Microeconomics vocab exam 1

Economics

The study of how people manage resources

Macroeconomics

Study of economy as a whole

Microeconomics

The study of how individuals and firms manage resources

Scarcity

The condition of wanting more than we can get with available resources

Trade offs

Doing something only when the benefit outweighs the cost

Opportunity cost

The true cost of your choice

Marginal decision making

Compare the additional benefits of a choice against the additional costs without considering related benefits and costs of past choice

Sunk cost

A cost that cannot be recovered

Incentive

Something that causes people to behave in a certain way by changing the trade-offs they face

Positive incentive

Makes someone more willing to do something

Negative incentives

Makes them less likely to do something

Efficiency

resources being allocated in the best way possible

Correlation

Two variables have a consistent relationship

Positive correlation

Both variables move in the same direction

Negative correlation

Variables move in opposite directions

Uncorrelated

no consistency in variables

Causation

One variable causes the other

Positive statement

A statement that makes a factual claim about how the world actually works

Normative statement

A statement about how the world should be

Absolute advantage

When a producer can generate more output than others with a given amount of resources

Comparative advantage

When a producer can make a good at a lower opportunity cost than other producers

Production possibilities frontier (PPF)

A line or curve that shows all the possible combinations of outputs

Market

Refers to the buyers and sellers who trade a particular good or service

Competitive Market

A market in which fully informed, price taking buyers and sellers easily trade a standardized good or service

Price taker

A buyer or seller who cannot affect the market price

Standarized good

A good or service for which any two units of it have the same features and are interchangeable

Transaction costs

The costs incurred by buyer and seller in agreeing to and executing a sale of goods or services

Demand

How much of something people are willing and able to buy under certain circumstances

Quantity Demand

The amount of a particular good that buyers in a market will purchase at a given price during a specific period

Law of demand

Inverse relationship between price and quantity demanded

Demand curve

Consumers’ willingness to buy

Determinants of demand

Consumer preferences, prices of related goods, income of the consumers, expectations of future prices and the number of buyers in the market

Consumer preferences

The personal likes and dislikes that make buyers more or less inclined to purchase a good

Substitutes

When goods serve similar enough purposes that a consumer might purchase one in place of the other

Complements

Related goods that are consumed together, so buying one will make the consumer buy the other

Inferior Goods

Goods for which demand decreases as income increases

Demand Expectations

Consumers expect price to fall in the future the demand will decrease

Change in non-price determinant for demand curve

“Increase in demand” or “decrease in demand”

Movement along the demand curve

“Increase in the quantity demanded” or “decrease in the quantity demanded”

Supply

How much of a good or service producers will offer for sale under given circumstances

Quantity supplied

The amount of a particular good or service that producers will offer for sale at a given price during a specified period

Law of supply

All else held equal, quantity supplied increases as price increases

Non-Determinants of supply

Prices of related goods, Technology, Prices of inputs, Expectations and the number of sellers

Price of related goods

Determines supply because it affects the opportunity cost of production

Supplies Expectations

Price in the future effects quantity supplied

Movement along the supply curve

a change in price increases or decreases the quantity supplied

Shift of the supply curve

A change in a nonprice determinant

Quantity supplied higher than Quantity demanded

Surplus, excess supply

Quantity demanded higher than quantity supplied

Shortage, excess demand

Elasticity

A measure of how much consumers and producers will respond to a change in market conditions

Price Elasticity of demand

Describes the size of the change in the quantity demanded of a good or service when its price changes

More elastic (demand)

consumers buying decisions highly influenced by price

More inelastic (demand)

Consumers not very sensitive to price changes

% change in Q demanded

(Q2-Q1) / (Q2+Q1 / 2)

% change in Price

(P2 - P1) / (P2+P1 / 2)

Negative change in Quantity demanded

Positive change in price

Positive change in Quantity demanded

Negative change in price

Price elasticity of demand (-)

Always a negative number, because price and quantity demand move in opposite directions

Perfectly elastic (demand)

The quantity demanded drops to 0 when the price increases even a miniscule

Perfectly inelastic (demand)

The quantity demand is the same no matter what the price

Elastic

When absolute value is greater than 1

Inelastic

Absolute value is less than 1

Unit-elastic

Absolute value is exactly 1

Total revenue

The amount that a firm receives from the sale of goods and services, calculated as the quantity sold multiplied by the price paid for each unit

Price elasticity of supply

The size of the change in the quantity supplied of a good or service when its price changes

Midpoint method

(Q2-Q1) / (Q1+Q2) / 2 over (P2-P1) / (P1+P2) / 2

Perfectly elastic (Supply)

Quantity supplied could be anything at a given price and is zero at any other price

Perfectly inelastic (supply)

Quantity supplied is the same

Price elasticity of supply (+)

Quantity supplied moves in the same direction as the price

Cross-price elasticity of demand

How much demand changes when the price of a different good change

Two goods are substitutes

Cross price elasticity will be positive

Two goods are complements

Cross price elasticity will be negative

Income elasticity of demand

How much demand changes in response to a change in consumers income