or limiting choice.

choice architecture

The design of ways people make choices, based on the idea that consumers make decisions in a particular context and are influenced by how options are presented to them

default choice

A choice that means doing the option that results when no one does anything

restricted choice

A choice that is limited by the government or other authority

mandated choice

A choice between alternatives that is made mandatory by the government or other authority

rational producer behavior

the standard theory of the firm according to which firms try to maximize profit

corporate social responsibility

the practices of some corporations to avoid socially undesirable activities (polluting, chlid labor, etc)

market share

the percentage of total sales in a market that is earned by a single firm

growth maximization

an alternative to profit, increase market share and size of firm

satisficing

a goal of firms to achieve satisfactory result