Economics

Scarcity

the limited nature of society’s resources

Economics

the study of how society manages its scarce resources

Efficiency

the property of society getting the most it can from its scarce resources

Equality

the property of distributing economic prosperity uniformly among the members of society

Opportunity cost

whatever must be given up to obtain some item

Rational people

people who systematically and purposefully do the best they can to achieve their objectives

Marginal change

an incremental adjustment to a plan of action

Incentive

something that induces a person to act

Market economy

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

Property rights

the ability of an individual to own and exercise control over scarce resources

Market failure

a situation in which a market left on its own does not allocate resources efficiently

Externality

the impact of one person’s actions on the well-being of a bystander

Market power

the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

Productivity

the quantity of goods and services produced from each unit of labor input

Inflation

an increase in the overall level of prices in the economy

Business cycle

fluctuations in economic activity, such as employment and production

Circular-flow diagram

a visual model of the economy that shows how dollars flow through markets among households and firms

Production possibilities frontier

a graph that shows the combinations of output that the economy can possibly produce with the available factors of production and production technology

Positive statements

claims that attempt to describe the world as it is

Normative statements

claims that attempt to prescribe how the world should be

Market

a group of buyers and sellers of a particular good or service

Competitive market

a market in which there are many buyers and many sellers so each has a negligible impact on the market price

Quantity demanded

the amount of a good that buyers are willing and able to purchase

Law of demand

the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises

Demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

Demand curve

a graph of the relationship between the price of a good and the quantity demanded

Normal good

a good for which, other things being equal, an increase in income leads to an increase in demand

Inferior good

a good for which, other things being equal, an increase in income leads to a decrease in demand

Substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other

Complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other

Quality supplied

the amount of a good that sellers are willing and able to sell

Law of supply

the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises

Supply schedule

a table that shows the relationship between the price of a good and the quantity supplied

Supply curve

a graph of the relationship between the price of a good and the quantity supplied

Equilibrium

a situation in which the market price has reached the level at which the quantity supplied equals the quantity demanded

Equilibrium price

the price that balances the quantity supplied and the quantity demanded

Equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price

Surplus

a situation in which the quantity supplied is greater than the quantity demanded

Shortage

a situation in which the quantity demanded is greater than the quantity supplied

Law of supply and demand

the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded of that good into balance

Elasticity

a measure of the responsiveness of the quantity demanded or quantity supplied to a change in one of its determinants

Price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in its price, calculated as the percentage change in quantity demanded divided by the percentage change in price

Total revenue

the amount paid by buyers and received by the sellers of a good, calculated as the price of the good times the quantity sold

Total revenue: P・Q

Income elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in consumers’ income, calculated as the percentage change in quantity demanded divided by the percentage change in income

Cross-price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, calculated as the percentage change in the quantity demanded of the first good divided by the percentage change in the price of the second good

Price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in its price, calculated as the percentage change in quantity supplied divided by the percentage change in price

Price ceiling

a legal maximum on the price at which a good can be sold; price must stay BELOW the ceiling

Price floor

a legal minimum on the price at which a good can be sold; price must stay ABOVE the floor

Tax incidence

the manner in which the burden of a tax is shared among participants in a market

Welfare economics

the study of how the allocation of resources affects economic well-being

Willingness to pay

the maximum amount that a buyer will pay for a good

Consumer surplus

Value to buyers - Amount paid by buyers

Cost

the value of everything a seller must give up to produce a good

Producer surplus

Amount received by sellers - Cost to sellers

Deadweight loss

the fall in total surplus that results from a market distortion

Externality

the uncompensated impact of a person’s actions on the well-being of a bystander

Internalizing the Externality

altering incentives so that people take into account the external effects of their actions

Corrective tax

a tax designed to induce private decision makers to take into account the social costs that arise from a negative externality

Coase Theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

Transaction costs

the costs that parties incur during the process of agreeing to and following through on a bargain

Absolute advantage

the ability to produce a good using fewer inputs than another producer

Comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

World price

the price of a good that prevails in the world market for that good

Tariff

a tax on goods produced abroad and sold domestically

Unilateral vs Multilateral approach to free trade

Removing restrictions themselves vs doing it together with other countries

Excludability

the property of a good whereby a person can be prevented from using it

Rivalry in Consumption

the property of a good whereby one person’s use diminishes other people’s use

Private Goods

goods that are both excludable and rival in consumption

Public Goods

goods that are neither excludable nor rival in consumption

Common Resources

goods that are rival in consumption but not excludable

Club Goods

goods that are excludable but not rival in consumption

Free Rider

a person who receives the benefit of a good but avoids paying for it

Cost-Benefit Analysis

a study that compares the costs and benefits to society of providing a public good

Tragedy of the Commons

a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole