ECON 1020: Principles of Microeconomics

The factories, machines, tools, and inventories in an economy. Capital is used in producing other goods and services. (education → human capital, factories → physical capital)

If the additional benefits (correctly measured) are greater than the additional costs incurred (correctly measured), go for it. If the additional costs are greater than the additional benefits, do not go for it.

Labor, capital, and our natural resources that can be used to produce goods and services.

Costs that do not change as a result of a decision.

Costs that have already been paid and cannot be recovered

The study of the economy as a whole. Growth of economy-wide production, changes in unemployment, and rates of inflation are the most common concerns.

The increase in benefits resulting from an action. Or the increase in benefits resulting from producing one more unit of output.

The increase in costs resulting from an action. Or the increase in costs resulting from producing one more unit of output.

Methods through which buyers and sellers come together and in so doing determine the prices and the quantities of goods and services that will be exchanged.

The study of individual consumers, workers, producers, businesses, and industries.

The value of the best forgone alternative. What one really gives up doing when making a choice.

The process of comparing the marginal benefits and marginal costs of an action. If the marginal benefits are greater than the marginal costs, a rational decision is to undertake the action.

Our wants are greater than our abilities to satisfy them. This leads to the necessity for making choices about how we use our resources.

An abstract description of a part of an economy. Simplifying assumptions are made, with a goal of understanding and explaining economics events.

An economic model showing possible combinations of outputs, given resources, and technology. The slope of the curve is the opportunity cost.

Increasing one output, while holding all other inputs constant, will eventually result in smaller and smaller additions to output. (this is why the production possibilities frontier is concave down)

As we increase the production of a good while increasing a single input, the opportunity cost eventually increases.

Using methods to produce goods and services that minimize costs of producing or maximize output given our inputs

Allocating our resources to produce the kinds of goods and services we want the most.

Using all of our resources and in a technically and allocatively efficient manner.

The buildings and physical improvements, machines, and tools that businesses use to produce goods and services.

Goods that are used together. When the price of one good increases, the demand for its complementary good decreases.

A table or graph showing the quantity of a good demanded at each price, assuming that all possible influencing factors other than price remain constant.

The price at which quantity supplied is equal to quantity demanded. The market is in equilibrium, that is, equilibrium price will not change until something else changes.

The quantity of a good bought and sold when quantity supplied equals quantity demanded. The equilibrium quantity will not change until something else changes.

A market is in equilibrium, with an equilibrium price and an equilibrium quantity, when the quantity demanded equals the quantity supplied.

A good is inferior, if in response to an increase in income, individuals decrease their consumption of the good.

A good is normal, if in response to an increase in income, individuals increase their consumption of the good.

The resources - labor, land, and capital - businesses use in producing goods and services. Those resources are often described as factors of production.

The principle that price and quantity demanded are inversely related. A decrease in price, assuming nothing else changes, will cause an increase in the quantity demanded and an increase in price will cause a decrease in the quantity demanded. The law of demand implies a negatively sloped demand curve.

The principle that price and quantity supplied are directly related. An increase in price, assuming nothing else changes, will cause an increase in the quantity supplied and a decrease in price will cause a decrease in the quantity supplied. The law of supply implies a positively sloped supply curve.

The market price and the quantity exchanged in a perfectly competitive market will move toward the price and quantity where quantity supplied is equal to quantity demanded.

Means for individuals and businesses to exchange goods, services, assets, and labor.

A change in quantity demanded caused by a change in a good's price.

A change in quantity supplied caused by a change in a good's price.

The quantity of a good or service that consumers intend to purchase throughout a given time period at a certain price.

The quantity of a good or service that producers intend to sell throughout a given time period at a certain price.

A shift is caused by changes other than a change in price:
(1) income
(2) tastes and preferences
(3) population size
(4) expectations of future prices
(5) prices of related goods (substitutes and complements)

A shift is caused by changes other than a change in price:
(1) prices of inputs
(2) technology
(3) expectations of future prices
(4) prices of related goods
(5) the number of firms in the market
(6) other events (weather, war, natural disasters, etc.)

At a single price, the quantity demanded is greater than the quantity supplied.

At a single price, the quantity supplied is greater than the quantity demanded.

Goods that can be used in place of one another. When the price of one increases, the demand for a substitute good increases.

A table (schedule) or graph (curve) showing the quantity of a good that producers are willing to supply at each price, assuming that all possible influencing factors other than price remain constant.

Demand is elastic when the percentage change in the quantity demanded is greater than the percentage change in the price of the good or service. The price elasticity of demand is greater than one.

Demand is inelastic when the percentage change in the quantity demanded is less than the percentage change in the price of the good or service. The price elasticity of demand is less than one.

The percentage change in quantity demanded of a good or service divided by the percentage change in price.

The percentage change in quantity supply of a good or service divided by the percentage change in price.

1) Necessity
2) Portion of income spent on good
3) Number of substitutes (ties in with necessity)
4) Time consumers have to adjust to price changes

1) Ability of producer to increase production
2) Time producers have to adjust to prices and costs

The percentage change in quantity demanded of a good or service divided by the percentage change in income.

Goods or services that are assumed to serve similar purposes.

The legal maximum price for which a good or service can be sold. Examples include laws limiting apartment rents in cities.

A legal maximum rent that can be charged for some apartments in some major cities.

The legal minimum price at which a good or service can be sold. An example is the federal minimum wage, currently $7.25 per hour.

A legal minimum for wages for most categories of workers.

A good or service that is viewed by consumers as a high priority. Consumers tend to be less sensitive to price changes of goods that are assumed to be necessities.

Payments from governments to producers or consumers of specific goods and services.

A tax placed on an imported good

The difference between the total value to the consumer of consuming a specific amount of a good and the amount the consumer must pay for that amount of the good.

As a consumer purchases more of a good in a specific time period, the additional satisfaction enjoyed from the additional unit of the good will diminish.

A consumer will maximize total well-being if the last dollar spent on each good provides the same marginal (additional) utility.

The change in total utility or satisfaction resulting from consuming one more unit of a good or service

Income adjusted for price changes. A measure of the amount of goods and services one can purchase.

The amount of satisfaction enjoyed from consuming a specific amount of a good or service.

The satisfaction gained from consuming a good or service.

Total cost divided by the total product

The total product divided by the number of units of an input used

The resources used to produce goods and services, often divided into three categories: labor, all the physical and mental inputs of people; capital, the machines, tools, buildings, and inventories; and land, the actual land used, including raw materials from land.

The marginal product of an input will eventually decrease as more of that input is used. The law of diminishing marginal returns assumes that all other inputs remain constant.

A time period long enough that all inputs can be changed.

The change in total costs that results from increasing total product by one unit.

The increase in output from using one more unit of an input while all other inputs are constant.

A function showing the maximum output for each specific amount of inputs, given technology.

A time period in which at least one input cannot be changed.

A shift in the production function, usually in the direction of a greater quantity of output at each level of input. Technological change may be the result of creation of new products, redesign of old products, or the creation of new methods of manufacturing.

The sum of total fixed cost and total variable cost

The costs (prices multiplied by the amounts of inputs) of the inputs that are fixed. This is also the amount of cost when total product is zero. Total fixed costs are costs that do not vary as output changes.

The total amount of output produced.

The costs (prices multiplied by the amount of inputs) of the inputs that can be changed. These costs vary as output changes.

Total variable costs divided by total output. Same as average total cost or average cost in the long run, when all costs are variable.

Long-run average total cost increases as the quantity of output increases

Long-run average total cost decreases as the quantity of output increases

The amount a firm receives for its product at each level of output.

Total revenue minus explicit costs. Accounting profit that could be earned elsewhere is not counted as a cost.

Total revenue divided by the quantity sold

Accounting profits minus normal profits

A firm's quantity supplied at each price level

The quantity supplied at each price, after firms are given time to vary all inputs and to enter and exit the industry.

The change in total revenue resulting from the sale of one more unit.

The sum of all of the individual firms' quantities supplied at each price.

A market with many buyers and sellers, with each seller offering the same good or service. Consumers and producers are aware of quality of inputs and goods and prices. Firms can easily enter and exit the industry.

A firm "takes" the price that is given it by the market supply and demand conditions. The firm can do nothing to change that price.

The number of goods sold multiplied by the price at which they are sold.

Average costs, at every possible level of output, are at minimums.

Some factor that prevents firms from entering an industry when economic profits are being earned.

A single firm in an industry with barriers to entry and no close substitute goods.

A firm that can produce at a lower average cost per unit of output than a number of smaller firms producing a similar amount of total output.

A producer charges different prices for different units of output o the same product for reasons other than differences in costs.

A group of producers agreeing to act in concert with one another.

An industry with many competitors, all producing slightly different products.

An industry with few producers.

Legislation that restricts deliberate formation of monopolies and prevents firms from engaging in anticompetitive practices.

A price, set by a regulator of a natural monopoly, equal to average cost at the corresponding quantity demanded.

A four-firm concentration ratio is the percentage of industry sales sold by the four largest firms in the industry. Other similar measures, that indicate the degree of market power and competitiveness, are often used.

A price, set by a regulator of a natural monopoly, equal to marginal cost at the corresponding quantity demanded.

A firm that can produce at a lower average cost per unit of output than a number of smaller firms producing a similar amount of total output.

A firm that lowers prices with the purpose of driving competitors out of a market, increasing its own market power, and eventually reducing output and raising prices is engaging in predatory pricing.

A difference in the wages of jobs with similar skill requirements when the cause is that something about the position makes it less attractive than alternative positions.

The quantity of labor demanded at each wages rate. Derived from the value of the marginal product at each level of employment.

Demand that is derived from the demand for something else. The demands for inputs into the production process are derived from the demand for the goods and services that they produce.

The factors such as experience, skills, education, and work habits that affect the value of a worker's marginal product.

A group of workers who have organized in an effort to increase wages and improve working conditions.

The amount of wages paid adjusted for inflation.

The amount of wages paid adjusted for inflation

The quantity of labor that workers are willing to supply at each wage level.

The increase in revenue resulting from the hiring of one additional worker.

The amount that workers are paid, usually including fringe benefits such as health insurance, retirement, and vacation.

Top performers earn large salaries, while others earn significantly less.

The principle based on the idea that one should pay for government services according to one's ability. We define that ability most often as the amount of income or amount of wealth.

The total tax paid divided by the total amount of income.

The principle that one should pay taxes according to the benefits received from government goods and services.

A tax on the increase in the value of a financial or real asset. Stocks and bonds are good examples. If an asset is sold, the difference between the purchase price and the sale price is the capital gain and is taxed.

A tax on specific goods and services.

Marginal rate are the same at all levels of income. Often exemptions and standard deductions are proposed at low levels of income.

People who have equal incomes should pay the same taxes.

The increase in revenue resulting from the hiring of one additional worker. Price of the product times the marginal product of labor equals the marginal revenue product.

The change in tax paid divided by a change in income.

A tax on income an individual or family receives.

The amount of tax paid as a percentage of income increases as one's income increases.

The amount of tax paid as a percentage of income stays the same as one's income increases.

The amount of tax paid as a percentage of income decreases as one's income increases.

A tax on most goods and services purchased.

A payment or grant from a government to an individual.

People who earn more should pay at least as much as those who earn less.

The value of assets owned minus the liabilities owed.