Chapter 9-11

Tariff

A tax imposed by a government on imports into a country.

Imports

Goods & services purchased domestically that are produced in other countries.

Exports

Goods & services produced domestically and sold in other countries.

Comparative advantage

The ability to produce a good or service at a lower opportunity cost than competitors.

Opportunity cost

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

Absolute advantage

The ability to produce more of a good or service than competitors using the same amount of resources.

Autarky

A situation in which a country does not trade with other countries.

Terms of trade

The ratio at which a country can trade its exports for imports from other countries.

Technology

Processes firms use to turn inputs into goods and services.

External economies

Reductions in a firm’s costs that result from an increase in the size of an industry.

Free trade

Trade between countries that is without government restrictions.

Quota

A numerical limit that a government imposes on the quantity of a good that can be imported into the country.

Voluntary export restraint (VER)

A restriction on the quantity of a good that can be imported by one country from another country.

World Trade Organization (WTO)

An international organization that oversees international trade agreements.

Globalization

The process of countries becoming more open to foreign trade and investment.

Protectionism

The use of trade barriers to shield domestic firms from foreign competition.

Dumping

Selling a product for a price below its cost of production.

Utility

The enjoyment or satisfaction people receive from consuming goods/services.

Marginal utility (MU)

The change in total utility a person receives from consuming one additional unit of a good or service.

Law of diminishing marginal utility

The principle that consumers experience diminishing additional satisfaction as they consume more of a good or service.

Budget constraint

The limited amount of income available to consumers to spend on goods/services.

Income effect

The change in the quantity demanded of a good due to a change in price affecting consumer purchasing power.

Substitution effect

The change in the quantity demanded of a good due to a price change making it more or less expensive relative to other goods.

Network externality

A situation where the usefulness of a product increases with the number of consumers who use it.

Behavioral economics

The study of situations where people make choices that do not appear to be economically rational.

Endowment effect

The tendency to be unwilling to sell a good already owned, even if offered a higher price than the purchase price.

Sunk cost

A cost that has already been paid and cannot be recovered.

Technological change

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

Short run

A period during which at least one of a firm’s inputs is fixed.

Long run

The period in which a firm can vary all its inputs and adopt new technology.

Total cost

The cost of all inputs a firm uses in production.

Variable costs

Costs that change as output changes.

Fixed costs

Costs that remain constant as output changes.

Explicit cost

A cost that involves spending money.

Implicit cost

A nonmonetary opportunity cost.

Production function

The relationship between inputs employed by a firm and maximum output produced.

Average total cost

Total cost divided by the quantity of output produced.

Marginal product of labor

Additional output produced by hiring one more worker.

Law of diminishing returns

The principle that adding more of a variable input will cause the marginal product to decline at some point.

Average product of labor

Total output produced divided by the quantity of workers.

Marginal cost

The change in total cost from producing one more unit of a good or service.

Average fixed cost

Fixed cost divided by quantity of output produced.

Average variable cost

Variable cost divided by the quantity of output produced.

Long run average cost curve

A curve showing the lowest cost at which a firm can produce a given quantity of output in the long run.

Economics of scale

The situation where a firm’s long run average cost falls as it increases output.

Constant returns to scale

The situation where a firm’s long run average costs remain unchanged as it increases output.

Minimum efficient scale

The level of output at which all economies of scale are exhausted.

Diseconomies of scale

The situation where a firm’s long run average cost rises as it increases output.