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Public Goods
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A good or service that is characterized by nonrivalry and nonexcludability. These characteristics typically imply that no private firm can break even when attempting to provide such products. As a result, they are often provided by governments, who pay for the using general tax revenues.
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Cost-Benefit Analysis
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A comparison of the marginal costs of a project or program with the marginal benefits to decide whether or not to employ resources in that project or program or to what extent.
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Externalities
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A cost or benefit from production or consumption that accrues to someone other than the immediate buyers and sellers of the product being produced or consumed.
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Tragedy of the Commons
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The tendency for commonly owned natural resources to be overused, neglected, or degraded because their common ownership gives nobody an incentive to maintain or improve them.
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Assymmetric Information
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A situation where one party to a market transaction has much more information about a product or service than the other. The result may be an under- or overallocation of resources.
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Income Effect
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A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price.
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Substitution Effect
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A change in the quantity demanded of a consumer good that results from a change in its relative expensiveness caused by a change in the good's own price.
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Utility
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The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service
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Total Utility
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The total amount of satisfaction derived from the consumption of a single product or a combination of products.
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Marginal Utility
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The extra utility a consumer obtains from the consumption of one additional unit of a good or service; equal to the change in total utility divided by the change in the quantity consumed.
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Rational Behavior
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Human behavior based on comparison of marginal costs and marginal benefits; behavior designed to maximize total utility.
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Budget Constraint
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The limit that the size of a consumer's income (and the prices that must be paid for goods and services) imposes o the ability of that consumer to obtain goods and services.
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Utility Maximizing Rule
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The principle that to obtain the greatest total utility, a consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility.
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Explicit Costs
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The monetary payment made by a firm to an outsider to obtain a resource
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Implicit Costs
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The monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market; equal to what the resource could have earned in the best-paying alternative employment; includes a normal profit.
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Normal Profit
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The payment made by a firm to obtain and retain entrepreneurial ability; the minimum income that entrepreneurial ability must receive to induce entrepreneurs to provide their entrepreneurial ability to a firm; the level of accounting profit at which a firm generates an economic profit of zero after paying for entrepreneurial ability.
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Economic Profit
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The return flowing to those who provide the economy with the economic resource of entrepreneurial ability; the total revenue of a firm less its economic costs (which include both explicit costs and implicit costs); also called "pure profit" and "above normal profit"
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Fixed Cost
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Any cost that in total does not change when the firm changes its output
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Variable Cost
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A cost that increases when the firm increases its output and decreases when the firm reduces its output.
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Total Cost
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The sum of fixed cost and variable cost
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Average Fixed Costs
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A firm's total fixed cost divided by output (the quantity of product produced)
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Average Variable Costs
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A firm's total variable cost divided by output (the quantity of product produced)
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Average Total Costs
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A firm's total cost divided by output (the quantity of product produced); equal to average fixed cost plus average variable cost
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Marginal Cost
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The extra (additional) cost of producing one more unit of output; equal to the change in total cost divided by the change in output (and, in the short run, to the change in total variable cost divided by the change in output)
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Economies of Scale
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The situation when a firm's average total cost of producing a product decreases in the long run as the firm increases the size of its plant (and hence, its output)
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Diseconomies of Scale
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That situation when a firm's average total cost of producing a product increases in the long run as the firm increases the size of its plan (and hence, its output)
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Price Taker
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A seller (or buyer) that is unable to affect the price at which a product or resource sells by changing the amount it sells (or buys)
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Average Revenue
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Total revenue from the sale of a product divided by the quantity of the product sold (demanded); equal to the price at which the product is sold when all units of the product are sold at the same price.
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Total Revenue
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the total number of dollars received by a firm (or firms) from the sale of a product; equal to the total expenditures for the product produced by the firm (or firms); equal to the quantity sold (demanded) multiplied by the price at which it is sold.
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Marginal Revenue
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The change in total revenue that results from the sale of one additional unit of a firm's product; equal to the change in total revenue divided by the change in the quantity of the product sold.
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Break-even Point
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An output at which a firm makes a normal profit (total revenue = total cost) but not an economic profit
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MR = MC Rule
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The principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost
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Increasing Cost Industries
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An industry in which expansion through the entry of new firms raises the prices firms in the industry must pay for resources and therefore increases their production costs.
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Decreasing Cost Industries
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An industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs.
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Productive Efficiency
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The production of a good in the least costly way; occurs when production takes place at the output at which average total cost in s a minimum and marginal product per dollar's worth of input is the same for all inputs.
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Allocative Efficiency
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The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal and at which the sum of consumer surplus and producer surplus is maximized.
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Pure Monopoly
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A market structure in which one firm sells a unique product, into, which entry is blocked, in which the single firm has considerable control over product price, and in which nonprice competition may or may not be found.
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Barrier to Entry
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Anything that artificially prevents the entry of firms into an industry.
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Simultaneous Consumption
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The same time derivation of utility from some product by a large number of consumers.
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Network Effects
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Increases in the value of a product to each user, including existing users, as the total number of users rises.
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Price Discrimination
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The selling of a product to different buyers at differing prices when the price differences are not justified by differences in costs.
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Oligopoly
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A market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms) and in which there is typically nonprice competition.
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Herfindahl Index
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A measure of the concentration and competitiveness of an industry; calculated as the sum of the squared percentage market shares of the individual firms in the industry
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Game Theory
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The study of how people behave in strategic situations in which individuals must take into account not only their own possible actions but also their own possible actions but also the possible reactions of others. Originally developed to analyze the best way to play games like poker and chess.
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