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Market Failure
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The inability of a market to bring about the allocation of resources that best satisfies the wants of society; the overallocation or underallocation of resources to the production of a particular good or service because of externalities or informational problems or because markets do not provide desired public goods
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Demand Side Market Failures
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Underallocations of resources that occur when private demand curves understate the consumers' full willingness to pay for a good or service
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Supply Side Market Failures
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Overallocations of resources that occur when private supply curves understate the full cost of producing a good or service
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Consumer Surplus
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The difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price; the triangular area below the demand curve and above the market price
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Efficiency Losses (Deadweight Losses)
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Reductions in combined consumer and producer surplus caused by an underallocation or overallocation of resources to the production of a good or service
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Private Goods
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A good, or service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude nonpayers from receiving the benefits
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Rivalry
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1) The characteristic of a private good, the consumption of which by one party excludes other parties from obtaining the benefit; (2) the attempt by one firm to gain strategic advantage over another firm to enhance market share or profit
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Excludability
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he characteristic of a private good, for which the seller can keep nonbuyers from obtaining the good
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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 them using general tax revenue
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Non rivalry
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The idea that one person's benefit from a certain good does not reduce the benefit available to others; a characteristic of a public good
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Non excludability
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The inability to keep nonpayers (free riders) from obtaining benefits from a certain good; a characteristic of a public good
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Free Rider Problem
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The inability of potential providers of an economically desirable good or service to obtain payment from those who benefit, because of nonexcludability
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Externality
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A cost or benefit from production or consumption that accrues to to someone other than the immediate buyers and sellers of the product being produced or consumed
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Government Failure
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Inefficiencies in resource allocation caused by problems in the operation of the public sector
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Principal Agent Problems
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a conflict of interest that occurs when agents (workers or managers) pursue their own objectives to the detriment of the principals' (stockholders') goals
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Special Interest Effect
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Any political outcome in which a small group ("special interest") gains substantially at the expense of a much larger number of persons who each individually suffers a small loss
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Rent Seeking
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The actions by persons, firms, or unions to gain special benefits from government at the taxpayers' or someone else's expense
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Unfunded Liabilities
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A future government spending commitment (liability) for which the government has not legislated an offsetting revenue source
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Regulatory Capture
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The situation that occurs when a governmental regulatory agency ends up being controlled by the industry that it is supposed to be regulating
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Loan Guarantees
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A type of investment subsidy in which the government agrees to guarantee (pay off) the money borrowed by a private company to fund investment projects if the private company itself fails to repay the loan
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Law of Diminishing Marginal Utility
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The principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases
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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 (or from the consumption of a collection of goods and services)
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Total Utility (TU)
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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 (MU)
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The extra utility a consumer obtains from the consumption of 1 additional unit of a good or service; equal to the change in total utility divided by the change in the quantity consumed (=∆TU/∆Q)
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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 (MU). For two goods X and Y, with prices Px and Py, total utility will be maximized by purchasing the amounts of X and Y such that MUx /Px = MUy /Py for the last dollar spent on each good
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Income Effect
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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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Explicit Cost
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The monetary payment made by a firm to an outsider to obtain a resource
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Implicit Cost
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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
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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
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Short Run
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a period of time in which producers are able to change the quantities of some but not all of the resources they employ; a period in which some resources (usually plant) are fixed and some are variable
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Long Run
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A period of time long enough to enable producers of a product to change the quantities of all the resources they employ, so that all resources and costs are variable and no resources or costs are fixed
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Total Product (TP)
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The total output of a particular good or service produced by a firm
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Marginal Product (MP)
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The additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in the quantity of a resource employed (∆TP/∆Q of a resource employed)
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Average Product (AP)
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The total output produced per unit of a resource employed; total product divided by the quantity of that employed resource; TP/Qresource
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Law of Diminishing Returns
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The principle that as successive increments of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease
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Fixed Costs (TFC)
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Any cost that in total does not change when the firm changes its output
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Variable Costs (TVC)
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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 (TC)
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The sum of fixed cost and variable cost (=TFC+TVC)
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Average Fixed Cost (AFC)
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A firm's total fixed cost divided by output (the quantity of product produced); =TFC/Output
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Average Variable Cost (AVC)
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A firm's total variable cost divided by output (the quantity of product produced); =TVC/Output
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Average Total Cost (ATC)
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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; =TC/Q=AFC+AVC
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Marginal Cost (MC)
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The extra (additional) cost of producing 1 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
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Diseconomies of Scale
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The 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 plant
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Constant Returns to Scale
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The situation when a firm's average total cost of producing a product remains unchanged in the long run as the firm varies the size of its plant
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Minimum Efficient Scale (MES)
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The lowest level of output at which a firm can minimize long-run average total cost
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